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 757,000 spread over approximately 38,394 square kilometers, roughly the size of Switzerland, with about 70.5percent 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. Gross National Income (GNI) per capita has consistently risen from US$730 in 2000 to US$2,409 in 2014, which is one of the highest in South Asia.


Bhutan has seen significant political changes in recent years. In 2008, the country undertook a transition from an absolute monarchy into a constitutional monarchy with an elected parliament, 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 December 9, 2006, in favor of his son, His Majesty Jigme Khesar Namgyel Wangchuck. A constitution was prepared, 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. The first elections for the National Council were held on December 31, 2007, while elections for the National Assembly were held on March 24, 2008. The second Parliament elections were held in 2013 where the People’s Democratic Party (PDP), the former opposition party gained the majority by winning 32 seats and formed a government under Prime Minister Tshering Tobgay. In its election pledges, the PDP outlined its vision for the country of greater decentralization, civil service efficiency, incentives for green industries, and balanced regional development with meaningful engagement of the private sector and foreign investment in the economy.


Bhutan’s economy has expanded at a robust pace driven by the hydropower sector. Gross Domestic Product (GDP) growth is estimated at 6.5 percent in FY2014/15 (from July 2014 to June 2015). Drivers of growth include continued construction of hydropower dams, the five-year plan implementation in full swing through increased capital spending financed by grants and tourism. On the demand side, while private consumption was supported by the relaxation of credit restrictions, investments have remained robust in hydropower and construction in particular. Growth of gross capital fixed investment is estimated at 10 percent, masking a larger expansion in the hydropower sector. Real export earnings grew at 3.3 percent, supported by tourism expansion, but was outpaced by rapid import growth (11.5 percent).

The poverty rate at the international line of US$1.90 a day (2011 Purchasing Power Parity Index) was 2.2 percent in 2012, one of the lowest in South Asia. At a higher poverty line of US$3.1/day, poverty decreased from 29.1 percent to 13.4 percent between 2007 and 2012 or 3.1 percentage points per year. During the same period, the mean per capita expenditure grew at 6.5 percent overall and also for the bottom 40 percent, according to the 2007 and 2012 Bhutan Living Standard Surveys. Bhutan’s growth rate for the bottom 40 percent was the highest among the six South Asian countries for which data are available circa 2007 and 2012.

The fiscal deficit in FY2014/15 was 2.5 percent of GDP. Civil service wages and allowances were increased by 19 to 23 percent respectively but the impact on spending was partly offset by a stabilization of non-wage current and capital expenditures in real terms. Domestic revenues as a share of GDP have declined over the last three years, from 22 percent to an estimate of 19.9 percent in FY2014/15, while grants finance 27 percent of the budget, 70 percent of which come from India. Bhutan’s public and publicly guaranteed external debt stood at 99 percent of GDP by end-June 2015, two thirds of which are from commercially profitable hydro projects. Domestic debt stood below 5 percent of GDP. The latest Debt Sustainability Analysis (DSA) jointly conducted by the World Bank and IMF in June 2016 confirmed that Bhutan’s debt dynamics are subject to a moderate risk of distress.

Bhutan runs a growing current account deficit (26 percent of GDP in FY2014/15), to which the hydropower sector contributed 15 percentage points. The deficit is essentially financed by donor resources, to which India contributes the most through loans and grants financing hydropower projects. International reserves had slightly declined to US$ 958 million by June 2015, while remaining at a very comfortable level of about 10 months of imports, reflecting prudent management.

Inflation rate measured by the consumer price index has slowed to 3.3 percent in May 2016 from 3.4 percent in July 2015, driven by the decline in oil prices and India’s easing of inflation (Bhutan has a fixed exchange rate with India from which it imports most of its consumption).

Development Challenges

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 Eleventh Five-Year Plan (2013-2018) (11th FYP) is currently under implementation. The overall goal of the 11thFYP is “Self-Reliance and Inclusive Green Socio-Economic development[1]”. The Guidelines for the Preparation of the 11th FYP states that although economic growth is a necessary condition for development, economic growth by itself does not necessarily translate into effective poverty reduction and broad based improvement in people’s quality of life. The Gross National Happiness (GNH) is a vision expressed by Bhutanese leaders, which supports the pursuit of higher collective wellbeing in all its dimensions, economic and non-economic, monetary and non-monetary as opposed to GDP or profit maximization. The visionary statement, “Gross National Happiness is more important than Gross Domestic Product” was first enunciated by His Majesty the Fourth King of Bhutan in the 1970s. In turn, the Fifth King declared: “Today, GNH has come to mean so many things to so many people but to me it signifies simply - Development with Values. Thus for my nation today GNH is the bridge between the fundamental values of kindness, equality and humanity and the necessary pursuit of economic growth.” Article 9-2 of the constitution directs the state “to promote those conditions that will enable the pursuit of Gross National Happiness”. GNH is translated into broad policy directions which overarch Government long-term strategies and five-year plans. The four pillars of GNH philosophy are: sustainable development; preservation and promotion of cultural values (traditional and cultural heritage paramount  - its loss leads to a general weakening of society); conservation of the natural environment (Bhutan’s constitution: 60 percent forest coverage, green economy), establishment of good governance. Therefore, Economic Development and Social Development (GNH – Pillar 1) shall be the two key thrust areas for the Eleventh Plan, with Balanced Regional Development complementing the efforts under Economic Development and Social Development. Carbon Neutral/Green Development (Pillar 2), Strengthening the Bhutanese Identity and Culture (Pillar 3) and Strengthening Good Governance (Pillar 4) shall be pursued under cross-cutting theme.

