Document of The World Bank FOR OFFICIAL USE ONLY ReportNo.: 20158 BHU MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECIUTIVE DIRECTORS ONA COUNTRY ASSISTANCE STRATEGY OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION FOR BHUTAN FEBRUARY 22, 2000 Bhutan Country Unit South Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Unit = Bhutan Ngultrum (Nu) US$1 = Nu 43.40 (February 22, 2000) FISCAL YEAR (FY) July I -June 30 ACRONYMS AND ABBREVIATIONS AIDS - Acquired Immune Deficiency Syndrome FDI - Foreign Direct Investment GDP - Gross Domestic Product GEF - Global Environment Fund GNP - Gross National Product HIV - Human Immune Virus IFC - Intemational Finance Corporation IMF - International Monetary Fund SDR - Special Drawing Rights UNDP - United Nations Development Program UJNHCR - United Nations High Commissioner for Refugees UNICEF - United Nations Children's Fund Vice President Mieko Nishimizu Country Director John W. Wall Team Leader Peter Nicholas BHUTAN COUNTRY ASSISTANCE STRATEGY Table of Contents Page No. EXECUTIVE SUMMARY .......................................... A. POLITICAL, ECONOMIC, AND SOCIAL CONTEXT ..........................................1 Dedicated, Professional Political Leadership .....................................................................l Rapid, Resource-led Growth ....................................................................2 Benign External Environment .....................................................................2 Strong Social Development, but Rising Challenges .....................................................................3 B. RECENT ECONOMIC DEVELOPMENTS AND KEY CHALLENGES ............................5 Resource-based Growth .....................................................................5 Heavy Reliance on Foreign Assistance .....................................................................6 Sound Public Expenditure Management .....................................................................6 Dutch Disease, the Private Sector, and Employment .....................................................................6 N'eed for Trade Diversification .................................................................... 7 Continuing Importance of Agriculture and Rural Development ....................................................8 C. BIIUTAN'S VISION FOR SOCIAL TRANSFORMATION.............................................8 Economic Reforms for Private Sector-led Growth ................................................................. 10 Strengthening Infrastructure ................................................................. 11 Defining a Future for Agriculture and Forests .................................................................. 11 Balancing Development: Human Development, the Environment, and Culture ........... ............... 12 D. IDA's ROLE IN BHUTAN'S DEVELOPMENT FRAMEWORK............................... 13 Past IDA Support .................................................................... 13 IDA's Assistance Strategy ..................................................................... 14 E. BIHUTAN'S DEVELOPMENT PARTNERSHIPS ..................................................... ........... 18 TABLES Table 1: Bhutan: Development Indicators ..................................................................... 4 Table 2: Proposed IDA Analytical and Advisory Assistance and Lending to Bhutan, FYOO-02 ...... 14 Table 3: Bhutan's Selected Development Priorities to be Assisted by IDA ...................................... 16 Table 4: Bhutan's Comprehensive Framework for Ongoing Development Assistance .................... 19 BOXES Box 1: Bhutan's Vision of Inclusion ...................................................3 Box 2: Bhutan: Hydroelectric Power Projects ........... ........................................S5 Box 3: Bhutan 2020 Vision ...................................................9 Box 4: Bhutan 2020 and the Comprehensive Development Framework ......................................... 15 FIGURES Figure 1: Bhutan: Trends in Sectoral Shares of GDP ....................................................2 ANNEXES Annex Al Bhutan's Development Priorities Annex BI Bhutan at a Glance Annex B2 Bhutan: Selected Indicators of Bank Portfolio Performance and Management Annex B3 Bhutan: Bank Group Program Summary, FY2000-2002 Annex B4 Bhutan: Summary of Nonlending Services Annex B5 Bhutan: Social Indicators Annex B6 Bhutan: Key Economic Indicators Annex B7 Bhutan: Key Exposure Indicators Annex B8 Status of Bank Group Operations in Bhutan Annex B9 Bhutan: CAS Summary of Development Priorities MAP No. IBRD 30467 THE INTERNATIONAL DEVELOPMENT ASSOCIATION'S COUNTRY ASSISTANCE STRATEGY FOR BHUTAN EXECUTIVE SUMMARY IDA'S MISSION 1. ID)A 's mission is to help Bhutan manage its considerable natural, institutional, cultural, and envitonmental assets in ways that can translate economic growth into rapid and inclusive social transformation and improvements in living standards. This is consistent with Bhutan's distinctive vision of its long-term development as it enters the new millennium. This is also a highly selective mission, in order to fit IDA's continuing role as one of Bhutan's smallest foreign aid donors. IDA's comparative advantage-in transferring knowledge and ideas to Bhutan rather than finance-is consistent with our small role in Bhutan, and complements Bhutan's development framework for donor coordination. Emphasizing IDA's comparative advantage in analytical and advisory work-as opposed to lending-also makes sense in terms of gradually filling IDA's information and knowledge gaps resulting from our very limited past involvemient in Bhutan. The government fully supports IDA's mission. DEVELO]PMENT CHALLENGES 2. This mission is set against Bhutan's unique characteristics: a small Himalayan nation of about 760,000 people with a 1998 GNP per capita of US $480; close political and trade relationships with India going back 40 years; large, environmentally benign hydropower assets that are fueling rapid GDP growth through electricity exports and energy-intensive industries such as cement, calcium carbide, and forestry; a comprehensive, well-articulated national vision for development that emphasizes the preservation of Bhutan's cultural and environmental heritage and rising investments in its people; girls accounting for 45 percent of primary school students and social indicators that are improving rapidly; fiscal prudence and a strong balance of payments position; sound public institutions; a participatory style of governance; and a committed administration. 