document of the world bank for official use only report no...
TRANSCRIPT
Document of The World Bank
FOR OFFICIAL USE ONLY
Report No. 70900-BT
PROGRAM DOCUMENT
FOR A
PROPOSED CREDIT
IN THE AMOUNT OF SDR23.9 MILLION (US$36 MILLION EQUIVALENT)
TO
THE KINGDOM OF BHUTAN
FOR A
SECOND DEVELOPMENT POLICY CREDIT
August 27, 2012
Poverty Reduction and Economic Management Unit South Asia Region
This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.
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BHUTAN - GOVERNMENT FISCAL YEAR July 1 – June 30
CURRENCY EQUIVALENTS (Exchange Rate Effective as of August 29, 2012) Currency Unit: Ngultrum
US$1.00 Nu. 55.6653
ABBREVIATIONS AND ACRONYMS AASBB Accounting and Auditing Standards Board of IEG Independent Evaluation Group Bhutan IFRS International Financial Reporting Standards ACC Anti-Corruption Commission IMF International Monetary Fund AD Asset Declaration IPSDS Integrated Public Service Delivery System ADA Asset Disclosure Administrators JICA Japan International Cooperation Agency ADB Asian Development Bank LGA Local Government Act ADF Asian Development Fund MDGs Millennium Development Goals BAS Bhutanese Accounting Standards MoEA Ministry of Economic Affairs BPFFS Budget Policy and Fiscal Framework Statement MoF Ministry of Finance BSS Bhutan Statistical System MoLHR Ministry of Labor and Human Resources BUDP2 Bhutan Urban Development Project 2 MoWHS Ministry of Works and Human Settlements CAR Capital Adequacy Ratio MYRB Multi-Year Rolling Budgets CAS Country Assistance Strategy NACSF National Anti-Corruption Strategic Framework CIB Credit Information Bureau NDRMF National Disaster Risk Management Framework CPI Consumer Price Index NECS National Environment Commission Secretariat CPIA Country Policy & Institutional Assessment NEPA National Environment Protection Act CPS Country Partnership Strategy NPL Non Performing Loans CRR Cash Reserve Ratio NSB National Statistics Bureau DAC Development Assistance Committee NSDS National Statistics Development Strategy DANIDA Danish International Development Agency OECD Organization for Economic Cooperation and DDM Department of Disaster Management Development DNA Damage and Needs Assessment PCC Phuentsholing City Corporation DoR Department of Roads PEFA Public Expenditure and Financial Accountability DPA Department of Public Accounts PEMS Public Expenditure Management System DPC Development Policy Credit PFM Public Financial Management DPG Development Policy Grant PPPD Public Procurement Policy Division DPOs Development Policy Operations PPPs Public Private Partnerships DPFIS Development Policy Financing for Institutional PRR Procurement Rules and Regulations Strengthening PRSP Poverty Reduction Strategy Paper DRM Disaster Risk Management RAA Royal Audit Authority DSA Debt Sustainability Analysis RAP I First Rural Access Project EAA Environmental Assessment Act RAP II Second Rural Access Project ECB External Corporate Borrowing RGoB Royal Government of Bhutan ECoPS Environmental Codes of Practice RMA Royal Monetary Authority EDP Economic Development Policy RSEA Regulation on Strategic Environmental EFRC Environmentally Friendly Road Construction Assessment EFTCS Electronic Funds Transfer Clearing System RSMP Road Sector Master Plan FDI Foreign Direct Investment RSTLAW RMA Short Term Liquidity Adjustment GDP Gross Domestic Product Window G2C Government to Citizen SAARC South Asian Association for Regional GNHC Gross National Happiness Commission Cooperation GNI Gross National Income SBI State Bank of India HRD Human Resources Development SMEs Small and Medium Enterprises IAS International Accounting Standards TFP Thromde Finance Policy ICA Investment Climate Assessment UCS Use of Country Systems ICB Inter-Corporate Borrowing UNCAC United Nations Convention Against Corruption ICRR Implementation Completion and Results UNDESA United Nations Department of Economic and
Report Social Affairs ICT Information & Communication Technology UNDP United Nations Development Program IDA International Development Association 10FYP Tenth Five-Year Plan IDF Institutional Development Fund 11FYP Eleventh Five-Year Plan
Vice President: Country Director:
Sector Director: Sector Manager:
Task Manager:
Isabel M. Guerrero, SARVP Robert J. Saum, SACAF Ernesto May, SASPM Vinaya Swaroop, SASEP Lalita M. Moorty, SASEP
Bhutan DPC2 Task Team (In alphabetical order)
Farhad Ahmed : Senior Transport Specialist, SASDT Shahnaz Sultana Ahmad : Program Assistant, SASEP Preeti Arora : Senior Economist, SARQA Vikram Chand : Senior Public Sector Management Specialist, SASGP Drona Raj Ghimire : Environment Specialist, SASDI Savinay Grover : Financial Management Specialist, SARFM Manju Hathtotuwa : Senior ICT Policy Specialist, SASFP Manoj Jain : Senior Financial Management Specialist, SARFM Sapna John : Program Assistant, SASGP Bala Bhaskar Naidu Kalimili : Statistical Officer, DECDG Aphichoke Kotikula : Economist, SASEP Zahed Khan : Senior Urban Specialist, SASDU Naoko Kojo : Senior Economist, PRMED Roch Levesque : Senior Counsel, LEGES Augustin Pierre Maria : Urban Specialist, SASDU Shafiq Muhammad : Program Assistant, SASEP Lalita Moorty : Senior Economist, SASEP, Task Team Leader Somil Nagpal : Health Specialist, SASHD Cecile Thioro Niang : Senior Economist, SASFP Susan Opper : Senior Education Specialist, SASHD Ann Christine Rennie : Lead Financial Sector Specialist, SASFP Kumaraswamy Sankaravadivelu : Procurement Specialist, SARPS Chau-Ching Shen : Senior Finance Officer, CTRLN Thirumalai G. Srinivasan : Senior Economist, SASEP Dechen Tshering : ET Consultant, SASDU Andrea Vermehren : Senior Social Protection Specialist, SASHD
Peer Reviewers (In alphabetical order)
Abebe Adugna : Lead Economist, ECSP2 Francisco Carneiro : Lead Economist, ECSP1 Christian Eigen-Zucchi : Special Assistant, MDM
THE KINGDOM OF BHUTAN
A PROPOSED SECOND DEVELOPMENT POLICY CREDIT
TABLE OF CONTENTS
I. INTRODUCTION ................................................................................................................. 1 II. COUNTRY CONTEXT ........................................................................................................ 3
A. Recent Economic Developments in Bhutan ........................................................................ 4 B. Macroeconomic Outlook .................................................................................................... 9
III. BHUTAN’S REFORM PROGRAM AND THE PARTICIPATORY PROCESS ........ 12 IV. BANK SUPPORT TO THE ROYAL GOVERNMENT’S PROGRAM ........................ 17
A. Links to Bhutan’s Country Partnership Strategy .............................................................. 17 B. Collaboration with the IMF and Other Donors ................................................................. 17 C. Relationship to Other Bank Operations ............................................................................ 18 D. Lessons Learned ............................................................................................................... 19 E. Analytical Underpinnings ................................................................................................. 20
V. THE PROPOSED OPERATION ...................................................................................... 20
A. Operation Description ....................................................................................................... 20 B. Policy Areas for Support under DPC2 .............................................................................. 22
VI. OPERATION IMPLEMENTATION............................................................................... 30
A. Poverty and Social Impacts ............................................................................................... 30 B. Environmental Aspects ..................................................................................................... 31 C. Implementation, Monitoring, and Evaluation ................................................................... 33 D. Fiduciary Aspects ............................................................................................................. 33 E. Disbursement and Auditing .............................................................................................. 34 F. Risks and Risk Mitigation ................................................................................................. 34 Annex 1: Policy and Institutional Reforms supported by DPC1 and DPC2 .............................. 36 Annex 2: Royal Government of Bhutan Letter of Development Policy .................................... 39 and Policy Program Matrix ........................................................................................ 39 Annex 3: Macroeconomic and Fiscal Tables ............................................................................ 50 Annex 4: Bhutan—IMF Assessment Letter for the World Bank .............................................. 53 Annex 5: Bhutan At a Glance .................................................................................................... 56
MAP OF BHUTAN
CREDIT AND PROGRAM SUMMARY THE KINGDOM OF BHUTAN
FOR A PROPOSED SECOND DEVELOPMENT POLICY CREDIT (DPC2)
Borrower Royal Government of Bhutan (RGoB) Implementing Agency
Department of Public Accounts, Ministry of Finance, Royal Government of Bhutan
Financing Data Credit: SDR23.9 million (US$36 million equivalent) (Blend terms; 25 years maturity with 5 years of grace)
Operation Type This operation is proposed as the second in a series of Development Policy Credits (DPCs), to support the RGoB’s medium-term reform agenda. Funds will be disbursed in a single tranche upon effectiveness.
Main Policy Areas
This proposed operation supports policy areas in the RGoB’s development agenda laid out in the Tenth Five Year Plan (10FYP). These policy areas are: (a) strengthening fiduciary systems for public financial management, improving transparency and efficiency of public procurement, strengthening public administration; (b) creating an enabling policy environment for the private sector, fostering private sector dynamism through enhancement of access to credit, strengthening the institutional framework underpinning the labor market, improving the employability of job-seekers; (c) promoting institutions to help meet road sector targets, fostering urban development and municipal management, promoting environmental sustainability.
Key Outcome Indicators
Progress Indicator Baseline (2008/09)
DPC1 (2010/11)
DPC2 (2012/13)
Reduced timeline for delivery of key services.
Service delivery standards under preparation, not implemented or online.
Service delivery standards prepared.
- Timber Permits: 180 to 21 days; - Security clearances: from 1 week to 24 hours; - Citizen ID Cards: from 35 days to 5 days.
Number of IAS/IFRS standards notified.
Consultants hired; no standards notified.
AASBB established and roadmap prepared; no standards notified.
18 Bhutanese Accounting Standards as per AASBB roadmap notified and adopted.
Number of Bank accounts linked to CIB, with Self Inquiry and Consumer Credit Information reports being generated.
CIB under development, but not operational.
Over 75 percent accounts linked to CIB, with reports generated.
Over 90 percent of all Bank accounts linked to CIB, with reports generated.
Computerization of property tax records and municipal assets in Thimphu and Phuentsholing City Corporations.
No Municipal Finance Policy in place.
Municipal Finance Policy drafted.
- Property tax records in Thimphu and Pheuntsholing City Corporations digitized. - Municipal asset register Thimphu and Pheuntsholing City Corporations computerized.
This DPC2 supports: (i) promoting government efficiency and effectiveness through sound fiscal and public financial management and procurement, and strong public administration; (ii) fostering private sector development by improving the policy environment and facilitating productive employment opportunities; and (iii) expanding access to infrastructure in a sustainable manner.
Program Development Objectives and Contribution to CPS
The Country Partnership Strategy (CPS) for Bhutan, covering FY11-14, is aligned to the 10FYP. The CPS emphasizes selectivity and proposes World Bank Group support for development in Bhutan in two broad areas: (i) economic diversification, job creation, and financial inclusion – for increasing growth and employment led by the private sector; and (ii) spatial planning and public services – for enhancing standards of well-being. These areas are underpinned by two cross-cutting themes of capacity building for good governance and environment. The objectives of both operations in this series are consistent with the CPS because both support implementation of the 10FYP. The three focus areas of the DPCs link well with the CPS areas of engagement. The first DPC component on promoting government efficiency and effectiveness will contribute to the cross-cutting theme on governance in the CPS. Improved budgetary processes, better fiduciary systems, expanded e-governance, and stronger public administration will strengthen institutional capacity and will help improve the quality of services for citizens. The second DPC component on private sector development aligns directly with the economic diversification and financial inclusion pillar of the CPS, and actions to enhance employability and improve the policy environment for the private sector will contribute to the corresponding CPS goals. The third DPC component on improving sustainable access to infrastructure will support spatial planning and public services. Institutional strengthening in the roads and urban sectors will ultimately help provide better access and quality, while measures to promote environmental sustainability and strengthen disaster risk management will contribute to better environmental stewardship.
Risks and Risks Mitigation
The main risks are: (i) aggregate demand pressures could linger resulting in persistent rupee shortage. Mitigating factors include: recent monetary and fiscal tightening; a calibration of capital spending by the RGoB based on foreign grants or loans; and commitment at high levels of the RGoB (in close coordination between Ministry of Finance, the Royal Monetary Authority, in consultation with the World Bank) to targets as evidenced by quarterly review of macroeconomic performance. The expansion of the existing line of credit with the Government of India as well as the currency swap arrangement should help ease pressures on the rupee; (ii) capacity constraints due to the small scale of government – mitigated by the RGoB’s ongoing capacity building efforts (in many areas supported by development partners); and (iii) political risk of changing government priorities – mitigated by the RGoB’s wide consultations on the development agenda and its commitment to sustaining reforms.
Operation ID P128201
1
IDA PROGRAM DOCUMENT FOR
A PROPOSED SECOND DEVELOPMENT POLICY CREDIT TO THE KINGDOM OF BHUTAN
I. INTRODUCTION 1. The second Development Policy Credit (DPC2) proposes financial support to the Royal Government of Bhutan (RGoB) in the amount of SDR23.9 million (US$36 million equivalent). The DPC2 is the second and final operation in a programmatic series that supports the RGoB’s Tenth Five Year Plan (10FYP).1 The development objectives of the series are: (i) promoting government efficiency and effectiveness through sound fiscal and public financial management and procurement, and a strong public administration; (ii) fostering private sector development by improving the policy environment and facilitating productive employment opportunities; and (iii) expanding access to infrastructure in a sustainable manner. The DPC2 reinforces reform areas supported by the First Development Policy Credit (DPC1)2 and builds the earlier policy-based operations. The DPC2 is aligned with World Bank’s strategic directions set out in the Country Partnership Strategy (CPS, FY11-14). 2. With a strong record on development, Bhutan is a well-performing country in South Asia. Real GDP grew by 8.5 percent during the past decade underpinned by political stability, prudent macroeconomic management, and the development of a hydropower sector. Atlas GNI per capita in 2011 is US$2,070, second only to Maldives in the region. While recognizing the importance of economic growth in alleviating poverty, the RGoB also prioritizes sustainable development. Therefore, its development vision attempts to maximize Gross National Happiness – a vision that places as much weight on the social, spiritual, intellectual, cultural and emotional needs of a society as it does on economic gain. In addition, several initiatives are in place to reduce corruption before it becomes a major issue, use its hydropower resources to fund socio-economic development, strengthen fiscal management to counter the impacts of economic volatility, foster private sector development to help diversify the economy, and provide gainful employment for its educated youth. With a Transparency International Corruption Perceptions Index of 5.7 in 2011, the country ranks better than others in the region. It had a Country Policy and Institutional Assessment (CPIA) rating of 3.9 in 2011 – also the highest in the region. On the social front, the country has already achieved three Millennium Development Goals (MDGs), and is on track to achieve the rest.3 3. However, Bhutan faces several challenges. As a small open economy dependent on hydropower revenues and budgetary grants, economic volatility complicates macroeconomic management. In the 10FYP, slightly over half the total Government revenues are expected to come from grants and sales of electricity to India. Therefore, revenues are dependent on the timing of hydropower projects coming on stream as well as on the seasonality of hydropower revenues, and on timely receipt of grants. Moreover, the development of a vibrant private sector is constrained by the absence of scale economies,4 limited access to finance, mismatched skills of the labor force, and under provision of infrastructure in a country with a difficult terrain. Because of a thinly spread population and high transport costs, benefits from urban agglomeration need to be promoted – therefore, urban management is important. Finally, given its vulnerability to natural disasters, Bhutan needs to put in place robust plans to manage risks proactively.
1 The 10FYP spans FY2008/09 to FY2012/13 2 The DPC1 was presented to the World Bank Board in November 2010. 3 Annex 5. 4 The 2011 Labor Force Survey Report estimates the population at 713,300, with a labor force of around 334,200. (http://www.molhr.gov.bt/molhrsite/wp-content/uploads/2011/11/Final-LFS-2011.pdf).
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4. The first democratically elected Government set out its development agenda in the 10FYP. The RGoB is committed to maintaining a sound macroeconomic framework by keeping the fiscal deficit below 5 percent of GDP on average over the Plan period through prudent expenditure patterns and by keeping current expenditures in line with domestic resources. In the first two years of the 10FYP (FY2008/09 and FY2009/10), including foreign grants averaging 14 percent of GDP, the RGoB ran small fiscal deficits averaging of around 1.8 percent of GDP.5 However, because of ambitious capital expenditures,6 the deficit rose to 2.1 percent of GDP in FY2010/11 and widened further to 3.5 percent in FY2011/12. In FY2012/13, largely because of expenditure compression and rationalization measures, the fiscal deficit is projected to narrow to 1.6 percent of GDP.
5. While Bhutan was largely insulated from the global economic crisis, it was affected by shocks resulting from natural disasters. The impact of the global economic crisis was felt temporarily through lower convertible currency revenues from tourism (US$31.8 million in 2009, down from US$38.8 million in 2008). Tourism revenues rebounded in 2010 and 2011. Meanwhile, natural disasters imposed significant economic costs. In May 2009, floods resulting from Cyclone Aila caused US$15 million in damage to infrastructure, followed by an earthquake in September that caused US$94 million in losses and reconstruction costs.7 An earthquake centered in the northeastern part of India in September 2011 resulted in losses and reconstruction costs of about US$56 million.8
6. As pointed out in the DPC1 Program Document, the World Bank supported Bhutan’s development agenda using three budget-support operations before this programmatic series. The First and Second Development Policy Grants were a programmatic series designed to support medium-term reforms.9 These two operations of US$15 million in FY06 and US$12 million in FY07, helped deepen policy dialogue and achieve selected development goals. Following the first democratic elections in 2008, a stand-alone Development Policy Financing for Institutional Strengthening (DPFIS) operation for US$20.22 million was approved under the previous Country Assistance Strategy (CAS) to support the development goals of the 10FYP.10 The ICRRs for all three operations show that they have satisfactorily achieved their development objectives.11 Progress under these operations include improving fiscal and financial management and procurement, enhancing transparency and accountability in public services, fostering private sector development, enhancing employment opportunities, promoting access to and enhancing the quality of infrastructure, and supporting environmental sustainability.
5 The RGoB publishes budget reports and financial statements on their website: http://www.mof.gov.bt/index.php?deptid=17&id=27. The RGoB recognizes that the quality of the fiscal data in Bhutan is weak and has requested World Bank assistance in improving it. 6 These do not include capital spending on hydropower projects that are off budget. 7 National Recovery and Reconstruction Plan Implementation Period: 2009-11, Department of Disaster Management, RGoB. 8 National Recovery and Reconstruction Plan Implementation Period: 2011-16, Department of Disaster Management, RGoB. 9 The DPG series highlighted measures to: (a) enhance the delivery of public services by strengthening fiscal management, (b) increase the effectiveness of public spending by improving financial management and procurement processes, (c) create better income earning opportunities by improving the investment climate, facilitating greater labor market flexibility, and increasing foreign direct investment, (d) raise educational attainment, particularly in previously under-served areas, by expanding access to high quality education services, and (e) reduce maternal mortality by increasing the number of births delivered in health facilities. 10 The DPFIS supported: (a) promoting good governance through sound fiscal and public financial management and procurement, and strong accountability institutions; (b) fostering dynamic labor markets, ensure skills match, and generate employment; and (c) expanding access to infrastructure (roads, hydropower, ICT) in an environmentally sustainable manner. 11 See World Bank (2010). “ICRR for Development Policy Financing for Institutional Strengthening,” and World Bank (2008), ICRR for Development Policy Grants 1and 2.”
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7. The current two-operation programmatic series responds to RGoB’s request to support its institutional reforms and to provide untied resources for its development agenda. As the young democracy deepens institutional reforms in pursuit of its development goals, assistance from the World Bank will be crucial. The RGoB has indicated that the World Bank’s budget-support operations have helped in furthering the RGoB’s policy reform agenda and has requested its support to carry this forward. While other development partners assist Bhutan, their financing is largely project specific and disburses over time. The DPC series are valuable because they are quick disbursing operations that can be deployed flexibly by the RGoB. Most important, they provide support during a critical transition in the Bhutanese economy, which is making massive upfront investments in productive capacity in the hydropower sector to generate a perpetual stream of significantly higher electricity export revenues. These resources are vital, therefore, to ensuring the sustainability and growth of the Bhutanese economy and supporting the general welfare for its people. As requested by the RGoB, this series builds on the previous DPFIS and focuses on strengthening institutions to:
Promote government efficiency and effectiveness through sound fiscal and public financial management and procurement, and strong public administration;
Foster private sector development by improving the policy environment and facilitating productive employment opportunities;
Expand access to infrastructure in a sustainable manner.
