86808 Bhutan: Country Snapshot March 2014 Bhutan: Country Snapshot EXECUTIVE SUMMARY Educational spending is strong and gross enrollment was 71 percent at secondary Economic Outlook school level in 2011. However, learning levels Bhutan’s growth rate almost halved to 4.6 remain low, with attendance by the children percent in 2012 due to poor agricultural of poor families limited by the out-of-pocket output and delays to a major construction costs of school. Immigration from the countryside through rapid urbanization risks project, but the outlook is brighter. Growth is leaving behind the old and at risk, deepening expected to bounce back to 6.5 percent in rural poverty. Measures are needed to 2013 and top seven percent this year, improve rural life, and Bhutan has an supported by several major hydropower ambitious plan to triple the size of the building projects and a better performance by nation’s road network. the farm sector, as well as stronger hydro- Environmental conservation - vital to electricity generation thanks to abundant Bhutan's tourist industry - is a unique part of Bhutan's development approach, and the rainfall. An easing of import and credit Constitution mandates that forests cover 60 restrictions, plus disbursements from India percent of the country’s land to protect them that will lift public spending, will also spur from the pressures of urbanization and economic activity. Tourism has become an population growth. Likewise, government important source of revenue which should steps to preserve the national culture are a strengthen going forward. However, the rate pillar of its Gross National Happiness policies. of inflation has moved up, driven by higher World Bank Group in Bhutan imported food prices from India, while The World Bank Group has an overall potential civil service pay awards could commitment of $113 million in Bhutan. The maintain upward inflationary pressures and Bank has four ongoing investment operations also boost domestic demand. A credit boom in for a net commitment of $82 million and the 2012 forced action by the central bank and International Finance Corp has a committed the authorities must remain on guard against investment portfolio of $31 million. Bhutan took the first step toward becoming a economic overheating. member of the Multilateral Investment Poverty Reduction Guarantee Agency in January 2013. Bank Poverty reduction has been broad-based and programs focus on rural and urban rapid, helped by the spreading development, regional wildlife protection, commercialization of agriculture, spillovers and sustainable financing for biodiversity from massive hydropower construction conservation. Support also seeks to foster projects, and the benefits of better rural government efficiency, sound fiscal and transportation. These trends have helped to public financial management, and a better almost halve the percentage of the nation's policy environment to encourage the private poor in the space of five years, to around 12 sector, which remains a small part of the percent in 2012. But the country’s lack of overall economy. IFC’s portfolio includes an social safety nets means that for every 10 equity participation in Bhutan National Bank, people who escape poverty, four slip back. as well as loans for the construction of five luxury guest houses. Free basic public healthcare and an expanded network now delivers healthcare coverage to 90 percent of the population. But malnutrition remains a problem, and a third of pre-school children are stunted. 1 Bhutan: Country Snapshot COUNTRY SNAPSHOT and an expected end to bans on imports and housing credit, which were imposed to Recent Economic Developments prevent economic overheating. In addition, disbursements from India to finance Bhutan’s Growth Performance 11th Five Year Plan should lead to higher Growth slowed to 4.6 percent in 2012 as public capital spending. There are also steps to curb a potential credit bubble anticipated benefits from economic stimulus combined with sluggish growth in agriculture plans; increases in public wages expected in and a delay in the construction of the the FY15 budget; and an expansion of tourism Punasantgchhu I hydropower project to through innovative measures to lift the dampen activity, resulting in the slowest pace sector. This boost to economic activity comes of economic expansion since 2008. However, with the risk of fresh economic overheating growth is expected to recover to 6.5 percent and worsening macroeconomic imbalances in 2013, supported by hydropower projects unless domestic demand is managed under construction, good rainfall which will carefully. Indeed, it will be important to lead to more electricity generation, and better tighten both monetary and fiscal policy in performance by agriculture. The impact of light of upcoming disbursements from energy tariff increase on ferro-alloys and economic stimulus, as well as the proposed other energy intensive industries ought not increase in the public service wage bill and a be large, given that energy prices remain very proposed relaxation of restrictions over competitive in Bhutan. foreign exchange, vehicles imports and housing loans, which could all undermine Figure 1: Ups and downs of economic growth economic stability. Fiscal tightening with in Bhutan: A hydropower story consistent monetary policy measures will be 20 needed to avoid fresh rupee shortages once 18 the restrictions are lifted. 16 14 Inflation 12 10 With 75 percent of Bhutan’s imports 8 coming from India and an exchange rate at 6 par with the Indian rupee, Bhutan’s 4 consumer inflation is intimately linked to 2 India’s inflation. Food and beverages has the 0 heaviest weighting in Bhutan's consumer 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 price index, at 36.9. With most of such items Services Industry imported from India, food prices there will Agriculture GDP continue to have the strongest impact on the Source: National Statistical Bureau and overall rate of inflation in Bhutan. Structural Macroeconomic Framework Coordination drivers of inflation in India, including rising Committee (MFCC) food prices, are expected to persist. India’s consumer price inflation averaged a rapid The 2014 outlook is positive but 10.1 percent in 2013 and it is expected that macroeconomic pressures on domestic inflationary pressures in India will remain in demand will have to be managed. We the near future. Consumer price inflation in estimate growth will advance to 7.3 percent, Bhutan accelerated to 11.3 percent year-on- supported by a combination of favorable year in the third quarter of 2013, up from 7.3 factors. These include the on-going percent in the second quarter. Inflation is construction of four hydropower projects; the expected to be 10 percent for 2013 as a whole commissioning of the Dagacchu project by and price pressures will likely remain present mid-2014; Dungsam Cement coming on line; in 2014 but then ease slightly, following India. 2 Bhutan: Country Snapshot Fiscal Policy scheme and additional revenues coming from The government continues to rely heavily Chhukha’s electricity export tariffs. on foreign grants to finance its An upward revision in public expenditure. Grants finance around 36 compensation is under discussion for percent of total spending, or 10 percent of FY2014/2015. This could see salaries raised GDP in fiscal year 2012/13, of which the to account for the last three years of inflation, government of India provides around 70 in order to adjust civil servant purchasing percent. The budget for 2013/14 projected a power. This would also put upward pressure decline of nearly nine percent in nominal on domestic demand. Therefore, it will be spending compared with the revised budget important to tightening fiscal and monetary for the previous fiscal year. Given the policy to counter-balance the increase in persistent shortage of rupees, the public sector purchasing power. Measures government has tightened the country's could include steps to incentivize saving as expenditure to bring it in line with the opposed to immediate consumption. available resources. Another reason is the Taxation, as well as strengthened macro- slow start of the budget year following prudential regulations, are being considered elections over the summer, the change of (see section on monetary and financial leadership, and delays in foreign grant development). disbursements. Table 1: Government Budget Public Debt Bhutan’s public and publicly guaranteed 2012/13 2013/14 2014/15 (PPG) external debt increased to As a Percentage of Nominal GDP Revised Budget Proj. 85 percent of GDP at end 2012/13, adding Revenue & Grants 35.6 25.5 28.9 14 percentage points of GDP over the Domestic Revenue 20.0 18.9 18.6 previous year. The rise in the external public Tax revenue 14.6 13.4 13.7 debt was, in large part, driven by hydro- Non-tax revenue 5.4 5.5 4.9 sector related external borrowing (52 percent Grants 15.0 6.6 10.3 of GDP). Hydropower projects are primarily Project-tied Grants 12.0 5.2 9.0 financed by India with a mix of loans (70 Program Grants 3.0 1.4 1.3 percent) and grants (30 percent). External Other receipts 0.6 0.0 0.0 debt continues to be dominated by Indian Outlay 36.6 30.0 29.6 rupees, which accounts for 61 percent of total Total Expenditure 37.3 31.6 31.1 external debt. Current 17.7 16.2 17.6 Capital 19.7 15.4 13.4 Bhutan’s risk of external debt distress is Net lending (NL) -0.7 -1.6 -1.5 moderate.1 The moderate risk is based on Primary Balance 1.5 -2.8 0.9 the commercial viability of the hydropower Fiscal Balance -1.0 -4.5 -0.7 projects, the risk sharing agreement with Borrowings 15.9 2.3 4.8 India for hydropower loans, Bhutan’s strong Repayments 15.2 2.3 2.2 track record of project implementation, rapid Resource Gap (dom. borrowing) -0.3 -4.5 1.9 growth in energy demand from India, committed donor support, and Bhutan’s high Source: Government Medium-term Fiscal level of international reserves. Bhutan’s rapid Framework Committee hydropower development is projected to lead to a substantial buildup of external debt in The deficit in FY2014/15 should ease to 0.7 the medium-term. Bhutan’s debt situation is percent of GDP, as more revenues will kick in with commissioning of the Dungsam cement project, the Dagacchu hydro electricity 1 On the basis of the upcoming recent Joint Bank- Fund Sustainability Assessment, 2014 3 Bhutan: Country Snapshot expected to improve over the long run, Bhutan runs a large capital account deficit reflecting significantly higher electricity (estimated at about 20 percent in 2013). It exports when hydropower projects come on is essentially financed by donor resources, of stream. which India contributes the most through loans and grants to finance hydropower External sector development. Even when excluding self- Export revenues from sales of electricity financed hydropower construction imports of are expected to improve in step with good goods and services (around a third of total rainfalls in 2013. Since no new hydropower good and services), the current account projects have become operational since 2006, deficit would stand at 10 percent of GDP, the fluctuation in export revenues