3. But it is also set against Bhutan's difficult terrain and still weak infrastructure, which puts more than half its population at least half a day's walk from the nearest motor road; the heavy reliance on foreign aid and a dominant, single-commodity export; a shallow financial sector that does not yet fully support private sector development; the difficulty of creating private sector employment opportunities, both in rural Bhutan, where much of the population lives, and in rapidly growing cities, where increasingly educated Bhutanese are entering the labor force; the highest population growth rate in South Asia; social tensions arising out of the presence of a Nepali-speaking minority in the south; and economic data deficiencies that may be constraining policy design even though the policymaking process remains highly participatory. BHUTAN'S DISTINCTIVE VISION OF DEVELOPMENT 4. Bhutan has adopted a balanced approach to development, seeking to calibrate development goals to its ability and readiness to absorb change without creating social alienation or excessive economic inequality. Human development, a living culture and heritage, balanced and equitable development, good governance, and environmental conservation remain the cornerstones of its recently articulated development vision.1 This vision reflects the notion of development as social transformation and, in its conception, implementation, and management of donor partnerships, precedes and is fully consistent with the Comprehensive Development Framework. The government has articulated desirable long-term outcomes and detailed milestones to measure progress in each development area (Annex Al). The government is emphasizing its development and poverty reduction strategy of larger investments in the social sectors, a better enabling environment for private sector development, diversification of exports and of the productive base, and improvements in rural infrastructure. The regular and extensive field visits by officials at all levels, combined with the small population size (fewer than 100,000 households), means that the government has a sophisticated and detailed knowledge of conditions and needs across the whole country. BHUTAN'S DEVELOPMENT PARTNERSHIPS 5. Bhutan differs from most other aid-dependent countries in that the government has a very strong sense of vision and development priorities-and of the comparative advantage of various donors-and deternines on this basis where technical and financial assistance is most needed, and which donor can best provide it. The admirably small size of the government means, however, that donor missions can impose a high cost on scarce government officials' time. Bhutan therefore prefers to limit the number of donors overall, and in any particular sector, in order to keep coordination costs low. This approach is fully consistent with the approach espoused by the Comprehensive Development Framework. India is the largest donor. Other important donors include Austria, Denmark, Japan, Netherlands, Switzerland, ADB, European Union, UNDP, and UNICEF. In forestry and education, IDA and Switzerland have been acting effectively as a single donor. The Government, U7NDP, and IDA jointly chair the donor Round Table Meetings, the last one in Geneva in 1997. UNDP holds sector-oriented coordination meetings frequently among donors resident in Thimphu, with participation from the non-resident multilateral institutions, as possible. IDA's ASSISTANCE STRATEGY 6. IDA's strategic goal is to assist Bhutan-in ways that are driven by Bhutan and in full partnership with other donors-in realizing its development vision. Bhutan' s favorable medium- term growth prospects and its comfortable macroeconomic balances, based on its natural resource endowments and substantial grant and concessional aid inflows, create ideal conditions for concerted action to meet its development challenges. Its development vision provides a well- articulated agenda for action that is fully owned by Bhutan. 7. The last country assistance strategy was discussed with the Board in July 1993 and emphasized a limited and highly selective role for IDA focusing on economic policy advice, natural resource management, and primary education. Bhutan has drawn relatively little on IDA financing in the past, preferring to use grant aid from bilateral donors and the UN before using multilateral assistance. This selective role will continue, but will build much more strategically on IDA's comparative advantage in Bhutan in transferring knowledge and ideas rather than finance. As a result of our limited past involvement, there are a number of gaps in our knowledge base in areas such as poverty analysis and public expenditures-the new emphasis on working with the government on analytical and advisory services will help fill these gaps over the next few years and lead to shared learning valuable both to Bhutan and IDA. ' Bhutan 2020: A Vision for Peace, Prosperity, and Happiness, Royal Government of Bhutan, Thimphu: 1999. - iii - 8. In line with this comparative advantage in Bhutan, the locus of IDA's assistance will therefore increasingly be to place its knowledge resources at the disposal of the government without t-ying them to IDA credits. The government has already requested such knowledge- based consultations on macroeconomic policy, a financial sector strategy, long-term health and education strategies, and accounting and auditing standards. IDA expects to assist with the generation and analysis of poverty data. Other areas in which IDA may assist with knowledge transfers include private sector development, foreign direct investment, trade and investment reform, public expenditures, employment analysis, school curriculums, rural road capacity development, and policy frameworks for economic and sector development. The government is interested in greater harmonization of donor support and in discussing the merits of more program-oriented funding and has asked for IDA's help in thinking through the issues. 9. IDA's limited role in providing financial support for Bhutan's development is likely to continue, with IDA lending only modest amounts under special circumstances when other donors cannot put together a timely package of knowledge, practical expertise, and financing as requested by the government. In line with the previous CAS, past lending has focused on primary education and forestry. As part of our ongoing dialogue, and following the two infrastructure projects accompanying this country assistance strategy, IDA will explore with the government options for financing high-priority projects in social and physical infrastructure and forestry that have a high payoff for improving the living standards of the poor and for private sector development. Such financing could take the form of standard project credits or sector program credits. Given Bhutan' s strong record of governance and implementation, economy- wide program credits have also been discussed with the government, to be provided if economic conditionis merit such support, and based on prior public expenditure and poverty analysis. RISKS 10. Bhutan faces two kinds of development risks. First, is the vulnerability arising out of its external environment-the heavy reliance on power exports to India and financial support from India, and, in general, on foreign aid. Relations with India continue to be principled and reflect the long-standing partnership between the two countries, with no emerging problems that would suggest increased vulnerability. The development effectiveness of foreign aid in Bhutan suggests that it will continue to receive aid flows, but Bhutan's large and growing foreign exchange reserves could lead some donors to reallocate aid flows at the margin to other countries. The government's long-term goal is to reduce its reliance on foreign aid. Macroeconomic stability is not itself likely to be much of an issue over the medium term because of the past history of fiscal prudence, a strong balance of payments position with very little debt, and the nominal anchor provided by the currency peg with the Indian rupee. 