The Kingdom of Bhutan is considered a development success story, with decreasing poverty and improvements in human development indicators. The Bank's engagement in Bhutan is aimed at supporting the government's goal of Gross National Happiness. Read More »
The Kingdom of Bhutan is a small, mountainous, landlocked country in South Asia, located in the eastern Himalayas, bordered by India and China. Bhutan is home to a population of about 740,000 spread over approximately 47,000 square kilometers, roughly the size of Switzerland, with about 70% of its land under forest cover. Much of the population lives in the central highlands, and almost two-thirds are classified as rural inhabitants. The terrain is mostly mountainous, with alpine peaks in the north and some sub-tropical foothills in the south. Per capita gross national income (GNI), one of the highest in South Asia, has consistently risen from $730 in 2000 to $2,070 in 2011.
Bhutan has seen significant political changes in recent years. In 2008, the country undertook a transition from an absolute monarchy into a constitutional monarchy and multi-party democracy, following a decade of planning and public consultations. After 34 years on the throne, the Fourth King, His Majesty Jigme Singye Wangchuck, stepped down on Dec. 9, 2006, in favor of his son, His Majesty Jigme Khesar Namgyel Wangchuck. A constitution was prepared, following a process led by the chief justice, involving widespread public consultations within Bhutan and with the international community. The new democratic system comprises a National Council and a National Assembly, the latter based on political party affiliations. Elections for the National Council were held on Dec. 31, 2007, while elections for the National Assembly were held on March 24, 2008. The next elections are scheduled for the first half of 2013.
Bhutan’s economy has expanded at a robust pace driven by the hydropower sector. Gross Domestic Product (GDP) growth is estimated at nearly 8% in 2011/12 (from 8.5% in 2010/11) and is projected to reach 12.5% in 2012/13 due to the acceleration in hydropower-related construction. Inflation has risen, reaching 13.5% in the second quarter of 2012, with both food and non-food components accelerating. Bhutan’s medium-term outlook is favorable, as growth should remain strong at around 8%–9%, driven by hydropower, manufacturing, and domestic services. The current account deficit has widened to an estimated 23% of GDP in 2011/12, driven in part by strong imports related to the hydropower sector, but the overall balance of payments deficit was 5% of GDP due to sizable grants and loan disbursements. Strong growth in domestic demand has fueled the demand for Indian rupees (since about 80% of Bhutan’s imports are from India), contributing to a rupee shortage. Convertible currency reserves, however, are broadly adequate ($723 million in July 2012).
Overall, Bhutan’s development has been rapid. Until the 1950s, Bhutan was largely isolated from the rest of the world, and its dispersed rural population depended on subsistence agriculture. Once it started a gradual process of opening up to the outside world in the 1960s, the country embarked on a far-reaching development strategy that has been articulated in a series of five-year development plans. The Tenth Five-Year Plan (2008-2013) is currently under implementation, and constitutes the basis for the country’s Poverty Reduction Strategy Paper. The plan’s overall objective is to reduce poverty from 23% in 2007 to 15% by 2012-13. The 11th Five-Year Plan is under preparation and expected to be implemented in July 2013, after the country’s second elected government is in place.
Bhutan is on track to achieve its Millennium Development Goals. However, while the poverty rate has fallen from 36% in 2000 to 23% in 2008, the MDG mid-term report notes worsening of conditions affecting those suffering from severe poverty. Household food security is linked to low food production and weak agricultural productivity, limited access to land and other productive assets, extensive crop destruction by wildlife and pests, inadequate opportunities for rural employment, poor food use, and weak access to road and transport infrastructure. Bhutan's mountainous terrain is a fundamental constraint to growth and rural poverty reduction. Poor road access isolates a large proportion of rural people from markets and social services, and limits their livelihood to subsistence agriculture. The government of Bhutan and development partners have responded to this constraint by constructing more than 1,500 kilometers of farm roads and tracks since 2003. The proportion of rural people within one hour walking distance of a road head increased from 40% in 2000 to 53% in 2008. The proportion of people residing within six hours walking distance from a road has increased from 84% to 90%.