reflects the illustrating a significant national dissaving, vagaries of hydrological flows. The monsoon and the need for the country to borrow to rains in 2013 have been better than the finance consumption imports. previous year, which is why data show a 12 percent rise in export revenues from sales of Gross international reserves have built up electricity in 2013. Exports of minerals and to 13 months of merchandise exports. mineral-based products account for more International reserves amounted US$920.8 than half of total exports, with hydropower million by end November 2013, of which 88 exports comprising a further 45 percent, and percent was in convertible foreign exchange, manufactured products a tiny 5 percent. India with the rest in Indian rupees.2 There is, receives almost 90 percent of Bhutanese however, a continuing mismatch in the electricity production. Continued shortages of composition of Bhutan’s reserves and the power in India will ensure strong demand for structure of its international transactions, as electricity from Bhutan the country primarily needs Indian rupees for trade settlement and debt service. The tourism sector has turned into an important contributor to export revenues Financial Sector in recent years. Tourist arrivals and revenues (from convertible currency-paying tourists) expanded at an average of 15 percent per year in the five years to 2013. Figure 2: Bhutan’s Balance of Payments (Percentage points of GDP) Picture source: http://www.bbs.bt/news/wp-content/uploads/2012/12/BoB-LoanOpens..gif Bhutan’s financial sector compares relatively well with the rest of South Asia, with a private credit ratio of 47.7 percent of GDP in 2012, slightly above the South Asia average of 45.8 percent. The financial sector is dominated by banks and, as would be expected in a country of its size, the stock market size is small with only 20 listed companies. Source: Royal Monetary Authority 2 The Constitution requires that foreign exchange reserves should be maintained at 12 months of essential imports. 4 Bhutan: Country Snapshot percent in September 2013, up from 10.5 Significant investments in financial sector percent in September 2012. As of August infrastructure occurred in the last three 2013, the largest sectoral exposure of the years. Among other things, the use of banks was in the building and construction electronic payments in commercial banks is sector (27 percent). more widespread, a fully functional Credit Information Bureau (public registry bureau) Emergency prudential measures have was put in place in 2009, and a central been taken by the central bank, in registry for secured transactions was set up particular in March 2012, to address the in 2013. credit boom and ensuing rupee shortage. Measures include the total ban on new Access to financial services has improved, lending in the housing and transport sectors. although unequally. For instance, the Though they were initially temporary, these percentage of adults with a loan account are still in place. Other measures were almost tripled between 2007 and 2011 to announced in 2013, including increased risk 14.2 percent. The geographical coverage of weightings - effective in December 2013 - bank branches has also risen, but remained at that may result in several banks falling below a low average of two branches per 1,000 km2 the statutory minimum capital adequacy ratio in 2011. Policy efforts to improve financial of 10 percent. In September 2013, banks’ inclusion saw the launch of a financial literacy capital adequacy ratio remained above the 10 campaign across the country in 2011. In percent threshold, although it had declined addition, with the support of the World Bank, from 18.9 to 15.1 percent year-on-year. the government in 2012 developed a financial Nonetheless, the impact of the risk-weighting inclusion policy to draw out policy objectives directive will vary from bank to bank, and and strategies to increase financial inclusion. risks triggering a credit crunch unless banks receive additional capital. Banking regulation and supervision is being strengthened, starting with the Policy measures have slowed private- setting up of the new Royal Monetary sector credit growth. The liquidity squeeze, Authority (RMA) Act in 2010. In addition, coupled with measures taken by the RMA to the Financial Services Act of 2011 was aimed contain the rupee shortage in March 2012, at better regulating various financial service appear to have slowed total credit growth, providers, including non-bank financial which dropped from 33.8 percent (yoy) in institutions (NBFIs). January 2012 to seven percent by May 2013. Similarly, private credit growth has slowed Bank credit to the private sector grew down from 30.7 percent to 7.1 percent in June significantly in recent years. Private sector 2013, with a drag on the economy estimated credit nearly doubled from 2007 to 2012. at one percentage point of GDP. Lack of bank Factors that contributed to the credit boom liquidity could evolve into a credit crunch, include robust economic growth, spillover with negative repercussions for the economy. effects from large hydro projects, expansion of the financial system with the increased number of banks, large salary increases in the public sector, and demographic factors such as urban migration and high demand for housing. Rapid credit growth of the kind seen in Bhutan often leads to deterioration in credit quality, albeit with a lag. So far, there has been a modest rise in non-performing loans (NPLs) with a rate standing at 12.7 5 Bhutan: Country Snapshot Fig 3: Credit growth (% point) electrification) and spillovers from the new construction of massive hydro- electric projects. Helped by the strengthening trade links with neighbors India and Bangladesh (signed in 2006 and 2009), Bhutanese farmers are increasingly specializing in commercial production. The value share of fruits, cardamom and eggs nearly doubled between 2008 and 2012. Rural infrastructure development has been a key area of the 10th Five Year Plan (2008-13), delivering a massive expansion in farm roads to nearly 4,000 km, versus 500 km in 2006. In Poverty and Statistical Capacity Building addition, continuing construction of the Southern East-West Highway (along the India border) has cut travel times and lowered the cost of transporting goods. With an emphasis on rural electrification, 97 percent of the villages are now electrified, with the poor doubling their access. Three new massive hydro-electric power projects (Punatsangachhu I and II, and Mangdecchu) with eight year construction phases were begun between 2008-2010 at a cost of Nu. 187 billion (187 percent of 2012 GDP). Poverty reduction in Bhutan has been Immediate benefits to the local economy from rapid, broad-based and inclusive between construction activities are sizeable: hiring 2007 and 2012. Both consumption-based local contractors for transportation; and a poverty measures and broad-based multi- three-fold rise in food and rental spending by dimensional poverty indicators show that the foreign construction workers, who number percentage of poor was cut by nearly half - nearly a third of the local population in the from around 23 percent in 2007 to 12-13 project site dzonkhags. percent in 2012. This conclusion is robust to However, poverty reduction is alternative poverty lines. The improvements accompanied by some notable touched the poorest of the poor, and not only vulnerabilities. The chronically poor people just under the poverty line. Evidence constituted two-third of all poor in 2012. For from focus group discussions reinforce the every 10 people who moved out of poverty, view that there has been perceptible sense of four fell back. The lack of formal social safety improvement in living standards in rural nets and targeting mechanisms for the Bhutan. Thus Bhutan has almost eliminated chronically poor restrains the escape from extreme poverty (measured as beneath $1.25 poverty. Women-led households, although on in purchasing power parity terms, per person, par with male-led households in terms of per day) within the memory of a single poverty incidence, are less upwardly mobile, generation. and have fewer recourses to cope. The primary drivers of such a rapid pace of poverty reduction are the accelerating commercialization of agriculture, rapid development of rural infrastructure (roads, schools, health centers and 6 Bhutan: Country Snapshot Table 2: Poverty Dynamics Based on Synthetic But progress has been made to correct data Data for Two Periods, Bhutan 2007-2012 flaws in select areas, including price data (Joint Probabilities, Percentage) collection, and dissemination using a map First Period & Poverty Status portal. Updating the 2008 National Statistical Second Period Development Strategy, and the resources it 8.3 needs for implementation, are relevant areas Poor, Poor for engagement with the government. (0.1) Poor, Nonpoor 10.5 Private Sector (0.1) Nonpoor, Poor 4.1 (0.0) Nonpoor, Nonpoor 77.2 (0.2) N 6045 Note: 1. Predictions are obtained based on data in the second survey round. We use 500 bootstraps in calculating standard errors. Bhutan's economy remains dominated by 2. All numbers are weighted using population weights. state-owned enterprises (SOEs), with 3. Household heads' ages are restricted to between 25 and private sector contributing a mere eight 55 for the first survey round and adjusted accordingly with percent of national revenue. Advantages the year difference for the second survey round. include a stable and low-corruption environment, good human development Sustainability of the pace of poverty including wide-spread knowledge of English, reduction appears to be good. Rural trade access to low cost and reliable electricity, intensification spurred by trade agreements preferential access to the large Indian market, with neighboring countries, and upgrades to and easy access to skilled and unskilled labor road links along the North-South and the from India. Against these advantages, private Southern East-West highways will continue sector development is limited by the absence apace under the 11th Five Year Plan. Ongoing of scale economies, uneven access to finance, and new hydro-electric projects will continue mismatched labor force skills, and the lack of to stimulate the economy to 2020, and adequate infrastructure. income from projects in production phase will fund the provision of public goods. In the To spur private sector development, a short-term, investment in strengthening number of policies and laws have been irrigation channels, eradication of pests formulated. These include the Economic destroying cash crops like oranges and Development Policy (EDP) and amended cardamom, effective ways to fend off wild rules on foreign direct investment (FDI). animals (wild boars, monkeys and elephants) Forthcoming measures also include an that inflict crop losses, plus the introduction industrial infrastructure development policy of formal social protection mechanisms and to govern economic zones, a public private crop-insurance could help reduce poverty partnership (PPP) policy, a licensing protocol, further and diminish vulnerability. and policies on mineral development, renewable energy, and micro, small and Bhutan’s statistical system is considered medium-sized enterprises (MSME). These are fragile, lacking in human resources and a in addition to a consumer protection bill and legal framework, as well as suffering from an enterprise registration act. The PPP policy data weaknesses and poor data coordination. 