11. Second, and more important, Bhutan faces the risk of rising social and political tensions from rapid population and economic growth, particularly if economic growth does not yield universal increases in levels of living. What happens to growth will remain a function of how well Bhutan strikes the balance between growth and concerns about the environment and maintaining the integrity of its historical heritage and cultural values. Much will depend on the way Bhutan manages the conversion of economic growth into social transformation, including meaningful employment opportunities for its people. In doing so it will have to manage expectations associated with a 6-7 percent GDP growth rate. In particular, unrest in the south related to Nepali-speaking minorities has attracted considerable attention. The government is - iv - attempting to negotiate a just settlement to the refugee issue together with the Nepalese government. In the east, the incursion into Bhutan of rebels opposing the Indian government in Assam poses risks, but the government is working with the Government of India to contain such incursions. ISSUES FOR BOARD DISCUSSION 12. In its discussions, the Board may wish to consider the following: * IDA' s recognition of Bhutan' s unique characteristics and its distinctive vision for its development, which seeks to improve the lives and living standards of its citizens in holistic ways without compromising its cultural identity and its environmental heritage. * IDA's willingness-within a Comprehensive Development Framework and recognizing that IDA is among the smallest donors but also has unique comparative advantages-to support Bhutan first and foremost through knowledge transfers, then through financial assistance as needed. Such a knowledge-intensive strategy will also lead to learning that will fill IDA's information gaps on Bhutan. * IDA's continuing support to Bhutan in building its social and physical infrastructure as ways of converting its rapid economic growth into inclusive social transformation. MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON THE INTERNATIONAL DEVELOPMENT ASSOCIATION'S COUNTRY ASSISTANCE STRATEGY FOR BHUTAN 1. Ehutan is a landlocked Himalayan country with a 1998 population of about 760,000, wedged between the world's two most populous countries, India and China. With altitudes varying ifrom 1 00 to 7,000 meters (within a south-to-north distance of less than 1 00 kilometers), Bhutan has almost every micro climate of the world and much rugged terrain. Its 1998 per capita GNP was US$480. Bhutan has many factors in its favor. Rich in natural resources, including large, environmentally benign hydropower assets, it has a ready market for electricity and resource-based exports to India. Its public administration of dedicated professionals, headed on a rotating basis by a member of the Cabinet, has a clear vision for Bhutan's future based on extensive consultations with the people and elected representatives at all levels of society. Few Bhutanese are hungry, landless, or homeless, although there have been no comprehensive living standards surveys to provide accurate assessments of rural and urban poverty and changes over time. There is relatively little gender discrimination-girls make up almost half of primary school children, women constitute a substantial proportion of new civil servants, and inheritance is matrilineal in many areas. Bhutan was one of the first countries to start protecting its enviromnent and culture; over 70 percent of the country is under forest cover, and tourism is limited t.o sustainable levels. 2. 13ut despite impressive development gains over the past 30 years, Bhutan faces the many development problems of a low-income country. Its fundamental challenge is to translate rapid economic growth into inclusive social transformation and improvements in the living standards of its people, and to do so without compromising its cultural identity and environmental heritage, to which it attaches great value. Perhaps as much as half the population lives in remote areas without access roads, electricity, piped water, or telephones, and far from schools, health clinics, markets, and public transportation. Eighty-five percent of the population is rural, and agriculture accounts for 38 percent of GDP. It has a nascent modem private sector and a still-shallow financial sector. It will take time for the private sector to lead growth and generate substantial employment. Though the government relies on highly participatory modes of policymaking at all levels of society, development and economic statistics are limited and not always reliable. A. POLITICAL, ECONOMIC, AND SOCIAL CONTEXT Dedicated, Professional Political Leadership 3. As part of a decade long process of political transformation, Bhutan introduced far- reaching political changes in 1998, when the entire cabinet was asked to resign and a new six- member cabinet was selected from among high-achieving civil servants. T he King is no longer the head of government, a post now held on a rotating basis by a Cabinet member. Cabinet -2- members were approved by secret ballot by Bhutan's elected body, the National Assembly. New Cabinet elections are to be held every five years, and the Assembly is elected every three years. 4. Bhutan's government is dedicated, professional, and honest. Decision-making and budget authority have been increasingly decentralized. Civil servants are well paid relative to their counterparts in the private sector-recent pay increases have largely corrected the slippage of past years. The increasing use of private sector bidders on government contracts has led to some minor corruption, to which the government has responded rapidly by strengthening the Audit Authority. The governnent has also rededicated itself to preventing misuse of public funds, with officials held accountable for actions that might go unremarked in many other countries. Rapid, Resource-led Growth 5. Bhutan's development has been rapid. Until the 1950s, Bhutan isolated itself from the rest of the world, and its dispersed rural population depended on subsistence agriculture. Once it opened to the outside world in the 1 960s, Bhutan embarked on a far-reaching development strategy that has been articulated in eight Five-Year Plans. Bhutan has developed a physical infrastructure of roads, power supply, telecommunications, and Figure 1: Bhutan: Trends in SectDral Shares of GOP water supply that now 100.0 - - serves a rapidly increasing - ------ - Services share of the population. . - At the same time the 0I Oter lndusby government has . . . developed a social infrastructure of education 20.0 -,,,,,, 9 Agriculture and health services that, ,, despite the difficult terrain 0.0 . , and scattered population, 1980 1985 1987 1998 has greatly improved Source: Naional Accounts Stfislics. access. 