II. COUNTRY CONTEXT
8. Bhutan’s location provides opportunities and challenges. Nestled in the eastern Himalayas, Bhutan is bordered by two Asian giants – China and India. Its tiny population of about 713,300 is spread over 38,394 square kilometers. Elevation ranges from 200 meters in the southern foothills to some peaks in the north that are around 7,000 meters above sea level. Bhutan’s picturesque topography consists of tall mountains, thick forests and tumultuous rivers. In keeping with its philosophy of sustainable development, Bhutan’s constitution requires that 60 percent of its land area be covered by forests (around 72 percent of the land was under forest cover in 2010). Challenges include a difficult terrain – tall mountains with sheer drops – that makes connecting remote areas difficult and expensive. Moreover, Bhutan is located on the Indian and Eurasian tectonic plates, whose movements and collisions cause frequent earthquakes in the area. It also experiences other disasters such as landslides, forest fires, and glacial lake outburst floods. 9. Bhutan transitioned peacefully from a monarchy to a multi-party democracy in 2008, following a decade of planning and consultations. This transition started under the leadership of the Fourth King, Jigme Singye Wangchuck, who stepped down in December 2006 in favor of his son, Jigme Khesar Namgyel Wangchuck. After widespread consultations and preparations,12 the Constitution was finalized and elections were held. The King is the nominal head of state while the executive power rests in the hands of an elected Government led by the Prime Minister. The new democratic system consists of a National Council and a National Assembly. The National Council has 25 members of which 20 are elected and 5 are appointed by the King. The National assembly has 47 elected members who are affiliated with political parties. Election for the National Council was held on December 31, 2007 and for the National Assembly on March 24, 2008. The ruling party, Druk Phuensum Tshogpa, holds 45 of the 47 seats in the National Assembly. The next elections both the National Council and the National Assembly are due within the year and the dates are being decided by the Election Commission.
12 These included the establishment of numerous constitutional bodies, including an election commission, an anti-corruption commission and an independent auditor-general.
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A. Recent Economic Developments in Bhutan 10. Bhutan’s growth performance remains strong. Real GDP grew at an average annual rate of 7.8 percent over the period 2008/09-2011/12 (Table 1), which is in line with the target for the 10FYP. Both hydropower13 and non-hydropower sectors contributed almost equally to GDP growth between 2008/09 and 2011/12. Growth in GDP of the hydropower sector (construction, generation and transmission) slowed during 2010/12 because of the phasing of construction activities and temporary technical problems with the operation of Tala plant. Value added in the non-hydropower sector during the 10FYP was driven mostly by manufacturing and services. The former was largely because of new industries coming into the country attracted by the availability of power.
2008/09 2009/10 2010/11 2011/12
Act. Act. Act. Est.
Real sector
GDP growth 5.7 9.3 8.5 7.7
Hydropower GDP 11.3 13.7 11.1 9.3
Non-hydropower GDP 4.1 7.0 6.6 7.1
Consumer prices (period average) 7.1 4.8 8.6 9.1
Monetary sector
Broad money 30.1 30.1 21.1 3.5*
Credit to private sector 28.9 40.7 29.4 28.0*
External sector
Current account balance -1.1 -9.9 -24.3 -23.5
Trade balance -7.5 -20.8 -30.7 -27.7
Overall balance 9.5 7.4 5.8 5.1
Gross int'l reserves (in millions of US$) 758 862 950 769
Gross int'l reserves (months of G&S imports) 9.7 8.7 9.3 7.0
*Data as of end-May 2012.
Source: Bhutanese authorities.
(annual percentage change)
(in percent of GDP)
Table 1: Selected Economic Indicators
11. The Bhutanese economy showed signs of overheating until recently, but fiscal and monetary actions coupled with physical controls, have helped dampen the pressures. Growing aggregate demand because of expanding fiscal deficits, spillovers from rising hydropower expenditures, and sustained growth in private sector credit led to overheating of the economy in the recent past. Given that most of the increase in aggregate demand translates into a demand for rupees in a small open economy (India is Bhutan’s largest trading partner), this resulted in a shortage of rupees by end-2011.14 The RMA sold US$200 million – around 20 percent of reserves – to meet the rupee obligations. The demand for rupees showed no signs of abating and the RMA had to impose emergency rupee restrictions in March
13 Hydropower sector GDP is defined as value added in electricity generation/distribution as well as construction of power plants. 14 Bhutan had around 7.0 months of import cover by end FY12, which while lower than at the beginning of the 10FYP, are still at a comfortable level. However, Bhutan faces a shortage in rupee reserves because its imports from India outstrip its exports. Bhutan’s constitution requires that convertible currency reserves be maintained at a level equivalent to 12 months of “essential” imports. Convertible currency reserves are built from loan/aid proceeds and to a lesser extent, through tourism. The definition of essential imports was not clear until recently, when a Task Force looking into the rupee shortage defined it as “sustenance of livelihoods and continuation of basic economic activities in the country. On the sustenance of livelihood, food, household and medical items etc are included. Basic economic activity does not envisage any expansion, but allows for the provision of raw materials, replacement and spares for capital equipment.” The earmarking of reserves to meet the constitutional requirement, when added to the reserves pledged to secure the State Bank of India overdraft facility and debt service due every year, leave little room for selling convertible currency reserves to buy rupees.
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2012 (Box 1). Recent policy actions by the RGoB and the Royal Monetary Authority (RMA), have resulted in the reduction in aggregate demand pressures. Evidence shows that the private sector credit growth has slowed remarkably. The impact on balance of payments is expected with some delay. Fiscal tightening has been put in place for the current fiscal year with a projected deficit of 1.6 percent (down from 3.5 percent in 2011/12). As a precaution, the RGoB secured an increase in the line of credit from Government of India (from Rs. 3 billion to Rs. 10 billion at 5 percent) and plans to use a SAARC Currency Swap arrangement announced in May 2012. 12. Inflation has remained high, mostly reflecting price developments in India and to some extent domestic demand pressures. Year-on-year inflation spiked to 13.5 percent in the second quarter of 2012 (Figure 1). Price increases were driven mainly by an increase in the food prices (18.4 percent), while non-food price increases have also been high (10.7 percent). Bhutan’s inflation tracks India’s closely, as the latter is the source of 80-90 percent of imports and its currency is pegged to the Indian rupee (Figure 2). While prices in Bhutan are largely influenced by developments in India, there is some evidence that domestic demand pressures are also fueling inflationary expectations. For example, looking at the non-tradables, house rents showed a rise in 2010/11 (11 percent) before moderating somewhat in the first half of 2011/12. A wedge seems to have opened up with Indian inflation since the beginning of the year with Bhutanese prices rising more, possibly because of rupee shortage fuelling profiteering by big traders and a rise in transport costs.
13. Monetary policy contributed to overheating until early 2012, but measures adopted since March 2012 have addressed it. Total credit continued to grow at rates well above 30 percent (year-on-year) from December 2010 until March 2012, driven by a strong demand for housing and vehicles.15 Since March 2012, in response to policy measures by RMA, growth in credit to private sector decelerated rapidly to 28 percent by end-May 2012 (Box 1). Month-to-month credit growth showed even sharper decline to 10 percent (three-month moving average of seasonally adjusted data) by end-June 2012, raising the likelihood of a credit crunch. While moderation in credit will cool the overheating, it needs close monitoring and proactive management to prevent rapid contraction. Over time, the policy tools introduced by RMA are expected to improve monetary transmission and allow interest rates – which have generally been low and negative in real terms – to play a more important role in monetary policy.
15 This creates pressure on the balance of payments – fueling demand for imports from India and adds to the rupee shortage.
Figure 1. Bhutan CPI Inflation (Annual percentage change)
Source: National Statistics Bureau.
Figure 2. Inflation: Bhutan and India (Annual percentage change)/1
1/ Six-month moving average. Source: National Statistics Bureau, Bhutan and Ministry of Commerce and Industry, India
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India WPI Bhutan CPI
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Box 1: Rupee restrictions, credit and liquidity control measures Faced with rupee shortage, the RMA adopted some emergency measures to enforce the existing foreign exchange regulations more rigorously and added some new restrictions in the money and banking sector. With these in place, the RMA also introduced several policy measures control credit growth. Stronger enforcement Rupee-denominated transactions. The following rupee-denominated transactions will be permitted subject to documentary evidence: (i) Payments related to Government and public sector corporations; (ii) Payments for import of capital goods, spares, raw materials and other inputs for industries (manufacturing and services); (iii) Payments for import of oil and fuel products; (iv) Payments for medical supplies and equipment; (v) Payment for the import of construction materials for approved housing constructions (by the Dzongkhag Authorities and Municipalities) as on 8th March 2012, by individuals/business entities; (vi) Payments for the import of goods excluding transport/vehicle goods (except for public transport buses) by individuals/business entities etc.; (vii) Payments for education/training and medical treatment expenses in India. Foreign exchange surrender requirement. All export proceeds must be surrendered by exporters through the banking channel within 91 days from the date of export. Access to convertible currencies. With effect from May 4, 2012, the Annual Travel Scheme (US$3,000) facility will be made available for collection from only the Bank of Bhutan’s exchange counter at Paro International Airport for passengers with a boarding pass. New restrictions Access to rupee cash from commercial banks. Release of Indian Rupees in cash to Bhutanese nationals by commercial banks (including rupee withdrawals through credit/debit cards and pre-paid cards) will be limited to Rs. 10,000 per day, with a maximum monthly limit of Rs. 50,000 per person if they have a citizenship identity card. Non-Resident Foreigners’ accounts. Non-resident foreigners could not open any deposit accounts from 9th March 2012. All existing deposit accounts were closed by 15th March, 2012 under the following conditions – (i) all accounts closed on or before 9th March, 2012 were paid in INR/BTN; (ii) term deposit accounts maturing after March 9th, 2012 had the option to pre-mature by 9th March, 2012 or continue till maturity with no further renewals. (iii) for those term deposits opting for the premature, payments were paid in INR/BTN. However, for those term deposits opting for full maturity were paid only in BTN. Private credit. In collaboration with the financial institutions, access to Indian rupees for the import of construction materials for new housing and for personal transport vehicles was temporarily suspended. Credit and liquidity control measures The RMA has taken a number of steps since March, 2012 to address the rupee shortage by dampening credit growth and the evolving liquidity position of the Banks. The RMA put in several measures to deal with credit growth, which it had to re-calibrate to deal with liquidity squeeze that ensued as the foreigners closed their accounts and the wholesale depositors withdrew their deposits in a sizeable manner to pay taxes and dividends. Currently, the measures include: (ii) Increased risk weighting (150 percent) on loans in sectors that represent over 20 percent of banks’ portfolios to be complied by end-2012; (ii) Increased provisioning on NPLs in the sector on which the bank has the greatest exposure; (iii) The introduction of a new Policy Rate, Short Term Liquidity Adjustment Window facility (RSTLAW), and base rate; and (iv) a directive issued to NBFIs (insurance companies and the NPPF) to discontinue lending activities from June, 2014; and (v) reduction in Cash Reserve Ration (CRR) to 5 percent by June 2012. Source: Royal Monetary Authority 14. The recent widening of the central government’s deficit has been due to growing capital expenditures. Bhutan has followed a prudent rule of meeting its current expenditures entirely out of current revenues (excluding grants). However, capital spending rose sharply starting 2010/11 by 7 percentage points of GDP, resulting in a fiscal deficit of 3.5 percent in 2011/12 ( Table 2). This is a 5-percentage points of GDP swing during the 10FYP, which added to aggregate demand pressures. The
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2012/13 budget commits to narrows the fiscal deficit to 1.6 percent of GDP, mainly through expenditure compression and rationalization.
2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15
Actual Actual Actual Revised Budget Projection Projection
Total revenue including grants 40.4 46.4 36.7 39.2 31.2 24.3 25.7
Total revenue excluding grants 24.2 23.4 22.8 22.9 20.7 18.8 17.8
Tax revenue 11.2 14.4 15.1 15.5 14.9 12.5 12.1
Non‐tax revenue 13.1 8.9 7.7 7.4 5.7 6.2 5.7
Grants 11.3 16.6 13.7 15.5 10.4 5.5 7.9
Project‐tied Grants 8.6 13.7 11.4 13.4 8.4 4.2 6.7
India 5.2 8.8 8.5 9.5 6.0 2.5 4.3
Others 3.4 4.9 2.9 3.9 2.5 1.7 2.4
Program Grants 2.7 2.9 2.3 2.1 2.0 1.4 1.2
India 2.4 2.1 1.8 1.6 1.4 1.2 1.0
Others 0.3 0.9 0.5 0.5 0.7 0.2 0.2
Other receipts 4.9 6.3 0.3 0.8 0.0 0.0 0.0
Expenditure and net lending 38.6 44.7 38.8 42.7 32.7 26.8 25.5
Total Expenditure 36.0 38.6 38.4 43.6 33.7 28.0 27.0
Current expenditure 19.1 19.3 19.2 19.9 17.8 16.9 16.2
Capital expenditure 17.0 19.3 19.2 23.6 15.9 11.1 10.8
Net lending (NL) ‐2.7 ‐0.6 ‐1.2 ‐0.9 ‐1.0 ‐1.2 ‐1.5
Advance/Suspense (Net) 0.3 0.5 1.6 0.0 0.0 0.0 0.0
Other Payments 4.9 6.2 0.0 0.0 0.0 0.0 0.0
Fiscal Balance, including grants 1.9 1.6 ‐2.1 ‐3.5 ‐1.6 ‐2.5 0.3
Financing ‐1.9 ‐1.6 2.1 3.5 1.6 2.5 ‐0.3
Net Borrowings ‐1.0 ‐0.6 0.5 ‐1.8 2.5 ‐2.6 0.3
Borrowings 2.5 3.5 4.2 1.0 5.6 3.0 3.0
Repayments 3.5 4.1 3.7 2.8 3.1 5.5 2.7
Changes in cash balance 1/ 0.8 1.0 ‐1.6 ‐5.3 0.9 ‐5.0 0.6
Source: Bhutanese Authorities
1/ Negative figures indicate savings.
Table 2: Central Government Operations (in percent of GDP)
15. Off-budget hydropower activities contribute to aggregate demand during the construction phase. Project spending was small during 2007/08-2008/09, with no major construction activity taking place. However, with the beginning of the construction work for the two Punachu Hydropower Projects, project spending has risen sharply since 2009/10. Projects are financed by India, with a large grant component and the bulk of the material/equipment and labor also coming from India. However, some portion of this spending spills over to the local economy through ancillary activities contributing to aggregate demand. Once the construction phase is over, much of this pressure is expected to dissipate. 16. Although public sector debt is high and on the rise, this is mostly for commercially viable hydropower projects. As of June 2012, public sector debt was estimated to be 75.8 percent, compared to 63.9 percent a year earlier (Table 3).16 Of this, around 24 percent of GDP is owed to the multilateral creditors and 51.1percent to bilateral creditors. The ADB is the largest multilateral creditor, while the
16 Excludes state-owned enterprises debt for which comprehensive data are unavailable.
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Government of India is the largest bilateral creditor. Before 2011/12, hydropower debt was twice the non-hydropower debt. Most of the public debt is owed to external creditors, and domestic debt is negligible. Debt service obligations rose since 2007-08, with the start of repayment for GoI financed hydropower projects (Figures 3 and 4).
2007/08 2008/09 2009/10 2010/11 2011/12Act. Act. Act. Act. Est.
Total Debt 1/ 59.8 59.4 55.1 63.9 75.8Domestic debt 2.5 2.1 1.6 1.2 0.7External debt 57.3 57.3 53.5 62.8 75.1
External debtPublic and publicly guaranteed 57.3 57.3 53.5 62.8 75.1
Medium- and long-term (DOD) 57.3 57.3 53.5 62.8 75.1Official creditors 57.3 57.3 53.5 62.8 75.1
Multilateral 18.9 21.0 20.0 22.4 24.0Asian Development Bank 9.4 9.8 10.5 12.0 14.3EFIC (Australia) 0.0 0.0 0.0 0.0 0.0IFAD 2.1 2.2 2.0 2.0 1.9KFAED 0.0 0.0 0.0 0.0 0.0World Bank (IDA) 7.4 9.0 7.6 8.5 7.7
Bilateral 38.4 36.3 33.5 40.4 51.1Government of Austria 5.7 5.3 4.0 5.4 4.9Government of India 31.3 29.9 27.4 32.4 43.5Government of Denmark 1.4 1.1 0.7 0.6 0.4JICA 0.0 0.0 1.4 2.0 2.3
Private creditors 0.0 0.0 0.0 0.0 0.0Short-term debt 0.0 0.0 0.0 0.0 0.0Private Non-guaranteed 0.0 0.0 0.0 0.0 0.0
Memo ItemsHydro Power Debt 37.0 34.2 33.7 43.2 44.6Non-Hydro Power Debt 20.2 23.2 19.8 19.6 30.5Nominal GDP (US$ million) 1290 1213 1433 1691 1729
1/ Data reflects recent revisions as of August 2012.
Sources: Bhutanese authorities
Table 3: Public Debt (in percent of GDP)
Figure 3. Public Sector Debt Services (in percent of GDP)
Figure 4. Public Sector External Debt Services (in percent of exports of goods & services)
Sources: Bhutanese authorities
0.0
2.0
4.0
6.0
8.0
Government of India Others
0.0
5.0
10.0
15.0
Government of India Others
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17. The external position has deteriorated since 2008/09, with strong demand for imports outstripping exports. The current account deficit was 24.3 percent of GDP in 2010/11, compared with 10 percent in the previous year, as export growth was unable to keep pace with growth in imports – particularly imports from India. Part of the increase in imports from India was related to the construction of new hydropower projects and imports of fuel, but consumption-related imports also grew strongly. In particular, there was a marked increase in imports of vehicles, which grew at 50 percent per year on average during 2009-11, facilitated by easy credit. The overall balance of payments remained in surplus in 2010/11 due to sizable grants and concessional loan disbursements. However, Bhutan’s balance of payments position with India was in deficit, as the large capital and financial account surpluses with India were insufficient to close the widening current account deficit. This has resulted in a shortage of rupees. 18. Faced with growing difficulties in financing transactions with India, the RMA has resorted to expensive short-term liquidity facilities. By end-November 2011, the RMA borrowed Rs. 3 billion from a line of credit from the Government of India at 5 percent and Rs. 8 billion at 10 percent from the State Bank of India (SBI) through an overdraft facility. In December 2011, having reached its rupee overdraft limits with the SBI, the RMA sold US$200 million from its convertible currency reserves. The purchase of rupees also allowed the RMA to clear all outstanding borrowings from the SBI. However, demand for rupees did not let up, and the RMA had to resort to the SBI overdraft facility again.
19. On the social front, poverty is declining, other social indicators have improved, but malnutrition is persistent. Over the past decade, Bhutan has made progress in reducing poverty. According to the US$1.25 a day international poverty line, the poverty rate declined by more than half between 1990 and 2008. As a result, it is on track to achieve the MDG on poverty reduction. Meanwhile, Bhutan has attained or is on-track to achieve many of the MDGs. In education, the net primary school enrollment and primary completion rates are 92 percent and 90.2 percent, respectively (2009). Bhutan has already achieved MDG of halving the proportion of people without access to improved water source and sanitation facilities. In health, mortality rates of under-five children were reduced by about half (from 123 to 61.5) between 1990 and 2007. Infant mortality has also decreased from 90 to 40.1 per 100,000 live births over the period 1990-2007. The target of reducing it by two-thirds by 2015 appears feasible. However, improvements in general wellbeing have not translated to better nutrition for children. More than a third of children are stunted. The problem is particularly severe in the Eastern region, where the prevalence of stunting is 42.8 percent. Chronic malnutrition can translate into lower potential for learning and development of the next generation.