7 Bhutan: Country Snapshot and Bhutan's first IT Park (Thimphu Tech taken place and only need a final push to Park, the first PPP in Bhutan) were delivered reach conclusion. In particular, the passage of in 2012 with the support of the World Bank. two regulatory reforms through parliament in coming months would help to make it easier Private sector participation in to start a business: infrastructure and social service delivery is important in the context of job creation and • The Enterprise Registration Bill, which will bridging the infrastructure gap in Bhutan. The introduce legal forms and registration Eleventh Five Year Plan aims to creat 82,000 procedures for partnerships and sole new jobs through the Rapid Investment in proprietorships. This law will also eliminate Selected Enterprises (RISE) program. Based the need for an operating license, and will on experience in other countries, the World introduce the legal framework for new Bank Group can assist in finding ways to companies to register online; and bridge the skills gap, and in identifying and selecting strategic private sector enterprises • An amendment to the existing Companies for the RISE program. Act (2000), which regulates limited liability companies, will eliminate the requirement for Doing Business in Bhutan a company seal. Despite having improved by five positions in the Doing Business 2014 report Two other important improvements with a compared to last year, Bhutan still lags potential medium term big impacts are: behind all other South Asian countries except for Afghanistan. Its weakest areas were • Modernizing the Company Registry and the construction permits (132nd), protecting Property Registry, which are both still paper investors (147th), and trading across borders based. Furthermore, legislative reviews of (172nd), while it performed the best in the secured transactions and insolvency will help area of enforcing contracts (37th). The uncover bottlenecks related to getting credit. private sector is small and, while 15 to 24 year-olds represent a fifth of the Bhutanese • Final implementation of the RAMIS system population, unemployment among the youth is key for improvement in the areas of taxes is relatively high. and trade. Over the past few years, the government has also taken important steps to improve the In addition, many recommendations aimed at investment climate. In the area of business the ease of doing business are related to registration, it eliminated two procedures: improvements in e-government and e- name approval and location clearance. It services, for instance by developing created a Land Commission in 2008 to handle information and communication technology cases involving the transfer of property. In (ICT) infrastructure and internet 2009, it improved credit information by connectivity. launching a public credit registry. In August 2013, the Royal Monetary Authority (RMA) The “Better Business Summit”, a joint opened a collateral registry for moveable government and private sector initiative, collateral. was held in late March in Bhutan to promote investments by providing a platform Preliminary findings of an Investment for dialogue between the public and private Climate Reform Memorandum and sector. To ensure a wide ownership of the subsequent action plan suggest several medium term reform agenda, the event was areas where Bhutan can improve its used to communicate about the reforms and regulatory environment. These relate to to get feedback from the private sector. reforms where a lot of work has already Political leadership is required to set up an 8 Bhutan: Country Snapshot institutional framework to support reforms The most significant health problem in within the government, and to cut across terms of developmental impact is the high ministries. rate of malnutrition. Though there has been improvement in recent years, it is Health nevertheless worrisome - some 33.5 percent of Bhutanese preschool children are stunted (BMIS 2011). From a long term perspective, sustainability of healthcare financing needs attention too. With the burden of non- communicable diseases (NCD) growing, health services at the district level are largely geared to serving the still existing burden of infectious diseases, such as common cold, diarrhea, skin diseases and conjunctivitis. In addition, alcoholism remains a significant Picture source: http://futurechallenges.org/wp-content/uploads/2013/01/SDC14012-11.jpg health challenge, requiring multi sectorial behavioral interventions. Bhutan has sustained investments in health over the last two decades and made Education remarkable progress. In 2010-11, public health expenditure stood at four percent of GDP and nine percent of government spending, considerably higher than other South Asian countries. The expansion of the network of health facilities now ensures that 90 percent of the population live within a three hour walk of a health facility; there are 25 traditional medicine operations at Basic Health Units (BHUs); and there are at least two functioning ambulances at each district hospital, forming part of a new health helpline and nationwide emergency transport Picture source: network, accessible by phoning 112. http://c85c7a.medialib.glogster.com/media/57/5768287a78e0f6819406dd507c5bcecb3a0f5ee99a01002c857bc968f475ed07/e ducation-in-bhutan-jpg.jpg Access to health services is satisfactory, Bhutan’s education expenditures are although peripheral facilities require equally strong. Public education improvement and service quality needs to be expenditure stood at 7.3 percent of GDP and improved. The Constitution (2008) lays out 16.7 percent of total government spending that the state will provide free basic public (MOF, 2012). These figures are amongst the health services to all citizens. As of now, all highest in the South Asia region. The health services, barring a handful of dental, Constitution (2008) provides for the state to cosmetic and other services, including ensure free education up to Grade 10 for all international referrals where needed, are children of school-going age, and to make provided free by the government. technical and professional education Nevertheless, some Outreach Centres (ORCs) generally available, and higher education are very remote and require health workers, equally accessible to all on the basis of merit. the unsung heroes of the country’s public At the same time, this progress has led to a health system, to walk for many hours, and refocus by development partners on other sometimes even days, to reach the most priorities, which may make it difficult to remote facilities. sustain high education spending. 9 Bhutan: Country Snapshot Table 3: Poverty and Social indicators There is a growing role of private institutions and financing in the tertiary sub-sector. The 11th FYP expansion plans for tertiary education are ambitious but essential for Bhutan to build a human resource base to support a knowledge-based economy. Student intake is to increase to 15,000 (from just over 5,000 currently). To keep this from overburdening public expenditures, a greater role for the private sector is seen. But this raises new issues of quality and relevance. Since it will take the Education City some years to become operational, the Royal University of Bhutan (RUB) is the main Bhutan is on track to achieve the reference point for the quality assurance and Millennium Development Goals in accreditation framework. education by the end of the 10th FYP (10FYP, 2008-2013). Bhutan has established The government’s recent decisions at the an organized public education system since tertiary level are to adopt a single quality the 1960s. This diversified sector now assurance model for both public and includes over 650 schools and institutes, private tertiary institutions. This would more than 180,000 students and nearly 9,000 involve endorsement of “accreditation” as the teachers. Notably, gender parity has been mode of quality assurance (as distinct from achieved up to Grade 10. Females constitute solely “audit” or “assessment”); and structure nearly 50 percent of enrollment in higher the QAA implementation procedures in three secondary education and nearly 40 percent at tiers, whereby “accreditation” is the third tier, tertiary level. The gross enrollment ratio was preceded by registration and licensing of 71 percent at secondary level and 30 percent institutions (tier one) and self-appraisal and at tertiary level in 2011 (WDI 2011). peer review (tier two). A key issue is that despite high enrollment Social Protection and levels of public financing, learning levels remain low. Poverty remains a key constraint on enrollment and attendance. Gewogs where fewer children attend school tend to be those with comparatively high poverty rates. This is mainly due to high out- of-pocket expenditure for households. Sector wide, the majority of education service delivery is through the public Picture source: http://www.fao.org/docrep/r6560e/r6560e0t.jpg sector. The exception is higher secondary education (HSS, Grades 11-12) where 50 In addition to the provision of free health percent of the students are in private and education, there is a formal system of institutions. The 11th FYP expansion plan to social protection in Bhutan. However this boost student numbers will require more was limited to about seven percent of the intensive collaboration with the private population. Coverage of Bhutan’s pension sector and attention to school mapping to system is limited to civil servants and joint- ease existing unbalanced patterns of sector companies. These groups encompass participation in secondary education. under seven percent of the population in 10 Bhutan: Country Snapshot 2012. In addition, the armed forces are Agriculture covered under a separate scheme. Participation in the National Pension and Provident Fund (NPPF) extends across some parts of the formal sector workforce beyond higher income groups, and a similar proportion of the elderly are receiving some benefits from the system. There is low coverage of the most vulnerable. Most of the poorest 20 percent have no social protection coverage. The lack of safety nets, particularly Picture source: for those outside of public sector jobs, leaves http://blogs.adb.org/sites/default/files/styles/medium/public/bhutan_0.jpg?itok=ujYsUCNx the majority of the population vulnerable to Bhutan is predominantly an “agriculture- shocks and risk. This seems to influence the based society”. The agriculture sector is decisions of the young people of Bhutan dominated by smallholder subsistence entering the labor market, with a majority of farmers who occupy the majority of the youth focused on the limited job arable land and produce most of the crop and opportunities in the public sector. livestock