6. Agriculture continues to account for the largest share of GDP (38 percent in 1998, Figure 1). Hydropower (11 percent of GDP) and foreign aid (23 percent of GDP) are important elements in Bhutan's small economy (1998 GDP of US$428 million). Its average GDP growth rate of almost 7 percent a year since 1985 has been propelled by the 370 MW Chukha hydropower project, which has boosted GDP growth directly through power exports to India and by facilitating energy-intensive industries such as cement, ferro-alloys, and calcium carbide. Benign External Environment 7. The Bhutanese economy is closely linked to India. The Indian rupee circulates in Bhutan as legal tender. Bhutan's free access to the vast Indian market (India's GDP is almost a thousand times larger than Bhutan's) and almost unlimited demand for hydropower have boosted Bhutan's -3- exports. Bhutan's large trade deficit with India has been financed by Indian grant aid. India has also financed Bhutan's major hydropower projects and some of its large industrial investments. Beside ][ndia, other donors have also been generous in giving aid to Bhutan. Between 1993 and 1998 Bhutan annually received an average of about US$80 million in disbursements of concessional assistance. Of this 85 percent was grant aid, with extermal borrowings limited by the government' s policy of first using grants. The highly favorable terms of its aid, combined with efficient, cost-effective, and transparent use, has enabled Bhutan to limit its external debt. Its 1998 ratio of debt service to exports was under 7 percent. Strong Social Development, but Rising Challenges 8. Poverty and Social Indicators. While few Bhutanese are hungry or homeless, the governnent is deeply concerned about the presence of seasonal hunger, food insecurity, and exclusion of groups living in remote and marginal areas (see Box 1). Even though policymakers themselves engage in an unusually high degree of consultation starting at the village level, Bhutan does not have good poverty statistics that could better inform policy choices on poverty programas. It needs to carry out a living standards survey to provide a firmn basis for analyzing living standards and income distribution in both urban and remote areas, with periodic and selective poverty monitoring thereafter. While there are no direct measures of poverty incidence, social iindicators themselves reveal an impressive advance (even allowing for data deficiencies in earlier years). Mortality and education indicators are relatively good, especially given Bhutan's scattered and remote population, and life expectancy at birth is substantially above the South Asian aLverage (Table 1). The provision of more rural access roads is part of the government's poverty reduction strategy. The government is also working on targeted programs for eastern Bhutan, where soils tend to be poorer and population densities higher. Box 1: Bhutan's Vision of Inclusion In May 1999, the Royal Government produced a comprehensive statement of Bhutan's future as it enters the next millennium, Bhutan 2020: 4 Vision for Peace, Prosperity and Happiness. On inclusion, Bhutan 2020 notes: Although the vast majority of our population have benefited in very tangible ways from the process of social and economic development, the benefits have not been shared equally. This is an inevitable consequence of modernization in a country in which the population is so scattered, the terrain so severe, and infrastructure still incomplete. Despite the rapid expansion of the road network, more than half of our population lives more than half a day's walk from the nearest motor road, while in more isolated and remote areas communities are still dependent on trails, muletracks and ropeways for communication.... .In these remote and isolated areas lives are still characterized by vulnerability and uncertainty and by the sheer drudgery of toil from dawn to dusk in order to satisfy daily survival needs. Food shortage of some three months, coinciding with planting seasons, are not uncommon in a few dzongkhags (districts), while in isolated pockets within them food insecurity is more severe and malnutrition widespread. Although free basic education and health care are today reaching these pockets of disadvantaged and vulnerable groups, the need to contribute to the construction and maintenance of buildings, the cost of travel, contributions to school welfare funds, the cost of school uniforms and so forth, while modest, are sufficient to place the services beyond the reach of the poorest farmers and their families.... Ensuring that disadvantaged and vulnerable groups are able to benefit more fully from the process of social and economic development is a challenge that must be met in the years ahead. Sotirce: Bhutan 2020: A Vision ofPeace, Prosperity, and Happiness, Royal Government of Bhutan, May 1999. -4- 9. Within South Asia itself, Bhutan is still catching up with most other countries. In the mid-1970s, Bhutan's social indicators were the lowest of any country in South Asia. Now, 25 years later, they are roughly comparable to the regional averages, with the exception of its higher fertility and population growth rates. Globally, UNDP ranked Bhutan 145th among 174 countries in 1997 on its Human Development Index. 10. With the continuation of the right policies and expenditure priorities, and given the country's resources and capacity, Bhutan should be able to raise social indicators substantially. However, Bhutan's rapid population growth rate-estimated on average at 2.9 percent a year for 1995-2000 and higher than in India, Bangladesh, and Sri Lanka-makes the improvement in social indicators a challenge. Finding employment for its young and increasingly educated labor force is also a challenge. The government is correctly determined not to become the employer of first and last resort. The modem private sector is not developed enough to absorb the rapidly growing labor force. This is a challenge for which there is no easy solution, given the difficulty of finding labor-using private sector activities that can compete with Indian goods. Table 1: Bhutan: Development Indicators .i970s 1998 1/ South Asia Low-income Total population (million) 0.44 0.76 1305 3515 Growth rate (% annual average) 1.4. 2.9. 1.8. 1.7 Urban population (% of total) 3.5 15 27.0 31.0 _,~~~~~~~~~~~~~~~~~~~~~~~ ............... . .,_... .. ..................... ......... .. ... ... ................. ------------------ . .......... ........................... ... ... ...... ..................... ............... . .............. ........... ...... . ............... ....... .. Total fertility rate (births per woman) 5.8 3.5- 3.2 _ _ . . _ .................... __ ... _ _ , .... ....... .. ............. ....... ................... ........... .. ......... ... .. ............ . .............. ..... . ................. .. ..... ............... .... .... ...... Life 46etnyatbrh 66s ... ........... .... 62 ~ 63 Infant mortality (per 1,000 ive births) 142 712 77 69 Maternal mortality (per 1,000 live births) 7.7i 3.8 dult iteracy rate (oO2 2 54': 51 68 _. _ . __ . __ ._ ..........~~~~~~~~............. ... . . . .. _ ........... ..................... ..... .. ........ ...... .. ............ ... ......................................... .. ... . ..... ..................... .. .. Gross primary school enrollment (%) 35 72: 100 108 Roads (kin) 1,755 3,440 Electricity connections 9,750- 29,700: . . . . . _ _ _._. _ . _ . _. ........................... ..... .. ............................................ Rural water supply schemes 150 1760 Telephones 1, 8801 9,314 Source: Royal Government of Bhutan & World Bank. 1/ When not available, most recent data shown. Pop. based on 1990 Census of 600,110. Data for S. Asia and low-income countries are most recent available. 