B. Macroeconomic Outlook
20. Bhutan’s growth outlook is favorable in the medium term, but its short-term prospects are subject to downside risks. Growth is expected to remain strong, underpinned by the construction of hydropower projects. Value addition in the hydropower sector is projected to rebound strongly, with new projects being constructed and coming on stream. Non-hydropower sectors, in particular, manufacturing, are also expected to perform strongly due to the commissioning of the Dungsum Cement Project (Table 4). Nevertheless, whether this growth scenario is realized hinges on the authorities’ persistence in addressing the macroeconomic challenges. They are well aware of the implications of the rupee restrictions, and intend to lift them once demand for imports is curbed through the macroeconomic policy measures. Meanwhile, structural measures are also being considered to expand the economy’s production base in the longer term, thereby reducing import dependence and creating domestic employment. 21. The 2012/13 Budget, endorsed at the National Assembly in June 2012, is a step in the right direction. The budget envisages a reduction in the central government deficit to 1.6 percent of GDP, from 3.5 percent in 2011/12, through expenditure compression and rationalization. In particular, the budget allocation for capital expenditure is lowered sharply from 24 percent of GDP in 2011/12 to 16
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percent, with priority given to the completion of on-going works. No new activities are planned that would spill over to the 11FYP (2012/13 is the last year of the 10FYP). Allocations for non-essential current expenditure are cut, and the resulting savings are redirected towards spending on maintenance of public infrastructure. Revenue is expected to decline sharply, mainly due to a projected fall in external grants by 5 percent of GDP. The budget also projects lower domestic revenue, because of the higher maintenance costs and investment requirements associated with the Tala Plant is likely to compress the budgetary contribution from the electricity sector. To boost revenue and stem demand for imports for India, the government proposed a number of new tax measures, but only the green tax measure of 20 percent on vehicles above 1800 cc and 5 percent for the rest was approved by the Parliament. The revenue benefits from this measure will materialize only when the rupee restrictions on vehicles are lifted. The budget deficit will be financed by the combination of external and domestic sources. However, the consolidated fiscal deficit (central government deficit and hydropower deficit) is projected to widen because of the increase in project spending. Hydropower spending is projected to rise significantly because of the number of planned hydropower projects (Table 5). While hydropower project costs are financed by grants and loans by the Government of India, there will be some impact on the domestic demand. 22. Government debt is expected to rise further on account of borrowing for the construction of new hydropower projects. Public debt has risen owing to hydropower project investment. After declining to 64 percent by 2010/11, public debt is expected to rise to 96 percent of GDP by 2012/13 as a result of investments in the hydropower sector. The interim 2012 debt sustainability analysis (DSA) shows that most indicative debt thresholds are breached in the baseline scenario putting Bhutan at a high risk of debt distress. The present value of public debt is projected to peak at 115 percent of GDP in 2014/15. However, risks are mitigated by the concentration of debt in commercially viable hydropower projects, which account for more than half of total debt. Other mitigating factors are also important, including Bhutan’s strong project implementation record and good governance, and India’s strong energy demand growth. 23. The outlook on the financial sector remains favorable. The monetary measures put in place to deal with the rising aggregate demand were discussed earlier. In addition, based on reported data, banks are well capitalized and portfolio quality remains acceptable. The Capital Adequacy Ratio (CAR) was 18.6 percent as of March 2012, in excess of the 10 percent prudential requirement. Asset quality has also seen a generally improving trend over the past several years; however, there has been a recent deterioration in 2011/12, with gross Non Performing Loans (NPLs) increasing by March 2012 from 7.7 percent to 8.7 percent and from 2.1 percent to 4.1 percent net of loan loss provisioning. According to banks, most lending to the housing sector – the largest sectoral exposure of banks at 25 percent of total loans – is for construction of rental properties in urban areas, and there is significant pent-up demand for rental property due to urban migration. Moreover, banks indicate that they apply conservative loan-to-value ratios (60 percent), although lack of data on real estate values makes this difficult to confirm. So far, gross NPLs to the sector remain low, at just over 3 percent.
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2010/11 2011/12 2012/13 2013/14 2014/15Act. Est. Proj. Proj. Proj.
GDP growth 8.5 7.7 12.3 11.5 9.5 Hydropower GDP 11.1 9.3 34.6 30.1 20.9 Non-hydropower GDP 6.6 7.1 3.9 2.3 2.3Consumer prices (period average) 8.6 9.1 7.6 7.6 7.6
Central government operationsTotal revenue & grants 36.7 39.2 31.2 24.3 25.7Total expenditure & net lending 38.8 42.7 32.7 26.8 25.5Overall balance, incl. grants -2.1 -3.5 -1.6 -2.5 0.3Overall balance, excl. grants -15.8 -19.0 -12.0 -8.0 -7.6
Government debt 63.9 75.8 96.1 102.2 119.6 Government domestic debt 1.2 0.7 0.8 0.5 2.2 Government external debt 62.8 75.1 95.3 101.7 117.4
External sectorCurrent account balance -24.3 -23.5 -24.3 -32.4 -35.3 Trade balance -30.7 -27.7 -23.7 -27.5 -32.9 Exports (goods) 39.3 37.5 34.8 33.9 32.3 Imports (goods) 70.1 65.1 58.5 61.4 65.2 Grants (current transfer) 13.7 15.5 10.4 5.8 8.5Capital account balance 27.5 28.6 25.5 30.2 44.5 Loans (net) 20.7 22.7 17.4 17.3 31.0Overall balance 5.8 5.1 1.2 -3.9 6.6Gross int'l reserves (in millions of US$) 950 769 826 .. ..Gross int'l reserves (months of G&S imports) 9.3 7.0 7.0 .. ..Sources: Bhutanese authorities and IMF
Table 4: Medium Term Macroeconomic Framework
Project Capacity (MW)
Construction schedule
Development model 1/
Punachu I 1,200 2008 – 2017 IGPunachu II 1,020 2010 – 2018 IGMangdichhu 720 2010 – 2017 IGSankosh 2,560 2012 – 2018 IGKuri-Gongri 3,200 2014 – 2023 IGAmochhu 540 2013 – 2019 IGNikachu 130 2013 – 2017 ADB, JVWangchhu 570 2013 – 2020 JVBunakha 180 2012 – 2019 JVKholongchu 600 2012 – 2019 JVChamkharchhu I 770 2012 – 2020 JV
1/ IG: intergovernmental undertakings with the Government of India. JV: joint venture
Table 5: Hydropower Projects in the Pipeline
Source: Bhutanese authorities
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24. Overall, the current macroeconomic framework of Bhutanese authorities is adequate. Robust growth prospects, a frugal fiscal stance, sustainable long-term public debt, broadly appropriate monetary policy stance and precautionary foreign reserve management (including the Indian Rupees) lend credibility to the macroeconomic framework. The Bhutanese economy has good potential to realize the targeted 11 percent annual growth in the next three-years because of hydropower investments already underway. Fiscal management has always adhered to the golden rule of containing current expenditures below current revenues excluding foreign grants. The government has programmed to rein in fiscal deficit to 1.5 percent of GDP on average for the next three years. Although the scope for additional revenue mobilization remains limited in the run up to the elections in March 2013, the government has managed to introduce a broad-based green tax on import of personal vehicles that could yield revenues once the imports are allowed. The projected near-term rise in public debt is mainly to invest in hydropower projects with guaranteed export purchase agreements; the long-term debt remains sustainable. Despite the constraints of a monetary policy regime with a currency pegged to the Indian Rupee, the RMA successfully neutralized the recent overheating of the economy by deploying several monetary policy tools supplemented by temporary trade restrictions. The RMA has shown willingness to recalibrate rapidly policy levers as the situation evolves. The RMA is managing foreign reserves with goals of liquidity, safety and return (in that order) to maintain foreign reserves equal to one year of essential imports – a constitutional requirement. Though Bhutan has adequate convertible foreign currency reserves, the steady erosion of Rupee reserves proved problematic since December 2011. In addition to introducing/enforcing foreign currency regulations (in addition to fiscl and monetary measures), the RMA utilizes lines of credit with Government of India and overdraft facilities with the State Bank of India and the Punjab National Bank to replenish Rupee reserves and plans to use the SAARC currency swap arrangement as well. 25. Going forward, Bhutan needs to gradually reduce its reliance on foreign savings and diversify the economy, which would help boost employment and strengthen capacity to earn foreign currencies to support trade and development. The authorities are aware that past development paradigm, that was successful in bringing the country to this point, may no longer be sustainable. These changes will take time, but Bhutan needs to seize this opportunity to more realize its vision of gross national happiness. The proposed DPC2 is aimed at supporting the long-term structural transformation of the Bhutanese economy.
III. BHUTAN’S REFORM PROGRAM AND THE PARTICIPATORY PROCESS 26. The RGoB’s reform program, set out in the 10FYP, remains unchanged from what was described in the DPC1 Program Document.17 The 10FYP was based on consultations with a range of stakeholders, including the private sector and local government bodies across the country. The overarching objective of 10FYP is to reduce headcount poverty from 23.2 percent in 2007 to 15 percent by the end of the Plan period.18 To achieve this goal, growth needs to be sustained and the RGoB set itself a target of 7.7 percent over the medium term driven by construction, electricity, and transport and communication. The strategic priorities for the 10FYP are: (i) vitalizing industry; (ii) strengthening national spatial planning; (iii) synergizing rural-urban development; (iv) expanding strategic infrastructure; (v) investing in human capital; and (vi) fostering an enabling environment through good governance. The DPC1 Program document highlighted elements of the RGoB’s overall reform program that form the basis of this programmatic series covering FY2009/10 to FY2012/13. These areas were chosen because the RGoB identified them as crucial at the start of the series. Because the DPC1 document describes these areas in detail, they will not be repeated here. Instead, this section will focus on progress made in the reform areas supported by this DPC series.
17 This section draws from the DPC1 Program document. 18 See RGoB (2009). “Tenth Five Year Plan (2008/09 to 2012/13): Strategic Policy Perspectives and Dimensions and Sectoral Objectives.”
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(a) Promoting government efficiency and effectiveness through sound fiscal and public financial management and procurement, and strong public administration 27. In a young democracy, the 10FYP sees good governance as cross-cutting issue to create an enabling environment for development. The RGoB prioritizes the strengthening of the public financial management (PFM) and procurement systems. To ensure better public service delivery and streamline procedures, the RGoB is committed to use Information and Communication Technology. As a pre-emptive measure, the RGoB aims to strengthen the Anti-Corruption Commission (ACC) to promote transparency and reduce costs of public service delivery. 28. Several reforms were undertaken to strengthen the fiduciary systems for public financial management and procurement systems. Based on the findings of the PEFA report, the RGoB aims to strengthen the PFM framework – focusing on areas such as predictability and control in budget execution, and accounting recording and reporting that are in need of improvement. Meanwhile, the RGoB has also made progress on adopting international standards for accounting and financial reporting by Bhutanese companies – many of which are in the public sector. For competent financial reporting and transparency, the RGoB wants to develop Bhutanese Accounting Standards in line with the International Accounting Standards (IAS)/International Financial Reporting Standards (IFRS) for the public and private sector. International consultants were hired to assist the RGoB in defining the standards and its implementation, including advising the RGoB on the changes required in the necessary policy and legal frameworks to harmonize the accounting and financial reporting requirements. Towards this objective, RGoB has established an Accounting and Auditing Standards Board of Bhutan (AASBB). A road map has been prepared by AASBB towards the adoption of standards aligned to IAS/IFRS. 29. The RGoB also took steps to improve the transparency and efficiency of public procurement. Building on the progress described in the DPC1 Program document, the RGoB aims to strengthen its procurement systems based on the findings of the recently validated Use of Country Systems (UCS) Assessment.19 Progress was made in implementing the short-term recommendations of the UCS Assessment – which include the issuing a Procurement User’s guide, strengthening the Public Procurement Policy Division (PPPD), establishing a PPPD website, creating an independent bid review body, publishing contract awards immediately after award, and revising the Standard Bidding Documents for goods and works. 30. The RGoB has embarked on an ambitious Government to Citizen (G2C) program to provide services electronically to citizens in a timely fashion through community centers. The G2C service program is likely to result in a significant decline in the travel time needed to access services in a country with significant geographical barriers. The program is likely to be operational across Bhutan by December, 2012 when all 205 community centers begin functioning. The program has defined turnaround standards for some 72 individual services in key areas including: timber permits, security clearances, civil registration services (births and death certificates, issuance of citizen identity cards, household information records), and trade licenses among others. This program flows from the Integrated Public Service Delivery System (IPSDS) initiative that conceptualized the idea of delivering services in a simplified and integrated fashion across Bhutan. The IPSDS initiative was a prior action under DPC1; the G2C Program transforms IPSDS into a project, supervised by the Prime Minister’s office and the Committee of Secretaries which serves as its Board. 31. Although Bhutan outperforms its neighbors on Transparency International’s Corruption Perceptions Index,20 it has taken proactive steps to further strengthen its Anti-Corruption legal 19 This UCS assessment aims to introduce the use of national procurement systems for projects funded by the World Bank. 20 In 2011, Bhutan ranked 38th out of 183 countries with a score of 5.7.
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framework. Given that Bhutan’s economic growth stems in significant measure from corruption-prone sectors – such as hydropower and construction – the RGoB’s focus on anti-corruption is not misplaced. Since the DPC1 document went to the Board, the RGoB took significant steps to strengthen its legal framework by undertaking a United Nations Convention against Corruption (UNCAC) self assessment and passing the 2011 Anti-Corruption Law, which takes into account many of UNCAC recommendations. The ACC also further strengthened its own capacity to deal with corruption in 2012 by revamping the rules governing asset declarations by public servants.
(b) Fostering private sector development by improving the policy environment and facilitating productive employment opportunities 32. The RGoB aims to diversify the economy through a vibrant private sector and provide gainful employment to its citizens. A strategic priority of the 10FYP is to revitalize industry, for which it is important to improve the investment climate by streamlining rules and regulations and modernize the financial sector infrastructure. The RGoB is cognizant that Bhutan’s industrial and export base is narrow, and is exposed to single market (India) and single commodity (hydropower) risks. Bhutan faces growing challenges in creating suitable productive employment opportunities in the private sector for its educated and semi-skilled population, and for the youth. 33. To provide the necessary framework for private sector development, the RGoB prepared an Economic Development Policy (EDP) in April 2010 as a prior action under DPC1. The EDP sets the agenda and the general direction for the development of the economy for the next 10 years by providing incentives for promoting investments in areas prioritized by the RGoB. A number of policies and laws are being formulated or reviewed to implement the EDP, including the business licensing policy, simplification of industry (medium and large) application, streamlining environmental clearances, development of informational e-portal, the mineral development policy, Public Private Partnerships policy, the renewable energy policy, the micro small and medium enterprises policy, the consumer protection bill, and the enterprise registration act. The Gross National Happiness Commission (GNHC) is responsible for reviewing the implementation of the EDP, monitoring performance, making projections about the future, and recommending appropriate policy measures. No meetings of ministries and agencies of RGoB have yet been held to discuss the implementation status of various provisions of the Policy. Meanwhile, the GNHC has requested UNDESA to assist in the review of the EDP in preparation for the 11th Plan. Moreover, the RGoB also aims to enhance Foreign Direct Investment (FDI) to increase employment, earn foreign exchange, and benefit from technology transfer. Updated FDI Rules and Regulations have been prepared to implement the amended 2010 FDI Policy. The RGOB has also prepared a Public Private Partnership (PPP) Policy to govern institutional arrangements for government facilitation of PPPs and proposed an institutional framework for PPPs,21 expected to be submitted to the Cabinet before the start of the 11FYP. The industrial infrastructure development policy (governing economic zones) has also been drafted and is expected to be submitted through GNHC screening in the next few months. 34. Bhutan has taken several steps to modernize its financial sector infrastructure. The RMA established a Credit Information Bureau (CIB) in 2009/10, as a DPC1 prior action.22 This was done to make the financial system more efficient and reliable by improving credit risk assessment, reducing extraordinary amounts of collateral, lowering default risk, and enabling expansion of credit-based lending. The CIB is now fully operational, incorporating information on 96 percent of consumer data and 42 percent of commercial data of all bank accounts as of February 2012 and generating an average of 100 reports per day and an average monthly income of Nu 800,000. Meanwhile, an Electronic Funds Transfer Clearing System (EFTCS) was inaugurated in June 2010 in Thimphu and will be expanded to other 21 This was also supported through technical assistance by the World Bank with funding from the Public Private Advisory Facility (PPIAF). 22 This reform was captured in the Doing Business 2012 report and Bhutan jumped from the 170th to the 126th rank.
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regions. As of January 2012, Nu.37.40 million (US$750,000) worth of transactions were processed monthly through the EFTCS – a 25 percent increase since September 2011. The system’s functionalities include credits (salaries, dividends) and debits (utility bill payments). The coverage of EFTCS increased from 22 to 37 institutions between March 2011 and January 2012, including the MoF and the Royal Audit Authority, are using National Electronic Clearing System Credit to transfer of funds relating to salaries, Provident Fund contributions, taxes relating to salaries, loan repayments, and TA/DA. The National Pension and Provident Fund has also started disbursing pensions through this system. Future functionalities under consideration include Initial Public Offering refunds and government taxes. The RMA plans to draft a Payment and Settlement Systems Act, with technical assistance from the Reserve Bank of India. To allow for interoperability of Automated Teller Machines (ATMs) and bank Point of Sale terminals, the RMA launched Bhutan Financial Switch, a national card switch system in December 2011. The RMA has also made the National Electronic Funds Transfer System available to the public since December 2011.23 The RGoB has also drafted a financial inclusion policy, with support from the World Bank,24 which is set to be finalized by September 2012. 35. Meanwhile, the RGoB also aims to strengthen the institutional framework underpinning the labor market. The 10FYP established the fight against unemployment as a key area of focus, and set a target to bring unemployment down to 2.5 percent in the medium term. While still above the target rate, unemployment came down to 3.1 percent (from 3.3 percent in 2010) in 2011, which is a welcome downward trend.25 This was helped, in part, by improved labor and employment policies and regulations, active labor market programs focusing on skills development using public private partnerships, and enhanced intermediary services including labor market information and job counseling. An important strategic initiative under the 10FYP is to improve employment conditions in the private sector through the enforcement of the 2007 Labor and Employment Act and its regulations. To implement the Act, the RGoB had approved 14 Rules and Regulations on Employment Conditions.26 To fully implement the Labor and Employment Act, the RGoB issued two additional sets of regulations focusing on Occupational Health and Safety in March 2012,27 which emphasize both preventive and protective measures to be implemented by workers and employers with a particular focus on the important construction sector, but also on the health and safety in any workplace. The RGoB has asked for World Bank help in building capacity to implement these Rules and Regulations. (c) Expanding access to infrastructure in a sustainable manner 36. The RGoB recognizes that, for a small, landlocked economy like Bhutan, the expansion of infrastructure is important. The development, expansion, and maintenance of rural economic and communication infrastructure such as local markets, farm and feeder roads, irrigation schemes, electricity, and communication centers will be undertaken, as they are vital for stimulating and sustaining a thriving rural economy. Moreover, given the rapid projected pace of urbanization, enhancement of national urban management capacity through institutional strengthening of various agencies and municipalities involved in urban development is a 10FYP goal. Finally, the RGoB is committed to securing ecologically balanced and sustainable development, while promoting economic and social progress. In recognition of its environmental fragility, Bhutan has developed reasonably sound environmental acts, regulations,
23 This system is a nationwide inter-bank fund transfer system that facilitates transfer of funds among individuals and institutions. 24 Under the ongoing Bhutan Private Sector Development Project. 25 Based on World Bank Aide Memoire (May, 2012). “Bhutan Institutional Strengthening of Ministry of Labor and Human Resources, Implementation mission.” 26 These include rules on minimum wage, provident fund, foreign workers’ recruitment, acceptable forms of child labor, sexual harassment, leave, workers’ compensation, gratuity, worker’s associations, internal service, labor inspection, grievance procedures, and penalties regulations. 27 These Regulations relate to (i) Regulations on Occupational Health and Safety in the Construction Industry and (ii) Regulations on Occupational Health, Safety and Welfare.
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guidelines, and codes of practices. The RGoB also realizes the importance of having an effective and robust disaster management and response system, and aims to move towards a proactive approach through putting certain mitigation measures in place, having communities prepared, and providing an effective response in case of a disaster. 37. The RGoB aims to promote institutions that help meet road sector targets. The 10FYP has an ambitious road construction and expansion program – and this is justifiable given the topography of Bhutan. An important target for 10FYP is to ensure that 85 percent of the rural population lives less than half a day’s walk from the nearest road-head, up from 77.5 percent in 2005. The sector was guided by the Road Act of 2004 and the Road Sector Master Plan (RSMP), which provides the strategic tool to guide the development of road infrastructure over 20 years. In 2009, the RGoB published Guidelines on Road Classification System and Delineation of Construction and Maintenance Responsibilities, which clarify ownership and roles of various agencies as regards to planning and budgeting, implementation, and maintenance. To reflect changes suggested by the road classification guidelines, the existing Road Act of 2004 was amended and submitted to the Parliament for adoption in 2012.