products. As per the Labor Force Survey Report of the MoLHR, 2012, the Employability of Bhutanese youth is a key agriculture sector provides livelihood to 62.2 priority. Employment opportunities for percent of the total population contributing youth are limited, particularly at higher level to 12 percent of the total GDP. managerial jobs (skills and job mismatch in While the contribution of agriculture to market). The government target is to bring GDP has been declining, it continues to be down the youth unemployment rate from 7.3 an important sector. It is particularly percent in 2012 to 5.0 percent or less by the important as a source of employment and for end of the next plan period (2013-2018). reducing poverty. But its growth has been Within this context, the Ministry of Labor and insufficient to adequately address poverty, or Human Resources (MOLHR) has decided to deliver food security. Immigration from rural develop a social protection strategy to to urban areas, particularly by youth and men provide more equity of social protection to looking for a more modern life style, has those who work across different sectors, and resulted in the feminization of the agriculture provide support to senior citizens outside of sector particularly in the lagging areas. the formal sector. A range of policies are needed to improve There are some existing specialized grant rural life and maintain rural population. programs for those outside of the formal Physical access to rural areas and between sector, including scholarships, and welfare rural areas and markets needs to be schemes distributed by the King or by NGOs, improved. Dispersed and small scale but there is little coordination. Other support production hinders adoption of good to the elderly comes through family and agriculture practices. Greater access to credit social networks. Changing social structures and technology, and sustainable approaches and rapid urbanization is likely to leave many to pest and wildlife encroachment are all elderly rural poor without informal social needed. Other issues include the loss of safety nets. Nine percent of the population is agriculture land for other development, lack over 60, with more living in rural than urban of infrastructure such as irrigation, farm areas, and this difference becomes even more roads and post-harvest storage, labor prominent for those over the age of 70. shortage, and the scarcity of existing market traders and wholesalers. 11 Bhutan: Country Snapshot The agriculture sector strategy in meeting supply schemes. Ongoing soil erosion and 11th FYP (2013-2018) objectives: To deforestation threaten watershed conditions achieve eradication of poverty to less than 10 and their functional integrity. Concerns on percent by the end of 2018, the sector needs water quality stem from the rise in domestic to grow at an annual rate of four percent. The and industrial waste generation, along with 11th FYP will adopt a multi-dimensional improper disposal and run-offs from approach to develop the lagging regions. To agricultural fields and urban centers. achieve this, the Ministry of Agriculture and Forestry’s key strategy will be to transform The government has taken several agriculture into a commercially viable sector important steps to preserve the that provides higher returns to farmers, environment. Bhutan’s environment improves rural livelihood, reduces imports policies include: (i) mandating a minimum and promotes exports, and offers attractive forest cover of 60 percent of the country’s employment opportunities to youth. total land area in the Constitution; and (ii) increasing the proportion of land under Environmental Conservation protected area status to around 50 percent at present from 26 percent in 2000. It has established a permanent Land Management Unit for sustainable land management, and a plan for the Bhutan Trust Fund for Environmental Conservation (BTFEC) to adopt more modern governance and business practices. It has also launched a wildlife Picture source: http://cdn.lightgalleries.net/4bd5ebf721640/images/bhutan021-2.jpg crime unit within the Department of Forest and Park Services including an online Environmental conservation is a reporting system on wildlife offenses. cornerstone of Bhutan’s unique Protection of the environment is also development approach. Bhutan remains embedded in its Gross National Happiness endowed with dense and virtually untouched (GNH) policies, including the need for forests, abundant water resources and investments to meet basic environmental and diverse wild species. Nevertheless, it cultural standards. confronts chronic pressures primarily related to land degradation and biodiversity loss due Cultural Heritage Assets Management to development and population growth. Land degradation can stem from inappropriate agriculture production and mining practices, overgrazing, and excessive forest harvesting, as well as solid waste disposal in and around population centers. Threats to biodiversity include illicit forest harvesting, human- wildlife conflict, poaching, and habitat fragmentation arising from land development projects. A particularly important element is the need for integrated water management. Despite the positive outlook for water availability, incipient challenges relate to the sustainability of urban water supply systems and functionality of existing rural water 12 Bhutan: Country Snapshot Preservation and promotion of culture is shaped Bhutan’s society, economy and one of the four pillars of GNH and of the landscapes. Constitution, and is central to the government’s five-year development plans These initiatives come at a critical time, as and it’s Vision 2020. It is also a key asset modernization is promoting changes in and economic driver especially through the Bhutan that require a rethinking of the tourism sector and as an alternative source of way the country has been developing, and job creation for skilled masters and the the continuity of its cultural assets and educated youth. values in the 21st century. These policies are not only expected to enlarge Bhutan’s While notable, the government’s cultural definition of cultural preservation beyond strategy has not paid enough attention to monuments to address living areas, but also the country’s majority of non-monumental to increase the value of traditional skills and assets; villages and their immediate to create new employment opportunities and surroundings that have supported growth sources within a creative economy. community life for centuries. These assets Rural areas may particularly benefit through are increasingly under threat from a number increased demand for labor in the traditional of unprecedented challenges. Economic construction and tourism sectors, supported liberalization of the country has brought an by specialized training and establishment of influx of “modern” influences and more centers of excellence. This may also materialistic aspirations, especially among contribute to create attractive employment young people. Ways of living, landscapes, and alternatives outside overgrowing Thimphu. cultural practices, particularly those enshrined in rural communities and that have By strengthening its own identity and shaped Bhutan’s society for centuries, are integrity as a cultural landscape and being transformed in the quest for new protecting people’s cultural assets, Bhutan lifestyles and less laborious job opportunities. will thus be better equipped to cope with Overall, the conservation of Bhutan’s broad powerful external economic and social cultural assets need to be prioritized as an pressures in a way that meets its aspirations integral element of city-wide growth to promote inclusive development, based on planning, regional development, service nonmaterial well-being, happiness, and delivery and poverty reduction programs. cultural values. The weakening of community vitality and loss of cultural assets has spurred the Disaster Risk Management and Climate government to enact measures to formally Change Adaptation steward its cultural heritage with an emerging emphasis on living landscapes. Within this context, Bhutan is starting to institutionalize a broad, inclusive range of policies, principles and practices to steer its development in a people-centered, culturally sensitive manner. These include the 11th Five Year Plan focus on “Prosperity for All” aimed at raising awareness of the unique value of Bhutan’s traditional way of life as a driver for an inclusive and sustainable pattern of development, and the draft Heritage Sites Bill aimed at the stewardship of the very social fabric, properties and sites which have 13 Bhutan: Country Snapshot Bhutan is highly prone to disasters and leadership of the prime minister. The climate related risks. Its rugged topography, Department of Disaster Management (DDM) geographic and climatic features make it under the Ministry of Home & Cultural Affairs prone to natural disasters such as - the national coordinating agency for all earthquakes, glacial lake outburst floods disaster management activities, will serve as (GLOFs), flash floods, landslides, and wind the executive arm and secretariat to the storms, as well as both man-made and natural NDMA. The DDM is formulating a fire disasters. Over the past 40 years, several comprehensive National Disaster Risk earthquakes above a magnitude of six on the Management Strategy for Bhutan which will Richter scale have occurred. According to the guide DDM and all other relevant World Bank report on Natural Disaster stakeholders in carrying out disaster Hotspots (2005), 31.3 percent of Bhutan is in management activities prioritized as short, risk areas, and 60.8 percent of population is medium and long term. Key challenges at high mortality risk from multiple hazards. include (i) strengthening preparedness and The frequency and intensity of extreme early warning systems; (ii) mainstreaming weather events appears to be increasing. disaster risk management, including in The country has become increasingly construction; and (iii) strengthening disaster vulnerable to hydro-meteorological related response capacity. disasters which may be an effect of climate change. It has become increasingly important Urban Development to understand the changes in the climate and weather patterns to have reliable weather forecast and early warning systems in place. Along with rising mean temperatures and glacial retreat, there is evidence of formation of supra-glacial lakes. Of the 2,674 glacial lakes in Bhutan, 25 have been identified as potentially dangerous. Natural dam formation and dam bursts that could release huge volumes of water pose a major risk to hydro- power plants, farmlands and human settlements. Strong winds have also become a Bhutan is undergoing a rapid transition noticeable cause of damage. from a rural economy to an urban society. The government adopted the Disaster The average annual urban population growth Management Act in 2013 to strengthen the rate has been around four percent since 2007. disaster management system. The Act The Bhutan National Urban Strategy (NUS, decentralizes disaster management activities, 2008) projects that