The overall outlook is positive but macroeconomic pressures on domestic demand must be managed. The impact of the ongoing turbulence in global financial and exchange markets is expected to remain moderate on Bhutan’s economy, mostly through higher imported inflation and lesser tourism earning in the event of a global economic slowdown. While debt risk is assessed as moderate, the rapid build-up over the recent year cautions against any additional non-concessional borrowing, given that Bhutan’s debt-carrying capacity will only improve in the long run reflecting significantly higher electricity exports when hydropower projects come on stream. Efforts to deepen the financial sector must be sustained to provide the country the basis for financing sound and sustainable development and diversification.

Despite remarkable progress in poverty reduction, large urban/rural gaps remain. In 2012, rural poverty rate stood at 19 percent, compared to less than 2 percent in urban areas. Over 90 percent of the poor (at PPP US$3.1/day) lived in rural areas. While poverty incidence is low, urban areas face a higher unemployment rate (6.7 percent) than rural areas (1.2 percent). The gap is more pronounced for youth unemployment: 28 percent in urban and 4.8 percent in rural in 2015. Queuing for public-sector jobs and high reservation wages among urban youth and widespread informality in rural areas point to significant mismatches in the labor market.

Bhutan became a member of the World Bank in 1981. Through the International Development Association (IDA), the World Bank’s concessionary lending affiliate that provides low-interest or interest-free loans, the Bank began its program of assistance to Bhutan in the early 1980s. Bhutan joined the International Finance Corporation (IFC) in 2003 and the Multilateral Investment Guarantee Agency (MIGA) in October 2014.

Country Partnership Strategy

The current joint World Bank/IFC-Bhutan Country Partnership Strategy (CPS) covers the period FY2015-19 and is aligned with the government’s 11th FYP and organizes its activities under three results areas:

(i)              Improving fiscal and spending efficiency,

(ii)             Increasing private sector growth and competitiveness,

(iii)             Supporting green development.

Implementation of the CPS will be monitored through a results matrix. The CPS seeks to protect Bhutan’s recent gains in reducing poverty and boosting shared prosperity through continued focus on improving rural livelihoods and managing urbanization, while protecting its natural assets. At the same time, it will focus on the emerging challenges of increasing Bhutan’s competitiveness and managing the gains of rapid growth fueled by hydropower development. Here, the World Bank Group (WBG) will aim to support the government to manage macroeconomic and fiscal imbalances, design a clear fiscal strategy and role for the public sector and improve the business environment to diversify the economy.

Drawing on the lessons of past programs in Bhutan and feedback from stakeholder consultations, the WBG’s engagement during this CPS period will aim to be selective and to leverage IDA resources through partnerships and knowledge sharing. The WBG will exercise greater selectivity by focusing new interventions in areas that are critical for future growth, while building on Bhutan’s past achievements in poverty reduction through the existing portfolio. New interventions will aim to strengthen the investment climate to spur private sector growth and job creation and to facilitate regional connectivity so landlocked Bhutan can reap the benefits of proximity to the vibrant markets of India and Bangladesh. Much of this work will be supported through analytical work and technical assistance. The main envisaged financing instruments include a series of Development Policy Credits (DPC) and investment loans (including potentially regional IDA resources) to finance trade and transport infrastructure to support intra-regional trade. Given the limited resource envelope for Bhutan, the WBG will leverage additional resources—financing and non-financing—to meet Bhutan’s growing needs along three fronts: (i) increased coordination within the WBG; (ii) partnerships with other donors; and (iii) supplementing of IDA financing with technical assistance and analytical work.


Bhutan’s IDA17 allocation is about US$56 million over three years between July 2014 and June 2017, given that Bhutan has one of the highest Country Policy and Institutional Assessments (CPIA) in the IDA cohort. The program is small but active, with four IDA operations under implementation: (i) Development Policy series of two operations (US$20 million each); (ii) Urban Development II (US$12 million) and additional financing (US$17 million); (iii) Remote Rural Community Development (US$9 million); (iv) Bhutan is a small participant in the regional IDA wildlife project (US$2.9 million) with a total commitment of US$41.9 million of IDA (plus US$20 million of Development Policy Credit).