38. The RGoB also aims to foster urban development and strengthen municipal management. Economic development is linked to rapid urbanization, with resulting challenges for Bhutan. The RGoB has undertaken various measures to meet the growing challenges. Given the ongoing decentralization, to create a more autonomous local government system, the RGoB has prepared the Local Government Act (LGA) 2009.28 The RGoB has finalized and approved the Thromde (Municipal) Rules for the implementation of the new LGA. These Rules give legal effect to the provisions of the LGA, and specify responsibilities, procedures, functions, and revenue sources of the Thromde. Going forward, the RGoB expects to implement these Thromde Rules, starting with measures like municipal budgets for Thimphu and Phuentsholing City Corporations. A Thromde Finance Policy has been prepared and is being adopted by the RGoB in 2012 to support the municipal reform towards more decentralized and accountable local governments. Selected priority measures such as computerization of property tax records and municipal asset registers are being implemented under the World Bank’s Urban Project. 39. The RGoB realizes the importance of having an effective disaster management and response system, given its vulnerability to natural disasters. It is looking to move away from an ad hoc system, with an ex-post rather than ex-ante funding mechanism in place. The preparation of a Disaster Management Bill constitutes the central element of the National Disaster Risk Management Framework (NDRMF). The Disaster Management Bill would strengthen the institutional framework for DRM in Bhutan, with the formation of a National Disaster Management Authority. The enactment of the Disaster Management Bill will empower the Department of Disaster Management (DDM) as the secretariat and executive arm of the National Disaster Management Authority as well as the National Coordinating Agency for disaster management. The draft Bill underwent review in a series of consultation meetings and workshops with various stakeholders. It has been endorsed by the Cabinet during its 114th session on October 4th, 2011 and submitted to the Parliament on November 7th 2011. The bill was deliberated and endorsed by the National Assembly during its 8th session on January 20th 2012, and by the National Council during its 9th session on June 19th, 2012. The Bill will be presented to a joint session of the National Assembly and National Council for the final deliberation and enactment. The following activities will be carried out following the enactment to operationalize the Disaster Management Act: (i) Institutionalization of disaster management committees and working groups at various levels. (ii) Setting up of financial arrangements. (iii) Drafting and finalization of rules and regulations to supplement the Disaster Management Act and (iv) Establishment of Critical Disaster Management Facilities.
28 The overall direction of urban development is provided by Bhutan’s National Urbanization Strategy (BNUS) of 2008, which emphasizes: (1) municipal reform towards more decentralized and accountable local governments; (2) balanced regional development by creating urban hierarchy and identifying regional centers; (3) prioritization of investments in the two major cities and regional centers; (4) environmental protection and cultural conservation; and (5) capacity building of urban institutions.
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IV. BANK SUPPORT TO THE ROYAL GOVERNMENT’S PROGRAM
A. Links to Bhutan’s Country Partnership Strategy 40. The World Bank’s program for the period FY11-14 is set out in its Country Partnership Strategy (CPS), which is aligned with the RGoB’s 10FYP. The CPS has two broad areas of engagement: (i) economic diversification, job creation, and financial inclusion to increase growth and employment led by the private sector; and (ii) spatial planning and public services to enhance the living standards and increase well-being. Cutting across these broad areas for engagement are two themes – capacity building for good governance and environment. During several rounds of CPS consultations, the RGoB has reiterated its request for continued support through budgetary operations. 41. As mentioned in the DPC1 Program Document, this DPC series directly supports the goals of the CPS – both of which seek to support implementation of the 10FYP. More specifically, the first DPC component on promoting government efficiency and effectiveness will contribute to the cross-cutting theme on governance in the CPS. Improved budgetary processes, better fiduciary systems, expanded e-governance, and stronger public administration will strengthen institutional capacity and achieve better quality of services for citizens. The second DPC component on private sector development aligns directly with the economic diversification and financial inclusion pillar of the CPS, and actions to enhance employability and improve the policy environment for the private sector will contribute to the corresponding CPS goals. The third DPC component on improving sustainable access to infrastructure will support spatial planning and public services. Institutional strengthening in the roads and urban sectors will ultimately help provide better access and quality infrastructure, while measures to promote environmental sustainability and disaster risk management will contribute to better environmental stewardship and improved sustainability of infrastructure.
B. Collaboration with the IMF and Other Donors 42. The World Bank worked in close coordination with the IMF on this programmatic series. The IMF and the World Bank staffs consult regularly on key macroeconomic issues and advice provided to the RGoB. The staffs also collaborate on routine tasks such as the Joint Staff Advisory Note of Bhutan’s 10FYP (PRSP), the 2011 DSA, as well as the recent interim update of the DSA in 2012. 43. The World Bank is also coordinating with the Asian Development Bank (ADB) in putting together this operation. The ADB is planning a budget support operation in early 2013 totaling US$30 million under Asian Development Fund (ADF), which will be disbursed in two tranches over 2-3 years. The ADB program would likely focus on fiscal and debt management – the latter drawing on the recent Debt Management Reform Program prepared by the World Bank. The Staffs of ADB and the World Bank have ensured that the areas for support under their respective operations complement each other to maximize the development impact. 44. The World Bank maintains regular contact with other development partners as well, which is made easy because of their relatively small number in Bhutan. For instance, progress under DPGs 1 and 2 was reviewed at workshop held in Bhutan in April 2008, which was attended by the main development partners. These discussions were reflected in the focus areas for the DPFIS, which are largely continuing under this DPC program. Discussions at the workshop also centered on sectors and themes that could be supported by future operations. Additional donor consultations to discuss the new reforms and the Bank’s program were organized in October 2008, June 2009, and June 2010. The latest round of consultations was held in June 2012 with donors and civil society organizations to discuss the policies and actions supported by the DPC2.
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45. On specific reforms supported by this DPC series, the World Bank is working with development partners. The World Bank, IMF, and United Nations Development Program (UNDP) teams are supporting RGoB’s efforts to develop a sound multi-year fiscal framework and improve public expenditure management. The Bank’s ongoing PFM work has undertaken comparisons of national and international public sector accounting and auditing standards, and is moving towards alignment or adoption of international standards of accounting and auditing in a phased manner, in collaboration with other donors, including ADB. The Danish International Development Agency (DANIDA) has supported the PEFA Assessment of the Bhutan’s financial management systems which forms the basis for further PFM reforms, while Helvetas, UNDP, and the Japan International Cooperation Agency (JICA) have participated in consultations around it. To strengthen procurement systems in Bhutan, the Bank and DANIDA have collaborated on a series of procurement reform measures. The ADB has also collaborated with the Bank’s procurement team to further the united approach to support the RGoB modernize its public procurement system. The UNDP has supported the RGoB in preparing its Economic Development Policy, which is reflected in this DPC program. The Bank has collaborated with the UNDP on the Damage and Needs Assessment (DNA) following the 2009 and 2011 earthquakes in Bhutan.
C. Relationship to Other Bank Operations
46. The proposed DPC2 seeks to support the World Bank’s investment operations by highlighting policy and institutional changes that will contribute to some of the projects achieving their expected results. The initiatives under the proposed DPC1 and DPC2, on macroeconomic/fiscal management and fiduciary systems, will have cross-cutting impacts enhancing the effectiveness of public spending, as well as include specific elements that will be central to the implementation of the procurement training project. Several of RGoB’s efforts supported by DPC1 and DPC2 on private sector development will be important to the Private Sector Development project, including the labor law, FDI regulations, and the cost of doing business. The skills enhancement/employment component of the DPCs complements the objectives of the Education Development Program, by focusing on employability of Bhutanese youth. Initiatives supported under DPC1 and DPC2 on strengthening infrastructure — particularly road development — will complement the Second Rural Access Project (RAP II), which focuses on helping residents of beneficiary dzongkhags to utilize improved rural transport infrastructure and services. Policy reforms supported under the urban development component support the policy objectives of the Second Bhutan Urban Development Project (BUDP2). 47. The earlier Development Policy Operations (DPOs) have been complemented by technical assistance, and this approach will continue. Several Institutional Development Funds (IDF) grants support objectives of the DPC series. There was a deepening engagement on macroeconomic, fiscal, and financial management issues, through IDF grants supporting capacity in these areas. An IDF grant on Public Financial Management focused on building capacity within the RGoB for better expenditure control and information, and enhancing technical capacity in internal and external audit. Another IDF is assisting the development of the Multi-Year Rolling Budget/Public Expenditure Management System (MYRB/PEMS), to monitor performance better. The RGoB, through the National Environment Commission Secretariat (NECS), is also implementing an IDF Grant for Strengthening Institutional Capacity for Implementation of Environmental Safeguards, with the aim of revising/updating the existing environmental codes of practices and guidelines and developing new ones, improving capacity and skills for decentralization of environmental clearances, enforcement and monitoring, training of trainers, etc. To strengthen the recently-established Public Procurement Policy Division (PPPD), the Bank has approved a three year IDF which aims to support the operationalization of this division. The Bank also approved an IDF grant to strengthen the institutional capacity of the MoLHR to facilitate employment and labor market entry of Bhutanese youth. In addition, the Bank team is leveraging technical assistance funds from other sources. The RGoB has requested further IDF’s to help support the implementation of a few DPC2 prior actions.
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D. Lessons Learned 48. This operation builds on lessons from Implementation Completion and Results Reports (ICRRs) of previous policy-based lending operations and their reviews by the Independent Evaluation Group (IEG). This operation also benefits from the World Bank’s wider experience in providing budgetary support. Leveraging policy-based lending with technical assistance and investment operations can be
important for promoting key reforms. For instance, the satisfactory outcomes in ICRs of DPGs 1 & 2 were, in part, due to the fact that they were supported by World Bank assistance for private sector development, education, procurement, and HIV/AIDS. Similarly, the DPFIS also benefited from World Bank projects in procurement, rural access roads, and private sector development. The current DPC series builds on this experience in several ways – leveraging on the Bhutan Urban Development Project II, private sector development project, and procurement work.
Experience also shows that analytical work is important for building support for reforms within the
government. Reform actions that are supported by specific background studies – as in the Investment Climate Assessment (ICA) work for private sector development reforms, the PEFA assessment for public financial management reforms, the Use of Country Systems (UCS) study for procurement reforms, and the Damage and Needs Assessment (DNA) for the disaster risk management reforms – have been welcomed by the government. This DPC2 builds on the PEFA, ICA, DNA and the UCS (see section E below).
Previous evaluations also show that the World Bank needs to carefully assess the prospects for impact in sectors where other donors play much larger roles. For instance, in the power sector, other donors like the Government of India and the Asian Development Bank play bigger roles than the World Bank. As such, this DPC2 focuses on sectors where its small IDA lending envelope can have maximum impact.
Institution and capacity building efforts are essential for success. Experience has shown that reforms
have succeeded in Bhutan where adequate capacity either already exists, or was mobilized as a part of the deepening engagement in the area (such as in procurement). The proposed DPC2 takes that into account and has mobilized additional technical assistance to support government counterparts in their work. For example, the World Bank hired experts to provide technical assistance in formulating the Thromde Finance Policy and helped build capacity.
In small countries like Bhutan, where government capacity is stretched, it is more productive for
reforms to take place in a programmatic framework. This gives time for the government to pace itself and work towards the reforms in a phased and incremental manner. This DPC series contains two operations and moves reforms sequentially to preserve continuity of reforms. In between the operations, it is also important for the World Bank to remain engaged to support implementation of policy reforms through its advisory and lending activities.
Identifying indicators to measure progress is difficult, especially in a country like Bhutan with limited capacity and data. The DPFIS experience also shows the difficulty in finding suitable indicators of progress, when attribution is difficult. This DPC series makes efforts to rely on quantitative and qualitative progress indicators that can be measured or assessed within the duration of the series.
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E. Analytical Underpinnings 49. The proposed DPC2 benefitted from recent analytic work and knowledge gleaned from broader World Bank engagement in Bhutan through investment projects and non-lending technical assistance. The first policy objective of increased public sector efficiency and effectiveness was informed by the 2010 Public Financial Management Accountability Assessment. In addition, the 2010 Use of Country Systems Assessment also helped design this operation. The second policy objective of private sector development was based on the 2010 Investment Climate Assessment. The World Bank’s engagement on labor issues using an IDF also helped inform this component. The third and final policy objective on sustainable infrastructure is based on the World Bank’s engagement through the Bhutan Urban Development Project. The Damage and Needs Assessment following the recent earthquakes helped inform the Disaster Risk Management reforms. The macroeconomic section in this report draws on the World Bank’s ongoing macroeconomic updates, IMF Article IV reports (various years), the recently updated joint Bank-Fund Debt Sustainability analysis and the recently finalized World Bank’s Debt Management Reform Program.
V. THE PROPOSED OPERATION
A. Operation Description
50. The DPC series has three overarching development objectives. These are: (a) promoting government efficiency and effectiveness through sound fiscal and public financial management and procurement, and strong public administration; (b) fostering private sector development by improving the policy environment and facilitating productive employment opportunities; and (c) expanding access to infrastructure in a sustainable manner. These objectives are closely aligned with the strategic priorities of the 10FYP, and were formulated in consultation with counterparts in the RGoB, development partners and civil society organizations.29 51. The RGoB’s reform program warrants financial and analytical response from the World Bank. Even under normal circumstances, the strength of the RGoB’s reform plan and progress to date would merit support from the World Bank. The current rupee shortage has exposed the difficulties in macroeconomic management faced by small economies like Bhutan that undertake capital projects that are large relative to the size of the economy. On the one hand, taking a long view of the Bhutanese economy, these hydropower projects have a significant growth generating potential, raise the standard of living, will earn foreign exchange, and will help integrate the Bhutanese economy into regional/global economy. Therefore, Bhutan’s push to expand its hydropower sector by 2021 is understandable. However, in the transition period, this will create problems for macroeconomic management. Under these circumstances, Bhutan needs to undertake a mix of (i) macroeconomic policies that aim to stabilize aggregate demand in the short term and (ii) structural policies that boost productivity and diversify the economy in the medium to long term. This DPC series is trying to assist with both through the World Bank’s ongoing policy dialogue, including for the Medium Term Fiscal Framework, and the structural reforms it supports. This financial support complements the ADB operation planned over the next 2-3 years, with focus on fiscal and debt management. 52. Programmatic approach. The World Bank engagement is proposed as a programmatic series consisting of two single-tranche operations supporting the RGoB’s reform agenda over 2009/10–2012/13. The Bank and the RGoB teams designed the operations as a programmatic series to preserve continuity of reforms, to leverage stronger policy actions, and to better monitor implementation of institutional measures. A US$24.75 million DPC1 was presented to the Board in November 2010 using Bhutan’s
29 Also see paragraph 44 for details on consultations.
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IDA15 allocation. This DPC2 operation – of US$36 million using Bhutan’s IDA16 allocation – is to be presented to the Board in October 2012, to be disbursed against prior actions. These prior actions are based on the six indicative triggers set out in the DPC1 document with modifications, as well two new prior actions relating to strengthening governance and disaster risk management (Table 6).
Table 6: Summary of changes in prior actions compared to DPC1 program document
Indicative Triggers Proposed in the DPC1 Document
Revised Prior Actions in the DPC2 Document
Comments
Government efficiency and effectiveness Amend Companies Act 2000 to reflect Accounting and Auditing Standard Board’s mandated role as the standard-setting body for Bhutan, and notify Bhutanese Accounting Standards from Phase I of road map.
The RGoB authorizes the Accounting and Auditing Standards Board of Bhutan to issue Bhutanese Accounting Standards and to set criterion for phase-wise implementation of said standards by Bhutanese companies.
The RGoB is doing a broader revision of the Companies Act of 2000 and this will take time to be completed. The indicative trigger was modified so that the MoF can authorize the AASBB to notify the Standards for Phase I.
Amend Procurement Rules and Regulations 2009 to account for priority short-term recommendations from the Use of Country Systems Assessment.
In line with the short-term recommendations from the Procurement Use of Country Systems Assessment, the RGoB (a) issues a Procurement User Guide, (b) strengthens the PPPD, (c) establishes a PPPD website, and (d) amend the Procurement Rules and Regulations 2009 to include (i) an independent bid complaint review mechanism, (ii) requirements to publish contract award immediately after award, and (iii) revisions to the Standard Bidding Documents for Goods and the Standard Bidding Documents for Works.
Revised to make the prior action clearer – all short term actions are stated upfront and it is made clear which ones require amendments to the 2009 Procurement Rules and Regulations.
Parliament adopts a new Anti-Corruption Law and the Anti-Corruption Commission adopts new Asset Declaration Rules.
New prior action.
Fostering Private Sector Development Approve revised Foreign Direct Investment Rules and Regulations
The RGoB approves revised Foreign Direct Investment Rules and Regulations
Revised to make the prior action clearer.
Finalize eight remaining rules and regulations on Occupational Health and Safety for approval by Ministry of Labor and Human Resources
The RGoB approves two regulations on Occupational Health and Safety for (a) the Construction Industry and (b) other sectors.
The 8 remaining Rules and Regulations on Occupational Health and Safety were collapsed in two volumes. This is not a dilution of the initial agreement on the formulation of Rules and Regulations but just a re-grouping.
Present new Road Act to the Parliament.
The RGoB submits the new Road Bill to the Parliament.
Revised to make the prior action clearer.
Sustainable Infrastructure Adopt Municipal Finance Policy, and apply selected priority measures Thimphu and Phuentsholing City Corporations.
The RGoB adopts the Thromde (Municpal) Finance Policy (TFP).
Revised to make the prior action clearer. “Thromde” replaces “Municipal” to reflect the local language.
The RGoB submits the Disaster New prior action. This is a
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Management Bill to the Parliament. follow up from the DPC1 Program document (paragraph 101), which mentions that specific policy actions on strengthening disaster risk management will be included in DPC2.
B. Policy Areas for Support under DPC2
53. The proposed DPC2 supports specific policy measures within the RGoB’s overall program that have been mutually agreed as critical to disbursement of funds (Annex 1). This section presents the individual prior actions within the broad framework (described in Section III), which will form the legal basis for disbursement of the proposed DPC2. The proposed DPC follows the good practice principles on conditionality (Box 2).
Box 2: The Proposed DPC and Good Practice Principles on Conditionality Principle 1: Reinforce ownership The proposed operation is closely aligned with the RGoB’s priorities set out in the 10FYP, and evolved through a participatory process involving local governments and central agencies. The program chooses those policy measures that the RGoB deems essential to the successful implementation of their program while complementing other donor assistance. Principle 2: Agree upfront with the government and other financial partners on a coordinated accountability framework The program has been developed to support the 10FYP and the reform matrix was developed in close coordination with the RGoB. All missions have been held jointly with the RGoB counterparts, and aide memoires have been prepared and agreed with the RGoB. In the RGoB, the coordination of external assistance is systematically handled by the Ministry of Finance. There are regular donor meetings at the technical level, and the broad DPC reform program — as well as individual elements in public financial management, procurement, infrastructure, and private sector — has been discussed with relevant donors. Principle 3: Customize the accountability framework and modalities of Bank support to country circumstances The accountability framework and mode of assistance (budget support) are customized to Bhutan’s circumstances. Budget support is a response to the RGoB’s request, and builds on lessons from past successful attempts to implement policy-based reforms. It takes into account the low share of budget support in the RGoB’s overall external assistance. The triggers and prior actions were developed keeping in mind the timings for disbursement, as requested by the RGoB. Principle 4: Choose only actions critical for achieving results as conditions for disbursement The triggers and actions for the proposed DPC series represent only those actions that are deemed critical for achieving the program’s development objectives. They are identified in close consultation with the RGoB. Given the limited capacity in a small country, selectivity is particularly important. The DPC series picks up specific actions (Annex 1) from the RGoB”s wider reform program for the disbursement of funds. Principle 5: Conduct transparent progress reviews conducive to predictable and performance-based financial support Although monitoring and evaluation remains challenging, the RGoB is taking steps to strengthen this. The Bank’s supervision plan, along with the indicators in the Policy Program Matrix provides a
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framework in which to review progress. During the supervision phase of the operations, benchmarks will be regularly evaluated and interim steps taken by the RGoB will be monitored.