by 2020, the country will empowers the nodal institutions with the be most likely 60 percent urbanized. As legal status to implement disaster reduction Bhutan evolves into a more urbanized strategies, mandates the mainstreaming of society, the government recognized the DRM into all national plans and policies and country’s unique challenges in urban emphasizes a consultative process at the development: the rapid rates of urbanization; national as well as the local levels. The and the limited availability of serviced land. National Disaster Management Authority The urbanization rate across the country (NDMA) will be formed in accordance with is skewed toward the Western region. the Disaster Management Act 2013, which Thimphu and Phuentsholing are the two most will be the highest decision making body on favored destinations for migrants. Through disaster management in Bhutan under the the enactment of the Local Government Act 14 Bhutan: Country Snapshot (2009) and the approval of the Municipal However, power generation can get Finance Policy (2012), the government has disrupted during winter months. During established four autonomous cities wet seasons existing hydropower plants can (Thimphu, Phuentsholing, Gelephu and generate sufficient electricity to meet Samdrup-Jokhar). Under the proposed domestic demands and power exports. National Urban System, these centers would Nevertheless, since all the existing plants are play an important role as future engines of run-of-the-river, the total generation capacity growth. drastically drops to around 288 MW during winter dry seasons (December–March). This Bhutan is relatively well positioned to low capacity does not meet the system peak meet the challenge of rapid urbanization, demand during winter dry seasons. To deal given its low population. Nevertheless, with the seasonal power shortage, industrial urban institutional and governance systems loads have been curtailed during the winter need to be strengthened. Spatial planning is months. Winter power shortages will likely also needed, as lack of affordable and housing remain until 2016 when the Punatsangchhu-I for lower-income groups is becoming a hydropower plant (1,200 MW) is expected to critical issue. Another important issue is to come online. provide for jobs for an increasingly urban youth population. In 2008, Bhutan agreed to develop and export 10,000 MW of new capacity to India Energy by 2020. Under the bilateral framework, one project at Punatsangchhu (stage 1, 1,200 MW) has started construction and contracts for two projects at Punatsangchhu (stage 2, 1,020 MW) and Mangdechhu (720 MW) have been awarded. Seven other large hydropower projects are at various development stages with the Indian government and its own enterprises. In addition, small and medium sized hydropower operations are being Picture source: http://www.bbs.bt/news/wp-content/uploads/2012/08/SharingEnergy.gif developed as public–private partnerships Hydropower development has (PPPs). In 2008, the Asian Development Bank underpinned the rapid growth of Bhutan’s (ADB) agreed to finance the Dagachhu economy. The total installed capacity of hydropower project (126 MW) as the first existing hydropower plants is 1,480 PPP infrastructure in Bhutan. The project’s megawatts (MW). Of total annual power joint venture was established between DGPC generated, 80 percent is exported to India and India’s Tata Power Company. The after meeting domestic consumption. Power Department of Hydropower and Power exports account for the largest source of Systems also intends to promote independent national revenue in the form of taxes and power producers (IPPs) as the next step after dividends, generating more than 40 percent formulating rules and guidelines required for of government revenue. Power exports also IPPs. contribute to 25 percent of gross domestic product (GDP), and hydropower The hydropower development will require infrastructure development contributes extensive investments in power another 25 percent of GDP through the transmission. While these transmission lines construction sector. are expected to be developed and aligned with hydropower development, a holistic 15 Bhutan: Country Snapshot development approach will be crucial for the Transportation network expansion to maximize the investment benefits and minimize any adverse safeguard impacts on transmission corridors. Bhutan has set an ambitious goal of providing electricity for all by 2015. Mountainous terrain and the resultant difficulties of grid extension have kept some of the rural population without access to clean energy. Traditional fuels, such as kerosene and fuel wood, cause indoor Transportation is a critical constraint in pollution and health burdens. To reduce the provision of affordable rural access to poverty and stimulate inclusive economic social and economic services and facilities development, the government has embarked in Bhutan. For instance, the Bhutan Living on a large-scale rural electrification Standards Survey (2012) reports that campaign. As of December 2012, 84 percent transportation services alone account for of households had access to electricity, approximately 23 percent of the cost incurred supported by the ADB and JICA. In addition to where households sought health care to grid extension to rural areas, households in address sickness or injury. According to remote villages may have access to electricity Bhutan’s 2010 Investment Climate through standalone solar home systems. Assessment, transportation is the biggest Bhutan has also begun to develop infrastructure problem encountered by firms renewable energy to diversify the energy in Bhutan. Roughly 40 percent of all firms and supply base through wind, solar, biomass, and 70 percent of large firms surveyed had small and micro hydropower. Wind power experienced losses due to ground projects have the potential to generate clean transportation difficulties. energy to supplement hydropower in winter Bhutan has achieved significant dry seasons. Bhutan also has biogas milestones in the transport sector. development potential as an alternative Investments under the 10FYP have helped energy source to replace fuel wood for increase connectivity towards the official goal cooking in rural areas. Rural households of having 85 percent of the population within depend heavily on fuel wood, which emits half a day's walk from the nearest road. indoor air pollutants and poses a health Parliament has also passed the Road Act in hazard. To promote renewable energy, a 2012 which empowers the Department of national policy must be established and Roads to coordinate various institutions financial and fiscal incentives provided to working in the roads sector. These help overcome the entry and financial accomplishments show a strong government barriers for development. commitment to developing Bhutan’s transport sector and the institutions that will sustain it into the future. Recent physical achievements, supported by a World Bank project, that benefited 12,000 rural residents in three dzongkhas, include: (i) 67 km of new roads, (ii) 24 km of improved roads; and (iii) seven newly constructed motorable bridges. Project beneficiaries have experienced a 62 percent reduction in travel time to reach 16 Bhutan: Country Snapshot socio economic facilities (schools, clinics, Bhutan outperforms its neighbors on etc.). Transparency’s International’s Corruption Perception Index. In 2012, Bhutan moved Looking forward, Bhutan Transport 2040 further up the index, from 38th to 33rd, in envisages meeting increased demand for recognition of additional steps it has taken to rural transport with a dzongkhag road strengthen its anti-corruption legal network that is 3-½ times its current length framework, including passage of the 2011 with connections to every gewog. Achieving Anti-Corruption Act, the establishment of an such targets will require approximately Anti-Corruption Commission (ACC), and 2,500km new roads. Bhutan Transport 2040 further strengthening of rules governing asset also targets major investments such as: (i) declaration by public servants in 2012. In widening of the existing East–West Highway 2013, Bhutan has moved further up to be (and other key routes) to two lanes; (ii) ranked 31. A key element for improving improving access routes between industrial governance has been an ambitious centers and major border crossings; and (iii) government-to-citizen program to provide improving various existing alignments along services electronically through community the national highways network to improve centers, which is particularly important in safety and travel times. Bhutan also needs to light of geographical barriers. Similarly, with strengthen the technical systems used for support from the IFC, the government has prioritizing, planning, and implementing developed a government-to-business e-portal essential maintenance activities for the to provide a comprehensive inventory of sustainable development and management of licenses and other information on business the national transport network. processes. Improving quality and availability of Public financial management (PFM) urban transport services is also a key reforms are part of national priorities. priority. The number of Bhutanese living in Bhutan over the years has been making urban areas nearly tripled between 1990 and progress in the area of accounting, budget 2010. Increasing rates of motor vehicle execution oversight, control and reporting. ownership and use have accompanied this Parliamentarians increasingly pay attention trend, creating unprecedented impact on the to the budget approval process and also in urban environment (many negative, including reviewing the audit observations through emissions, congestion, noise, etc.). Bhutan’s public accounts committee. The government urban transport systems are still developing continues to take steps for strengthen PFM in to meet increasing demand for urban the country. The public at large has also mobility. Nevertheless, less than one third of become more demanding in terms of urban households in Bhutan report using transparent and efficient government. public transport in a given month. Nevertheless, further improvement is needed on oversight of public sector entities, Governance, Public Financial predictability in funds available for Management and Procurement expenditures, the quality and timeliness of budget reports and financial statements, implementing the standards on auditing and accounting, PFM information systems, availability of professionally qualified staff and effectiveness of internal audits. Bank has provided an IDF Grant to help the government in strengthening PFM in the public and private sectors in Bhutan by strengthening internal audit in public sector, 17 Bhutan: Country Snapshot assist in the implementation of Bhutanese Decentralized Rural Development, Urban Accounting standards (BAS) and Development II, Remote Rural Communities strengthening public accounting functions of Development – one regional IDA project – RGoB. Regional Cooperation on Wildlife Protection – and one GEF grant operation – Sustainable Significant progress has been