87029 April 2014 Bhutan Development Update The World Bank 1 Contents Summary ................................................................................................................................................... 3 Recent Economic Developments .............................................................................................................. 4 Official unemployment is relatively low and declining: so why is it an issue? .................................. 13 Special Focus 1: Malnutrition and Stunting Demand a Coordinated Response ..................................... 15 Special Focus 2: Pioneering Cultural Heritage Protection as a National Asset ...................................... 17 Figure 1:Economic Growth in Bhutan – ....................................................................................................... 4 Figure 2: Inflation and its Contributors......................................................................................................... 6 Figure 3: Wage Bill of Bhutan ...................................................................................................................... 7 Figure 4: Bhutan’s Balance of Payments (% of GDP).................................................................................. 9 Figure 5: Credit Growth has Slowed Sharply along with a Construction Squeeze… ................................. 10 Figure 6: Construction & Personal Loans drove Credit Growth................................................................. 11 Figure 7 Unemployment affects mostly youths and urban women ............................................................. 13 Figure 8: Anemia Prevalence in Women (by age) ...................................................................................... 15 Table 1: Electricity Tariffs in Bhutan are Low ............................................................................................. 4 Table 2: Cement Production ......................................................................................................................... 5 Table 3: Government Budget ........................................................................................................................ 7 Table 4: Poverty Dynamics* ....................................................................................................................... 12 Box 1: Factors Impacting Macroeconomic Development in 2013 & 2014 .................................................. 5 Box 2: Features of the Economic Stimulus Plan........................................................................................... 6 Box 3 : The Chhukha Tariff’s Upward Revision .......................................................................................... 9 Box 4 : Government’s Plan for Full Employment ...................................................................................... 14 2 Summary After a policy-engineered slowdown in 2012, which saw GDP growth decline to 4.8 percent, the lowest since 2008, Bhutan's economy is expected to rebound to 6.5 percent this year, supported by hydropower construction and higher electricity and food production, following favorable rains. The tight fiscal stance introduced in 2012 has been maintained to bring spending in line with lower non- hydro revenues and a slowdown in foreign grant disbursements, but the revenue situation is expected to improve with the commissioning of cement and electricity projects. This may provide space for an increase in public sector compensation to offset recent declines that have occurred in the face of an average 8 percent annual increase in the CPI over the past five years. Bhutan's external debt, at 85 percent of GDP, remains high, but is likely to fall sharply as assured hydropower revenues begin to flow from projects for which the external loans were taken. However, its narrow exports base and the large rupee-reserves mismatch make the country vulnerable to shortfalls in external earnings and pose a moderate risk. Although gross international reserves rose to US$920.8 million at end-November 2013, only 12 percent was in the Indian Rupee, which is needed for trade settlement and debt service. Liquidity in the banking system has eased and measures have been taken to improve the monetary transmission mechanism, which should improve the monitoring of liquidity conditions. This is important as negative real loan rates persist, accounting partly for the 30 percent annual increase in nominal credit over the past decade. Bhutan's success in reducing absolute poverty is noteworthy, with the poverty rate falling from 23 percent in 2007 to 12-13 percent in 2012, improving the lot of the poorest segments of the population rather than merely that of those clustered around the poverty line. A rapid growth of commercial agriculture, expanding rural infrastructure, and beneficial effects from the construction of massive hydropower projects has established a sound platform for further poverty reduction. However, continued out- migration to urban areas and vulnerability of infra-marginal groups, the relative absence of formal social protection institutions, youth unemployment, and the persistence of malnutrition, anemia and stunting point to the need for continued effort at tackling non-income poverty. Further, a better framework for managing Bhutan's cultural assets could improve employment opportunities, especially in rural areas, among poorer segments of the population. The macroeconomic projections for 2014 set GDP growth at 7.3 percent, stemming from new projects, increased tourism receipts, easier credit conditions and the effects of the Economic Stimulus Plan. 3 percent increase compared to 2012, or 50 Recent Economic Developments percent of domestic consumption), while vegetable production has reached 98 percent of Growth has been volatile, dependent on consumption, despite cyclone Phailin damaging hydropower developments and crops across the country in the fall of 2013. disbursements from India Increased plantings and higher yields through irrigation, mechanization, and introduction of Economic growth is expected to rebound in high-yielding varieties are the factors behind the 2013.1 While administrative measures have been increase. maintained throughout 2013, growth is expected Increased industrial electricity tariffs are to recover to an estimated 6.5 percent supported raising concerns about the profitability of the by hydropower projects under construction, ferro-alloys industry. The industry is good rainfall (leading to more electricity concentrated in steel, iron, and ferro-alloy generation), and better agricultural performance products, selling mostly to external markets with (Figure 1). In 2012, corrective administrative India the primary destination. Bhutan being a measures to stop the rupee shortage led to a price-taker, the performance of the sector sudden halt in construction and service growth depends largely on internationally determined in 2012 which, combined with a poor record in metal prices the costs of inputs. The impact of agriculture, contracted growth to 4.6 percent, the the increased electricity tariffs – of about 30 lowest level since 2008. In 2013, hydropower percent from October 2013 to 2016 – should be has benefited from better rainfall, leading to a modest, since the industry will still be price- 10.7 percent increase in electricity generation.2 competitive with those of India, China, South Figure 1:Economic Growth in Bhutan – Africa, and Russia – the last two being world a Hydropower Story leaders in ferro-alloys (Table 1). We estimate, 20 therefore, that the sector should continue to 18 expand despite the higher energy cost. 16 14 Table 1: Electricity Tariffs in Bhutan are Low 12 2014 Electricity above tariffs Bhutan 10 USD/KWH 8 average 0.13 290% China 6 South lowest 0.06 100% 4 Africa 2 highest 0.17 430% 0 India highest 0.16 400% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 lowest 0.05 40% Services Industry West Bengal 0.13 300% Agriculture GDP Delhi 0.08 140% Sources: National Statistical Bureau and Bhutan national 0.03 0% Macroeconomic Framework Coordination Source: WB staff calculations (various sources) Committee (MFCC) The construction sector besides hydropower With reportedly improved paddy production has slowed significantly with the freeze on and a record increase in vegetable housing loans (see Figure 5). Construction in production, 2013 is expected to see an hydropower has been sustained, with four agricultural rebound. Although it employs projects under construction at an average annual more than two-thirds of the population, investment cost of 28 percent of GDP. Delays in