Bhutan is characterized by good progress in human development, particularly in urban areas, and the increasing availability and use of public services throughout the country. However, this progress has been slower to reach more remote areas. Expansion of key infrastructure, including rural roads and urban municipal services, is needed for broader economic and social transformation in the country. Over the past decade, social indicators have improved. Life expectancy at birth has risen from 65 years in 2005 to 69 years in 2010. Infant mortality per 1,000 live births has been reduced from 59 in 2005 to 44 in 2011. Maternal mortality rates in 2010 were estimated at 180 deaths per 100,000 live births. Literacy and education enrollment rates have also risen with a net enrollment rate in primary schools of 89% in 2010. Unlike much of the rest of South Asia, primary school enrollment among girls is higher than boys in many urban areas, and nationwide almost half of primary school students are girls. Property rights are also much more equal than in most of South Asia, with women rather than men inheriting property in some areas. However, there is growing youth unemployment. As youth comprise almost 59% of the population, adequate job creation will depend on robust private sector development, combined with initiatives to increase skills and employability.
The CPS Results Framework is organized into two areas of engagement: (a) Economic Diversification, Job Creation and Financial Inclusion and (b) Spatial Planning and Public Services. The CPS also identifies two cross-cutting themes: (i) Capacity building for good governance; and (ii) Environmental sustainability. The CPS reflects Bhutan’s GNH development philosophy, emphasizing economic and material growth in equal measure with the well-being of individuals, communities, and society.
Outcomes of the two areas of engagement focus on unleashing potential for private-sector growth, ensuring that all members of society benefit from quality infrastructure and services, tailored to the specific needs of both urban and rural populations, while simultaneously ensuring that the country’s remarkable gains in the social sectors of health and education continue apace. In addition, the CPS focuses on helping the government build human and institutional resource capacity. It acknowledges the central role of capacity for implementing development plans efficiently and effectively. The CPS also focuses on environmental stewardship and the application of environmental safeguards, disaster risk management, and adaptation to climate change.
The next CPS is scheduled to begin in July 2014, within 12 months of finalization of the next five-year national development plan. It is anticipated that many of the themes of the current CPS are likely to continue to resonate. The bulk of IDA financing is expected to continue in the form of development policy lending, supplemented by a limited number of specific investments in key areas, particularly infrastructure, and a robust analytic program. The potential for greater use of results-based financing will be explored. The next CPS probably will reflect a shift toward IDA-IBRD blend status for Bhutan, which would open up the possibility of increased levels of funding. This is in keeping with Bhutan’s evolving middle-income country (MIC) status.
Improving Disaster Management Capacity of Bhutan (GFDRR), $400,000, November 2015
Strengthening of the Public Procurement Policy Division (IDF), $490,000, May 2013
Institutional Strengthening of the Ministry of Labour and Human Resources (IDF), $500,000, June 2013
Strengthening the Institutional Capacity of Druk Holding and Investments to Improve Corporate Governance in Bhutan (IDF), $500,000, May 2014
Three development policy operations providing budgetary support to the government have been processed over the last six years. The most recent, Development Policy Credit-2 (DPC-2), was approved by the Bank’s Board of Executive Directors in November 2012 for a total of $36 million. This operation focuses on:
Promoting government efficiency and effectiveness through sound fiscal and public financial management and procurement, and strong public administration;
Fostering private-sector development by improving the policy environment and facilitating productive employment opportunities; and
Expanding access to infrastructure in a sustainable manner.