Proposed Prior Actions for DPC2 Component A: Promoting Government efficiency and effectiveness through sound fiscal and public financial management and procurement, and strong public administration
i. Prior action for DPC2 (1 of 8) The RGoB authorizes the Accounting and Auditing Standards Board of Bhutan to issue Bhutanese Accounting Standards and to set criterion for phase-wise implementation of said standards by Bhutanese companies. Issue: The objective of this prior action is to ensure consistency and comparability of financial statements prepared by Bhutanese companies30 for stakeholders to have more confidence in them and the companies, in turn, can access international finance. As a background, Bhutan currently does not have clear accounting standards and Indian Accounting Standards are often followed in practice. Because there are no clear guidelines on the accounting standards, financial statements are inconsistent as evident in a review of the financial statements of a sample of 22 companies. With the growing number of companies and opening up of the economy, the RGoB wants to improve the quality of financial reporting by following accounting standards that are aligned with International Accounting Standards/International Financial Reporting Standards (IAS/IFRS). This is expected to lead to consistency and transparency in financial reporting, improve access to international capital markets, enable benchmarking with global peers, and attract foreign direct investment. Accordingly, to promote high quality financial reporting and auditing standards that are consistent with international best practice,31 the Accounting and Auditing Standards Board of Bhutan (AASBB) was established in May 2010, under the chairmanship of the Auditor General of the Royal Audit Authority (RAA) and consultations were held with stakeholders including the MoF, RMA, and members of industry groups. Given the shortage of qualified accountants in Bhutan,32 which makes it difficult to adopt all measures simultaneously, the AASBB prepared a roadmap for implementation of IFRS in three phases and linked the roadmap with concomitant measures to build capacity. Of these, in the first phase, 18 standards have been identified for implementation with effect from January 2013 – while the more complex ones will be implemented over the medium term (Box 3). This DPC2 seeks to support issuance of Standards and the setting of criterion for their phase-wise implementation. Status: This prior action has been met. The RGoB authorized the AASBB on February 16, 2012 to issue the accounting standards and to set the criterion for implementation of the standards in a phased manner by Bhutanese companies. Accordingly, AASBB has decided to fully adopt the IFRS by 2021 in phased manner and has developed Bhutanese Accounting standards (BAS, modeled on IFRS) for the interim period. AASBB issued the notification for this on April 6, 2012. The said Bhutanese standards will be adopted in a phased manner with 18 standards from January 1, 2013. For small and medium companies, a separate set of standards has been issued which is modeled on IFRS for SMEs and will be applicable for
30 The accounting and auditing standards being issued by AASBB will apply to companies in the public and private sector. The Phase I Standards will apply to 33 large companies, which include wholly-owned large government companies, financial institutions and listed companies. Of these 33 companies, 20 belong to public sector. Given the large number of public sector companies, this prior action has been included under this development objective although it will apply to the private companies as well and will therefore support the second development objective of DPC2. 31 Roles and Responsibilities of AASBB attached with MoF office order of March 25, 2010. 32 Bhutan currently has 27 professional accountants.
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the period beginning January 1, 2014. To ensure legal compliance under the Companies Act of Bhutan, the Registrar of Companies has initiated steps to amend the existing rules under the Companies Act to mandate BAS in a phased manner. This is likely to be completed by October 31, 2012. The World Bank is planning to use an IDF to help support the implementation of the Standards in Phase I.
Box 3: Phase-wise Accounting Standards in Bhutan The AASBB has decided to adopt the IAS/IFRS in three phases, and plans to complete the process by 2019. Full IFRS adoption is scheduled to happen by 2021. The phased approach ensures timely compliance with IFRS but is also accompanied by significant building of capacity to implement the standards. This is particularly important in a small country with limited capacity. Phase I (2013-15) consists of 18 standards. These standards are: Presentation of financial statements; Inventories; cash flow statements; Accounting policies, change in accounting estimates and errors; events after balance sheet date; construction contracts; income taxes; property plant and equipment; revenue; accounting for Government grants and disclosure of Government assistance; the effects of changes in foreign exchange rates; borrowing costs; related party disclosures; consolidated and separate financial statements; earnings per share; interim financial reporting; provisions, contingent liabilities, and contingent assets; and operating segments. Phase II (2016-17) consists of 9 standards. These standards are: leases; employee benefits; accounting and reporting by retirement benefit plans; investment in associates; interests in joint ventures; impairment of assets; intangible assets; investment property; and agriculture. Phase III (2018-19) consists of 10 standards. These standards are: financial reporting in hyperinflationary economies; financial instruments: presentation; financial instruments: recognition and measurement; first time adoption of international financial reporting standards; share-based payment; business combinations; insurance contracts; non-current assets held for sale and discontinued operations; exploration for and evaluation of mineral resources; and financial instruments: disclosure. Source: Based on AASBB (January, 2012), “Bhutanese Accounting Standards: A Proposal for Implementation.”
ii. Prior action for DPC2 (2 of 8)
In line with the short-term recommendations from the Procurement Use of Country Systems Assessment, the RGoB (a) issues a Procurement Users Guide, (b) strengthens the PPPD, (c) establishes a PPPD website, and (d) amends the Procurement Rules and Regulations 2009 to include (i) an independent bid complaint review mechanism, (ii) requirements to publish contract award soon after award, and (iii) revisions to the Standard Bidding Documents for Goods and the Standard Bidding Documents for Works. Issue: The objective of this prior action is to increase the efficiency of public procurement. A Use of Country Systems (UCS) Assessment was prepared that aims to introduce the use of national procurement systems for all competitive bidding in World Bank supported countries where procurement standards are deemed adequate. A baseline has been established from its findings. Around 50 percent of the sub-indicators pass the requirements established by the OECD/DAC methodology and an additional 2 percent of the sub-indicators pass with conditions, while 48 percent of sub-indicators fail to meet the required conditions. The Assessment recommends actions for further strengthening of public procurement over the short, medium and long term. For the purposes of DPC2, the RGoB is expected to implement the priority short-term recommendations of the report and amend the Procurement Rules and Regulations (PRR) of April 2009, where necessary (Box 4).
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Box 4: Short-term Recommendations of the UCS Assessment The World Bank Board approved the “Use of Country Procurement Systems in Bank-Supported Operations: Proposed Piloting Program” in 2008 and the RGoB expressed interest in participating in this pilot program. To establish a baseline for public procurement reform in Bhutan, an assessment of the national procurement system was conducted in two stages. In stage I, the national procurement system was assessed with reference to international best practice using the OECD/DAC methodology. The assessment focused on the legislative and regulatory framework; the institutional framework and management capacity; the procurement operations and market practices; and the integrity and transparency of the procurement system. Stage II determined whether the RGoB procurement policies and procedures were consistent with those of the World Bank. Based on the findings of the assessment, a World Bank validation mission agreed upon an action plan with the RGoB. This action plan includes short, medium, and long term measures aimed at improving the public procurement system. This DPC2 focuses on the short-term recommendations of the UCS assessment – some of which require amendments to the Procurement Rules and Regulations, 2009. The short-term recommendations focus on the following: (i) preparing a User's Guide to support procuring entities in executing procurements, which includes detailed guidance on the contents of bidding documents; (ii) Improving the oversight framework by strengthening the Public Procurement Policy Division so that it can play its regulatory and supportive role more effectively; (iii) Establishing a website for the Public Procurement Policy Division; (iv) Modifying the relevant rules to include independent bid complaint review as part of the mandate of the Tax Appeals Board with the Public Procurement Policy Division serving as its secretariat for bid complaint reviews; (v) Including specific requirements to publish contract award information immediately after contract award; and (vi) Revising the Standard Bidding Documents for Goods and Works to include certain provisions. Short-term recommendations iv-vi require amendments to the 2009 Procurement Rules and Regulations. Source: World Bank (2010). “The Kingdom of Bhutan: Draft Report on the Assessment of the Public Procurement System (Stages I and II).”
Status: This prior action has been met. A User’s Guide has been prepared and was issued on June 15 2012. The Public Procurement Policy Division has been strengthened with 7 full-time staff compared to 3 in 2008. A website has been created with help from an IDF Grant, but needs further improvement to be officially launched. An Independent Review Body has been established on June 15 2012 to review complaints on bids. The 2009 Procurement Rules and Regulations have been amended to publish contract awards. The Standard Bidding Documents for Goods and Works have been revised and the Procurement Rules and Regulations amended accordingly, and an amendment to this effect was issued on June15, 2012.
iii. Prior action for DPC2 (3 of 8) Parliament adopts a new Anti-Corruption Law and the Anti-Corruption Commission (ACC) adopts new Asset Declaration Rules. Issue: The objective of this prior action is to improve the ACC’s ability to prevent, investigate and prosecute corruption. Bhutan outperforms its neighbors on Transparency International’s Corruption Perceptions Index. However, given that Bhutan’s economic growth stems in significant measure from corruption-prone sectors, the RGoB has taken a proactive stance on curbing potential corruption. Bhutan had a 2006 Anti-Corruption Law, which needed strengthening in several ways by: highlighting the preventive function of ACC; clarifying what constitutes a corruption offense and a range of penalties attributable to each one; authorizing the use of investigative techniques prescribed by United Nations Convention Against Corruption (UNCAC); establishing a framework of cooperation with other countries to deal with corruption; and delineating powers of ACC with respect to seizure or freezing of assets during investigation, as well as confiscation after prosecution. The ACC needed to take further measures to strengthen its own ability to tackle corruption by revamping the rules governing asset declarations by public servants by: replacing the impeachment of public servants with a fine-based system that is more practical to implement; taking a more targeted approach to asset declaration; introducing a transparent
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formula for calculating disproportionate assets; laying out the functions of Asset Disclosure Administrators (ADAs) in agencies; authorizing the Royal Audit Authority with auditing compliance with asset declaration requirements across agencies and allowing for the destruction of declarations after ten years; and making filing easier online. This DPC2 supports the RGoB’s move to pass a comprehensive Anti-Corruption Law and the new Asset Declaration Rules that address the concerns mentioned above (Box 5).
Box 5: Improvements in the 2011 Anti-Corruption Law and the 2012 Asset Declaration Rules
The new Anti-Corruption law of 2011 contains sweeping changes compared to Bhutan’s first piece of anti-corruption legislation passed in 2006 and now repealed. Critical changes in the new Anti-Corruption law, 2011 include: An expanded code of conduct for the Anti-Corruption Commission, including vesting it with the power to discipline its own staff for violations. The emphasis is on the preventive functions of the ACC in addition to its investigative and prosecutorial roles. Measures include defining a legal framework for administering asset declarations and debarment processes; empowering the ACC to work with the private sector to develop ‘Business Codes of Conduct’; and allowing the ACC to ask private individuals to file asset declarations when required. The new law also clearly sets out what constitutes a corruption offence and the range of penalties attributable to each one. Previously corruption offences were scattered across the Bhutan penal code and several offences laid out in UNCAC were not included in the old law. Key changes include: (i) A Wider Definition of Bribery: While the previous law did make giving and accepting a bribe a corruption offence, the new law also includes ‘promising’ a bribe as well as ‘soliciting’ one, as per UNCAC standards. In line with UNCAC, the new law also penalizes bribery involving a foreign public servant, including employees of international organizations. (ii) Active Trading in Influence: The law makes using influence to obtain “work, employment, contracts, or other benefits from a public agency” an offence,” as recommended by UNCAC. (iii) Money Laundering: Concealing, converting, or transferring the proceeds of illegally obtained wealth is now treated as a corruption offence in Bhutan. (iv) Bringing the Private Sector within the Ambit of the Law: The new law contains several sections that cover “commercial bribery” (this includes bribery among private individuals) as well as fraud in bids, auctions, and contracts with public agencies (covered under the earlier law but in less depth). It also includes a section making embezzlement of funds, securities, and property in the private sector an offence. The new law also includes a key section authorizing the use of special investigative techniques recommended by UNCAC, including allowing the monitoring of suspicious consignments, permitting informers to give or receive a bribe, conducting physical surveillance and undercover operations, wire-tapping, and intercepting communications (with the authorization of a court). A major change in the new law is the establishment of a framework for cooperation with other states to address corruption, including tracking property, freezing, and confiscating illegally acquired assets, creating joint investigative panels, and allowing for the transfer of criminal proceedings and sentenced persons from one jurisdiction to another. This new chapter fulfills in large measure the requirements that UNCAC imposes on signatory states with respect to cooperation in the fight against corruption. Finally the new law lays out in greater detail the power of the ACC with respect to seizure or freezing of assets during investigation, as well as confiscation after prosecution. It also strengthens the provisions relating to witness and informer protection, another requirement of UNCAC. Moreover, the ACC has also taken further measures of its own to strengthen its ability to tackle corruption. In line with the 2011 Anti-Corruption law, it has revamped the rules governing asset declarations by public servants. The Asset Declaration Rules, 2012 are a marked improvement on those issued in 2008 in the following respects: (i) The 2008 Asset Declaration rules imposed the extreme penalty of impeachment on Schedule 1 public servants who failed to declare their assets. In practice, however, the legislature was loath to carry out this sanction as a result of which no public servant was penalized for not filing a declaration. The 2012 Asset Declaration rules replace impeachment
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with a fine-based system that is more practical to carry out. (ii) In addition, the 2008 Asset Declaration rules required all public servants regardless of rank to file asset declarations. The 2012 Asset Declaration rules take a more targeted approach: Unscheduled public servants in the grade of P5 or above need to file an asset declaration unless they belong to a vulnerable area of public administration (e.g., a procurement unit). All high level (Schedule 1) public servants continue to file asset declarations without distinction. (iii) The 2012 Asset Declaration rules also introduce a transparent formula for calculating disproportionate assets; a fifty percent or greater increase in the assets of a public servant in a given year triggers an inquiry by the head of the agency concerned and a referral to the Anti-Corruption Commission if necessary. (iv) The 2012 Asset Declaration rules clearly lay out the functions of Asset Disclosure Administrators in agencies, and task the Royal Audit Authority with auditing compliance with asset declaration requirements across agencies, and allows for the destruction of declarations after ten years.
Status: This prior action has been met. The RGoB has moved to strengthen the framework for addressing corruption by passing a comprehensive Anti-Corruption law in 2011 that incorporates many of the standards set out by the UNCAC and effectively prepares for Bhutan’s accession to UNCAC in the near future.33 This new law is an improvement over the 2006 Law by addressing the shortcomings mentioned above. The 2011 Anti-Corruption law is comprehensive and addresses the problems described above in the 2006 Law. In addition, the newly adopted 2012 Asset Declaration Rules are an improvement over those issued in 2008 and address all areas mentioned above. Component B: Fostering private sector development by improving the policy environment and facilitating productive employment opportunities
iv. Prior action for DPC2 (4 of 8) RGoB approves revised Foreign Direct Investment Rules and Regulations. Issue: The objective of this prior action is to increase Foreign Direct Investment (FDI) inflows into Bhutan as envisaged under the 10FYP. To achieve the objectives set out in the EDP,34 the RGoB has adopted the FDI Policy 2010 to encourage FDI in both manufacturing and service sectors. The objectives of the FDI policy are to: (i) support private sector development; (ii) generate employment; (iii) promote capital inflows; (iv) foster transfer of skills and appropriate technology; (v) expand market access and international trade; and (vi) enhance foreign currency earnings. The FDI Policy has the following features: (a) lists priority sector activities which shall be fast tracked for approval and clearances; (b) allows FDI in other activities with specified maximum foreign investors’ equity and minimum project costs; and (c) lists activities where FDI will not be permitted. The Policy was finalized after extensive consultations with stakeholders, and the FDI Committee that worked on it has representation from the private sector. Both the Bank and the IFC provided advisory services on the formulation of the FDI Policy. As a next step, the RGoB issued rules and regulations to help support the implementation of the Policy, which is supported under the DPC2 (Box 6). Status: This prior action has been met. In February 2012, the Ministry of Economic Affairs shared the draft Rules and Regulations for implementation of the FDI Policy with stakeholders – including the Bank and IFC. After several rounds of consultations, the draft was finalized and adopted by the RGoB in mid-July 2012.
33 Bhutan has signed but not ratified UNCAC. 34 To provide the necessary framework for economic development, the RGoB adopted an Economic Development Policy (EDP) in April 2010 as a prior action under DPC1.
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Box 6: 2012 FDI Rules and Regulations The 2012 FDI Rules and Regulations seek to implement the 2010 FDI Policy. The FDI Rules and Regulations set out the following: sectors and size of investment; currency of investment; collaboration and franchise; company incorporation; subscription; debt equity ratio; lock-in period; foreign exchange and borrowing; repatriation of dividends and investment capital; expatriate employment, work permits, visas and dependent cards; taxation; land for FDI business; incentives and exemptions; and protection of intellectual property rights. They also provide the details of: eligibility for registration of FDI business; the FDI registration application; FDI Registration certificate; FDI business approval process; sector licenses; rejection of business; FDI Register; amendments, suspension or cancellation of FDI business. The Rules and Regulations also specify: the composition of the FDI Facilitation Committee; Project Approval Committee; the powers of the Department and its immunity; disposal of investment; dispute settlement mechanism; appeals mechanism; monitoring and reporting of FDI businesses; penalties for violations etc. Source: RGoB, “Foreign Direct Investment Rules and Regulations 2012.”
v. Prior action for DPC2 (5 of 8) RGoB approves two regulations on Occupational Health and Safety for (a) the Construction Industry and (b) other sectors. Issue: The objective of this prior action is to improve working and employment conditions in the private sector, which is an important goal in the 10FYP. Improving the working conditions in the private sector is becoming increasingly important to attract particularly young Bhutanese to jobs outside the historically preferred public sector jobs. Until 2007, when the RGoB approved the Labor and Employment Act, there was no labor market legislation in Bhutan. To implement the Act, the RGoB has approved 14 Rules and Regulations on Employment Conditions, which was a measure supported by the World Bank’s DPFIS. To fully implement the Act, the RGoB had planned on issuing eight additional Rules and Regulations, focusing on Occupational Health and Safety. There were some delays in developing these remaining Regulations as they are highly technical in nature and needed further refinement and consultation. It was finally decided to collapse the eight remaining Rules and Regulations on Occupational Health and Safety into two volumes. This is not a dilution of the initial discussion under this DPC series, but a re-grouping into Occupational Rules and Regulations for the (i) construction industry and (ii) other industries. These Rules and Regulations emphasize both preventive and protective measures to be observed and implemented by workers and employers to ensure their safety, health, and welfare and protect them from work-related risks. The World Bank supported these efforts through an IDF. The DPC2 seeks to support the adoption of the two remaining sets of rules and regulations on Occupational Health and Safety. Status: This prior action has been met. The two remaining Rules and Regulations on Occupational Health and Safety (in the construction industry and other industries) were adopted by the Ministry on March 7, 2012 and came into effect from May 1, 2012. The RGoB has asked the World Bank to help train staff so that these standards can be better implemented. Component C: Expanding Access to Infrastructure in a Sustainable Manner
vi. Prior action for DPC2 (6 of 8) RGoB submits the new Road Bill to the Parliament.
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Issue: The objective of this prior action is to improve road network planning and maintenance following the revised road classification system. Reforms in the roads sector were introduced into development policy lending in Bhutan, starting with the DPFIS to exploit synergies with investment lending operations. A key sector strategy under the 10FYP is to formulate a comprehensive plan for strategic infrastructure development. As a first step towards strengthening the policy framework in the roads sector, a measure supported by the DPFIS was for the RGoB to prepare and publish Guidelines on the Road Classification System and Delineation of Construction and Maintenance Responsibilities, which clarify ownership and roles of various agencies as regards to planning, implementation, and maintenance. These guidelines were adopted in 2009. This, in turn, necessitated changes in the Road Act of 2004. This DPC2 supports the drafting and presentation of the revised Roads Bill to the Parliament with a view to improving planning and implementation of the road sector plans and programs. Status. This prior action has been met. The Ministry of Works and Human Settlements drafted and shared the revised Road Act with all stakeholders, including the World Bank. The revised Roads Bill was submitted to the Parliament. vii. Prior action for DPC2 (7 of 8)
RGoB adopts the Thromde (Municipal) Finance Policy (TFP). Issue: The objective of this prior action is to provide a financially sustainable policy framework for the delivery of public services by municipalities (Thimphu, Phuentsholing and other Class A Thromdes). The World Bank hired an international expert to provide technical assistance for drafting the TFP and bringing it in line with international standards. The TFP aims to assist the Thromdes to establish sound financial management practices, strive towards financial sustainability and self-reliance. Municipalities will collect all the taxes, charges and fees as stipulated in the Local Government Act (LGA), as well as receive development grants. They will adopt measures to improve budget implementation and municipal financial management. With the approval of the TFP, the RGoB will begin implementing selected priority measures, with particular focus on Thimphu and Phuentsholing. In fact, selected priority measures from the TFP are already being implemented with support from the municipal finance and management component of the ongoing Second Bhutan Urban Development Project. These include: design and implementation of the system for digitization of property tax records in Thimphu and Phuentsholing Thromdes; computerization of municipal asset register; and drafting the strategy for municipal accounting reform and a policy note on internal controls. This DPC2 supports the adoption of a TFP in Bhutan. Status: This prior action has been met. The TFP was adopted in mid-July, 2012. Selected priority measures from the TFP are being implemented in the Thimphu and Phuentsholing Thromdes under the World Bank’s Urban Project and will be replicated in the other two thromdes when they are ready. viii. Prior action for DPC2 (8 of 8) RGoB submits the Disaster Management Bill to the Parliament. Issue: Bhutan is prone to multiple natural hazards like earthquakes, Glacial Lake Outburst Floods forest fires and landslides. Although the loss of life has been minimal, these disasters often impose significant costs in terms of damaged infrastructure and cultural assets that draw tourists. Although recovery work was carried out immediately after all the disasters, it was often ad hoc. To make the disaster risk management and response program more systematic and streamlined, the RGoB plans to enact Disaster Management legislation. The drafting of a Disaster Management Bill was initiated in 2007, drawing on the existing principles in the National Disaster Risk Management Framework, 2006. The draft bill has undergone a number of reviews through a series of consultation meetings and workshops with various
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stakeholders including: (i) District Administrations, Ministries and Agencies including the High Court and the Office of the Attorney General; (ii) International experts; (iii) Deputy Speaker and other members of the National Assembly, and the Legislative Committee on environment and urban development. Several presentations were made on the Bill to the Cabinet. This DPC2 supports the drafting and presentation of the Disaster Management Bill to the Parliament. Status: This prior action has been met. The draft Bill was presented to the Parliament on November 3, 2011 after being approved earlier by the Cabinet on October 4th 2011. The National Assembly has since approved it on January 20th 2012, and the National Council on June 19, 2012. The Bill will now be presented to the joint session of the Parliament for final enactment.