11. Ethnic Unrest and Threats to Social Stability. The government is working to create a fair society in which all nationals can benefit equally from the fruits of Bhutan's development. But Bhutan, like most multi-ethnic societies, has experienced social tension. In the 1980s concern arose about the ambitions of some among the Nepali-speaking minority inside Bhutan (mainly in southern Bhutan, where the majority of Nepali speakers live) and activists outside Bhutan. The government began enforcing its citizenship laws and moved to solidify national cultural convergence. Unrest emerged in the south in the late 1 980s, and the ensuing violence led to refugee camps springing up in Nepal. While some of the refugees are former inhabitants of Bhutan (illegal immigrants or not), some are said to be Nepalese who had never resided in Bhutan. The government has been actively seeking solutions through discussions with the Government of Nepal and the United Nations High Commissioner for Refugees, and is working with Amnesty International. A more recent threat is the incursions into eastern Bhutan of Bodos and members of the United Liberation Front of Assam (insurgents opposing the Indian -5- governmnent in Assam). These insurgents are using the dense forests in the area as safe havens. The government is working with the Government of India to contain this threat to Bhutan's stability. B. RECENT ECONOMIC DEVELOPMENTS AND KEY CHALLENGES Resource-based Growth 12. Real GDP grew by about 6 percent in 1998-99, boosted by investments in hydropower and by power exports. Three medium- to large-scale hydroelectric projects are under construction, including the 1,020 MW Tala project (Box 2). These projects, all run-of-the-river, are environmentally and socially benign, requiring no large storage reservoirs. Bhutan's medium- tern economic prospects are good, with a major economic boost expected in 2004 when Tala comes on-stream, and with smaller jumps expected in 2001 and 2002 when the 45 MW Kurichu and 60 MW Basochu projects come on-stream. These projects will raise the proportion of power in GDP to about 30 percent from its current 11 percent. India is reforming its power sector and moving to a more market-oriented approach. This is likely to lead to greater price differentials depending on when and with what reliability electricity is supplied. Over the long run, Bhutan's export power tariffs will need to be competitive with those of other Indian suppliers, while still continuing to provide adequate royalties for the use of its water resources and for servicing debt. Box 2: Bhutan: Hydroelectric Power Projects * Chu[kha. The largest power project commissioned so far, Chukha was completed in 1988 with an installed capacity of 336 MW, subsequently increased in 1997 to 370 MW. The project cost of US$255 million was financed by the Indian government through concessionary loans (40 percent) and grants (60 percent). Eighty- four percent of Chukha's cumulative generation since commissioning had been exported to India as of Febiruary 1999, with a corresponding revenue from sale of power of $170 million. According to the initial agreement between Bhutan and India, electricity tariffs were to be revised every four years, but these have been reviewed more frequently in view of escalating maintenance costs since the tariff was first set at 1.9 US cents (Nu 0.27) per kWh in 1988. The last tariff was set in June 1999 at 3.5 US cents (Nu 1.5) per kWh. . Basochu. Construction of the Basochu project started in 1998 and is expected be completed by the end of 2001. The combined peak capacity of Basochu will be 60.8 MW. The generated capacity will meet domestic demand of 11 districts in the west-central region of Bhutan. The project cost, estimated at US $37 million, is being financed by concessionary loans and grants provided by the Austrian government. * Kuirichu. Construction of the 45 MW Kurichu project began in 1995 with an estimated cost of US$89 million. It is expected to be fully commissioned by September 2001. The project is financed by the Indian government on a 60 percent grant and 40 percent concessional loan basis. Additional financing for a fourth generating unit to increase the installed capacity to 60 MW is being considered by the Indian government. The installed capacity of the project will meet the domestic demand of the eastern region of Bhutan. The project is also expected to provide power to the Dungsum Cement Project in eastern Bhutan. . Tala. Construction of the 1020 MW Tala project began in 1998 and will be the largest power plant when it is completed in 2004. Tala, estimated to cost about US$727 million, is being financed by the Indian government on a 60 percent grant and 40 percent concessionary loan basis. The generated capacity will be mainly exported to India under a power purchase agreement signed in 1996. -6- Heavy Reliance on Foreign Assistance 13. Foreign assistance, mostly in the form of grant aid, is likely to continue at present rates at least over the medium term. Rupee debt is expected to increase over the next few years from borrowings for the Tala and Kurichu power projects. The 50 percent increase in the power export tariff to India in 1999 should, however, more than compensate for the increased debt service. There are many signs of the impact of these large inflows of resources: a high domestic saving rate (38 percent of GDP), high foreign exchange reserves, budget surpluses, and a high proportion of domestic financial assets in the form of foreign assets (80 percent foreign, of which 80 percent are in hard currency). Sound Public Expenditure Management 14. Bhutan has a strong record of public expenditure management. The overall budget (after grants and concessional credits) has always been close to balance, with just a small surplus or deficit. Bhutan's attention to quality and development effectiveness has meant year-on-year slippages in capital expenditures, with actual capital expenditures tending to undershoot annual budgets, but coming in close to plan over the entire five-year plan period. Recurrent expenditures have tended in aggregate to be slightly above plan and budget, with health expenditures having proportionately the largest overrun. But conservative forecasting of revenues has avoided sustained budget deficits. It has also allowed the government to ensure that recurrent expenditures are domestically financed, which is crucial for ensuring the sustainability of the development program-the government has always closely considered the recurrent cost implications of new capital expenditures to make sure that they can be financed without recourse to excessive deficit financing. The government recently raised domestic power prices and introduced user charges for domestic water and school materials. It is considering establishing a personal income tax. Over the longer run, Bhutan needs to diversify its revenue base. Dutch Disease, the Private Sector, and Employment 15. Bhutan's economy is both blessed and burdened by the richness of its natural resources and the large volume of donor aid it attracts. The large inflow of foreign aid and of foreign resources produced not by the competitiveness of domestic production and diversified exports but by hydroelectric power exports that are large relative to the total economy, has created a peculiar strain of "Dutch disease." And because Bhutan's exchange rate is pegged at parity to the Indian rupee, the exchange rate does not work as a mechanism for lowering the prices of tradables relative to nontradables. Instead, the real exchange rate appreciates, making imports more attractive and exports less attractive. This has undermined the domestic competitiveness of non-power exports and discouraged them. The effect is also seen in the high wages of Bhutanese farm and unskilled workers (several times the wages of similar workers in India) and low labor absorption (and therefore employment). 