Analytical and Advisory Activities (AAA)
The Bank also undertakes considerable analytical work in Bhutan. A number of key AAA activities have been undertaken during the current CPS period. The Bank has provided knowledge to Bhutan through a combination of non-lending technical assistance (NLTA) and economic and sector work (ESW). A number of reports, diagnostics, and studies have been done under the present CPS and helped to shape dialogue with the government in key areas of engagement. An Investment Climate Assessment and follow-up technical assistance completed in FY12 served to underpin the most recent budget support operation (DPC-2) to improve the policy framework governing private sector development in the country. NLTA for capacity building in the labor and human resource development sector has similarly helped policy for private sector development. A number of cross-sectoral analytical pieces, including those for poverty monitoring, human development (i.e. education, health) public expenditure, higher education, and financial inclusion have provided in-depth analysis to help shape policy and governance in these strategically crucial areas for national development. NLTA in other key areas such as ICT, e-government, corporate governance, and infrastructure public-private partnerships has provided guidance to policymakers.
International Finance Corporation (IFC)
The IFC has a total committed investment portfolio in Bhutan of $8.8 million. The advisory portfolio includes corporate advice and access to finance service. IFC supports Bhutan in three broad areas: inclusive growth, climate change, and regional and global integration. IFC plans to explore investment and advisory support with respect to the following areas: investment climate reforms, the financial sector (including small and medium enterprise finance, trade finance, credit lines, and equity), tourism, and agribusiness. To strengthen infrastructure, IFC considers exploring ICT, hydropower, and public-private partnership programs, with advisory assistance and investments.
Under the current Country Partnership Strategy, outcomes have been satisfactory and notable advances have been made in each of the four CPS results areas. Notably, substantial progress has been made in improving the business environment, reforming regulatory frameworks, encouraging public-private partnership through strategic infrastructure and support access to financial services. Achievements have been made in employment and skills development, particularly though the Timphu TechPark investment. Progress has been made improving rural livelihoods through access to markets, road connectivity, and agricultural productivity and in improving the availability of urban municipal services, particularly in Thimphu. Key milestones have been achieved in strengthening institutional capacity in the area of public financial management and procurement. Steps have been taken to strengthen disaster management capacities. Awareness and understanding of Bhutan’s nutrition status have been raised through robust and timely analytical work in this crucial area.
Economic Diversification, Job Creation, and Financial Inclusion
Investment Climate: Overall progress in improving the business and regulatory environment has been substantial. Dialogue to support the increased use of public-private partnerships, grounded in the Bank-financed Investment Climate Report recommendations, has fostered a series of reforms now reflected in the country’s economic development and foreign direct investment (FDI) policies. These recognize that unless the business enabling environment is improved, the private sector’s potential as an engine for growth cannot be unleashed. Reforms and simplifying regulatory procedures for businesses and foreign direct investment have been initiated, placing Bhutan above regional averages. IFC assisted the government with optimization of its company registration process and now is working to improve the efficiency of business entry. Updated FDI rules and regulations have been prepared for implementation under an amended FDI policy (2010).
Private-Public Partnerships: Progress toward improving private sector participation for strategic infrastructure has been significant. Bank technical assistance has resulted in finalizing Bhutan’s PPP policy and the overarching framework which describes PPPs’ goals and objectives. The framework provides assurances for private sector investment and helps ensures transparency, competition, and regulation in the awarding of PPP projects. This technical assistance has also helped improve client capacity by bringing global good practices and, in particular, understanding of the private sector’s willingness and capacity to participate in PPP transactions in the future. The Bank-financed Thimphu TechPark, the country’s first IT park, has been a flagship pilot for public-private partnerships in infrastructure and service delivery in Bhutan.
Financial Sector: Good progress has been made in strengthening financial infrastructure and improving financial inclusion. The Bank has supported analytical work through a Financial Inclusion Focus Group Survey which provided household-level evidence on access to finance in urban and rural communities. Building on the assessment of the Bhutan’s financial sector, the government has prepared a Financial Inclusion Policy which draws up policy objectives, strategies, and an action plan to increase financial inclusion. This report provides demand-side evidence previously unavailable in Bhutan for informing government policy regarding financial inclusion. Simultaneously, IFC has provided training for senior officials of the Royal Monetary Authority (RMA) and leading financial institutions, along with advisory services to the Bank of Bhutan and Bhutan National Bank on risk management, IT strategy, and long-term development strategies.