Bhutan also has about 12 other trust funded-operations, including a GEF sustainable financing for biodiversity and several grants on disaster management, REDD+, hydromet, corporate governance, PFM, intergovernmental fiscal relations, ICT, tourism and cultural heritage, hydropower environmental and social impact assessment, urban public transport, financial sector (FIRST), South-South knowledge exchange, statistical capacity building.

The first Development Policy Credit (of a series of two) became effective in July 2015 for a total of US$20 million.  The Bank has been preparing for additional IDA operations in FY2017 including: (i) the regional connectivity project (national IDA of US$9 million, with additional regional IDA); and (ii) the second Development Policy Credit.

Advisory Services and Analytics (ASA)

The Bank also undertakes considerable analytical work in Bhutan.  A number of key ASA 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. The Bank also provides Bi-Annual Economic Update which is shared widely with its stakeholders including the Development Partners. Other completed work/assistance include a Public Finance Note- a Just In Time Note to assess the short, medium and long term impact of hydropower development on the Bhutanese macro-economy and the role of public finance in addressing related challenges; Poverty assessment, a green growth study; Assistance to build a public expenditure database (BOOST); Update of the National Statistical Strategy and implementation of CAPI methods for surveys; Update of the ICT Roadmap; Enterprise Survey 2015; Support the development of Bhutan’s Social Protection Strategy and Technical research on electric vehicles and international experiences with EV incentives. Ongoing FY16 analytic work includes an in-depth labor market study, an agribusiness note and an investment climate assessment, Environmental and Social impact of hydropower,  mining, a financial sector strategy, the review of Bhutan’s tourism policy, hydromet, disaster management and climate change TA (Bhutan is a pilot PPCR country), a procurement review to allow Thimphu municipality to use Alternative Procurement arrangements (APA) per the World Bank new Procurement Policy, social assistance technical assistance focused on discussion for better understanding of poverty and vulnerability, Poverty and Social Impact Analysis of the draft Heritage Sites Bill, Green Data Center strategy and a technical assistance on tax reforms. The active ASA portfolio are selected according to one of the 3 following principles: (i) support an ongoing or future operation; (ii) fill a knowledge gap critical for Bhutan’s development path; (iii) strategically position the World Bank.

International Finance Corporation (IFC)

The IFC has a total committed investment portfolio in Bhutan of about US$34 million. The portfolio consists predominantly of IFC’s equity participation in Bhutan National Bank (BNB) and support for the expansion of a local hotel. IFC, using some of its own funds and mobilizing funds from the ADB and GAFSP, will provide US$12 million in equity and debt assistance to a hazelnut plantation project in Bhutan. IFC’s first debt assistance of US$10 million to a local hotel was made in 2003 and successfully liquidated in June 2015.

The advisory portfolio includes advice in structuring PPPs, improving Bhutan’s investment climate and enhancing access to financial services. IFC successfully completed a post-transaction advisory engagement with the Thimphu Municipality for the development of a multi-level car park PPP project. The engagement involved advising municipal and government officials in managing PPP projects using the case of the ongoing project. IFC is also providing assistance to the Ministry of Economic Affairs and Druk Holding and Investments to help them consider setting up a power trading company in India.

IFC continues to explore areas of assistance in the hydropower, tourism, manufacturing, agribusiness, health, and education sectors, among others. IFC’s advisory support on investment climate reforms, infrastructure development through PPPs and the financial sector is expected to continue.

Multilateral Investment Guarantee Agency

On October 21, 2014, Bhutan became the 181st member of MIGA.  In light of Bhutan’s recent membership, MIGA has not provided guarantee coverage for investment in Bhutan to date. 

Under the current Country Partnership Strategy, outcomes have been satisfactory and notable advances have been made in each of the three CPS results areas.

Improving fiscal and spending efficiency

The CPS attempts to addresses the need to increase revenues and reduce the fiscal deficit through a combination of ongoing policy dialogue and program support using the DPC as an instrument. Fiscal responsibility will supplement the efforts for smoothing consumption by adoption of prudent fiscal rules to manage public finances, with the goal to enforce greater discipline on government spending and reduce the fiscal deficit. In parallel to the DPC, the WBG has also provided policy support through various knowledge products, particularly a public finance think piece, which identifies possible saving opportunities, including possibilities for outsourcing activities to the private sector and increasingly relying on demand side finance for service delivery. The Bank is also supporting the Ministry of Finance on tax reforms, building on previous work by the IMF.