agriculture has grown sluggishly. The Food & construction of Punatshantchu I, following Agriculture Organization expects the paddy unforeseen geological challenges, have harvest in 2013 to increase to 88,000Mt (a 4 reportedly delayed commissioning of the plant 4 by a year, to FY17/18. Domestic sales of leading to higher public capital spending, the cement, a good proxy for construction-sector economic stimulus plan, increased public wages activities, slowed markedly in 2013 (Table 2). expected in the FY14/15 budget, expansion of Cement production is expected to rebound in tourism with innovative measures).6 This boost 2014, with the Dungsam Cement mega-project in economic activity could risk a resumption of starting production.3 overheating and macro imbalances. It will be Table 2: Cement Production important to tighten monetary and fiscal policies Production in MT 2010 2011 2012 2013 in light of (i) upcoming disbursements in the economic stimulus, (ii) a proposed increase in Clinker Production 273,765 244,200 244,130 238,820 the public service wage bill, and (iii) proposed variation -11% 0% -2% relaxation of restrictions over foreign exchange, Cement Production 424,055 384,510 370,469 344,830 vehicle imports, and housing loans. Fiscal variation -9% -4% -7% tightening with consistent monetary policy measures will be needed to avoid a new episode Penden Cement Authority Ltd of rupee shortage once the restrictions are lifted. Services expansion in 2013 was subdued due to weak tourism growth, delay in the Puna I Box 1: Factors Impacting Macroeconomic Development construction, and tightening of credit in the in 2013 & 2014 financial sector. The World Bank estimates that 2013 hotel, restaurants and trade/retail will grow at a  Delay in Puna I construction (-) low 10 percent in 2013. Banking sector activities  Good rainfall for agriculture and hydro generation in 2013 have been subdued, with liquidity (+) drying up in step with the Royal Monetary  Better agricultural performance (rice and Authority (RMA)’s restrictions on housing vegetables) through plantings & higher yields (+) loans. Bhutan was able to draw only 10 percent  Cyclone Phailin (-) more tourists last year, leading to a low 1  Elections delaying budget readiness and public percent increase in convertible currency administration spending (-) revenues – the lowest growth in five years.4  Ongoing construction of four hydro projects Bhutan is facing rising competition from worth twice Bhutan’s GDP, or US$3.2 billion (+) destinations such as Myanmar and Sri Lanka.  Scheduled increase in electricity tariffs (-) Despite the rise of the dollar in 2013, Americans  Developments in India’s inflation and exchange rate (+/-?) beat out the Japanese to reemerge as the top 2014 market, with 6,927 visitors compared to 4,015  Dungsam cement starts production early-2014 (+) Japanese. For the first time, China became the  Dagachhu project is commissioned mid-2014 (+) second-biggest market with 4,764 visitors,  Boost in tourism revenues with new measures (+) indicating a lucrative new tourism trend. Most  Twenty percent public wage bill hike (+) visitors are Indian, qualified as regional  Increase in electricity tariffs (+/-?) tourism.5  Four new joint-venture hydropower projects The 2014 outlook is positive but agreed (+) macroeconomic pressures on domestic  Economic stimulus plan introduced (+) demand will have to be managed. We estimate  Developments in India’s inflation and exchange rate (+/-?) growth to reach 7.3 percent supported by a  Possible lifting of bans on housing credit and combination of favorable factors (on-going imports of vehicles and furniture (+) construction of four hydropower projects, the  Possible new fiscal measures to temper domestic commissioning of the Dagachhu project by mid- demand if bans are lifted 2014, Dungsam Cement coming on line, the possible lift of the bans on imports and housing credit, disbursement from India to finance the 11th Five-Year Plan (FYP-11, 2013-2018) 5 Inflation Closely Follows that of India Box 2: Features of the Economic Stimulus Plan With 75 percent of Bhutan’s imports coming In an effort to address the issue of liquidity shortage and from India and an exchange rate at par with boost lending to productive sectors, the Economic Stimulus Plan (ESP) was formulated with a Rs 5 billion the Indian rupee, Bhutan’s consumer grant from the Indian government. Part of this assistance inflation is intimately linked to India’s will be injected through the financial system to improve inflation. Food and beverages have the heaviest liquidity and create a revolving fund for collateral-free weighting in Bhutan's consumer price index, at lending to productive sectors such as cottage and small 36.9 percentage points, and since most are industries, non-formal rural agri-based activities and youth imported from India, they will continue to have education and employment. the strongest impact on overall inflation. The stated intention is to help Figure 2: Inflation and its Contributors increase liquidity of financial institutions, and lending to export promotion, import substitution and employment- generating sectors. Of the Nu 5 billion, Rs 1.9 billion is being allocated to a SME “revolving fund” to boost primary and secondary sectors and the rural economy in general. Under this allocation, Revolving Fund-I has been established with Rs 1.5 billion to support cottage- and small industries, including manufacturing and production centers. Revolving Fund-II, with the remaining Rs 0.4 billion set aside, will support non-formal activities, individuals and cooperatives, and rural enterprises. In December 2013, the Bhutan’s Prime Minister issued a government order to establish a Business Opportunity and Information Centre (BOIC) under the Ministry of Economic Affairs to administer and implement the Rs 1.9 billion SME Revolving Fund to ensure flows reach the priority sectors. Of the remaining Rs 3.1 billion of the grant, Rs 2.1 billion will be injected into banks through a subordinated debt, strengthening their ability to lend to the private sector. The money will be injected into the banks based on the permissible limit under the prudential norms of the Source: National Statistical Bureau central bank, which is up to 50 percent of a bank’s capital fund. Subordinated debts injected by the government into Despite the recent easing of inflation in in the banks have a ten-year repayment period but the interest India during December/January, inflationary (6 percent) will have to be paid annually. pressures will continue through 2014. The remaining Rs 1 billion will set up a Special Support Structural drivers of inflation in India, including Scheme, with sub-schemes for higher education, senior rising food prices, are expected to persist. citizens, and guaranteed employment. India’s consumer price inflation averaged a The Bhutanese government has already received Rs 3.7 rapid 10.1 percent in 2013 on the back of a weak billion of the Indian government’s Rs 5 billion rupee, supply-side shortages, rising demand, and commitment, in three instalments of Rs 1 billion, Rs 1.5 changing consumption patterns (due to higher billion, and Rs 1.2 billion. Rs 4.2 billion will be injected into the economy in the rural incomes). Any changes in subsidy policy first fiscal year, FY13/14, while the remaining Rs 800 (fuel, power, and fertilizer), or a monsoon shock, million will be spread over the next four years. The could boost inflation significantly. government will release Rs 20M each year. The first Consumer price inflation in Bhutan tranche of funds, under ESP through a subordinated issue accelerated to 11.3 percent, y-o-y, in the third to the financial institutions, is scheduled for early 2014. 