Corporate Governance: Progress toward improving the corporate governance to state-owned enterprises (SOEs) is on track. Training has been provided to the 60 out of 65 Druk Holding and Investment (DHI) company directors in an internationally renowned institute. DHI has developed a performance monitoring system for six of its companies.
Employment and Skills Development
Good progress has been made toward improving skills development and increasing productive employment opportunities. Under the Private Sector Development Project, which established the Thimphu TechPark, a total of 1,034 secondary and tertiary graduates have been trained. Approximately 804 Bhutanese graduates between the ages of 19 and 24 years, with equal representation between young men and women across Bhutan’s 20 districts, are now working in the IT/ITES sector. The cost to the government per job created under the project has been estimated to be in the range of $1,000, which is highly satisfactory per regional and global standards. Private sector led training approaches have been successful in changing vocational training strategies adopted by the government in other sectors. These include output-based matching grants to private sector training firms, industry linkage training and employment programs, and international train-the-trainer (TTT) programs to build capacity and standards among local private sector training companies.
Institutional capacity has been strengthened to facilitate labor market entry and employment among Bhutanese youth. Through innovative skills development and PPP models, training has been provided to approximately 100 youth in the tourism and hospitality sectors. A draft National Employment Policy has been prepared and awaits Cabinet approval. This policy is expected to create conditions for the achievement of full, productive, and voluntary employment for people, particularly youth, and ensure a coordinated approach to unemployment. It will also address the requirement of producing an adequately skilled workforce that matches the requirements of the job market. Enforcement of the Labor and Employment Act (2007) through supporting rules and regulations is already taking place and can now be extended to occupational health and safety. Improving employment conditions in the private sector is a critical part of facilitating sustained employment.
Sustainable Urban-Rural Development
Urban Development: Finance reform for the new municipal administrations managing Bhutan’s two largest cities, Thimphu and Phuntsholing, is progressing well with the recent finalization of the draft Municipal Finance Policy, approved in July 2012. Based on a broad-reaching reform agenda, selected priority measures are now being implemented in both cities. Initial work to provide basic municipal services in northern areas of the Thimphu valley, including roads, piped water, and sewage, is under way.
Rural Livelihoods: Substantial progress has been made in improving rural livelihoods by improving market access and agricultural productivity in rural communities in Bhutan. The Bank has helped increase community irrigation plans, small-scale infrastructure, and agricultural extension services in six project districts. These initiatives have led to better access to markets, a reduction in transportation costs and better access to agricultural services. Travel time to the nearest motorable road has been reduced by 50%. Access to all-season feeder roads has been constructed and improved in 100% of the target project areas under the Second Rural Access Project (RAP-2). An innovative environment friendly road construction approach was successfully piloted and mainstreamed under RAP-2.
Sustainable Land Management: Impressive achievements have been made in sustainable land management (SLM) practices. The Bank’s contribution has demonstrated a successful approach to participatory management of land and land resources through the active involvement of local communities. This has facilitated better understanding of how to prevent erosion and stem productive soil loss using new and varied sustainable land management technologies and practices. It has also facilitated the institutionalization of successful SLM practices now encapsulated under the government’s five-year national development plans.
Disaster Risk Management (DRM): The Bank has supported activities to improve disaster management capacities within key DRM agencies in coordination with the Department of Disaster Management, Ministry of Home and Cultural Affairs. The government has prepared a draft Disaster Management Bill which will support improved disaster risk management and response activities in a more systematic and streamlined manner. Search and rescue training, financed by the Bank, was carried out to strengthen capacity for responding to disasters. Technical assistance from the Bank contributed to capacity building in the Department of Disaster Management and other counterparts through a national-level training program and Bhutanese participation in international conferences and seminars on disaster management. A draft national action plan for schools and hospitals has been prepared and recommendations presented to relevant ministries and other government and civil society bodies.