16. This Dutch disease syndrome is limiting the development of a diversified, employment- intensive economy and may become a more serious concern when the massive Tala hydropower project comes on-stream in the next decade. These forces have been dampened somewhat by -7- Bhutan's high savings rate, rising investment in basic social and physical infrastructure, and a lean but effective government. But the population growth rate is high, and the modem sector is still small. Together with the rapid rise in education levels, this suggests that finding employment opportunities for an expanding and increasingly educated labor force will be a serious problem. 17. There is no easy cure for Bhutan's Dutch disease-like problem. One approach is to invest the inflows in cost-reducing infrastructure (roads, communication networks), as some countries did to albsorb the sudden increase in oil income in the 1980s. Another is to invest surplus resources abroad to create a sustainable income flow, as some countries in the Middle East did in the 1980s. Besides investing in social and physical infrastructure, Bhutan's approach is to focus on strengtheniing the enabling environment for its still-nascent private sector. The government is gradually reducing its own role in commercially viable areas of the economy, privatizing many public sector corporations and encouraging the private sector to compete in areas that were previously the reserve of the public sector. 18. In this effort, Bhutan needs to avoid the common mistake of other resource-rich countries, which was to subsidize the domestic production of manufactured items that are inherently noncomripetitive internationally. Bhutan seems to be heeding this caution and has a long-term goal of creating high knowledge-content service industries (advanced medical care, high quality education, financial and banking services, medicinal drugs) that can serve nearby international markets and sustain high salaries. This strategy will require very high and sustained investments in health and education. Bhutan is already investing public resources in basic physical and social infrastructure (roads, communications, basic health and education) and focusing on high technology (digital telecommunications system, Internet and intranet services, computerization of information flows, and higher education abroad for technical and engineering students). Need for Trade Diversification 19. India, with which Bhutan has a free trade agreement, accounts for 85 percent of Bhutan's external trade. Bhutan also has transit agreements with India for trade with Bangladesh and the rest of the world. Most of that trade goes through Calcutta port, 600 miles away. The potential for export through Bangladesh is being explored. Major shifts in the pattern of trade are unlikely in the next few years. Bhutan's trade regime continues to favor exports to India. In addition, transport costs, domestic human and capital resource constraints, and a nascent private and financial sector limit the scope of major third-country export industries. 20. Recently, tariffs on third-country imports have been reduced from a maximum of 100 percent to 30 percent and in some cases to zero. Further reductions are constrained by concerns over re-exports to India, which also led to the imposition in 1997 of the Bhutan sales tax on all third-country imports. Quantitative restrictions and other forms of non-tariff barriers are being significantly reduced. Import licensing procedures for third-country goods have been streamlined to allow for greater diversity and competition in meeting the demand for consumer and capital good imports. Imports from third countries are likely to rise faster than exports as a consequence of this liberalization and of rising incomes. High levels of mostly hard-currency foreign assistance more than cover the current account deficit with third countries, but if assistance levels decline the need for export diversification will grow more urgent. -8- Continuing Importance of Agriculture and Rural Development 21. Bhutan is a mountainous country with limited arable land (8 percent of area) and a large number of terrains, micro climates, and soil types. With 85 percent of the population in rural areas, 3 8 percent of GDP in agricultural production, and poor transport facilities, rural development is a daunting but crucial goal for the government. 22. Bhutan is well-positioned relative to the Indian plains and has the climates to produce agricultural products in India's off seasons. Bhutan also has free and ready export access to the huge Indian market, the only country in the world with this advantage. With its climate, remoteness, and high wage labor, Bhutan's clear comparative advantage in the future lies in high value crops and high technology agriculture to supply the Bhutanese and Indian markets, and possibly beyond. For the present, however, there is little optior but to continue the low input-low output agriculture currently practiced. Scattered rural communities, very difficult and high-cost transport, and traditional farming practices force the production of cereals and dairy products for home consumption and local sale. Both crop and livestock agriculture have low yields, with little fertilizer use on fields and low efficiency animals. There are also some policy obstacles to change, including the law banning conversion of paddy fields to other production. 23. Despite the obstacles, there has already been some movement away from these low productivity practices. Some farmers have already seen the profits from producing potatoes for domestic and Indian markets. These could well be followed with off-season supplies of other basics-tomatoes, ginger, onions, cabbage, and a wide range of other horticulture crops. Bhutan could also increase farm incomes even further with the use of greenhouse technology that maximizes returns to land and labor and access to niche markets. 