6 quarter of 2013, from 7.3 percent in the second Table 3: Government Budget 2012/13 2013/14 2014/15 quarter, and will reach around 10 percent in As a Percentage of Nominal GDP Revised Budget Proj. 2013. Inflation in 2014 and beyond will be Revenue & Grants 35.6 25.5 28.9 driven largely by the scheduled rise in electricity Domestic Revenue 20.0 18.9 18.6 tariffs, by up to 30 percent, but its impact on Tax revenue 14.6 13.4 13.7 poverty should be modest, given the progressive Non-tax revenue 5.4 5.5 4.9 nature of tariffs. Grants 15.0 6.6 10.3 Project-tied Grants 12.0 5.2 9.0 Tighter public spending kept the fiscal Program Grants 3.0 1.4 1.3 Other receipts 0.6 0.0 0.0 stance in check, despite a sharp decline in revenues Outlay 36.6 30.0 29.6 Total Expenditure 37.3 31.6 31.1 Current 17.7 16.2 17.6 The government continues to rely heavily on Capital 19.7 15.4 13.4 foreign grants to finance its expenditure. Net lending (NL) -0.7 -1.6 -1.5 Grants financed about 36 percent of total Primary Balance 1.5 -2.8 0.9 Fiscal Balance -1.0 -4.5 -0.7 spending, or 10 percent of GDP, in FY12/13, 70 Borrowings 15.9 2.3 4.8 percent of it from the government of India. The Repayments 15.2 2.3 2.2 budget for FY13/14 projected a decline of nearly Resource Gap (dom. borrowing) -0.3 -4.5 1.9 9 percent in nominal spending compared with the revised budget for the previous fiscal year. Source: Ministry of Finance Given the persistent shortage of rupees, the An upward revision of public compensations government has tightened expenditures to bring is under discussion for FY14/15. It could them in line with available resources. Another match the last three years’ inflation to adjust reason for the spending dip is the slow start of civil servant purchasing power, but will also put the budget year because of the elections in the pressure on domestic demand. It will be summer, change of leadership, and delays in important to put tightening fiscal/monetary foreign grant disbursements. Grants are expected measures in place to counter-balance the to more than halve, from 15 percent in FY12/13 increase in purchasing power in the public to about 6.6 percent of GDP, due to slow sector. Such measures could incentivize savings initiation of the 11th Five-Year-Plan (FYP). over immediate consumption. Taxation Domestic revenue is projected to decline to measures and strengthened macro-prudential 19.5 percent in FY13/14 from 20.8 percent of regulations are being considered (see section on GDP in FY12/13 due to lower non-hydro monetary and financial development) to replace revenues, particularly in the area of business existing bans on import and housing credit. income tax, excise duties and non-tax revenue.7 Figure 3: Wage Bill of Bhutan Hydro revenue remains stable at 3.7 percent in FY13/14, with no new projects starting generation. The deficit in FY14/15 should ease to 0.7 percent of GDP, as more revenues will kick in with commissioning of the Dungsam cement project, the Dagacchu hydro electricity scheme, and the Chhukha power plant’s electricity export tariffs revision (see Box 3). Source: Ministry of Finance 7 Bhutan: Structure of Public Sector Debt 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 Total Public Sector Debt (percent of GDP) 75 66 57 69 72 90 External 71 64 56 66 71 85 Hydropower sector debt 46 41 36 43 46 52 Convertible currency debt 28 25 23 27 28 29 Standby facility with GoI 6 5 6 6 Domestic 4 3 2 3 1 6 Source: Ministry of Finance debt is expected to gradually decline in the long term to about 29 percent in 2034 once construction of most of the hydropower projects Public Debt: is High Level also High Risk? is completed and debt service commences to pay down the debt stock. As a result, the present Bhutan’s public and publicly guaranteed value (PV) of PPG external debt-to-GDP external debt increased to 85 percent of GDP gradually declines to only 25 percent over the by end-FY12/13, adding 14 percentage points long term. The commissioning of the of GDP to the previous year. The rise in the hydropower projects (in FY17/18), which also external public debt was driven in large part by marks the start of the debt repayment, puts the hydro sector-related external borrowing (52 debt ratios on a steady downward trajectory. percent of GDP). Hydropower projects are financed primarily by India with a mix of loans Bhutan’s risk of external debt distress (70 percent) and grants (30 percent). External continues to be moderate.9 This is based on debt continues to be denominated in Indian the commercial viability of the hydropower rupees (and related to hydropower sector debt), projects, the risk-sharing agreement with India which accounts for 61 percent of total external for hydropower loans, Bhutan’s strong track debt, with convertible currency debt accounting record of project implementation, rapid growth for only 29 percent of GDP. Domestic debt was in energy demand from India, committed donor due entirely to a loan to purchase aircraft for support, and Bhutan’s high level of international national carrier Druk Air in FY9/10. reserves. Bhutan’s concentrated export base, rupee-reserves mismatch with external debt and Bhutan’s rapid hydropower development is the trade structure of the country leave it projected to lead to a substantial buildup of vulnerable to exports and any shortfalls in aid external debt in the medium-term, with debt inflows. Additional risks stem from bulky ratios breaching most of the country-specific hydro-related debt service payments requiring indicative thresholds. Bhutan’s debt situation is provisioning of rupee reserves.10 expected to improve over the long run, reflecting significantly higher electricity exports when These projects also bring strong economic hydropower projects come on stream. dividends in the long term, boosting average real GDP growth and exports. Moreover, despite Under the baseline scenario, Bhutan pursues the large increase in the stock of debt, the a planned expansion of its power generation addition of the new hydropower projects does capacity to about 10,000MW by 2020.8 not create substantial vulnerabilities in debt Bhutan’s external and public debt closely traces servicing over the long term. Bhutan’s strong the power cycles. External debt is projected to track record of project implementation, the rise to 121 percent of GDP in FY16/17 with commercial viability of the new hydropower disbursements for hydropower sector projects, projects, the close economic and political ties before declining slightly to 116 percent of GDP that Bhutan has with India are all mitigating in FY17/18 with the completion of the first factors which mitigate the commercial risks of phase of hydro construction. The stock of these projects. India has been both the main external public and publicly guaranteed (PPG) 8 provider of financing for hydropower projects mainly from India with light travel requirements and the main consumer of the projects’ output. but the statistics are not up-to-date for this segment. External Sector: Bhutan’s Negative Savings Bhutan runs a large and growing current Export revenues from sales of electricity are account deficit (estimated at about 20 percent expected to improve in step with good in 2013). It is essentially financed by donor rainfalls in 2013. Since no new hydropower resources, of which India contributes the most projects have become operational since 2006, through loans and grants to finance hydropower the fluctuation in export revenues reflects the development. Even when excluding self- vagaries of hydrological flows. The monsoon financed hydropower construction imports of rains in 2013 have been better than the previous goods and services (around a third of total good year, which is why data show a 12 percent rise and services), the current account deficit would in export revenues from sales of electricity in stand at 10 percent of GDP, illustrating a 2013. The potential for future increases remain significant national dissaving, and the need for strong. Exports of minerals and mineral-based the country to borrow to finance consumption. products account for more than half of total Gross international reserves had built up to exports, with hydropower exports comprising a 13 months of merchandise exports. further 45 percent, and manufactured products a International reserves amounted US$920.8 tiny 5 percent. India receives almost 90 percent million by end-November 2013, 88 percent of of Bhutanese electricity production. Continued which was in convertible foreign exchange, with shortages of power in India will ensure strong the rest in Indian rupees.11 There is, however, a demand for electricity from Bhutan continuing mismatch in the composition of Figure 4: Bhutan’s Balance of Payments (% of GDP) Bhutan’s reserves and the structure of its international transactions, as the country primarily needs Indian rupees for trade settlement and debt service. Box 3 : The Chhukha Tariff’s Upward Revision The export price of Chhukha power has been revised by 25 paisa per unit in February 2014, retroactively to 2013. The new export rate is now fixed at Rs 2.25 per unit from the existing Rs 2 per unit. The increase means that the 336MW Chhukha hydropower project will earn additional revenue of Rs 450 million annually. Chhukha exports around 1,800 million units of power to India every year. That decision followed a bilateral agreement to review the rate every four Source: Royal Monetary Authority years. The next revision is set for January 2018, and is based on increases in operating and maintenance The tourism sector has turned into an costs, and in the number of hydropower companies in important contributor of export revenues in India, and a range of other factors. recent years. Tourism revenues are 20 percent Chhukha is Bhutan’s oldest hydropower project, of non-hydro exports. Tourist arrivals and commissioned in 1989, and built with funding based revenues (from convertible currency-paying 60 percent on loan and 40 percent on grant. The tourists) expanded at an average of 15 percent entire loan component has been repaid fully since per year in the five years to 2013. In 2013, some 2007. 