VI. OPERATION IMPLEMENTATION
A. Poverty and Social Impacts
54. Overall, the poverty and social impacts of the key policies supported by this programmatic series are expected to be positive. No negative impact is anticipated. The first policy area helps improve public sector efficiency and effectiveness, which will have
direct positive social effects. There is a growing agreement that quality of public spending affects poverty. Pro-poorness of public expenditure in Bhutan is indicative of the scope for the poor to benefit from government budget. Spending (current and capital) on education and health account for 25 percent of budgeted expenditure in FY 2012-13. In addition, agriculture sector spending 12 percent of budget) also benefits the poor whose livelihood depends – close to 80 percent of the poor -on agriculture in the rural areas. Actions supported by this programmatic series relate to bolstering fiduciary systems for public financial management, improving transparency and efficiency of public procurement, and strengthening public administration. Such actions are expected to result in transparent use of public resources, including crucial social sector expenditures. These actions are also expected to result in improved service delivery in all sectors. The municipal finance reform under the planned DPC would help decentralize revenue and expenditure functions making the authorities more accountable to the local poor. Finally, improvements in governance are also crucial for entrepreneurial decisions on long-term investments, growth and poverty reduction in an economy.
The second policy area aims to foster private sector development and generate employment. The actions supported by this programmatic series aim to create an enabling environment for private enterprise; enhance access to credit to create a vibrant private sector; strengthen the institutional framework that underpins the labor market; and improve employability of job-seekers. Access to credit has been limited for all but for those in poorest quintile had only one-half the access of the richest. In urban areas most poor have indicated that improvements in labor and employment creation are a welfare priority for public action for improving their welfare. Reforms that aim at creating jobs through development of a vibrant private sector and enabling better skill matches will have direct social benefits because of enhanced employment opportunities. The enforcement of the Labor and Employment Act through supporting Rules and Regulations will remedy the institutional void and provide basic protection to all workers. Moreover, by limiting child labor, the Act will protect poor children – a group where child labor is most prevalent. The increased access to and quality of training programs that cater to low-paid workers will enhance labor market opportunities of these workers. The urban poor rate vocational training facilities more than twice as important compared to the non-poor. Better guidance for jobseekers, particularly via enhanced job-matching services, will help young people to find jobs faster, and to ensure better job matches (including enabling higher wages). Occupational health and safety rules and regulations will provide better working conditions for all workers.
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The third policy area aims to expand access to infrastructure in a sustainable manner. Actions supported in this area include promoting institutions to help meet road sector targets, fostering urban development and municipal management, and promoting environmental sustainability. The rural poor have highlighted road infrastructure and bridges besides electrification to be the most important welfare priorities that will improve their living conditions. Actions to improve infrastructure availability will directly help poor and remote communities to access basic services and markets. Infrastructure investments are expected to greatly enhance productivity and competitiveness and stimulate new businesses and create new jobs, while enriching the quality of life for all Bhutanese. Measures to improve urban management/finances will help alleviate the costs of agglomeration, that fall disproportionately on the poor. Bhutan, located in seismically most active zones of the world, is susceptible to multiple natural hazards such as Glacial Lake Outburst Floods in the north and flash floods and land-slides in the rest of the country. The incidence of poverty is higher in most of the eastern and southern dzonghkhags ranging from 29 percent to 53 percent – with nearly a third of the country’s population living in these districts.35 The 2009 earthquake which inflicted close to US $100 million in losses and damages hit the eastern part of the country.36 The poor tend to live in more risk prone areas and are less able to afford self-insurance mechanisms to cope with natural disasters. The measures to improve disaster risk management under the proposed DPC will mitigate the risk for these vulnerable poor.
B. Environmental Aspects 55. Bhutan has accorded a high priority to environmental conservation and sustainable development. Bhutan’s constitution, the 20 year perspective plan (Bhutan 2020), the 10FYP, and the National Environment Strategy, all enshrine the concept of sustainable development. Projects or developmental activities are not permitted in protected areas. All development proposals are subject to environmental assessment as required by the Environmental Assessment Act (2000) and Regulation for the Environmental Clearance of Projects and Regulation on Strategic Environmental Assessment (2002). The RGoB has made progress in strengthening environmental considerations by enacting the National Environment Protection Act of Bhutan (NEPA 2007), an umbrella environmental act. Building on experience, Bhutan is also in the process of revising Environmental Act, Regulations, and the Application for Environmental Clearance Guidelines as well as Environmental Codes of Practices. 56. The RGoB’s reform program highlighted above is expected to improve institutions for environmental practices. Reforms of environmental regulations will clarify mandates, roles, and responsibilities. Revised Application for Environmental Clearance Guidelines and new environmental quality standards will improve environmental mainstreaming. A web-based information management system that is under preparation will enhance availability of data. 57. All development proposals are subject to environmental screening and assessment processes and procedures which result in environmental management plans that incorporate specific recommendations for mitigating potential negative impacts. The NECS, the designated Competent Authority and District Environmental Officer are responsible for issuing environmental clearances and monitoring. At present NECS monitors ambient air quality at four locations, and carries out annual compliance checks by reviewing compliance with environmental standards as well as with the terms and conditions included in the environmental clearance. Surprise or unannounced checks may also be carried out. Protected areas and forest protection/conservation measures are strictly enforced. At various projects, compliance checks are also carried out by the district environmental office or by the designated
35 Based on Poverty Analysis Report, 2007. 36 The 2011 earthquake inflicted slightly smaller loss and damage of about US $ 57 million in the western part of the country.
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competent authority. Although there is limited capacity, the practice of compliance checking has contributed to improving environmental management practices and performances.
58. No major environmental concerns are noted for the first two themes supported under the DPCs. Measures to promote good governance and effective public spending are unlikely to have negative environmental consequences, and are expected to be environmentally neutral. Potential environmental concerns of encouraging greater employment through fostering private sector dynamism include the risk of increased pollution from industries, and lower health and safety of the workers. The proposed Rules and Regulations on Occupational Health and Safety are expected to address health and safety concerns. To minimize, mitigate, and manage the risk of increased pollution, the RGoB will ensure that environmental standards are not lowered and environmental due diligence is maintained in all private sector investments, including FDI. The FDI Policy incorporates international best practices, to ensure that environmental standards are met. All FDIs are subject to Bhutan’s stringent environmental requirements. 59. The potential environmental concerns related to access to infrastructure are more important. However, it is to be noted that infrastructure expansion is part of the RGoB’s 10FYP regardless of this operation. By supporting environmental sustainability, the DPC series actually mitigates those concerns. Adverse environmental impacts of DPC2 are expected to be minimal, since the RGoB is committed to applying strict environmental guidelines. In the roads sector, the Department of Roads (DoR) has gained considerable experience in Environmentally Friendly Road Construction (EFRC) during implementation of RAPI and RAPII, and the approach is being mainstreamed to all road construction activities. In urban development, only limited environmental impacts are expected from the expansion of municipal services in the designated local areas, and proposed activities are unlikely to have adverse impacts on natural habitat and forest resources. In fact, activities supported under the proposed BUDP2 are likely to contribute to improving environmental conditions of cities. Project design includes provision of a wastewater treatment plant and an Environmental Management Plan that supports specific measures to mitigate relevant, though minor, impacts that are likely to result from the project activities — for example slope disturbances and erosion, air quality and noise issues during construction, labor and labor camp issues, etc. Building on the ongoing RAP II experiences, BUDP2 also proposes to use Country Systems on environmental safeguards. 60. However, there is room for strengthening the environmental management in Bhutan. The Bhutan Country Environmental Safeguard Review, the Equivalency and Acceptability Reports,37 and Bhutan Country System Evaluation-Environmental Safeguard38 make similar recommendations for strengthening environmental management system in Bhutan. These include reforms in policies (legislative framework) and institutions as well as need for capacity strengthening. As noted earlier, the RGoB is gradually revising existing policies/ legislations, implementing some capacity strengthening measures such as orientations and trainings within few projects, and National Environmental Commission Secretariat is slowly moving towards more decentralized environmental enforcement by deputing environmental officers to District, and by planning to establish four regional environmental offices in near future. However, these efforts do not seem to be guided by a longer-term country-plan and hence appear to be ad hoc or an isolated activity. And there are many recommendations which are yet to be implemented. In the given context, RGoB needs to be encouraged in preparing country-plan with resource allocation that provides guidance for time-bound implementation of the recommendations made for strengthening Bhutan’s environmental management system.
37 prepared during preparations of World Bank funded RAP II and UDP II Projects (Safeguard Diagnostic Review for Piloting Use of Bhutanese Systems to Address Environmental and Social Safeguard Issues) 38 Independent Evaluation of Use of Country System in Bhutan RAP II
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C. Implementation, Monitoring, and Evaluation 61. The Department of Public Accounts (DPA), Ministry of Finance, will be responsible for overall implementation and monitoring of the DPC program. The RGoB has already established an inter-ministerial group of officials, headed by the Secretary, Ministry of Finance, to provide overall coordination for the DPC process. This group has worked with the Bank team since DPOs were first used in Bhutan and is therefore familiar with Bank procedures. The Bank team will supervise the project by monitoring actions and reviewing implementation progress of the proposed operation. The Policy Program Matrix of the proposed operation will provide a results framework that describes expected outputs/outcomes, as well as indicators by which to gauge progress and monitor interim steps. Implementation Support Missions will be undertaken at regular intervals, in consultation with the RGoB. 62. Monitoring and evaluation remains challenging, as significant data gaps and uncertainties are still being addressed. The National Statistics Bureau (NSB) of Bhutan has prepared a National Statistics Development Strategy (NSDS) with the support of the World Bank Trust Fund for Statistical Capacity Building to improve the coordination and strengthen the capacity of the Bhutan Statistical System (BSS) to meet users’ data needs. The NSDS provides a framework and action plan that aim to align the statistical development strategy with wider poverty-focused national development programs and strategies. The NSDS is consistent with Bhutan’s overall development vision, and will lead to better monitoring of development outcomes under the upcoming DPC program. In parallel, the Bank is also working with the RGoB to further support statistical development through technical assistance.
D. Fiduciary Aspects 63. The World Bank team has been engaged in public financial management issues, through an extensive TA/capacity building program with oversight agencies, supervision activities on investment projects, as well as the DPC support to RGoB’s reform program, as described above. While several challenges remain (including the timeliness of accounting and reporting, the monitoring of financial performance, the effectiveness of internal audits, and the execution of other control functions), the core elements of an adequate financial management system are largely in place, including publication of the budget. Progress is also being made in strengthening the capacity of the accountability and oversight institutions, and establishing the necessary legal underpinnings needed to ensure that the financial management and transparency demands arising from the increased revenues and spending expected over the coming years are met. 64. The overall fiduciary framework is adequate to receive the proceeds of DPC2. The positive trajectory of improvements in financial management stems from RGoB’s commitment to: (a) strengthen the legal framework; (b) enhance institutional capacity and internal control framework; (c) improve the financial management information system, and (d) strengthen the oversight of public finances. Together, these actions are aimed at increasing accountability and improving the timeliness, quality, transparency and reliability of the RGoB’s accounting and reporting functions. These positive steps, as well as the RGoB’s demonstrated focus on results and strong commitment for continued PFM reforms, provide a satisfactory basis for proceeding with the proposed budget support operation. 65. The IMF has not carried out a Safeguards Assessment of the Royal Monetary Authority (RMA), Bhutan's Central Bank. As part of the appraisal for DPC2, the audit reports and published annual financial statements for the last two financial years FY10-11 were reviewed by the World Bank. The auditors have issued an unqualified report and the auditors are the Royal Audit Authority. The accounts and audits were compiled and conducted in accordance with generally accepted accounting and auditing standards. Based on the audit reports and the satisfactory track record in the operation of special (designated) accounts in several IDA-financed investment operations in the past, which have been held in
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the RMA, it was concluded that the Bank has reasonable assurance that the control environment for foreign exchange at the RMA is satisfactory.
66. In procurement, external donors have looked favorably on the national procurement system. The UCS Assessment to follow uniform procurement procedures highlights a number of areas which need to be further improved, and together with the Bank and other development partners, efforts are underway to harmonize the use of Bhutan’s fiduciary (including procurement) and safeguards systems. As noted above, there is a deepening engagement on procurement issues, and the RGoB has moved forward on key items of their reform program, including: (a) revising the procurement manual (including drafting and issuing standard bidding and request for proposal documents); (b) creating a central Public Procurement Policy Division; and (c) improving capacity through procurement training (improving implementation of rules and facilitating decentralization of procurement functions). Overall, the procurement risk can be gauged as medium, but in partnership with other donor agencies, the Bank team is working with the RGoB to continue moving forward on fiduciary reforms.
E. Disbursement and Auditing 67. The process is unchanged from what was described in the DPC1 program document. Once the credit is approved by the Board and becomes effective, the RGoB will submit to the IDA an application for withdrawing the proceeds, provided that IDA is satisfied with the progress achieved by the Government in carrying out the Program and with the adequacy of the country's macroeconomic policy. IDA will disburse the US dollar proceeds of the credit in one tranche to the Government Consolidated Fund (Budget Fund) Account of RGoB maintained with RMA after which the disbursed foreign currency will be converted within five (5) business days to local currency and made available to finance budgeted expenditures of RGoB. Transactions and balances of the account will be promptly and fully incorporated into the Government’s accounting records and financial statements. The government will confirm to the Bank within 45 days of disbursement, the receipt of these funds and its credit into the Government Consolidated Account of the country (including the date of receipt, exchange rate applied to convert the Credit proceeds into Bhutanese Ngultrum and name/number of the government’s bank account in which the funds have been deposited). The administration of this credit will be the responsibility of the Debt Management Division, Department of Public Accounts, MoF. 68. Disbursement of the credit proceeds would not be linked to specific purchases. However, the RGoB would not use the credit proceeds to pay for expenditures included in the Bank’s standard negative list which includes expenditures on military hardware and environmentally hazardous goods. If any portion of the credit is used to finance ineligible expenditures as so defined in the Financing Agreement, IDA shall require RGoB to refund the amount to IDA.
F. Risks and Risk Mitigation 69. No major risks that are likely to derail the reforms are identified. However, there are some risks that can affect implementation progress — but mitigation measures are also in place. Macroeconomic risks. There are several risks, with mitigating factors.
(i) The main risk is that the aggregate demand pressures could linger resulting in persistent rupee shortage because of high off-budget hydropower expenditures and capital spending by state-owned enterprises. While these expenditures are fully financed by India or other development partners, the risk is that they could boost ancillary private sector activities, which could add to the rupee shortage in the gestation period. Mitigating factors include: recent monetary and fiscal tightening; a calibration of capital spending by the RGoB based on foreign grants or loans; and commitment at high levels of the RGoB (in close coordination between
35
Ministry of Finance, the RMA, in consultation with the World Bank) to targets as evidenced by quarterly review of macroeconomic performance. The expansion of the existing line of credit with the Government of India as well as the currency swap arrangement should help ease pressures on the rupee. (ii) Recent rapid credit growth in recent years has increased financial sector vulnerabilities. Mitigating factors include actions by RMA to adjust prudential regulations and norms – as done recently – to help curb large exposures to some sectors. Periodic stress tests by the Banks should also help monitor risks. (iii) The interim Debt Sustainability Analysis (2012) shows Bhutan to be at a high risk of debt distress. Risks are mitigated because public debt is sustainable in the long term and debts are concentrated in the commercially viable hydropower projects, which account for half the total debt. Other mitigating factors include Bhutan’s strong project implementation record and good governance, and India’s strong energy demand.
Capacity risks. The preceding DPOs identified risks related to technical capacity constraints and put
forward some mitigation measures, including the provision of appropriate technical assistance to support the RGoB in implementation of the reforms. In addition to technical capacity, high-level managerial capacity is also in short supply. To some extent, familiarity with World Bank procedures and continuity of key counterpart officials will help mitigate this risk. As in the case of the earlier DPOs, the design accounts for capacity constraints through selectivity and limiting the number of prior actions. It will also seek to leverage technical assistance resources.
Political risks. Changes in government priorities and working officials could affect the relevance
and implementation of the program. The upcoming elections next year could give rise to populist pressures and put further stress on the fiscal/external situation. Sustainability is helped by ownership of the reform program by the current government (and civil service). The DPC program is a response to a request by the RGoB, which is on board with the reform program supported by the proposed DPC series as anchored in the RGoB’s own 10FYP. Key counterpart officials have not changed, and the inter-ministerial group of officials steering the implementation have already had experience in satisfactorily implementing the earlier DPO program.
Annex 1
36
Annex 1: Policy and Institutional Reforms supported by DPC1 and DPC2 Reform Area / Medium-Term Outcome
DPC1 Prior Actions (2009/10)
DPC2 Prior Actions (2012/13)
Progress Indicator for Results
Baseline before DPC1 Preparation
(end-2008/09)
Target End-of-Program Result (end-2013)
A. Government Efficiency and Effectiveness Promoting government efficiency and effectiveness through sound public fiscal and financial management and procurement, and strong public administration
Bolstering fiduciary systems for public financial management
The RGoB authorizes the Accounting and Auditing Standards Board of Bhutan to issue Phase I of Bhutanese Accounting Standards and to set criterion for phase-wise implementation of said standards by Bhutanese companies.
Number of IAS/IFRS standards notified.
Consultants engaged to work on preparing the standards, but no IAS/IFRS standards officially notified.
2013 Financial Statements prepared for the 33 large companies listed in the notification on the basis of Bhutanese Accounting Standards (Phase I).
Improving transparency and efficiency of public procurement
In line with the short-term recommendations from the Procurement Use of Country Systems Assessment, the RGoB (a) issues a Procurement User Guide, (b) strengthens the PPPD, (c) establishes a PPPD website, and (d) amends the Procurement Rules and Regulations 2009 to include (i) an independent bid complaint review mechanism, (ii) requirements to publish contract award soon after award, and (iii) revisions to the Standard Bidding Documents for Goods and the Standard Bidding Documents for Works.
Contracts awarded and published.
UCS assessment not undertaken, public procurement governed by existing Procurement Rules and Regulations 2009.
100 percent of contract awards published online within 15 days after award.
Strengthening public administration
As part of the IPSDS initiative, service delivery standards prepared by 42 ministries, agencies and dzongkhags. NACSF approved by Cabinet, published and disseminated.
Parliament adopts a new Anti-Corruption Law and the Anti-Corruption Commission
Reduced timeline for delivery of key services. Timber permits Security clearances Citizen ID cards
Service delivery standards under preparation, not implemented or online. 180 days 1 week 35 days
21 days; 24 hours; 5 days. Compliance with asset disclosure rises from 69 percent in 2011 to 83 percent
Annex 1
37
Reform Area / Medium-Term Outcome
DPC1 Prior Actions (2009/10)
DPC2 Prior Actions (2012/13)
Progress Indicator for Results
Baseline before DPC1 Preparation
(end-2008/09)
Target End-of-Program Result (end-2013)
(ACC) adopts new Asset Declaration Rules.
in 2012.
B. Private Sector Development and Employment Generation Fostering private sector development by improving the policy environment and facilitating productive employment opportunities
Creating an enabling policy environment for the private sector
Economic Development Policy approved by the Cabinet, and publicly released.