24. Meeting this challenge of rural development rests on the achievement of an interconnected rural sector in which communities are well-served with roads, electricity, schools, health facilities, trucks, banks and good government. Bhutan needs to increase basic investment in public physical and social infrastructure to channel the benefits of its foreign inflows to its poorer and more remote communities and households. C. BHUTAN' S VISION FOR SOCIAL TRANSFORMATION 25. In May 1999, the government produced a seminal and comprehensive vision statement of Bhutan's future as it enters the next millennium, Bhutan 2020: A Vision for Peace, Prosperity and Happiness. This 20-year vision is remarkable both for its candor and for the clarity with which it analyzes and makes choices on Bhutan's distinctive path of development. Annex Al shows the concrete milestones under the five topics put forward by Bhutan 2020 as contributing to increasing Bhutan's "Gross National Happiness" (Box 3). Bhutan's desire to lead development with this strong vision sets the context for IDA's country assistance strategy and is therefore discussed in some detail here. -9- Box 3: Bhutan 2020 Bhutan recently articulated a clear vision and set of values in Bhutan 2020: A Visionfor Peace, Prosperity and Happiness. Vision 2020 seeks a "cautious interpretation of modernisation." It puts human happiness, not economic growth, at the center of the nation's vision and values for development: "Our guiding principles for the future development of our nation and for the safeguarding of our sovereignty and security as a nation-state must be complemented by a single unifying concept of development, ...the distinctively Bhutanese concept of Gross National Happiness .... The concept places the individual at the center of all development efforts and it recognizes that the individual has material, spiritual and emotional needs. It asserts that development cannot and should not be defined exclusively in material terms. ... The concept of Gross National Happiness must be translated into objectives that are able to give direction to the Kingdom's long-term development." Bhutan 2020 articulates five development objectives: * Human Development, to enable all Bhutanese to achieve their full potential as human beings. It stresses the need to provide expanded choices and opportunities consistent with the greater self- reliance of the nation and of individuals, families, and communities. * Cultural Development, to promote awareness of Bhutan's rich cultural heritage and its role in meeting spiritual and emotional needs, maintaining a distinctive identity, and cushioning some of the negative effects of modernization. * Balanced and Equitable Development, to ensure that the benefits of modernization are shared equitably by different income groups and regions and in ways that promote social harnony, stability, and unity and contribute to the development of a just and compassionate society. * Institutional Development, to develop institutions, human resources, and governance systems that allow Bhutan to reduce its dependence on aid, to manage an increasingly complex system of development, and to enlarge opportunities for all people to participate in decisionmaking. * Environmentally Sustainable Development, to see that development embodies the principle of environmental sustainability and protects Bhutan's globally significant biodiversity and natural environment. The Vision is explicit that, in achieving these objectives, Bhutan will have to: '... take the good with the bad. We have opened the doors to [a globalizing world] and we are no longer able to close them, even if we wanted to. ... The challenge is to find and strike the right balance ... to maximize gains while minimizing ... disruptive impacts. This will be an immensely difficult task, but we are not without tangible assets. Our beliefs and values, so deeply rooted in the perceptions and behavior of our people, provide us with the prisms through which we will continue to interpret the world and to distinguish between positive and negative forces of change." 26. The essential development challenge for Bhutan is to convert its rapid economic growth into effective social transformation, while maintaining its cultural identity and traditions of equality and dealing with an inadequate supply of jobs for the growing, high-wage labor force. Bhutan 2020 sees the private sector-including knowledge-intensive industries-as the driving force behind employment growth. Bhutan is working to improve the business environment by reforming the financial sector, reducing trade and investment barriers, and keeping the govenunent compact and efficient. This is a vision for the long term, however. For the shorter term, given the conditions of human and physical development, and the large portion of the -10- population still dependent on agriculture, this sector will have to absorb the bulk of the rapidly growing labor force. Economic Reforms for Private Sector-led Growth 27. Private Sector Development. A strong private sector is crucial to the balanced growth of the economy. The government is committed to reducing, as rapidly as feasible, its role in the productive economy and focusing on the provision of basic infrastructure and social services. Majority ownership and management in seven public sector enterprises (constituting 25 percent of manufacturing/non-government services) have been transferred to the private sector, and other public enterprises have been corporatized. The government has privatized bus services and corporatized postal services. The only non-performing public enterprise has been liquidated after the failure of an initial attempt to revitalize it through privatization. There are plans to privatize some agricultural services, to contract out much power construction and road maintenance, and to encourage private sector participation in education and health. However, the limited absorptive capacity of the local market for equity constrains progress on these initiatives. 28. The government is also taking a number of steps to improve the enabling environment for private sector investment, including: * Introduction of a transparent framework for direct foreign investment to replace the current restrictive case-by-case approach; * Issuance of more work permits to expatriate labor; * Establishment of a transparent set of rules and regulations governing trade and payments with countries other than India; • Provision of foreign exchange for all bona fide external current account transactions; * A more active role for the Royal Monetary Authority in using market-based instruments to improve liquidity management; • Improvements in the legal framework for loan recovery and settlement of financial disputes. 29. The Financial Sector. There is considerable excess liquidity in the banking system, most of it sitting in non-interest bearing accounts with the Royal Monetary Authority. This has undermined the profitability of Bhutan's four main financial institutions, which are prohibited from investing abroad (except in short-term instruments of the Reserve Bank of India). Part of the problem has been a boom and bust cycle, with overly enthusiastic lending for enterprises, especially in the tourism sector, that proved not to be viable. The response was a significantly more conservative lending strategy and a sharp reduction in new lending. The imbalance between liquidity and productive lending opportunities will likely continue until Bhutan can break through into much higher value-added economic activities involving the private sector. 