44,000 tourists came to Bhutan, earning the country US$62.5 million in convertible currency, a modest increase compared to 2012. A similar number of tourists came overland, 9 Tight Monetary Conditions are Necessary to manage pressures on rupee reserves. Excess Protect the Economy from Overheating and liquidity should be closely monitored and Another Rupee Shortage promptly adjusted to prevent credit growth from rebounding strongly. In future, along with the The tight liquidity experienced by the development of a domestic capital market, banking system in 2012 eased recently. Excess increased issuance of treasury bills could be liquidity characterized the financial system from used to mop up excess liquidity. Rupee inflows 2008-mid 2011 due to large build-up of related to hydropower projects and grants should hydropower inflows and grants (and only partial be sterilized in order to curtail excess liquidity in sterilization of these funds by the RMA). The the banking system and dampen credit growth, tight liquidity conditions emerged in June 2011 without the need for administrative or macro- as a result of persistent growth in Indian rupee prudential measures. imports with an equivalent drain on local Figure 5: Credit Growth has Slowed Sharply along with a currency liquidity, a reduction in the overall Construction Squeeze… level of individual deposits, over-dependence on 50% the more volatile and seasonal corporate deposits as a source of funding; and bank- 40% financing of the large, long-term public- and private-sector investment projects (e.g., 30% Dungsam cement project). Since March 2012, in 20% order to address the tight liquidity conditions, the RMA cut the cash reserve ratio (CRR) twice 10% to 5 percent from 17 percent. As result, the 0% banking sector’s liquidity improved between Q2 2011 2012 2013 2012 and Q2 2013. -10% Interest rates have shown little movement Others Transport Building & Construction Service and Tourism previously, despite the absence of explicit Trade & Commerce Agriculture controls. Real interest rates have been negative, Manufacturing introducing a strong bias towards investment in real estate. While the reason for interest rate …while Monetization is No Longer an Outlier stickiness is unclear, higher and more flexible 200 interest rates may better reflect market 180 conditions and be more aligned with those in 160 Broad Money over GDP India. 140 The authorities have made progress towards 120 improving the monetary transmission 100 mechanism. In March 2012, the RMA 80 Bhutan introduced a Short-Term Liquidity Adjustment 60 Window (RSTLAW) for securitized RMA 40 lending to banks at a newly introduced policy 20 rate which is linked to the RSTLAW facility. To 0 further strengthen the transmission mechanism, 5 7 9 11 13 the RMA also launched a base rate system GNI per capita, Atlas method, (log, 2012) (below which lending is not viable for financial institutions) in order to curb credit growth, improve loan pricing transparency, and foster lending discipline. The base rate also serves as a reference benchmark for floating rate loans. Monetary conditions need to remain sufficiently tight to ward off overheating and 10 The Financial Sector Shows Signs of Strengthening supervision will be critical in Vulnerability, with Limited Supervision the short to medium term financial sector vulnerabilities have likely accumulated.14 The growth in bank credit to the private Banks appear to be well capitalized, with the sector in Bhutan has been remarkable. Private risk-weighted capital adequacy ratio rising to 19 sector credit has grown to an average above 30 percent. Non-performing loans reportedly percent during FY02-FY11, increasing credit declined to around 8 percent in the last two from 11 percent to 49 percent of GDP. This years, which partly reflects rapid credit growth. compares with a median of 32 percent for lower But the increase in the loan-to-deposit ratio to middle-income countries (16 percent for low- above 100 percent raises concerns, given the income countries), while coinciding with the overall decline in deposits. Financial sector median of 49 percent for South Asia. The rapid vulnerabilities also arise from growing asset- expansion stemmed from an initially low base, liability mismatches, with a significant growth in civil services wages, spillovers from proportion of the deposit base being (short-term, large hydropower projects, loose monetary seasonal and volatile) corporate deposits, conditions (including low and often negative whereas bank credit is concentrated in loans interest rates, as mentioned above) and the entry with longer time horizons to finance investment of three new banks in 2010.12 In addition, non- and projects (as in construction, particularly banks also have engaged in lending in the funding of large infrastructure projects).15 The absence of alternative investment concentration of lending in personal and real opportunities.13 estate loans raises particular concerns; more than Figure 6: Construction & Personal Loans drove Credit a quarter of the financial sector’s portfolio Growth consists of building and construction loans, Bhutan: Sectoral Contribution to Credit Growth followed by personal loans which constitute (In percent) around 16 percent of overall credit outstanding. 50 The recent decline in real estate prices following 40 years of increasing prices may expose weaknesses. 30 Efforts to deepen the financial sector in a 20 sustainable manner are underway. A 10 comprehensive Financial Sector Development Strategy is underway with a careful sequencing 0 Other Personal loans of reforms within a medium-term plan. It will Transport Building and construction -10 Services and tourism Manufacturing emphasize the importance of balancing further Trade and commerce Agriculture Total deepening with maintaining financial stability, -20 promoting alternatives to bank financing for the 2004 2005 2006 2007 2008 2009 2010 2011 2012 private sector including, and improving information and market infrastructure by steps that included broadening coverage of the credit bureau. Source: RMA Quarterly Bulletin 11 Poverty Declined but Rural Vulnerability strengthened trade agreements with neighboring Prevails, Magnified by Out-Migration India and Bangladesh, signed between 2006 and 2009, Bhutanese farmers are increasingly Poverty reduction in Bhutan has been rapid, specializing in commercial production. The broad-based and inclusive between 2007 and value share of fruits, cardamom, and eggs have 2012. Both consumption based poverty nearly doubled to 46 percent in just four years to measures and broad-based multi-dimensional end-2012. Rural infrastructure development has poverty indicators show that the percentage of been a thrust area of the 10th Five Year Plan poor was cut by nearly half -from around 23 (2008-13). The eight-fold expansion in farm percent in 2007 to 12-13 percent in 2012. This roads has been phenomenal: nearly 4,000kms of conclusion is robust to alternative poverty lines. farm roads were built, with 500kms in 2006 The reduction has been deeper touching the alone. Besides the these roads, ongoing poorest of the poor not just the people just under construction of the Southern East-West Highway the poverty line. Evidence from focus group (along the India border) has decreased travel discussions further corroborate that there has times and lowered the cost of transportation of been perceptible sense of improvement in living goods. With the emphasis on electrification of standards in rural Bhutan. Bhutan has almost all rural areas, 97 percent of the villages are now eliminated extreme poverty ($1.25 purchasing electrified with the poor having doubled access. power parity terms, per day per person) within Three new massive hydro-electric power the living memory of a generation. projects (Punatsangachhu I and II, and Table 4: Poverty Dynamics* Mangdecchu) with an eight-year construction window were started in 2008-10 costing a little First Period & Second Period Poverty Status (%) over Nu187 billion (187 percent of GDP in 2012). The immediate benefits to the local Poor, Poor 8.3 economy from construction activities are (0.1) sizeable because of the hiring of local 10.5 contractors to provide transportation, food, and Poor, Non-poor rental for the three-fold increase in foreign (0.1) construction worker numbers (involving nearly Non-poor, Poor 4.1 one-third of the local population in project-site (0.0) dzonkhags). Non-poor, Non-poor 77.2 The big reduction in poverty is accompanied (0.2) by notable vulnerabilities, magnified by out- 6045 migration to urban areas. Urbanization is on N * Based on synthetic data for two periods in Bhutan, 2007- the rise, with Thimphu capital city drawing the 2012 (joint probabilities). greatest interest of rural migrants. Males and the Note: young are most likely to migrate to urban areas. 