RGoB approves revised Foreign Direct Investment Rules and Regulations.
Implementation of Economic Development Policy. Increase in FDI inflows.
EDP under preparation.
Specific actions highlighted in EDP implementation on track, as per GNHC and MoEA reports. One additional FDI investment by end 2013.
Fostering private sector dynamism through enhancement of access to credit
The CIB is in operation, with products including Consumer Credit Information Reports and Self Inquiry Reports.
Accounts linked to CIB, with reports being generated as required.
CIB not operational. Over 90 percent of all Bank accounts linked to CIB, with reports available as required.
Strengthening the institutional framework underpinning the labor market
RGoB approves two regulations on Occupational Health and Safety for (a) the Construction Industry and (b) other sectors.
Number of labor inspectors and inspections carried out
- 9 labor inspectors nationwide. - 1462 labor inspections carried out.
- 24 labor inspectors nationwide (2013). - At least 2900 labor inspections carried out (2013).
Improving the employability of job-seekers
National HRD Policy and Strategy approved by Cabinet.
Progress in implementation of National HRD Policy.
National HRD Policy under preparation and consultation/
Implementation as per Action Plan, as reported by working-level Secretariat in MoLHR.
C. Infrastructure Expanding access to infrastructure in a sustainable manner
Promoting institutions to help meet road sector targets
RGoB submits the new Road Bill to the Parliament.
- Re-designation of roads. - Registry of primary and secondary national highways.
Road Act of 2004 in need of revision, to make consistent with new road classification system.
- Re-designated list of roads with clearly defined responsibilities to form a basis for planning. - Registry of primary and secondary national highways achieved by end-2013.
Fostering urban development and municipal management
Thromde Rules finalized and approved by Ministry, in support of LGA 2009.
RGoB adopts the Thromde
Progress in implementation of LGA 2009, through Thromde Rules. Progress is implementation of
LGA under preparation, along with draft Thromde Rules. Commencement of preparation
Submission of progress reports by Class A Thromdes annually to the Ministry of Works and Human Settlements outlining progress against plan activities. Property tax records digitized (2013). - Property tax records
Annex 1
38
Reform Area / Medium-Term Outcome
DPC1 Prior Actions (2009/10)
DPC2 Prior Actions (2012/13)
Progress Indicator for Results
Baseline before DPC1 Preparation
(end-2008/09)
Target End-of-Program Result (end-2013)
Finance Policy (TFP) Thromde Finance Policy. of Thromde Finance Policy, to provide financially sustainable policy for service delivery by municipalities.
digitized (2013). - Municipal asset register computerized (2013).
Promoting environmental sustainability
Environmental standards for Ambient Air Quality, Industrial Emission, Workplace Emissions, and Noise Levels approved and implemented.
Application / implementation of revised standards.
Standards outdated and in need of revision.
Compliance with new standards, as reported from random checks by National Environment Commission Secretariat.
Strengthening disaster risk management
RGoB submits the Disaster Management Bill to the Parliament.
Improved ability to deal with disasters.
Disaster relief efforts are ad hoc.
Setting up a National Disaster Management Authority.
Annex 2
39
Annex 2: Royal Government of Bhutan Letter of Development Policy and Policy Program Matrix
Annex 2
40
Annex 2
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Annex 2
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Annex 2
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Annex 2
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Annex 2
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Annex 2
46
The Royal Government of Bhutan: Medium-Term Reform Program: 2009/10 - 2012/13 Policy Program Matrix
Reform Area
Reforms Undertaken and
Progress Made until 2008/09 Reform Measures Medium-Term Outcome Goals &
Progress Indicators 2009/10 2010/11 & 2012/13
A. Government Efficiency and Effectiveness Promoting government efficiency and effectiveness through sound public fiscal and financial management and procurement, and strong public
administration A1. Strengthening budgetary processes
(a) MoH has held a multi-stakeholder workshop identifying areas for future work in health financing. Work on Analysis of Public Expenditure for Human Development initiated.
(a) The MoF monitors performance in key areas (to be mutually agreed based on evidence and sector priorities) for the MoE and MoH, as part of the budgetary process.
(a) Performance monitoring incorporates the key action points emerging from the Analysis of Public Expenditure for Human Development.
Outcome: Budgetary process linked to performance on key identified areas. Indicators: Performance in the areas specified are reported and reviewed semi-annually.
A2. Bolstering fiduciary systems for public financial management
(a) Technical Support Sub-Committee established to assist the high level Accounting and Auditing Reform Committee, international consultants engaged to assist RGoB in defining Accounting Standards for public and private sector companies. (b) RGoB has initiated assessment of public financial management performance using the PEFA framework as a tool.
(a) AASBB established and mandated to develop Bhutanese Accounting Standards in line with IAS/IFRS, and road map for 3-phase implementation of the Accounting Standards agreed. (b) The PFM-PEFA indicator based performance assessment completed and final report issued.
(a1) The RGoB authorizes the Accounting and Auditing Standards Board of Bhutan to issue Phase I of Bhutanese Accounting Standards and to set criterion for phase-wise implementation of said standards by Bhutanese companies. (a2) Related training, development of guidance notes, and related manuals completed. (b) RGoB adopts a time based action plan for improvements in PFM performance based on PFM-PEFA assessment.
Outcome: Improved fiduciary systems for public financial management. Indicators: Improved financial reporting following consistent application of accounting standards aligned with IAS/IFRS in financial statements. PFM performance measurement framework used as tool to set baseline and report on progress in PFM performance.
A3. Improving transparency and efficiency of public procurement
(a) Revised procurement manual launched in April 2009. Accompanying SBDs and SRFP issued and implemented. (b) Assessment to pilot UCS in Procurement in Bhutan initiated.
(b) Assessment to pilot Use of Country Systems in Procurement in Bhutan completed and validated.
(a) SBDs for small works, goods, and services issued. (b) Amended the Procurement Rules and Regulations 2009 and SBDs, where necessary to account for priority short term recommendations from UCS.
Outcome: More transparent and efficient systems for public procurement. Indicators: New SBDs implemented. Amended Procurement Rules and Regulations 2009 implemented for public procurement.
A4. Strengthening public administration
(a) Standard Cost Model to assess and reduce administrative and regulatory burden piloted in
(a) As part of the IPSDS initiative, service delivery standards prepared by 42 ministries, agencies and
(a) Service delivery standards adopted in a significant number of ministries, agencies, dzongkhags.
Outcome: Standards of service delivery and public officials’ accountability mainstreamed in
Annex 2
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Reform Area
Reforms Undertaken and Progress Made until 2008/09
Reform Measures Medium-Term Outcome Goals & Progress Indicators 2009/10 2010/11 & 2012/13
Transport, Business Licensing & Municipal Services. (b) National Anti-Corruption Strategy Framework (NACSF) drafted and consulted. (c) Rules for Asset Declaration and Gifts Restriction finalized and issued.
dzongkhags. (b) NACSF approved by Cabinet, published and disseminated. (c) Public officials, beyond those in Schedule I, are able to file their asset declaration statements on-line.
(b) Significant number of ministries / agencies develop own NACSF implementation plans, and monitoring indicators. (c) A majority of all public servants are filing their asset declaration statements.
ministries, agencies and dzongkhags. Indicators: The PM’s report to National Assembly includes implementation of service delivery standards by line ministries. Lower public perception of corruption reported in next Integrity Assessment Survey, planned for 2012, following the benchmark survey of 2010.
B. Private Sector Development and Employment Generation Fostering private sector development by improving the policy environment and facilitating productive employment opportunities
B1. Creating an enabling policy environment for the private sector
(a) EDP submitted to the GNHC, and to Cabinet for review. Revised draft, including timebound actions for implementation, submitted to Cabinet following consultations. (b) The revised FDI Policy was submitted to the GNHC, and then to Cabinet, for review. (c) Contract agreement in September 2009 with a global SEZ developer to DPFOOT an IT park in Bhutan.
(a) Economic Development Policy approved by the Cabinet, and publicly released. (b) FDI policy approved by Cabinet. (c) PPI Policy prepared and approved.
(a) All necessary policy framework and institutional arrangements for implementation of EDP established.
(b) Revised FDI rules and regulations approved and adopted by the Ministry. (c) Economic Zone Policy drafted.
Outcome: Improved environment for FDI and private sector development in the country. Indicators: ECB/ICB rules approved for borrowing. 5 percent average annual growth in FDI during 10FYP, from US$17 million in 2008/09. Increase in the number of FDI project approvals by at least 3 (from 20 approvals during 2005- 2010), subject to applications from the private sector.
B2. Fostering private sector dynamism through enhancement of access to credit
(a) The RMA Board has given an in-principle approval to set up three banks and one insurance company. (b) RMA has prepared a long-term strategic plan with a phased approach to introduce a modernized electronic payment systems.
(a) RMA Board issued two new commercial bank licenses, one new specialized bank license, and one new insurance company license, following the completion of the criteria laid out by RMA. (b1) The CIB is in operation, with products including Consumer Credit Information Reports and Self Inquiry Reports. (b2) Carry out development for an EFTCS.
(a) Strengthen supervisory functions in RMA to ensure stability of the financial sector. (b1) Draft and vet payment and settlement regulations, through consultative process. (b2) Implement National Card Switch to allow for interoperability of ATMs.
Outcome: Increased access to credit for the private sector. Indicators: Increase in the number of licensed financial service providers, from 6 in 2009. Increase in the volume of fund transfer transactions among banks channeled through the EFT system per year, up from nil. All bank accounts linked to CIB.
B3. Strengthening the institutional
(a) Labor and Employment Act approved in 2007. 14 rules &
(a) Review drafts of eight remaining rules and regulations on
(a) The remaining two rules and regulations on Occupational Health
Outcome: Improved employment and working
Annex 2
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Reform Area
Reforms Undertaken and Progress Made until 2008/09
Reform Measures Medium-Term Outcome Goals & Progress Indicators 2009/10 2010/11 & 2012/13
framework underpinning the labor market
regulations on Employment Conditions approved, and under implementation. Eight rules and regulations on Occupational Health & Safety drafted, and under revision.
Occupational Health and Safety, and have national consultations.
and Safety approved by Ministry.
conditions in private sector. Indicators: 16 rules and regulations under implementation.
B4. Enhancing labor market information
(a) Labornet is integrated with LMIS, Four additional sources of information outside MoLHR have been incorporated in the LMIS. Job Portal developed in 2004 not in effective use.
(a) Redesign the job intermediation instruments for Bhutanese jobseekers.
(a) Job intermediation system functional.
Outcome: Improved information for job intermediation services. Indicators: At least 3 Regional Offices have system functional and accessible through kiosks.
C. Infrastructure Expanding access to infrastructure in a sustainable manner
C1. Promoting institutions to help meet road sector targets
(a) RGoB approved and published road classification system, including definition and specification of road categories, procedures, and criteria for upgrading a road to next category. (b) MoWHS initiates the revision of the Road Act 2004 to make it consistent with published road classification guidelines. (c) Environment Unit in DoR is in need of strengthening to carry out its functions. .
(a) Redesignation of roads based on new road classification system in process.
(b) Revised Road Act drafted, and under review by Legal Officer. (c)Assistant Engineer of DoR assigned environmental responsibility, and Unit strengthened by linking with environmental team at PPD (MoWHS).
(a1) Redesignation of roads based on new guidelines completed. (b) New Road Act presented to the Parliament.
Outcome: Improved policy and planning framework. Indicators: Redesignated and prioritized list of roads to form basis for budgetary planning. Road Act implemented.
C2. Fostering urban development and municipal management
(a) Local Government Act 2009 promulgated. Thromde (Municipal) Rules drafted. Land pooling adopted for new urban development. (b) Draft Municipal Finance Policy prepared, with recommendations to improve municipal financial management in City Councils (CCs).
(a) Thromde Rules finalized and approved by Ministry. (b) Thromde Finance Policy reviewed and revised.
(a) Implementation of Thromde Rules, with municipal budgets, etc., processed and executed by TCC and PCC. (b) Thromde Finance Policy approved.
Outcome: Upgraded municipal management processes in urban local governments. Indicators: Wider coverage municipal services in Thimphu and Phuentsholing (with better consumer satisfaction to be gauged through surveys).
Annex 2
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Reform Area
Reforms Undertaken and Progress Made until 2008/09
Reform Measures Medium-Term Outcome Goals & Progress Indicators 2009/10 2010/11 & 2012/13
C3. Promoting environmental sustainability
(a) NEPA 2007 is effective, but EAA 2000 and RECP 2002 are under revision to consolidate experiences, remove duplications, and to clarify roles and responsibilities. (b) Revision / updating of the interim Environmental Quality Standards, standards for ambient air and water quality, as well as discharge (effluent and emission) standard initiated.
(a) Draft amendment bill prepared, and stakeholder consultations undertaken. (b) Environmental standards for Ambient Air Quality, Industrial Emission, Workplace Emissions, and Noise Levels approved and implemented.
(a1) Amendment bill submitted to Parliament for approval, following internal clearances. (b) Environmental standards for effluent discharge approved and implemented.
Outcome: Improved institutions for environmentally sustainable development. Indicators: Improved environmental quality standards under implementation.
C4. Strengthening disaster risk management
(a) The Disaster Management Bill was submitted to the Parliament in November 2011
Outcome: Improved capability to manage, prepare for, and respond to natural disasters. Enactment of Disaster Management Act. Setting up a National Disaster Management Authority.
Annex 3
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Annex 3: Macroeconomic and Fiscal Tables Table 1: Selected Macroeconomic Indicators
2009/10 2010/11 2011/12 2012/13 2013/14 2014/15
Act. Act. Est. Budget MTEF MTEF
Real sector
GDP growth 9.3 8.5 7.7 12.3 11.5 9.5
Hydropower GDP 13.7 11.1 9.3 34.6 30.1 20.9
Non-hydropower GDP 4.1 7.0 6.6 7.1 3.9 2.3
Consumer prices (period average) 7.1 4.8 8.6 9.1 7.6 7.6
Central government operations
Total revenue & grants 36.7 39.2 31.2 24.3 25.7 22.3
Total expenditure & net lending 44.7 38.8 42.7 32.7 26.8 25.5
Overall balance, incl. grants 1.6 -2.1 -3.5 -1.6 -2.5 0.3
Overall balance, excl. grants -15.0 -15.8 -19.0 -12.0 -8.0 -7.6
Monetary sector
Broad money 30.1 21.1 3.5* … … …
Credit to private sector 38.6 31.6 28.0* … … …
External sector
Current account balance -9.9 -24.3 -23.5 -24.3 -32.4 -35.3
Trade balance 11.2 9.1 9.6 9.3 7.2 7.3
Exports (goods) 38.0 39.3 37.5 34.8 33.9 32.3
Imports (goods) 58.8 70.1 65.1 58.5 61.4 65.2
Grants (current transfer) 16.6 13.7 15.5 10.4 5.8 8.5
Capital account balance 14.4 27.5 28.6 25.5 30.2 44.5
Loans (net) 7.1 16.3 21.2 23.5 17.5 31.2
Overall balance 7.4 5.8 5.1 1.2 -3.9 6.6
Gross int'l reserves (in millions of US$) 862 950 769 826 .. ..
Gross int'l reserves (months of G&S imports) 8.7 9.3 7.0 7.0 .. ..
Government external debt 53.5 62.8 75.1 96.1 102.2 119.6
Government external debt service ratio (in percent) 15.7 13.6 12.7 11.0 10.6 10.6
Exchange rate (Nu/US$) period average 46.7 45.3 50.3 .. .. ..
Source: Bhutanese Authorities and IMF* As of May 2012.
(annual percentage change)
(in percent of GDP)
(annual percentage change)
(in percent of GDP)
Annex 3
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Table 2: Central Government Budget Summary—Budget Policy and Fiscal Framework Statement (Percent of Nominal GDP)
2009/10 2010/11 2011/12 2012/13 2013/14 2014/15Actual Actual Revised Budget Proj. Proj.
Resources 46.4 36.7 39.2 31.2 24.3 25.7
Domestic Revenue 23.4 22.8 22.9 20.7 18.8 17.8
Tax Revenue 14.4 15.1 0.0 0.0 0.0 0.0
Non-tax Revenue 8.9 7.7 7.4 5.7 6.2 5.7
Foreign Grants 16.6 13.7 15.5 10.4 5.5 7.9
India 10.9 10.3 11.1 7.3 3.7 5.4
Others 5.7 3.4 4.4 3.1 1.9 2.5
Other Receipt 6.3 0.3 0.8 0.0 0.0 0.0
Expenditure Outlay 44.7 38.8 42.7 32.7 26.8 25.5
Current Expenditure 19.3 19.2 19.9 17.8 16.9 16.2
Salaries & Wages 8.4 8.5 8.5 0.0 0.0 0.0
Transfers to Public Enterprises (PEs) 1.0 1.0 0.0 0.0 0.0 0.0
Interest Payments 2.6 2.3 3.0 2.7 2.7 2.3
Internal 0.1 0.1 0.1 0.0 0.0 0.0
External 2.5 2.3 2.9 2.6 2.6 2.3
Capital Expenditures 19.3 19.2 23.6 15.9 11.1 10.8
o/w capital transfers to PE s 1.0 0.8 0.0 0.0 0.0 0.0
Net Lending (0.6) (1.2) (0.9) (1.0) (1.2) (1.5)
Advances/Suspenses (net) 0.5 1.6 0.0 0.0 0.0 0.0
Other Payments 6.2 0.0 0.0 0.0 0.0 0.0
Primary Balance 4.3 0.3 (0.5) 1.1 0.2 2.6
Current Balance (excluding grants) (15.0) (15.8) (19.0) (12.0) (8.0) (7.6)
Overall Balance 1.6 (2.1) (3.5) (1.6) (2.5) 0.3
Financing (1.6) 2.1 3.5 1.6 2.5 (0.3)
Borrowings (net) (0.6) 0.5 (1.8) 2.5 (2.6) 0.3
Foreign (net) (0.4) 0.7 (1.6) 2.4 (2.8) (0.8)
Borrowing 2.7 3.5 1.0 5.4 2.6 1.9
Repayment 3.1 2.8 2.6 3.0 5.4 2.6
Domestic (net) (0.3) (0.2) (0.2) 0.0 0.2 1.0
Borrowing 0.7 0.7 0.0 0.2 0.3 1.2
Repayment 1.0 0.9 0.2 0.2 0.1 0.1
Resource Balance 1.0 (1.6) (5.3) 0.9 (5.0) 0.6
Memorandum Items:Non-interest spendings 42.1 36.5 39.7 30.0 24.1 23.2
Total Debt 55.0 63.4 86.3 96.1 102.2 119.6
External Debt 53.5 62.3 85.5 95.3 101.7 117.4
o/w Hydro Power Debt 33.6 42.8 50.0 58.9 67.7 86.3
Source: Bhutanese Authorities
Annex 3
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Table 3: Balance of Payments (Millions of Ngultrum)
2009/10 2010/11 2011/12 2012/13 2013/14 2014/15
Actual Prov. Proj. Proj. Proj. Proj.
Current account ‐6634.9‐
18623.6‐
20424.9 ‐
24859.6‐
38602.8‐
48115.3
Trade balance
‐13938.2
‐23544.9
‐24043.6
‐24266.4
‐31092.7
‐41789.2
Exports, f.o.b. 25401.8 30160.1 32582.0 35613.6 38366.3 40987.6
Imports, c.i.f.