achieved on Financing for Biodiversity Conservation. An public procurement reforms. Among the additional financial project of the Urban outcomes are: (i) the introduction of the Development II is being prepared. In addition, procurement rules and regulations 2009 and the WB manages several grants for Bhutan on standard Bidding Documents for Goods, Disaster Management, Public Private Works and Services in April 2009; (ii) the Partnerships, Corporate Governance, Public establishment of the Public Procurement Financial Management and inter- Policy Division in August 2008; (iii) the governmental fiscal relations, Urban Budget career path and recruitment tools put in place Processes, and social protection. for a procurement profession; (iv) the generally well-functioning procurement The World Bank has extended three market; (v) a strong framework for control development policy operations over the and audit, spearheaded by the Royal Audit last six years. The most recent, Development Authority and the Anti-Corruption Policy Credit-2 (DPC-2) was approved by the Commission; (vi) set up of the Government World Bank’s Board of Executive Directors in Procurement and Property Management November 2012 for a total of $36 million. Division to conduct centralized procurement This operation has focused on: (i) Promoting of common items; and (vii) an independent government efficiency and effectiveness review body to handle procurement through sound fiscal and public financial grievances has been constituted Because of management and procurement, and strong this progress, the World Bank is moving public administration; (ii) Fostering private- towards use of country systems for all sector development by improving the policy procurements up to the International environment and facilitating productive Competitive Bidding Thresholds in Bhutan employment opportunities; and (iii) from end FY 2014-15. Expanding access to infrastructure in a sustainable manner. The World Bank Program in Bhutan The current joint World Bank/IFC-Bhutan The World Bank provides support on Country Partnership Strategy (CPS) covers knowledge through analytical work and the period FY11-14. It is aligned with three technical assistance. Recent analytic work key strategic frameworks – the Principles of includes a Gender Policy Note, a Nutrition Gross National Happiness (GNH); Bhutan Assessment, a Poverty and Social Impact 2020 Vision; and the Tenth Five-Year Plan Analysis of the proposed Bill on Cultural (2008-2013). The CPS has two areas of Heritage, a Human Development Public engagement: (i) Economic Diversification, Job Expenditure Review, a review of higher Creation and Financial Inclusion; and (ii) education, and an Investment Climate Spatial Planning and Public Services, with two Assessment, which served to underpin the cross-cutting themes: capacity building and most recent budget support operation (DPC- environmental sustainability. 2) to improve the policy framework governing private sector development. A The World Bank provides around $15-20 poverty assessment, Financial Sector million of new IDA resources per year. Assessment and a green growth study are There are four ongoing specific investment underway, as well as financial sector operations for a net commitment of $82 technical assistance to support the design of a million of IDA resources. These include three financial sector strategy. country specific IDA operations – 18 Bhutan: Country Snapshot The next CPS is scheduled to begin in FY investment climate and enhancing access to 2015. It is anticipated that many of the financial services. IFC continues to explore themes of the current CPS will continue to areas of assistance in hydropower, tourism, resonate. The bulk of IDA financing is manufacturing, agribusiness, health and expected to continue in the form of education sectors among others. IFC’s development policy lending, supplemented advisory support on investment climate by a limited number of specific investments reforms, PPP development and the financial in key areas, particularly where IDA sector is expected to continue. resources may be leveraged, and a robust knowledge program. The next CPS probably Multilateral Investment Guarantee will also reflect a shift toward IDA-IBRD Agency blend status for Bhutan, in keeping with Bhutan’s emerging middle-income country In January 2013, Bhutan took the first step (MIC) status. to becoming a member of MIGA by signing the MIGA Convention. The Convention has International Finance Corporation been ratified by the National Assembly and (IFC) the National Council. Bhutan is currently in the process of completing the other The IFC has a total committed investment requirements for membership. Upon portfolio in Bhutan of over $31 million. completion of the membership process, MIGA The portfolio consists predominantly of IFC’s will be able to support investments in Bhutan recent equity participation in Bhutan by providing guarantees. National Bank. The advisory portfolio includes advice in structuring Public Private Partnerships (PPPs), improving Bhutan’s 19 Bhutan: Country Snapshot BHUTAN: Decentralized Rural Development Project (DRDP) Additional Financing Key Dates: Approved: March 21, 2011 Effective: April 26, 2011 Closing: December 31, 2014 Financing in million USDollars*: Financier Financing MDTF 5.00 Total Project Cost 5.00 Financier Total Disbursed Undisbursed MDTF 5.00 4.9 0.1 *As of March 2014 Project Background: The Decentralized Rural Development Project (DRDP) was approved on March 1, 2005 for a credit of $7 million. Effective March 21, 2011, under the Global Food Crisis Response Program (GFRP) Multi-Donor Trust Fund, a grant for $5 million was allocated to Bhutan as additional financing for the DRDP. The additional DRDP grant funds were to help finance the costs associated with scaled-up activities and to address the impact of the continuing high prices associated with essential food commodities. Due to significant exchange rate savings/gains the project was restructured and the closing date extended to December 31, 2014. Project Development Objective and brief component description: The project development objective is to improve market access and increase agricultural output for rural communities in selected areas of Bhutan. The project supports improvements/rehabilitation of rural infrastructure (rural roads and irrigation) and promotes extension activities particularly for rice, maize and potato crops to address disease outbreaks and low productivity. The DRDP Additional Financing supports three components. The first component focuses on the rehabilitation and construction of irrigation canals and on the improvement of selected roads which support rice, potato and maize production areas. The second component helps farmers improve production of rice and maize through demonstration, knowledge sharing, improved technologies and capacity building. Finally, the third component focuses on institutional strengthening activities such as capacity-building at the local-level administration, for planning aspects, and for the physical reporting of project implementation performance, to ensure the appropriate transfer of funds to the local level. In addition, capacity building activities for pest surveillance, financial management, environmental and social screening will be supported. Results:  The project is on course to achieving its targets in improving rural infrastructure (irrigation canals and farm roads) and food crop production (rice, maize and potato). To date the project has benefitted over 8,272 households (target 6,700 households) from improved infrastructure and over 8,703 households (target 8,500 households) through improved extension services.  43.95 km of farm roads have been improved exceeding the end of project target of 15 km. Similarly, 256 km out of a required 200 km of irrigation canals have been rehabilitated.  In the last cropping season Jan-Feb 2013, 111 tons of basic seeds of potatoes were produced. With the increase in number of contract farmers for seed production and also with the increase in National Seed Center (NSC) area for cultivation, the total basic seed production is expected to exceed the 700 metric ton target by the project closing date. The multiplication of seeds of new rice, maize, and potato varieties has started, and is expected to be increasingly adopted by farmers. The adaptation rate for improved rice varieties is 45 percent against a project target of 25 percent. On the other hand 27 metric tons of Green Leaf Spot (GLS) disease tolerant maize seeds were produced by community based seed production (CBSP) groups, resulting in 60% of GLS affected maize seeds being replaced. The target replacement rate for the project is 80 percent. Key Partners: Ministry of Agriculture and Forests. 20 Bhutan: Country Snapshot BHUTAN: Second Urban Development Project (BUDP2) (P090157) Key Dates: Approved: April 29, 2010 Effective: August 24, 2010 Closing: December 31, 2015 Financing in million USDollars*: Financier Financing Disbursed Undisbursed IDA 12.0 5.0 6.7 Royal Government of Bhutan 0.7 Total Project Cost 12.7 5.0 *As of June 30, 2013 Project Background: The Kingdom of Bhutan has experienced rapid social and economic development over the past two decades, and this socio-economic transition is fueling rapid urbanization. Meeting the challenges of urban development, management and finance is now a key developmental agenda of the Royal Government of Bhutan (RGOB) and its international development partners. The World Bank started its support with the Bhutan Urban Development Project (1999-2006), which helped develop urban infrastructure systems in ten secondary towns. The RGOB showed strong interest and appreciation of the Bank’s policy advice through the project and technical assistance to prepare the National Urbanization Strategy (2008) and the Thimphu City Development Strategy. On the RGOB side, the Local Government Act of 2009 and Municipal Finance Policy (2012) provide the framework for the roles and responsibilities of urban local governments. In that context, the ongoing BUDP2 focuses on supporting urban/municipal development in Thimphu (the capital and Bhutan’s largest city) and Phuentsholing (second largest city and a commercial hub) as well as technical assistance for the urban local governments and the Ministry of Works and Human Settlement. Project Development Objective and brief component description: The project development objectives are to (i) support Bhutan’s municipal reform program by strengthening municipal finance an d management services in Thimphu and Phuentsholing; and (ii) improve infrastructure services in northern Thimphu where no formal services are currently available. The BUDP2 consist of three components: (i) municipal Finance and Management; (ii) Thimphu Northern Area Development; and (iii) Capacity Building. Component 1 ($1.5 million) aims at strengthening the institutional systems of Thimphu and Phuentsholing Thromdes (city corporations). The support for the city-specific reforms is being done broadly through (i) strengthening the local revenue administration systems and processes; and (ii) strengthening the expenditure management systems and financial management systems and processes of the two Thromdes. This component also supports Royal Government policy reforms aimed at setting up a policy framework for municipal financing. C omponent 2 ($9.3 million) supports the development of basic infrastructure systems in two ‘local area plans’ in northern Thimphu, including roads, stormwater drainage, water supply, sewerage and stree t lighting, as well as support for increase in low-income housing units in these areas. Under component 3 ($1.2 million), resources are being provided for training programs, equipment, technical assistance, and studies based on the needs of Thimphu and Phuentsholing Thromdes. It aims at significant upgrading of each Thromde’s capacities in various aspects of their internal work processes and service delivery to citizens through training of operational staff and provision of relevant equipment. Key Results: [Target Values at end of Project]  Increase in local revenue collection: 50 percent by Thimphu and 40 percent by Phuentsoling.  