1. Predictions are obtained based on data in the second survey Females are less mobile because of family round. We use 500 bootstraps in calculating standard errors. responsibilities and the inheritance of land. 2. All numbers are weighted using population weights. Young people migrate to study or for economic 3. Household heads' ages are restricted to 25-55 years for the reasons. The chronically poor constituted two- first survey round, adjusted accordingly with the year difference for the second survey round. thirds of all poor people in 2012. For every ten persons who moved out of poverty, four fell into The primary drivers of such rapid poverty poverty. The absence of formal social protection reduction are various. These appear to be institutions and targeting mechanisms for the accelerating commercialization of agriculture, chronically poor could be shackling them in a rapid development of rural infrastructure (roads, poverty trap. For example, the poverty incidence schools, health centers, and electrification), and of female-headed households is about the same spillovers from new construction of massive as male-headed households, but they are less hydroelectric projects. Benefiting from 12 upwardly mobile and have fewer coping resources. Figure 7 Unemployment affects mostly youths and Sustainability of the pace of poverty urban women reduction appears to be good. Rural trade intensification induced by trade agreements with neighboring countries and fortification of road links along the North-South Highways and the Southern East-West highways will continue apace under the 11th Five Year Plan. Ongoing and new hydro-electric projects will continue to stimulate the economy to 2020 and income from projects in production phase will fund public good provision. In the short-term, investment in strengthening irrigation channels, eradication of pests that are destroying the cash crops such as oranges and cardamom, effective ways to fend off wild animals (wild boars, monkeys and Sources: Labor Survey 2012, Ministry of Labor and elephants) that inflict crop losses, introduction of Human Resources formal social protection mechanisms and crop- insurance could help reduce poverty further and Aside from queries about methodology, there diminish vulnerability. are other issues, actual or perceived, that make Bhutanese skeptical of official Official unemployment is relatively low and employment figures. These include: declining: so why is it an issue? 1) Underemployment. This refers to those While youth unemployment and skills who work part time, but would work mismatches are perceived as an important more if they could. The Labor Force concern, reported official unemployment Survey does not provide any details figures are low and on the decline. about the number of underemployed in Unemployment rate has dropped from 4 percent the workforce, yet one would expect in 2009 to 2.1 percent in 2012, according to the underemployment to be significant, MoLHR Labor survey. Youth unemployment especially in agriculture, where 60 rate has also decreased from 12.9 percent in percent of employed persons are. The 2009 to 7.3 percent in 2012. This raises the farming sector is most vulnerable to question of the real nature of the issue. high underemployment. Measurement issues, including the narrow 2) Labor force drop-outs. Long-term definition of employment and unemployment, unemployed workers may be the limited information on underemployment, discouraged and drop out of the labor and the low frequency (annual) of the labor force (the people of working age and survey might be factors that underestimate the below retirement age who are actively unemployment issue in Bhutan.16 participating in the work force, or are actively seeking employment), thereby not being accounted for anymore in the labor force. 3) Aspirational mismatch. Often we hear in Bhutan about the existence of a mismatch between skills demand (skills needed for the current GDP structure of the economy and growth prospects) and skills supply (people offering their skills 13 for jobs). Young people would be unwilling to take blue-collar jobs, favoring white-collar occupations. The Box 4 : Government’s Plan for Full Employment existence of formal and informal social safety nets such as free health, free By the government’s calculation, the full education, family ties, would allow the employment pledge needs to create 82,000 jobs over unemployed to be more selective in their the five years (to achieve 97.5 percent, according to job search. In other words, these are the the FYP-11 and economic development policy of people who might (i) have no job, (ii) be 2010): actively looking for a job, but (iii)  42,000 people will be employed in five years, as per the regular employment projection baseline perhaps are not willing to work (government’s human resource development immediately, thereby not qualifying as plans) “unemployed”. They might also belong  30,000 jobseekers will be sent abroad for to the (under)employed category if, say, employment opportunities, and they have worked for one hour the week  10,000 jobseekers will be enrolled in various preceding the annual labor survey. programs in the country. Counterintuitively, employment trends in the economy over the last three years Overseas Employment: actually show a consistent increase in Three Bhutanese employment agents have been blue-collar occupations (elementary registered to date. Job offers amount to 9 at the Sheraton hotel in Qatar, 2,000 in the US and Saudi occupations, skilled agriculture workers, Arabia, 50 agricultural jobs and 30 basic agricultural plant and machine operators, and training openings in Israel, and 48 English-teaching assemblers). posts in Thailand. 4) Bias towards public-sector jobs (for better benefits and job safety). Public- Classes X and XII likely to enter the job market: sector jobs in Bhutan are the first choice A six-month training in agriculture would also be available for class XII graduates, and a total of 3,000 for young graduates. Job safety, youths will be enrolled in the pre-employment opportunity to study further, and good program. benefits (such as early retirement) are among the factors that cause the bias Another 3,000 youths would be given towards the public sector. Recent trends, entrepreneurship development training. Under this however, show a change, with private- program last year, 49 youths were trained in basic sector employment on the rise. entrepreneurship and 37 youths in comprehensive entrepreneurship. 5) Increasing rural to urban migration leads to (i) increasing urban To address the issue of a lack of job skills, a total of unemployment, and (ii) shortages of 7,142 youths would be enrolled in technical institutes labor and higher labor costs in rural in the country. areas. Agricultural land reportedly is increasingly being left fallow because of The labor ministry will train 3,000 graduates in the rural labor shortages. next five years under the university graduate internship program. In addition, some 2,000 youths would be given apprenticeship training over the next five years. The ministry trained 832 youths under this program last year. 14 Special Focus 1: Malnutrition and systematic review of sources provided by Stunting Demand a Coordinated various government ministries and departments, and an extensive on-line literature search. Both Response17 published and unpublished documents were used. In some instances, existing primary data Bhutan has made steady progress in recent was re-analyzed for further correlations. A years in its health indicators, and is now on primary qualitative study was also undertaken in target to achieve the major health-related sampled geographies from three regions of Millennium Development Goals (MDGs) of Bhutan: Western, Central, and Eastern. Besides the United Nations. The infant mortality rate development indicators, socio-cultural contexts decreased to 36 deaths per 1000 live births in in these three regions