‐39340.0
‐53705.0
‐56625.6
‐59880.0
‐69459.0
‐82776.8
Services ‐1007.1 ‐1587.9 ‐2278.6 ‐3552.2 ‐4368.2 ‐5431.7
Credit 3213.6 3707.7 4374.7 5163.0 6094.9 7196.8
Debit ‐4220.6 ‐5295.6 ‐6653.3 ‐8715.2‐
10463.0‐
12628.5
Income ‐2836.8 ‐3663.3 ‐6131.5 ‐6535.8 ‐7555.7 ‐9512.6
Credit 762.3 753.9 805.2 868.9 945.1 1034.0
Debit ‐3599.1 ‐4417.2 ‐6936.7 ‐7404.7 ‐8500.8‐
10546.6
Current transfers 11147.2 10172.4 12028.8 9494.7 4413.8 8618.3
Credit 12880.4 12517.7 16766.0 14909.5 9339.3 13937.1
o/w Budgetary Grants 11118.9 10497.7 13496.9 10691.2 6602.0 10761.0
Debit ‐1733.3 ‐2345.3 ‐4737.2 ‐5414.7 ‐4925.5 ‐5318.8
Capital and financial account 9621.4 21082.3 24859.3 26135.1 34146.2 56517.3
Capital transfers 3719.5 3652.0 5016.7 7923.0 14069.9 16620.1
Foreign direct investment 885.9 743.6 580.4 580.3 580.0 580.0
Portfolio investment 0.0 0.0 0.0 0.0 0.0 0.0
Other Investment 5015.9 16686.7 19262.2 17631.8 19496.3 39317.2
Foreign aid (RGOB loans net) 4763.3 12467.9 18417.8 24049.3 19831.7 39640.6
Disbursements 5893.5 14610.8 20671.6 27162.0 29281.5 43198.3
Principal repayments ‐2033.5 ‐2142.9 2253.8 3112.8 9449.8 3557.7
Other loans (net) 642.8 3384.1 1288.2 ‐6209.1 ‐222.1 ‐232.8
Disbursements 4756.8 16388.3 27657.7 0.0 0.0 0.0
Principal repayments ‐4312.8‐
13225.9‐
27053.8 ‐6362.3 ‐349.3 ‐338.6
Other 358.4 25.8 ‐443.8 ‐208.4 ‐113.3 ‐90.6
Net Errors and Omissions 1987.0 2014.5 0.0 0.0 0.0 0.0
Overall balance 4973.4 4473.2 4434.4 1275.5 ‐4456.6 8402.0
Change in Reserves (- increase/ + decrease) ‐4973.4 ‐4473.2 ‐4434.4 ‐1275.5 4456.6 ‐8402.0
Total reserves 38624.6 40637.1 45071.6 46347.1 41890.5 50292.5
Annex 4
53
Annex 4: Bhutan—IMF Assessment Letter for the World Bank August 22, 2012
1. Bhutan’s growth has remained robust, but the current account deficit has widened.
Bhutan’s economy has expanded at a robust pace driven by the hydropower sector developments. GDP growth is estimated at nearly 8 percent in 2011/12 (from 8.5 percent in 2010/11), and is projected to reach 12.5 percent in 2012/13 due to the acceleration in hydropower-related construction. Inflation has risen, reaching 13.5 percent in 2012Q2, with both food and nonfood components accelerating. Bhutan’s medium term outlook is favorable, as growth should remain strong at around 8–9 percent over the medium term, driven by developments in the hydropower sector, manufacturing, and domestic services.
The current account deficit has widened to an estimated 23 percent 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 percent of GDP due to sizable grants and loan disbursements. Strong growth in domestic demand has fueled the demand for Indian rupees (since about 80 percent of Bhutan’s imports are from India), contributing to a rupee shortage. Convertible currency reserves, however, are broadly adequate (US$723 million in July 2012).
Challenges in the banking sector caused by high credit growth have come to the fore. While credit growth has remained high at 26.2 percent year-on-year in June, it has moderated since March—contracting in sequential terms in June—as a result of tight liquidity and policy measures (see below). Loan concentration, particularly in real estate/construction and personal loans, is significant. Interest rates, albeit low, have started to increase. Financial stability indicators are generally adequate, but concerns about a prospective deterioration in asset quality have intensified as nonperforming loans (net) have risen to 5.9 percent from 3.1 percent of total loans a year earlier.
2. Current policy settings are broadly appropriate, and overheating pressures are being addressed.
Monetary conditions need to continue to be recalibrated to ensure that prospective credit growth remains in check and liquidity conditions are appropriate. The Royal Monetary Authority of Bhutan has taken appropriate steps to address high credit growth and improve its ability to manage liquidity, particularly with the introduction of the policy rate and base rate as well as liquidity adjustment facility, though the policy rate has been set at a low level. Financial sector supervision should be strengthened and prudential tools should continue to be used proactively. Greater financial intermediation in recent years may have increased systemic vulnerabilities stemming from rapid credit growth.
Fiscal policy has generally been prudent, but the widening of the fiscal deficit in 2011/12 has contributed to overheating. The budget deficit, estimated to have reached 4.3 percent of GDP, has led to greater demand for imports, putting pressure on the demand for Indian rupees and exacerbated the rupee shortfall. Strong commitment to the 2012/13 budget deficit target of 1.6 percent of GDP is welcome, as current expenditure declines as a share of GDP on the back of spending restraint and tax revenue is expected to improve slightly. While public debt is sustainable over the long term, the risk of debt distress stems from the possibility of shortfalls in aid-based foreign financing. Public debt has increased significantly since 2009/10 as a result of investments in the hydropower sector and is projected to exceed 93 percent of GDP in 2014/15, putting Bhutan at high risk of debt distress. However, risks are mitigated by the concentration of debt in commercially viable hydropower projects, which account for nearly two-thirds of external debt.
Annex 4
54
The rupee shortage reflects a structural imbalance in Bhutan’s economy, but overheating has also contributed. The spending on hydropower projects in the pipeline and volatile exports to India (due to the strong seasonality in electricity generation) continue to contribute to volatility in net rupee inflows. While the hydropower projects are financed by rupee loans and grants, ancillary private sector development (particularly construction) and aid inflows have fueled imports. However, loose aggregate demand policies (high credit growth and a widening of the fiscal deficit) have also contributed to the balance of payment pressures. Measures to curb credit growth are expected to alleviate the rupee shortage and fiscal restraint will also help.
3. The 2011 Article IV consultation was concluded on May 30, 2011. A staff visit took place in August 1-8, 2012 and the next Article IV consultation mission is planned for March 2013.
Annex 4
55
Nominal GDP (2010/11): US$1,547 millionPopulation (2011): 0.723 millionGDP per capita (2010/11): US$2140Quota: SDR 6.3 million
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13Est. Proj. Proj.
Real sector Real GDP at market prices (percent change) 10.8 5.7 9.3 8.4 7.7 12.6Consumer prices (percent change, period average) 6.3 7.1 4.8 8.6 8.4 9.0
General government
Total revenue and grants 34.9 32.8 46.3 36.8 37.7 30.8Tax revenue 9.0 9.9 13.4 14.2 14.8 15.0Non-tax revenue 14.6 11.6 16.3 8.9 7.0 5.7Foreign grants 11.4 11.3 16.6 13.7 15.9 10.2
Total expenditure and net lending 34.7 33.3 44.7 38.9 42.0 32.5Current expenditure 18.7 19.1 26.0 20.8 19.7 18.3Capital expenditure 19.2 16.9 19.3 19.3 23.4 15.2
Current balance (excluding grants) 4.9 2.4 3.8 2.3 2.1 2.3Overall balance 0.3 -0.5 1.6 -2.1 -4.3 -1.6Public sector debt 2/ 66.2 67.7 54.4 71.7 77.9 87.2
Monetary sector 3/
Broad money 2.3 24.6 30.1 21.2 … …Credit to private sector 39.7 29.3 41.1 31.6 … …Interest rates (end of period, in percent)
Deposits (less than 1 year) 4.8 4.8 5.0 5.0 ... ...Lending 10-16 10-16 10-16 10-16 ... ...
External sector
Current account balance -28 -26 -142 -325 -379 -528(In percent of GDP) -2.2 -2.2 -9.9 -21.0 -22.8 -27.8
Trade balance -72 -90 -299 -476 -490 -514Exports (goods) 599 516 544 609 625 684
(percent change) 4.4 -13.8 5.5 11.9 2.6 9.5Imports (goods) 671 607 843 1085 1115 1199
(percent change) 27.4 -9.6 39.0 28.6 2.8 7.5Grants (current transfer) 161 151 261 233 295 216
Capital account balance 58 109 206 426 294 487Loans (net) 39 73 108 337 187 331
Overall balance 45 115 107 90 -85 -41 (In percent of GDP) 3.5 9.4 7.4 5.8 -5.1 -2.1
Gross official reserves 645 758 862 950 769 826(In months of goods and services imports) 11.3 9.7 8.7 9.3 7.0 7.0
External debt (in percent of GDP) 63.5 65.6 52.8 69.0 71.5 81.5Ngultrum per US$ (period average) 40.4 47.8 46.7 49.5 … …
Memorandum items: Electricity exports (in percent of total goods exports) 41.9 40.1 41.0 34.1 30.8 27.9 Unemployment rate (in percent) 4/ 3.7 4.0 3.3 ... ... ...
Sources: Data provided by the Bhutanese authorities; and Fund staff estimates and projections.
1/ Fiscal year begins July 1.
3/ End-November 2010 data for 2010/11.4/ On a calendar year basis, e.g., the entry for 2007/08 is for 2007.
2/ Public and publicly-guaranteed debt, including loans for hydropower projects and the purchase of one aircraft.
(Percent change, unless otherwise indicated)
(In millions of dollars, unless otherwise indicated)
(In percent of GDP)
Table 1. Bhutan: Selected Economic and Financial Indicators, 2007/08–2012/13 1/
Annex 5
56
Annex 5: Bhutan At a Glance
LowerKey D evelo pment Indicato rs South middle
Bhutan Asia income(2011)
Population, mid-year (millions) 0.73 1,633 2,519Surface area (thousand sq. km) 38 5,131 23,579Population growth (%) 1.7 1.4 1.5Urban population (% of to tal population) 37 30 39
GNI (Atlas method, US$ billions) 1.5 2,151 4,458GNI per capita (Atlas method, US$) 2,070 1,299 1,760GNI per capita (PPP, international $) 5,480 3,314 3,832
GDP growth (%) 7.7 8.1 6.9GDP per capita growth (%) 5.8 6.6 5.3
(mo st recent est imate, 2004–2010)
Poverty headcount ratio at $1.25 a day (PPP, %) 10 36 ..Poverty headcount ratio at $2.00 a day (PPP, %) 30 71 ..Life expectancy at birth (years) 67 65 65Infant mortality (per 1,000 live births) 44 52 50Child malnutrition (% of children under 5) 13 33 25
Adult literacy, male (% of ages 15 and o lder) 65 73 80Adult literacy, female (% of ages 15 and o lder) 39 50 62Gross primary enro llment, male (% of age group) 110 113 110Gross primary enro llment, female (% of age group) 112 107 104
Access to an improved water source (% of population) 96 90 87Access to improved sanitation facilities (% of population) 44 38 47
N et A id F lo ws 2000 2011
(US$ millions)Net ODA and official aid 53 131Top 3 donors (in 2010): Japan 7 43 Denmark 8 13 Australia 1 8
Aid (% of GNI) 13.1 9.2Aid per capita (US$) 93 181
Lo ng-T erm Eco no mic T rends
Consumer prices (annual % change) 4.0 9.1GDP implicit deflator (annual % change) 3.9 5.3
Exchange rate (annual average, local per US$) 46.4 50.3Terms of trade index (2000 = 100) .. ..
1995–2000 2000–11
Population, mid-year (millions) 0.6 0.7 1.9 2.4GDP (US$ millions) 455 1,730 6.4 8.5
Agriculture 26.7 14.9 3.2 1.7Industry 37.0 42.6 7.0 10.7 M anufacturing 8.5 9.0 4.7 10.8Services 36.3 38.6 9.8 9.4
Household final consumption expenditure 52.6 41.6 .. 5.9General gov't final consumption expenditure 20.4 22.0 .. 8.6Gross capital formation 48.2 60.8 .. 9.7
Exports o f goods and services 30.5 34.6 .. 22.7Imports o f goods and services 51.3 55.1 .. 14.2Gross savings 34.8 44.4
Note: Figures in italics are for years other than those specified. .. indicates data are not available.
(average annual growth %)
(% o f GD P )
10 5 0 5 10
0-4
15-19
30-34
45-49
60-64
75-79
percent of total population
Age distribution, 2010
Male Female
0
50
100
150
1990 1995 2000 2010
Bhutan South Asia
Under-5 mortality rate (per 1,000)
0
5
10
15
05
GDP GDP per capi ta
Growth of GDP and GDP per capita (%)
Annex 5
57
B alance o f P ayments and T rade 2000 2011
(US$ millions)
Total merchandise exports (fob) 100 648Total merchandise imports (cif) 187 1,127Net trade in goods and services -87 -524
Current account balance -43 -406 as a % of GDP -9.4 -23.5
Workers' remittances and compensation of employees (receipts) .. 5
Reserves, including go ld 216 897
C entral Go vernment F inance
(% of GDP)Current revenue (including grants) 41.2 39.2
Tax revenue 14.7 15.5Current expenditure 17.5 19.9
T echno lo gy and Infrastructure 2000 2010Overall surplus/deficit -3.6 -3.5
Paved roads (% of to tal) 62.0 ..Highest marginal tax rate (%) Fixed line and mobile phone Individual .. .. subscribers (per 100 people) 2 58
Corporate .. .. High technology exports (% of manufactured exports) 0.5 0.1
External D ebt and R eso urce F lo ws
Enviro nment(US$ millions)Total debt outstanding and disbursed 204 1,287 Agricultural land (% of land area) 14 13Total debt service 7 87 Forest area (% of land area) 78.4 84.6Debt relief (HIPC, M DRI) – – Terrestrial protected areas (% of land area) 28.3 28.3
Total debt (% of GDP) 47.6 74.4 Freshwater resources per capita (cu. meters) 133,658 109,295Total debt service (% of exports) 4.6 12.8 Freshwater withdrawal (billion cubic metres) 1,225.2 1,607.3
Foreign direct investment (net inflows) 3 12 CO2 emissions per capita (mt) 0.70 1.0Portfo lio equity (net inflows) 0 0
GDP per unit o f energy use (2005 PPP $ per kg of o il equivalent) .. 11.8
Energy use per capita (kg of o il equivalent) .. 354
Wo rld B ank Gro up po rt fo lio 2000 2011
(US$ millions)
IBRD Total debt outstanding and disbursed 0 0 Disbursements 0 0 Principal repayments 0 0 Interest payments 0 0
IDA Total debt outstanding and disbursed 26 133 Disbursements 4 0
P rivate Secto r D evelo pment 2000 2011 Total debt service 0 2
Time required to start a business (days) – 36 IFC (fiscal year)Cost to start a business (% of GNI per capita) – 7.2 Total disbursed and outstanding portfo lio 0 4Time required to register property (days) – 92 o f which IFC own account 0 4
Disbursements for IFC own account 0 0Ranked as a major constraint to business 2000 2010 Portfo lio sales, prepayments and (% of managers surveyed who agreed) repayments for IFC own account 0 3 n.a. .. .. n.a. .. .. M IGA
Gross exposure – –Stock market capitalization (% of GDP) 11.0 .. New guarantees – –Bank capital to asset ratio (%) .. 10.1
Note: Figures in italics are for years other than those specified. 4/2/12.. indicates data are not available. – indicates observation is not applicable.
0 25 50 75 100
Control of corruption
Rule of law
Regulatory quality
Political stability and absence of violence
Voice and accountability
Country's percentile rank (0-100)higher values imply better ratings
2010
2000
Governance indicators, 2000 and 2010
Source: Worldwide Governance Indicators (www.govindicators.org)
IBRD, 0 IDA, 133
IMF, 0
Other multi-lateral, 281
Bilateral, 872
Private, 0
Short-term, 0
Composition of total external debt, 2011
US$ millions
Annex 5
58
With selected targets to achieve between 1990 and 2015(estimate closest to date shown, +/- 2 years)
Go al 1: halve the rates fo r extreme po verty and malnutrit io n 1990 1995 2000 2010 Poverty headcount ratio at $1.25 a day (PPP, % of population) a/ .. .. .. 10.2 Poverty headcount ratio at national poverty line (% of population) a/ .. .. .. 23.2 Share of income or consumption to the poorest qunitile (%) a/ .. .. .. 6.6 Prevalence of malnutrition (% of children under 5) 34.0 .. 14.1 12.7
Go al 2: ensure that children are able to co mplete primary scho o ling Primary school enro llment (net, %) .. .. 58 89 Primary completion rate (% of relevant age group) 19 29 51 95 Secondary school enro llment (gross, %) .. .. 41 66 Youth literacy rate (% of people ages 15-24) .. .. .. 74
Go al 3: e liminate gender disparity in educat io n and empo wer wo men Ratio o f girls to boys in primary and secondary education (%) .. .. 86 102 Women employed in the nonagricultural sector (% of nonagricultural employment) .. .. .. 27 Proportion of seats held by women in national parliament (%) 2 2 2 9
Go al 4: reduce under-5 mo rtality by two -thirds Under-5 mortality rate (per 1,000) 139 111 89 56 Infant mortality rate (per 1,000 live births) b/ 96 79 65 47 M easles immunization (proportion of one-year o lds immunized, %) 93 85 78 95
Go al 5: reduce maternal mo rtality by three-fo urths M aternal mortality ratio (modeled estimate, per 100,000 live births) 940 670 430 180 B irths attended by skilled health staff (% of to tal) .. 15 24 65 Contraceptive prevalence (% of women ages 15-49) .. 19 31 66
Go al 6: halt and begin to reverse the spread o f H IV/ A ID S and o ther majo r diseases Prevalence of HIV (% of population ages 15-49) 0.1 0.1 0.1 0.2 Incidence of tuberculosis (per 100,000 people) 308 308 253 151
Tuberculosis case detection rate (%, all forms) 67 81 79 120
Go al 7: halve the pro po rt io n o f peo ple witho ut sustainable access to basic needs
Access to an improved water source (% of population) .. .. 86 96 Access to improved sanitation facilities (% of population) b/ .. .. 39 58 Forest area (% of to tal land area) 64.6 .. 78.4 84.6
Terrestrial protected areas (% of land area) 14.2 26.4 28.3 28.3 CO2 emissions (metric tons per capita) 0.2 0.5 0.7 1.0
GDP per unit o f energy use (constant 2005 PPP $ per kg of o il equivalent) 16.8 .. .. 11.8
Go al 8: develo p a glo bal partnership fo r develo pment Telephone mainlines (per 100 people) 0.3 1.0 2.5 3.6 M obile phone subscribers (per 100 people) 0.0 0.0 0.0 54.3 Internet users (per 100 people) 0.0 .. 0.4 13.6 Computer users (per 100 people) .. ..
Note: Figures in italics are for years other than those specified. .. indicates data are not available. 4/2/12Note: a/: figures based on a 2007 household survey, b/: figure based on 2010 Bhutan M ulti Indicators SurveyDevelopment Economics, Development Data Group (DECDG).
B hutan
0
25
50
75
100
125
2000 2005 2010
Prim ary net enrol lment ra tio
Ratio of gi rls to boy s in primary & secondaryeducation
Education indicators (%)
0
10
20
30
40
50
60
70
2000 2005 2010
Fixed + mobile subscribers Internet users
ICT indicators (per 100 people)
0
25
50
75
100
1990 1995 2000 2010
Bhutan South Asia
Measles immunization (% of 1-year olds)
G A S A
THIMPHUPUNAKHA
P A R O
H A A
S A M T S E
M O N G G A R
PEMAGATSHEL
SAMDRUPJONGKHAR
B U M T H A N G
L H U E N T S E
C H H U K H A
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T R O N G S A
T SI R
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Z H E M G A N G S A R PA N G
WANGDUEPHODRANG
T R A S H I G A N G
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Thunkar
Daifam
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Panbang
Panka
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Tang
Kisona
Tendru
TangoChari
Khasadrapchu
Lobesa
Nganglam
Monggar
Pheuntsholing
Paro
Haa
Samtse
Chhukha Daga
Damphu
Sarpang
Zhemgang
Trashigang
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JakarTrongsa
Wangdue
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H i m a l a y a M o u n t a i n s
G A S A
THIMPHUPUNAKHA
P A R O
H A A
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M O N G G A R
PEMAGATSHEL
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B U M T H A N G
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C H H U K H A
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T R O N G S A
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Z H E M G A N G S A R PA N G
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T R A S H I G A N G
TRASHI'YANGTSE
Shingkarap
Thunkar
Daifam
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Panka
Yebilaptsha
Tang
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Monggar
Pheuntsholing
Paro
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Samtse
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Damphu
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Tongsa Chu
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To Alipur Duar
To Goalpare
To Goalpare
To Gamba
To Gorumara
To Cona
To Guahati
To Guahati
To Guahati
H i m a l a y a M o u n t a i n s
89°E 90°E 91°E
90°E 91°E 92°E
92°E
27°N
28°N
27°N
28°N
BHUTAN
This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.
0 10 20 30
0 2010 30 Miles
40 Kilometers
APRIL 2012
BHUTANSELECTED CITIES AND TOWNS
DZONGKHAG (DISTRICT) CAPITALS
NATIONAL CAPITAL
RIVERS
MAIN ROADS
RAILROADS
GEWOG (SUB-DISTRICT) BOUNDARIES
DZONGKHAG (DISTRICT) BOUNDARIES
INTERNATIONAL BOUNDARIES
IBRD 33373R2