The World Bank Bhutan - COVID-19 Crisis Response DPC (P175758) Program Information Document (PID) Concept Stage | Date Prepared/Updated: 15-Mar-2021| Report No: PIDC31489 Page 1 of 5 The World Bank Bhutan - COVID-19 Crisis Response DPC (P175758) BASIC INFORMATION A. Basic Project Data OPS TABLE Country Project ID Project Name Parent Project ID (if any) Bhutan P175758 Bhutan - COVID-19 Crisis Response DPC (P175758) Region Estimated Board Date Practice Area (Lead) Financing Instrument SOUTH ASIA Jun 21, 2021 Macroeconomics, Trade Development Policy and Investment Financing Borrower(s) Implementing Agency The Kingdom of Bhutan Ministry of Finance Proposed Development Objective(s) The operation supports policy reforms aimed at providing fiscal, economic and social relief from the crisis induced by COVID-19. Financing (in US$, Millions) FIN_SUMM_PUB_TBL SUMMARY Total Financing 35.00 DETAILS -NewFin3 Total World Bank Group Financing 35.00 World Bank Lending 35.00 Decision The review did authorize the preparation to continue B. Introduction and Context Country Context COVID-19 has impacted Bhutan’s population by affecting jobs and livelihoods and slowing progress in fighting poverty. Even though Bhutan managed to contain the number of domestic COVID-19 cases, the trade and tourism-dependence of the small landlocked economy has made it susceptible to the pandemic-induced shock. The employment impact of COVID-19 has been felt broadly across the country. Service sector workers in urban areas, including many that directly or indirectly depend on tourism, experienced job or earning losses. The pandemic’s adverse impact is exacerbated by existing structural vulnerabilities of Bhutan’s economy linked to its heavy reliance on hydropower: while hydropower projects drive economic growth and fiscal revenue through boosts in aggregate demand and through the export of Page 2 of 5 The World Bank Bhutan - COVID-19 Crisis Response DPC (P175758) surplus electricity to India, they have also reduced the focus on domestic non-hydro revenue generation and have generated substantial fiscal volatility. In addition, this capital-intensive growth model has not contributed to job creation. The proposed operation – a stand-alone crisis response Development Policy Credit (DPC) – focuses on providing fiscal, economic and social relief from the crisis induced by COVID-19. Consistent with the World Bank Group (WBG)’s COVID- 19 Crisis Response Approach Paper (June 2020), the proposed operation supports the Royal Government of Bhutan (RGoB)’s efforts to address the social and economic impact of COVID-19 while maintaining a line of sight to address Bhutan’s structural constraints to a resilient recovery. The proposed operation builds on the previous “Strengthening Fiscal Management and Private Sector Employment Opportunities� DPC series. Relationship to CPF The proposed operation is closely aligned with the objectives outlined under Bhutan’s CPF (FY21-FY24), which focuses on improving economic and environmental resilience as well as human capital accumulation. The priority of the CPF is job creation through labor market supply- and demand-side interventions. On the supply side, the CPF focuses on human capital, to which this operation will contribute through its support to the establishment of the national engagement program, the deployment of COVID-19 vaccines and the program to reduce gender-based violence. On the demand side, the CPF focuses on economic and environmental resilience. Economic resilience is supported by this operation through its support for GST implementation, debt transparency and debt management, a new national tourism policy, and a new credit guarantee scheme. With regards to environmental resilience, the CPF focuses on conservation and sustainable management of natural resources, to which this operation will contribute through its support to environmental standards and low emission strategies. C. Proposed Development Objective(s) Key Results Results intended to overcome structural constraints to a resilient economic recovery aim at: (i) strengthening domestic non-hydropower resource mobilization; (ii) enhancing debt transparency and management; (iii) supporting a sustainable recovery of the tourism sector; and (iv) reducing greenhouse gas emissions and air pollution. To address the immediate social and economic impacts of COVID-19, this DPC aims at four key results: (v) improving access to credit for the private sector; (vi) enhancing employment opportunities lost due to COVID-19; (vii) facilitating the comprehensive rollout of COVID-19 vaccines; and (viii) addressing gender impacts of COVID-19. D. Concept Description The proposed operation aims to achieve its policy objectives through two pillars, the first of which aims at addressing structural constraints to a resilient recovery from COVID-19. The operation will support approval of the GST Rules and Regulations, which will strengthen domestic non-hydropower revenue and reduce fiscal volatility. It will further support the publication of quarterly spending and debt reports and of the medium-term debt management strategy to enhance debt transparency and management and mitigate financing risks. Pillar 1 also supports the approval of a new tourism policy and tourism levy act, which will lay the regulatory groundwork for the recovery of the tourism sector. Finally, the program under pillar 1 supports the approval of new environmental standards and low emissions strategies, which