also vary significantly, 2012 (from 91 in 1990) and the under-five usually due to geographical terrain and climatic mortality to 45 per1000 live births in 2012 (as variations, and differences in religious and against 131 in 1990), both on target to achieve cultural practices. MDG 4. The Maternal Mortality Rate has also decreased rapidly from 940 per 100,000 live Despite the success on the MDG front, the births in 1990 to 180-200 deaths per 100,000 recently concluded Bhutan National Nutrition live births in 2008. With regard to MDG 1 target Assessment and Gap Analysis finds that two 2, Bhutan has managed to reduce underweight major indicators of under-nutrition remain rates amongst under -fives by more than half persistently elevated – stunted growth of from 38 percent in 1990 to 12.7 percent in 2010. children under five years of age, and anemia in women and children. The proportion of Bhutanese children under five years suffering from chronic under-nutrition (i.e., stunting) is 33.5 percent, and anemia affects 54.8 percent of women, and 80.6 percent of children – a prevalence which is among the highest rates in the world. These are alarming figures for two reasons: they have persisted over a long period of time (although stunting has dropped from 40 percent to 30 percent in the past decade, anemia levels have hardly decreased since 1988) and they are even more concerning when inequalities of gender, geography, poverty, and ethnicity are It was against this backdrop that the Bhutan taken into consideration. National Nutrition Assessment and Gap Figure 8: Anemia Prevalence in Women (by age) Analysis (World Bank, 2014, forthcoming), aimed to generate evidence and create awareness Anemia… among Bhutanese policymakers, program 80 64.9 65.4 managers, government officials and 59.2 53.8 development partners to invest in strengthening 60 51.2 51.5 the public nutrition system in order to address malnutrition in the first 1,000 days, i.e., from 40 conception through the first 24 months after birth. The objectives of the study were to review 20 the size, severity and key determinants of under- nutrition in Bhutan, and the current nutrition and 0 nutrition-related programs in order to identify 16- 21- 26- 31- 36- 46+ gaps and opportunities to scaling-up these 20 25 30 35 45 programs. Quantitative information for the study was gathered as secondary data through a Source: FNS 2008 15 nutrition through malabsorption or diversion of nutrients. In addition, sporadic food insecurity 100 89.5 88.7 affecting some remote areas for up to 3-4 76.8 months each year, and a lack of dietary diversity 80 due to poverty, climate, or education lead to 64.3 decreases in balanced intake of nutrients needed 60 for normal growth. As a cause of stunting, among the most important is the poor nutrition 40 and care of women before and during pregnancy 20 reflected in the profound levels of anemia in women, both pregnant and non-pregnant; this 0 despite 77 percent of women having at least four '6-11 '12-23 24-36 36+ antenatal care visits and 64.5 percent reporting skilled birth attendance, raises questions about the quality of care provided. Furthermore Bhutan faces an enormous Beyond the factors that directly impact on the challenge of addressing maternal and child nutrition of women and children are other under-nutrition in the context of a nutrition nutrition-sensitive issues specific to Bhutan: transition. A nutrition transition is epitomized the remoteness and inaccessibility of many by a shift from traditional diets based on villages and settlements, some at altitudes that indigenous staples, legumes, and fruits and strongly influence crop selection and production; vegetables, to a more global intake pattern trade dependency on imported foods that makes including processed and imported animal source the country vulnerable to food price fluctuations; foods and increased amounts of sugar, fats, and ethnic and other cultural variables that influence salt. As Bhutanese migrate to the cities in access to services and alter feeding practices; search of jobs and education, shift in lifestyles urban migration which further impinges on the generally accompanies the transition, favoring decreasing agrarian work force;; the lack of more sedentary lifestyles cars vs. walking and community awareness about the nutrition television vs. traditional forms of recreation. As problems of stunting and anemia with no a result of the nutrition transition, Bhutan is understanding of their causes, their significance, experiencing the double burden of malnutrition, or potential actions that could be taken to whereby both over-nutrition (overconsumption remedy them; and, related to the latter, a of energy dense nutrient poor foods that are high national, district, and community lack of human in fat, salt and refined sugar combined with low resources knowledgeable about public nutrition levels of physical activity) and under-nutrition with the requisite skills to educate and motivate (inadequate consumption of nutrient rich foods, changes in community behavior. poor hygiene and sanitation, and infections) co- exist in the same communities. The World As greater knowledge and awareness of public Health Organization estimates that 53.5 percent nutrition is needed, existing programs with a of Bhutanese women are now overweight with potential for impact on public nutrition were signs of the double burden of malnutrition reviewed in health, agriculture and forests, reflected in rising cholesterol and fasting blood education, rural water supply and sanitation. sugar levels. Two findings stood out from the assessment: (i) the enormous extent and relevance of these Some of the underlying factors can be programs for improving nutrition; and (ii) the interpreted as the direct or nutrition specific enormous opportunity to further strengthen determinants of under-nutrition in Bhutan: nutrition content in each, an opportunity which diarrheal diseases, high parasite loads in parts of is currently not optimally utilized. During the the country, and a very high prevalence of assessment, several training opportunities were Helicobacter pylori infections, linked to under- identified where content on public nutrition 16 could be included. Furthermore, it was found that staff from each of these programs does work Special Focus 2: Pioneering Cultural in the same villages and frequently with the Heritage Protection as a National same community workers, and need to better Asset coordinate their visits, to enhance their efficiency and effectiveness. Conclusions in the report of the assessment highlighted four major areas for consideration: in the individual and the community arena, the need for more emphasis on nutrition and care of women (pregnant and non-pregnant); in the workplace, the need for a significant augmentation of the public nutrition knowledge of the available workforce, along with the need for better job descriptions with defined competencies; in the organizational structure for the government departments, a need for better inter-sectoral coordination driven by a high level mandate where roles and accountabilities can be defined and monitored, and a better nutrition monitoring system that can be used to decide if programs and personnel are succeeding or not; and in the system environment of policies and laws that enable work to be done that will improve nutrition in the country, there is a need for much greater visibility of nutrition as the driving factor behind future national economic and intellectual development. Bhutan’s Heritage Sites Bill is a significant new approach and tool aimed to redefine the way in which Bhutan values and protects its cultural assets; with far-reaching implications for society. The Bill proposes a major shift in policy by widening Bhutan’s definition of cultural preservation beyond protection of monuments and cultural expressions towards stewardship18 of the very social and cultural fabric and sites which have shaped its society, way of living and landscapes for centuries. To achieve its goals, the Bill proposes a number of policy instruments, including a “landscape approach” to Bhutan’s cultural assets management; establishment of a dedicated Heritage Sites Fund; and provisions for designation and adaptive reuse of designated 17 heritage buildings and cultural sites. It also support system and promotion of communal devolves considerable responsibilities for festivals and ceremonies; and (iv) the protection protection to local owners of heritage sites given of its broad national heritage, including their ownership and critical role in transferring preservation of emblematic monuments and Bhutan’s values and