Progress toward improving private sector participation for strategic infrastructure has been significant. The Bank’s technical assistance has resulted in finalizing Bhutan’s PPP policy. 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. The Bank continues to provide technical assistance to help the government to draft the PPP rules and regulations.

Progress has been made in strengthening fiduciary systems and public financial management (PFM). The WBG continues to support efforts to strengthen PFM and procurement to align country systems to international standards. Further, to take the PFM agenda forward, a national level apex committee—the PFM Governance Group (PFM-GG)—has been formed to provide oversight, guidance, revision and monitoring of the implementation of the government’s PFM reform action plan. Ongoing PFM technical assistance supports setting-up and operationalizing the PFM-GG, supporting implementation, the review of existing planning, budgeting, revenue and expenditure management systems, training of public accountants, and strengthening of internal audit functions. As the next step, the WBG continues to support this agenda through the PFM Multi-Donor Fund, focused on strengthening: (i) fiscal management and budget formulation; (ii) accounting and reporting systems; (iii) public procurement through automation ensuring economy, efficiency and enhanced transparency; and (iv) accountability institutions. The MDF will provide a common platform for donor support to the government’s PFM action plan. A Public Expenditure and Financial Accountability (PEFA) conducted in May 2016 to assess the progress over the last five years and to sharpen the focus of the action plan is being finalized.

On 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.

Increasing Private sector growth and competitiveness

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.The WBG continues to promote the investment climate reforms with a focus on the regulatory business framework and access to financial services with the ultimate goal to increase private investment and promote growth and job creation. The DPC series along with technical assistance supports several ongoing and future policy reforms to strengthen the legal and regulatory framework that will simplify business procedures—inter alia by reducing the number of days required to start a business—promote fair competition and increase private investment. Key reforms include the Companies Act, the PPP policy, the Enterprise Registration Bill, business licensing policy and FDI policy.

To complement efforts to improve the business environment, the WBG undertook analytical work to enhance the understanding of Bhutan’s labor market dynamics and social protection. The government recognizes that the lack of safety nets, particularly for workers outside the public sector, leaves the population vulnerable. It also leads to a bias among young job seekers who pursue the limited opportunities in the public sector to secure better benefits. In order to increase the attractiveness of private sector jobs, it will be necessary to rebalance these benefits. To this end, the WB provided technical assistance in the design of a social protection strategy and the implementation of a safety net scheme for the most vulnerable. In addition, an in-depth study of the labor market dynamic and skills to examine the rising youth unemployment, labor mismatch, and bias towards the public sector is under process.

The WBG seeks to expand Bhutan’s trade prospects through financing for critical regional connectivity infrastructure. An IDA regional connectivity project to facilitate regional trade will respond to the 2014 poverty assessment, which identifies road connectivity (domestic and regional) as a key driver of poverty reduction and shared prosperity. The proposed project will greatly facilitate Bhutan’s international trade, especially with India and Bangladesh.

Good progress has been made in strengthening financial infrastructure and improving financial inclusion. The WBG continues to provide comprehensive support to implement a sound policy framework of the financial system, with a focus on increasing access to financial services. The WBG has supported the government in key financial sector reform, the amendment of the Royal Monetary Authority (RMA), amendment of the Movables and Immoveable Property Act and the development of a Financial Sector Development Action Plan. The Implementation of the action plan will pave the way for a more inclusive financial sector in Bhutan.

Supporting Green Development


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. Through an ongoing IDA operation, the Remote Rural Communities Development Project (RRCDP), WBG continues to promote improved irrigation and agronomic practices and rehabilitation of productive assets for key commodities. The project has also mainstreamed gender in the planning and implementation of the community infrastructure investments and agriculture technology with particularly focus on benefitting the female labor force. In addition, community-led investment has improved access of the poorest people (particularly women) to critical and missing infrastructure needs in the selected areas.

Under the Second Urban Development project, WBG continues to support improved urban planning and infrastructure provision in Thimphu. Capacity-building has been expanded to include two additional Thromdes or city corporations to promote more efficient, transparent and financially sustainable local governments. Basic infrastructure services such as roads, water supply, and sewage is targeted to improve in northern Thimphu.

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 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 also been prepared and recommendations presented to relevant ministries and other government and civil society bodies. WBG continues its engagement on disaster risk and climate change management in assisting the government to strengthen its disaster management and climate resilience.  In particular, it is helping build capacity of these respective agencies to support local communities’ preparedness and response to both seismic and water related hazards.

WBG also remains engaged in helping the country to manage its natural capital to enhance its contribution to development in a sustainable way. It continues its ongoing engagement in sustainable mining.


Bhutan: Commitments by Fiscal Year (in millions of dollars)*

*Amounts include IBRD and IDA commitments