will allow Bhutan to maintain carbon negativity and reduce air pollution during the recovery from COVID-19. The second pillar of the operation aims at providing support to firms and individuals affected by COVID-19. Supported reforms include the establishment and operationalization of a credit guarantee scheme that will provide capital to small- and medium-sized enterprises. This operation also supports the establishment of a new national engagement program, which will provide skills and employment opportunities to individuals who have lost their livelihoods to COVID-19. To Page 3 of 5 The World Bank Bhutan - COVID-19 Crisis Response DPC (P175758) mitigate the health risks of the pandemic, pillar 2 includes the approval of the national vaccine deployment framework, which is a pre-condition to receive COVID-19 vaccines from the global COVID-19 Vaccines Global Access (COVAX) facility. Finally, pillar 2 includes the approval of a program targeted at preventing gender-based violence during COVID-19. The proposed operation is aligned with the government’s program outlined in the 12th Five-Year Plan (FYP) and complements the RGoB’s COVID-19 response plan. The 12th FYP’s focus areas include: (i) a just society through human and institutional development; (ii) a harmonious society through a focus on culture; (iii) a sustainable society by focusing on macroeconomic policy and the environment and (iv) decentralization. In building a just society, the proposed operation supports efforts to reduce poverty and generate skillful employment, the prevention of gender-based violence, the distribution of COVID-19 vaccines and the provision of capital to small- and medium-sized enterprises. The maintenance of a harmonious society is supported through actions that aim at enhancing culturally and environmentally sustainable tourism. Towards a sustainable society, the proposed operation supports macroeconomic stability and resilience as well as a reduction in greenhouse gas emissions and pollution. Actions supported in this operation are also closely aligned with the RGoB’s COVID-19 response plan, which comprises health, social protection and economic support measures. E. Poverty and Social Impacts, and Environmental, Forests, and Other Natural Resource Aspects Poverty and Social Impacts The set of reforms that are supported by this operation are expected to have a positive poverty, social and gender impact in the medium to long run. Fiscal incidence analysis provided as part of the poverty and social impact analysis (PSIA) for the “Third Strengthening Fiscal Management and Private Sector Employment Opportunities DPC� showed that the positive effect on non-hydro revenue mobilization will outweigh the direct effect of the GST on poverty, which will likely be modest and short-lived. Measures to improve debt transparency and management are expected to have a positive distributional effect by supporting macroeconomic stability and safeguarding social sector spending. The new tourism policy can help reduce existing spatial employment gaps and provide a boost to rural incomes. The national credit guarantee scheme and the national employment plan can support job creation and retention and improve the quality of the jobs held by the poor and the bottom 40 percent. The successful rollout of vaccines is a prerequisite to averting a health crisis and normalizing economic activities and is thus expected to have positive distributional and social effects. The program targeted at preventing gender-based violence is expected to have a positive gender impact by protecting some of the most vulnerable groups that have suffered disproportionate consequences from the crisis. The approval of the national environmental standards and the low emission strategies is expected to distribution neutral. Environmental, Forests, and Other Natural Resource Aspects The reforms supported by this operation have mostly positive or neutral environmental impacts. The reform actions related to the national tourism policy and levy act, the environmental standards and the low emission strategies are expected to have positive effects on the environment. They are expected to minimize any potential negative impacts of the tourism sector on Bhutan’s environment, culture and society, and to reduce greenhouse gas emissions and air pollution. While the implementation of the national vaccine deployment framework bears the risk of negative environmental effects with regards to the management of medical waste, this risk is likely minor and manageable within the existing country systems. To mitigate potential adverse environmental effects from medical waste management, the Bhutan COVID-19 Emergency Response and Health Systems Preparedness Project includes capacity building to ensure compliance with medical waste management. The remaining reforms are expected to have neutral environmental impacts. . Page 4 of 5 The World Bank Bhutan - COVID-19 Crisis Response DPC (P175758) CONTACT POINT World Bank Florian Michael Blum, Melanie Simone Trost Zagatti Economist Borrower/Client/Recipient The Kingdom of Bhutan Implementing Agencies Ministry of Finance Nim Dorji Secretary ndorji@mof.gov.bt FOR MORE INFORMATION CONTACT The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 473-1000 Web: http://www.worldbank.org/projects APPROVAL Task Team Leader(s): Florian Michael Blum, Melanie Simone Trost Zagatti Approved By APPROVALTBL Country Director: Adama Coulibaly 29-Mar-2021 Page 5 of 5