knowledge to the new support for traditional arts and crafts. generations. While notable, this strategy has not paid By strengthening its own identity and enough attention to the country’s majority of integrity as a cultural landscape, Bhutan will non-monumental assets, villages and their thus be better equipped to cope with powerful immediate surroundings that have supported external economic and social pressures in a community life for centuries. These assets are way that meets its 21st Century aspirations to increasingly under threat from a number of promote an inclusive development, based on unprecedented challenges. Economic non-material wellbeing, happiness, and cultural liberalization of the country has brought an tradition. The government’s expectation is that influx of “modern” influences and more the Bill will contribute to: (a) improving the materialistic aspirations, especially among distribution of benefits to heritage villages and young people. Ways of living, landscapes, and cultural sites which tend to be poorer than non- cultural practices, particularly those enshrined in traditional sites; (b) better targeting rural communities and that have shaped improvements of living conditions in poor Bhutan’s society for centuries, are being villages and areas; (c) generating new alternative transformed in the quest for new lifestyle and employment opportunities linked to the less laborious job opportunities. protection of heritage villages and cultural sites; (d) clarifying roles and responsibilities and The weakening of community vitality and loss improving coordination for cultural heritage of their assets has spurred the government to preservation in Bhutan; and (e) increasing enact measures to formally steward its investments in communal stewardship of cultural assets with an emerging emphasis on Bhutan’s (currently undervalued) assets. living landscapes. Within this context, the draft Heritage Sites Bill tries to strike a delicate For insight into the implications of the Bill – balance between preserving the valued cultural drafting of which commenced in 2010 – traditions of Bhutan and accommodating the a Poverty and Social Impact Analysis (PSIA) understandable new aspirations of its youth. The was undertaken in 2012 and 2013. The aim of purpose of the PSIA was to shed light on how the PSIA was to assess the potential impacts and well the Bill’s provisions could perform that effectiveness of the draft Bill, in order to inform task. its further development.19 The PSIA assessed the potential implications The Bill has been drafted within the context of the Bill for villages, their owners and of Bhutan’s unique development philosophy, households, their geographic areas, and their as encapsulated in the Gross National cultural assets, and for traditional houses in Happiness (GNH) Index. Preservation and Thimphu.20 It also investigated the institutional promotion of culture is one of the four pillars of needs, including the capacity, regulations, and GNH and of the Constitution, and is central to financing mechanisms, to ensure effective the Royal Government of Bhutan’s five-year implementation of the Bill. development plans and its Vision 2020. Passed on from generation to generation, Bhutan’s  For potential rural heritage villages, the cultural preservation strategy includes: (i) a PSIA found that significant cultural value strict civic and cultural code of conduct and still resided in the homes, artefacts, etiquette; (ii) the oral transmission of cultural landscapes, and traditions of these locations. morals from older to younger generations Despite that, the levels of poverty in the through extended families; (iii) a strong social sampled villages are nearly 2 to 3 times 18 greater than the gewogs and dzongkhags to  Also to raise awareness of heritage which they belong. Subsistence poverty management and lead to its better rates are also twice the amount at the gewog, integration in poverty reduction and service dzongkhag or national levels. Provision of delivery schemes through the establishment basic services is uneven. The single main of needed regulations and procedures for item of expenditure is house renovations. coordination and transfer of resources and Agriculture is the main source of livelihood, services to heritage villages across the and sale of nonagricultural products and country, which often have poorer services, though cultural assets, such as populations than other nontraditional rural crafts, account for little income. Only 37 and urban communities; percent of rural households expressed being happy in comparison to 50 percent in cities.  It is also expected to increase the value of Such “geography of poverty” –low living traditional skills and improve the self- standards, lack of alternative job esteem of Bhutan’s ageing skilled opportunities especially for young people, craftspersons (and thus the transfer of such and unhappiness – is contributing to knowledge to younger generations), and to increased out-migration as well as families’ create new employment opportunities and breakdown and loss of communities’ growth sources within a 21st century creative vitality. economy. Rural areas will particularly benefit through increased demand for labor  For traditional houses in Thimphu, the PSIA in the traditional construction, skilled found that most of those few remaining were heritage, and tourism sectors, supported by isolated (individually or in small groups) as specialized training and establishment of they had been engulfed by unplanned urban centers of excellence. This may also expansion. The houses were considered to contribute to create attractive employment be of low value and maintenance was often alternatives outside overgrowing Thimphu; not cost-effective with no incentives for and owners to upkeep their traditional properties. Therefore many owners prefer to demolish  The Bill is also expected to clarify roles, traditional houses and replace them with responsibilities, and overlapping concrete blocks of flats as a source of institutional arrangements for heritage income. conservation by strengthening the function of the Ministry of Home and Cultural The PSIA findings demonstrate that the Bill Affairs as the nodal agency and putting in may result in positive impacts, especially in place the necessary coordination platforms the areas of poverty reduction and inclusive and incentives. development, with resources and people better distributed across Bhutan: The PSIA has also identified three areas that require further attention in the Bill’s current  The Bill comes at a critical time, as draft form to ensure its relevance and modernization is promoting changes in successful implementation: Bhutan that require a rethinking of the way the country has been promoting and  Economic burden on communities and safeguarding its cultural assets, and their individuals. Owners and caretakers of continuity in the 21st century; traditional houses in heritage villages may not have the financial resources or full  It is expected to address living areas and expertise to carry out the Bill’s proposed landscapes, following the latest thinking and technical and funding requirements for the practice in heritage conservation, maintenance and/or repair of their properties environmental management and and sites. Those in cities may incur greater urban/regional planning; absolute costs due their higher opportunity 19 costs, rising transaction costs, and the increase people’s awareness of and growing land values in cities; responsibility for the stewardship of the majority of privately owned assets currently unprotected  Increased financial and technical and at risk of being lost due to modernization. workload for dzongkhags and thromdes. To this end, the PSIA offers a group of material The Bill’s proposal to further decentralize and nonmonetary incentives, which combined conservation and monitoring responsibilities may lead to improved living standards and job to local authorities may increase the opportunities in heritage sites across Bhutan, and workload of already understaffed offices. ultimately a more balanced and inclusive Most local authorities also lack the funding development of the country in the 21st Century. and expertise needed to properly carry out those responsibilities; and  Unclear mandates and lack of institutional coordination. In the absence of a clear and enforced governance framework for cultural preservation in Bhutan, a variety of agencies tend to carry out similar work in an uncoordinated manner, with differing criteria and no standardized methods, leading to fragmented outcomes. Critical instruments such as permits are missing or deficient, and