New building permits issued for serviced plots: 175 (in two Thimphu Local Area Plans being developed)  Number of households with new piped water and sewerage connections: 600 (in two Thimphu Local Area Plans).  Number of municipal staff trained: 250 (with 150 in Thimphu and 100 in Phuentsholing) Key Partners: Ministry of Works and Human Settlement, Ministry of Finance, RGOB; Thimphu and Phuentsholing Thromdes.. 21 Bhutan: Country Snapshot BHUTAN: Thimphu Strategic Cultural Heritage and Sustainable Tourism and Implementation of Priority Actions Key Dates: Approved: Effective: Closing: June 30, 2014 Financing in million US Dollars*: 255,000 Financier Financing Disbursed Undisbursed MDTF (Governments of India and Italy Total Project Cost 255,000 81,592.69 173,407.31 *As of June 30, 2013 Project Background: The Kingdom of Bhutan emphasizes preservation of its culture, environment, and identity, while pursuing economic growth. The country’s unique development agenda, based on the concept of Gross National Happiness, highlights a synergistic and harmonious balance between material well-being and the spiritual, emotional, and cultural needs of individuals and society. As Bhutan pursues this goal, however, the country is experiencing a profound and rapid transition from a largely subsistence rural economy to a more urban society. This rapid urbanization is threatening the coun try’s traditional buildings and historic sites and undermining the practice of traditional arts and crafts. It is important that these skills and traditional knowledge are conserved because: (a) built heritage represents the country’s unique style of architecture and urban design and preserves centuries of insig hts on adaptation to local topography and climatic conditions; (b) traditional arts and crafts express the culture and identity of the country and are an important source of social cohesion; and (c) the country’s cultural assets provide much of the basis for Bhutan’s competitiveness in high-value, low-volume tourism. As the country responds to new and evolving challenges, cultural heritage conservation can be a dynamic force for its sustainable development. The proposed grant activity will pilot conservation-led urban planning to respond to Bhutan's goal of preserving and promoting cultural values, which is a main pillar of the government’s development philosophy. The focus will be Thimphu, the country’s largest city and its economic, administrative, and tourism center. Project Development Objective and brief component description: The PDO of this activity is to incorporate cultural heritage and sustainable tourism in the economic development of Thimphu and surrounding peri-urban areas, and create income-earning opportunities in the heritage conservation and cultural tourism sectors for unemployed youth, women, and other vulnerable groups. The project consist of three components: Component 1: Strategic Cultural Heritage and Sustainable Tourism Development Plan – Update of Thimphu Structure Plan. This component supports (a) the review of the Thimphu Structure Plan (notified in 2004), and (b) the updating and expansion of its cultural heritage and tourism elements of that plan in order to protect heritage and integrate culture into the broader economic development of Thimphu. The activity will address cultural heritage as both a national and local priority and involve the hiring of an international consultant to work with local planners, a series of stakeholder workshops, and production of a planning document. Component 2: Improvements at Changangkha Lhakhang. Component 2 finances improvements to this iconic temple founded in the 12 th century that is of great importance for Bhutanese and is a primary tourist destination in Thimphu. The investments are based on a plan prepared by the MoWHS and approved by the Ministry of Home and Cultural Affairs and other key agencies. Grant funds are used to address conditions that are undermining the sanctity, safety, and sustainability of Changangkha Lhakhang. Component 3: Capacity Building and Awareness Raising for National and Local Government Institutions and the Private Sector. This component is a direct response to Bhutan’s rapid urbanization, rising standards of living, escalating land prices, increasing costs of maintenance, and the pace of reconstruction after the 2011 earthquake, all of which are factors contributing to new construction and inappropriate repair of traditional structures that disrupt the visual harmony and value of Bhutan’s urban areas. To assist with conserving one of Bhutan’s most important cultu ral assets, its traditional architecture and urban landscapes, the MDTF is financing the preparation, publication, and dissemination of Bhutanese architecture guidelines under this component. Key Results: This activity is expected to result in:  Increased stakeholder participation in decision making related to heritage conservation and tourism development  Improved access, safety, and sustainability of a cultural heritage site important to the local population and tourists.  Increased awareness and appreciation of local cultural assets  Increased national and local commitment to safeguard cultural heritage Key Partners: Ministry of Works and Human Settlement (MoWHS) and Thimphu Thromde. 22 Bhutan: Country Snapshot BHUTAN: Sustainable Financing for Biodiversity Conservation and Natural Resources Management (P127490) Key Dates: Approved: May 15, 2013 Effective: Grant signature expected in July 2013 and effectiveness by September 2013 Closing: December 31, 2018 Financing in million USDollars*: Financier Financing Disbursed Undisbursed IBRD IDA Other – GEF 4.08 0 4.08 Total Project Cost 4.08 0 4.08 *As of June 30, 2013 Project Background: As development proceeds apace (8 percent average growth in the past three decades), Bhutan is facing pressures on its natural endowment stemming from population growth, agricultural modernization, hydropower and mineral development, industrialization, urbanization and infrastructure development. In keeping with Bhutan’s enduring national commitment to protecting the environment , one of the five main development objectives included in Bhutan’s 20-year perspective of development goals, Bhutan 2020: A Vision for Peace, Prosperity and Happiness is environmental conservation. Nevertheless, conservation efforts have been challenged by an inadequate system of prioritizing the wide range of environmental needs, weak institutions and capacity as well as limited financing. In recognition of the constraints, the government established the Bhutan Trust Fund for Environmental Conservation (BTFEC) in 1992. A GEF grant of $10 million implemented during 1992-97 helped to create a permanent, well capitalized institution. In comparison to BTFEC’s notable grow th in capital from bilateral donor contributions and careful management of investments, its grant-making performance has been modest and below its potential. With the socio-economic development needs of a modernizing and growing population especially with the advent of constitutional democracy in 2008, BTFEC’s challenge has become more formidable. It needs to gain greater prominence, authority and credibility as an effective and reliable institution for sustained funding of conservation activities and for setting annual conservation priorities. Project Development Objective and brief component description: The project development objective (PDO) is to improve the operational effectiveness and institutional sustainability of the Bhutan Trust Fund for Environmental Conservation. The project components are: (1) enhancing the operational effectiveness and sustainability of BTFEC by adopting more modern governance and business practices and ensuring the adequacy of its resources and tools going forward; (2) improving conservation management of the high altitude northern areas (HANAS) that support a globally important ecosystem under threat from population growth, patterns of agricultural cultivation, livestock grazing and urbanization; and (3) capacity building for mainstreaming of conservation and sustainable forest and natural resource management approaches into national policies, strategies and plans. Results: Grant effectiveness is expected by September 2013. Key Partners: Bhutan Trust Fund for Environmental Conservation Ministry of Agriculture and Forests, Royal Government of Bhutan. 23 Bhutan: Country Snapshot BHUTAN: Remote Rural Communities Development Project (RRCDP) Key Dates: Approved: October2, 2012 Effective: November 15, 2012 Closing: May 31, 2018 Financing in million USDollars*: Financier Financing Disbursed Undisbursed IDA 9.00 1.3 7.9 Total Project Cost 9.00 *As of March 2014 Project Background: The Remote Rural Communities Development Project (RRCDP) project area covers 26 geogs in 6 dzongkhags located in south-western and south central Bhutan. The RRCDP is designed to improve living conditions and incomes in the country's poorer and more remote rural areas. The populations in these areas currently rely on subsistence agriculture, and lack roads, irrigation, technologies, and community and social infrastructure that would allow them to improve their incomes and social integration. Project Development Objective and brief component description: The main objective of the project is to increase agriculture productivity and access to community assets in remote rural areas by improving access to markets, irrigation, agricultural technologies, and community infrastructure. Improvement in market access would be achieved by investments in farm roads and marketing infrastructure. Agricultural productivity and rural incomes would increase through promotion of improved irrigation and agronomic practices and rehabilitation of productive assets for key commodities. Community-led investments will improve the access of the poorest people to the critical and missing infrastructure in the selected area. The RRCDP consists of three components: Component A. Rural Infrastructure: The focus of this component is to connect the communities to larger roads and regional markets and to improve production potential through improved availability of irrigation. Component B. Community, Marketing and Productive Infrastructure: This component would cover investments in marketing and post-harvest infrastructure, critical community-level infrastructure, and investments identified by producers to increase agricultural productivity. Component C: Project Management and Institutional Strengthening: This component supports project management, including the monitoring and evaluation functions of the project. It covers: (a) technical and financial management; (b) procurement; and (c) supervision of compliance with environmental and social safeguards. This component will strengthen the capacity of the MoAF to effectively coordinate implementation and provide procurement support to local communities as needed. Results:  The Remote Rural Communities Development Project became effective mid-November 2012 and had its first implementation support mission in March 2013. It is therefore too soon to assess progress against the PDO or report on results in relation to the intermediate outcome indicators.  