Access to Quality Public Services
Higher Education: Analytical work carried out by the Bank to the tertiary education sector in Bhutan aims to support improved quality assurance and accreditation of college and university-level programs, as well as guide policymaking in this area. Policy recommendations for the tertiary education sector will contribute to Bhutan’s national strategy of creating a knowledge-based society. The study complements a Bank-supported public expenditure review (PER) of the human development sectors (health and education). The PER will help the government understand expenditure trends and support decision-making for ensuring that public spending has the most impact for these key sectors, while simultaneously reducing inefficiencies.
Health and Nutrition: Improvements have been made in understanding and creating awareness of Bhutan’s challenges in the areas of health and nutrition. The early findings of analytical work carried out through the Bhutan National Nutrition Assessment and Gap Analysis were presented to the government in October 2012. This included assessment of the current nutrition status of Bhutan, key determinants of malnutrition, as well as current programs, gaps, opportunities, and implementation challenges.
Other analytical work in the health sector has been supported by the Bank, including the country’s first-ever National Health Accounts (NHA) estimates, a study costing health facilities, a study using GIS tools on selected health indicators and their dependence on social and geographical determinants to health, and a rapid assessment of the pilot of Special Consultation Services (SCS). The human development PER also incorporates findings from these studies.
Public Financial Management (PFM): Progress has been made in strengthening fiduciary systems and public financial management. The Bank supported a Public Financial Management Accountability Assessment (PEFA) which identified key areas for improving public financial management. Based on the results of the PEFA, the government has prepared an action plan prioritizing PFM reform measures, including predictability and control in budget execution, and improved accounting recording and reporting. The Public Expenditure Management System (PEMS) and Multi-Year Rolling Budget (MYRB) approach were also introduced and rolled out in across government agencies.
Procurement: Steps have been taken to increase transparency and efficiency in the system of public procurement. The Bank has helped formulate short-term recommendations for the Use of Country Systems (UCS). The Bank has also supported a Procurement User’s Guide, strengthening the Public Procurement Policy Division (PPPD), creating an independent bid review body, publishing contract awards immediately after award, and revising standard bidding documents for goods and works.
Significant progress has been made in the enhanced use of country systems. All Bank-financed projects now fully use Bhutan’s own PFM system for budgeting, accounting, internal control, and financial reporting. This has resulted in capacity building of the main institutions of accountability across the government.
Investment: Since Bhutan joined IFC in 2003, IFC has made investments in high-end tourism infrastructure and put into place a Global Trade Finance Program (GTFP) with two of the country’s largest commercial banks. IFC has made progress in developing a pipeline of potential investments during the ongoing CPS period, including two in the financial sector, one in hydropower, and another in agribusiness. IFC continues to look for potential areas for investment in these and other sectors, including telecommunication, health, education, and tourism.
Advisory: IFC’s advisory services have been active for several years. Notable programs recently completed or ongoing include:
Transaction structuring of public-private partnerships for infrastructure projects in the transport sector;
Urban transit for Thimphu and Phuntsholing;
Development of a multi-level parking facility in Thimphu as a PPP; and
A pre-feasibility viability assessment of a combined inter-city and intra-city bus terminal as a PPP.
IFC’s program to improve the investment climate in Bhutan includes assistance on policy issues ranging from foreign direct investment to licensing, improving process efficiency (e.g., project approvals, environmental clearances), and introducing best practices for information sharing for business development. IFC is also supporting financial sector capacity building through policy notes on national payment systems, training on trade finance and targeted advisory assistance for Bhutan’s two largest banks. A corporate governance program for the financial sector is being planned. Finally, IFC is engaged in a number of ongoing and planned feasibility studies, including for special economic zones (completed), power trading company (ongoing), and non-bank financial institutions (planned), as well as a diagnostic study for the national airline, Drukair.