there are no effective mechanisms for the integration of heritage conservation into living communities through service delivery, integrated city and regional planning, adaptive reuse of traditional buildings, and managed growth of communities that steward their culture and landscapes. In order to realize the positive impacts of the Bill and mitigate the potential adverse impacts, the PSIA offers tailored recommendations and a package of combined incentives. At the core of the recommendations is the importance of engaging key stakeholders, particularly owners, caretakers, local authorities, and concerned agencies, in all key steps envisioned for the identification, inventorying, designation, and stewardship of properties and areas to be designated under the Bill as heritage sites. This is essential to ensure the relevance for concerned communities and households, and thus the achievement of the Bill’s objectives and the sustainability of its associated efforts. Another central recommendation is the value of an incentive-based Bill, rather than traditional command and control mechanisms, in line with its intention to 20 1 Macroeconomic cycles in Bhutan follow closely developments in the hydropower sector, given the magnitude of these projects compared to the size of the economy. During construction, hydropower, as many industries that produce intermediate goods has a major effect on GDP through construction, transport and services, directly and indirectly through money and spending multiplier effects. What makes hydropower unique in Bhutan is the size of projects relative to the economy. For instance, the four hydro projects under construction represent no less than a total investment of 200 percent of GDP (2012), spread over 7 years. 30 percent of construction cost may be attributed to domestic suppliers, the rest being imported. 2 RMA monthly bulletin, Feb 2014. Bhutan’s hydropower dams are run of the river schemes with no reservoirs, so better rainfalls is the main factor impacting generation from year to year. 3 As of March 2014, the Nu 10.88 billion (US$175 million) project was reported to operate at half capacity, so the overall impact in 2014 remains to be seen. Full capacity would total Nu 6 billion in total sales, and Nu 4 billion in revenues after debt repayment. 4 RMA Bulletin February 2014. 5 Indian National do not require visas and are exempt from the minimum daily tariff of USD 250 per person a day 6 In February, the Prime Minister announced the “Bhutan-Thailand friendship offer” aimed at attracting residents from Thailand during the leaner months of June, July and August, as an effort towards lean season promotion as well as the new flight from Mumbai to start in the fall of 2014. As a part of the offer, Thai nationals and others with proof of residency in Thailand will not pay the mandatory minimum daily tariff of US$200 per day for the lean season. Instead, they would be levied the daily royalty of US$65, while tour operators would have to compete and come up with attractive packages. In addition, the national airline will offer 50 percent discounts on airfare, while hotels will give up to 50 percent discounts on rates. 7 From 2013/14 onwards the excise tax retroceded from India to Bhutan will cover one year, instead of two. 8 The hydropower development policy of Bhutan consists of eleven new hydropower projects, which would quintuple Bhutan’s power generation capacity. External financing for non -hydropower sector activities continues to remain predominantly from multilateral and bilateral donors at concessional terms. 9 On the basis of the recent Joint Bank-Fund Sustainability Assessment, 2014. 10 Bulky debt service payments may have contributed to rupee shortage in that past, hence the need for good cash/reserves management and projections. 11 The Constitution requires that foreign exchange reserves should be maintained at 12 months of essential imports. 12 Five commercial banks dominate the financial system, accounting for nearly 90 percent of total loans in June 2013. The Bank of Bhutan and Bhutan National Bank dominate, holding 82 percent and 76 percent of banking sector credit respectively as of June 2013. Three new commercial banks, namely Druk PNB, T Bank, and Bhutan Development Bank commenced operations in 2010. The share of the three new banks in deposits has risen appreciably from 6 percent since their licensing in 2010 to 18 percent in June 2013, while the share in credit has risen from 17 percent to 24 percent over the same period. 13 The RMA has since then directed all nonbank financial institutions to suspend all lending activities by June 1, 2014. 14 Asset classification and provisioning rules were relaxed in March 2012 to address tight liquidity. 15 Private-sector deposits account for more than 70 percent of total deposits. The remainder consists of deposits of government corporations and public corporations. As of June 2013, 53 percent of total deposits were corporate. 16 Survey method Bhutan Labor Survey follows the ILO definition of unemployment where a person is considered unemployed when he/she is simultaneously: (i) without work; (ii) available for work; or (iii) seeking for work. A person is considered to be employed if she/he has performed some paid work in cash or in kind at least one hour during the reference period (a week). Unemployed are those who, during the period mentioned, (i) have no job, (ii) are able to work at any time, or (iii) are actively looking for jobs (ILO). Anybody who meets the three conditions at the same time may be called unemployed. Working a minimum of one hour/week excludes the individual from classification as a job seeker. 21 17 This brief was compiled by Somil Nagpal, Nkosinathi Mbuya and Preeti Kudesia, drawing upon the draft report of the recently concluded World Bank study authored by Stephen J. Atwood, Somil Nagpal, Nkosinathi Mbuya, and Luc Laviolette, World Bank, 2014 (forthcoming). 18 Heritage Stewardship encompasses protection, research, documentation, preservation, maintenance and operations as well as management of heritage assets, sites and landscapes. 19 The Bill is being drafted by the Division for Conservation of Heritage Sites (DCHS), Ministry of Home and Cultural Affairs; the PSIA was conducted by the World Bank in coordination with the DCHS. This note was prepared by Stefania Abakerli, World Bank, and summarizes the main findings of the PSIA study. For further information please contact sabakerli@worldbank.org 20 A sampling baseline survey was undertaken of 56 villages, and 4 sample villages were selected (Drugyel, Korphu, Rinchengang, and Sakteng) across the country. A rapid appraisal of the 27 remaining traditional houses and their residents was also carried out in Thimphu. 22 Selected Economic Indicators, 2008/09-2013/14 Provisional Projected Indicator 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 Gross domestic product ((US$ million at current prices)) 1,213 1,433 1,744 1,815 1,975 2,298 Consumer price index (% change) 3 6.1 8.3 13.5 5.5 8.0 Real annual growth rates (%, calculated at 2000 prices) Gross domestic product at market prices 5.7 9.3 10 8.1 5.6% 6.8% Balance of Payments (US$ millions) 2009 2010 2011 2012 2013 2014 a Exports (GNFS) 565.3 673.0 750.0 706.5 709.9 789.3 Merchandise FOB 504.3 597.4 655.2 594.3 582.6 642.0 a Imports (GNFS) 786.7 682 933.7 1,301.5 1,258.9 1,288.9 Merchandise FOB 670.5 606.6 843.2 1,184.7 1,126.5 1,125.2 Trade balance -166.3 -365.2 -436.2 -368.0 -358.0 -377.6 Current account balance -191.0 -420.8 -464.9 -418.1 -427.1 -499.6 Net private foreign direct investment 44.8 53.3 28.1 22.2 20.0 n.a Long-term loans (net) 91.7 247.1 332.4 289.8 292.0 n.a. Official 58.6 178.6 250.8 279.8 316.6 n.a. b Change in reserves 38.4 -63.1 -144.4 78.8 313.6 n.a. c Public finance (as % of GDP at market prices) actual actual actual actual estimated (budget) Current revenues (without grants) 24.2 23.4 22.0 22.0 20.0 18.9 Current expenditures 19.1 19.3 18.6 18.0 17.7 16.2 Current account surplus (+) or deficit (-) 5.2 4.1 3.4 3.9 2.3 2.7 Capital expenditure 17.0 19.3 18.7 19.6 19.7 15.4 Foreign financing (grants from FY2011) 11.3 16.6 13.3 13.5 15.0 6.6 Monetary indicators 2008/09 2009/10 2010/11 2011/12 2012/13 20013/14 M2/GDP 58.5 68 69.9 58.8 58.2 n.a Growth of M2 (%) 24.6 30.1 21.2 -1 18.6 n.a Private sector credit growth / 31.1 38.6 33.2 30.1 7.1 n.a Total credit growth (%) 21.7 42.3 32.7 51.3 12.8 n.a Notes: a: GNFS=Good and Non-Factor Services; b: includes use of IMF resources; c: account is for consolidated general government. All statistical information follows Bhutan's fiscal year (from July to June), except Balance of payment data (calendar year) 23