The project management team has been taking proactive steps to develop 18-month work plans for the project components; identification of geogs where project activities will be first implemented; started the recruitment process including the preparation of TORs for key staffing positions; and currently updating its operations manual and procurement plans.  The PDO indicators are: o Productivity of crops increased by at least 20 percent in targeted irrigation systems o Marketed value of agricultural production increased by 20 percent in targeted area o Share of beneficiaries with access to critical community infrastructure increased by 20 percent in targeted area  The project is expected to directly benefit about 6,440 rural household living in the project area. Key Partners: Ministry of Agriculture and Forests (MoAF). 24 Bhutan: Country Snapshot BHUTAN: IFC’S EQUITY INVESTMENT IN BHUTAN NATIONAL BANK Key Dates: Approved 20 December 2012 Effective: 31 December 2012 Closing: n/a Financing in million USDollars*: Financier Financing Disbursed Undisbursed IBRD IDA Other – IFC 28.5 28.5 0 Total Project Cost *As of June 30, 2013 Project Background: Bhutan faces a set of challenges typical of countries seeking to make a rapid transition from a mostly rural, agrarian society to one characterized by increasing levels of education, a large number of young people looking for more opportunities and, with increased globalization, shifting expectations and aspirations on the part of its population. It is critical for a country with such potential, yet facing a diverse set of challenges, to foster private sector-led growth and poverty alleviation. Strengthening of the banking sector is a key pre-requisite in this. Project Development Objective and brief component description: This landmark investment by IFC in a leading commercial bank in Bhutan is one of IFC’s most significant and impactful investments in South Asia. IFC’s $28.5 million investment for 20 percent stake in Bhutan National Bank (BNB) marked the following milestones: IFC's first equ ity investment in Bhutan, IFC’s fourth and largest investment in Bhutan to date, and for the country, the largest investment to-date by a foreign investor. The project brings together IFC’s two pillars of investment and advisory services to achieve optima l results for the client. IFC’s funding will help expand the bank’s outreach into the underbanked population of Bhutan. By capitalizing on BNB’s strong platform to reach underbanked SMEs, the expected improved access to fi nance will help address a key impediment to private sector competitiveness. Results: The project will have a strong development impact on many fronts. It will initiate and generate: (i) increased access to finance in Bhutan, a frontier market, with a sizeable underbanked and rural population, which will also support inclusive growth and job creation in the country; (ii) benefit Bhutan by providing BNB with access to international best practices in the areas of IT, risk management, social and environmental management and corporate governance, (the latter three are initiated) and by assisting the Bank in implementing its new growth strategy and expanding into new underserved market segments; (iii) positive influence on the country’s developing financial market and strengthening of the cou ntry's investment climate by introducing international guidelines and standards, thereby reducing systemic risk; and (iv) improvement in overall financial intermediation by promoting benefici al competition in the country’s banking sector. Key Partners: Bhutan National Bank, Royal Monetary Authority, Ministry of Economic Affairs, Ministry of Finance. 25 Bhutan: Country Snapshot BHUTAN: AMANKORA Key Dates: Approved:12/11/2003 Effective: Closing:12/19/2003 Financing in million USDollars*: US$10 million Financier Financing - Outstanding Undisbursed IFC US$10 million US$2million IDA Other US$8 million Total Project Cost US$18 million *As of June 30, 2013 Project Background: The Amankora project involved the construction of five luxury guest-house type resorts at different locations in Bhutan. The project operates under the Amanresorts brand of hotels which is recognized in the tourism industry for its ability to create high-end resorts in unique/frontier destinations. Project is funded with a with a long term loan of $10 million and an equity of $8 million. Project Development Objective and brief component description: The project contributes to the development of the tourism sector in Bhutan, more specifically the project has the following development impacts:  Created a demonstration and catalytic effect with regard to attracting private investment into Bhutan in general and to higher end hotels in particular (The Uma, Taj etc);  Direct and indirect job creation;  supports the government's 'high value - low impact' approach to expanding the tourism sector in Bhutan by attracting high spending, environmentally conscious and culturally interested visitors to the country;  transfers international best practices in hotel management, including service and quality standards, occupational health and safety, and environmental management, by an experienced sponsor to the emerging Bhutanese tourism industry;  reduces the risk of the dominance of the Indian Rupee on Bhutan's foreign exchange reserves by generating US dollar revenues for the country; and  encourages utilization of a significant proportion of goods and services required by the resort guests from local sources which will help develop the local supply base and encourage the growth of SMEs; Results: Bhutan appeals to world travelers seeking exotic locations and unique habitats. Amankora Resorts helped address limited hospitality infrastructure to enable the country to take advantage of its natural beauty to attract the tourist trade. The construction of the five lodges has resulted in the creation of 400-plus jobs. These developments have also stimulated an arts community, as local craftspeople, artisans, and performers benefit from tourist spending. Key Partners: The sponsors of the Amankora project are: (i) Bhutan Hotels Limited (BHL), a company incorporated in Bhutan and fully owned by Silverlink Holdings Limited a BVI-registered company and the owner of the Aman resorts brand of luxury hotels; and (ii) Bhutan Tourism Corporation Limited (BTCL), a publicly listed Bhutanese company and the third largest tour operator in Bhutan. 26 Bhutan: Country Snapshot Bhutan: Licensing Simplification Project Key Dates: Approved: November 4, 2010 Effective: November 4, 2010 Closing: June 30,2014 Financing in million USDollars*: Financier Financing Disbursed Undisbursed IBRD IDA Govt of --- Other $0.522 $0.446 $0.076 Total Project Cost *As of June 30, 2013 Project Background: According to Doing Business 2010, Bhutan’s ranking in ease of doing business and starting a business was #126 (#124 in 2009) and #80 (#66 in 2009) respectively. In this context, the Royal Government of Bhutan undertook a broad scope of reforms to improve efficiency of its services. The Economic Development Policy (2010) set the goal of reducing the burden of compliance through elimination of overlapping approvals and streamlining requirements for business start-up and operations by 2011. As requsted by the government, IFC conducted an inventory of business licenses and identified 119 licenses (issued by 29 agencies). The inventory also identified business entry constraints such as, inefficient and cumbersome procedures related to ex-ante licenses, systemic shortcomings including gaps in the regulatory basis, duplication of information required by different issuing agencies, and poor access to information which affects both domestic and foreign investors. To improve business licensing in Bhutan, IFC designed this project to play a special role by focusing on the in-depth analysis of key technical licenses, bringing knowledge of good international practice and corresponding regulatory changes. In addition, the project covers system-wide reforms to introduce good practice in business licensing and to develop an electronic Licensign e-portal containing information related to business licenses. Project Development Objective and brief component description: This project will help the Royal Government of Bhutan (RGoB) improve regulatory requirements underlying selected business licenses and promote streamlining, and achieve at least 25 percent time savings to the private sector due to process streamlining of three selected priority licenses, and better availability, quality and transparency of licensing information with a targeted 10 percent reduction in compliance costs for entry licenses made more accessible through improved provision of information. Licensing Policy: The project is supporing the government to adopt a Licensing Policy to apply international good practices in business licensing. Information Access: The project is supporting the government to improve information both online (www.g2b.gov.bt) and at the issuing agencies’ offices. Prirority License Reform: The project identified three priority licneses namely, FDI Approval, Project Approval and Environmental Clearance for in-depth reform. The project has aimed to contribute to the following impacts by April, 2015 (i.e. three years after project completion) • $1 million compliance cost savings; • $10 million FDI facilitation. Results:  G2B Licensing e-Portal developed and launched. PM issued Executive Order prioritizing the e-Portal for G2B interface.  Information about licensing made more available through Information Charters and Brochures for 11 pilot licenses.  FDI Approval process and Policy streamlined making it significantly faster to get FDI approvals. For the priority sectors the time reduction is from 213 days to 10.5 days and compliance cost savings is $1.07 million.  Domestic Project approval for medium and large businesses has been streamlined making it faster and easier. Key Partners: Ministry of Economic Affairs, Gross National Happiness Commission, National Envir. Commission, Ministry of Finance. 27