30. The government has started to liberalize the financial sector. The competitiveness of the banking system was improved significantly with the conversion of the Unit Trust of Bhutan into a fully fledged commercial bank (in which Citibank has an equity stake) and with the liberalization of interest rates on loans and large deposits. (This has not changed the interest rate structure in practice, however. Deposit rates range from 5 to 11 percent and lending rates from 13 to 16 percent.) The government is also tightening regulation of the financial sector, in -11- response to the threat of a rapid increase in the number of nonperforming loans. All financial institutions are required to maintain a capital-adequacy ratio above 6 percent, to provision for nonperforming loans, and to maintain a minimum liquidity ratio. The Royal Monetary Authority conducts on-site inspections of financial institutions at least every six months. Clear bankruptcy procedures have been established, and banks now have the right to seize personal property when loans are in default. A Loan Recovery Committee has reduced the nonperforming loans of financial institutions. A computerized stock exchange has been established to encourage equity investments. The Royal Monetary Authority plans to conduct a detailed study of the financial sector and to draft a comprehensive strategy. Strengthening Infrastructure 31. Aside from the massive investment in the Tala hydopower project and the two other smaller hydropower projects, the government's infrastructure priorities are urban planning and dev.elopment-Bhutan's major towns are growing rapidly-and road maintenance and improvement. Urban development programs are being prepared for Bhutan's rapidly growing cities, including new urban housing sites. The emphasis for roads is on increasing private participation in maintenance and construction, shortening road connections, making road design and construction more environmentally safe, and expanding the country's still incomplete infrastructure, especially to remote areas. Deifining a Future for Agriculture and Forests 32. Agriculture has traditionally been the principal source of income for most Bhutanese famnilies and is still the largest area of private sector production. Approximately 85 percent of the population is engaged in farming or forestry, which account for 3 8 percent of GDP. 33. Under the Eighth Plan (1997-2002) the government is moving away from its unsuccessful emphasis on large capital investments toward a program framework approach. Agricultural activities will be managed under six discrete programs: development of farm systems, crop and livestock production, forest management, horticulture exports, planning and management, and training. Bhutan is diversifying into new export crops and emphasizing domestic production of nontraditional crops such as potatoes. Community involvement and cost-sharing are increasing, especially for irrigation. Irrigation schemes for cash crops will be fully financed by the farming communities, with the government providing only technical advice. 34. The government's role in forestry is fundamentally different from its role in much of the rest of the rural economy, where production is in private hands. Almost all forests are state- owned. The government sees itself as the custodian of an asset of national significance for maintaining sustainable rural livelihoods and of global significance for biodiversity protection. Forest cover has increased from 60 to 70 percent over the last 20 years-despite heavy subsidies on forest products-because of strict enforcement of controls on encroachment on forest lands and other damaging practices. 35. Fearing a reversal of this trend, and in the interests of economic efficiency, the government is reducing its heavy subsidies on wood for urban and industrial users. Rural users, however, will retain free access to restricted quantities of wood, in line with the government's policy of containing rural to urban migration, and to prevent an upsurge in uncontrolled and -12- environmentally damaging illegal felling. The government has recently banned exports of round wood and timber in an attempt to increase domestic supply. Balancing Development: Human Development, the Environment, and Culture 36. Education. Bhutan introduced modern secular education in 1961. Since then, it has made enormous progress in building a public primary and secondary education system and, to a more limited extent, in providing selective tertiary schooling. Primary enrollment, which has been increasing at an annual rate of 8 percent in recent years, is now over 70 percent. Bhutan has also emphasized the quality of learning outcomes while raising enrollments. English is the medium of instruction in schools and serves to unify Bhutan' s multiple linguistic groups. 37. The government will devote its efforts to achieving universal primary education by early next century and to expanding secondary education to meet rapidly growing demand. The majority of students will continue to receive tertiary education abroad, principally in India. Bhutan has also been gradually increasing the capacity of its own degree granting institutions, where it is cost effective to do so, and is actively developing its strategy for higher education in line with its longer term objectives for growth and development. 38. Health. The introduction of modem health services in the 1960s has probably done more than any other program to enhance the quality of life in Bhutan. The country has made remarkable progress in establishing a four-tier health delivery system that is able to deliver health services effectively to its people. There is very little private provision of health services outside of urban areas, since the public provision of health services is effective and health clinics are well stocked and managed (average annual public health expenditures were $18 per capita in 1997, slightly above the South Asian average of US$16). 39. Bhutan's high population growth rate, estimated to be about 2.9 percent a year, remains a matter of concern. Reducing the population growth rate is a top priority, and the Eighth Plan has a strong focus on reproductive health and family planning. The government also plans to consolidate and strengthen health infrastructure; improve staffing and service quality, including greater attention to traditional medicine and mental health; and increase access to health care in remote areas. The government has also been conducting a wide-ranging public information campaign on HIV/AIDS prevention. HIV/AIDS prevention will remain high on the government's agenda, including attention to capacity building for an effective national public health program and intensified health promotion interventions targeting vulnerable groups and border areas in the south. For the sector as a whole, capital investments will focus on upgrading basic health units and improving the health delivery system. The Eighth Plan calls for a 50 percent increase in the number of doctors, a 47 percent increase in the number of basic health workers, and a 40 percent increase in the number of technicians. Some degree of cost-recovery is under active consideration, both to raise revenues and to control the excess demand that a free good generates. 40. Environment and Culture. Bhutan has been well ahead of much of the world in recognizing the importance of environmental protection. It also places a high value on maintaining its cultural identity, emphasizing its living culture rather than a culture preserved only in museums. The strength of its commnitment-and its willingness to sacrifice short-term gains in growth to achieve it-is shown by the 1 0-percentage point increase in forest cover in the last 20 years and by the control of tourism using a substantial tourist fee. Bhutan's commitment -13- to the environment is embodied in its Trust Fund for Environmental Conservation, established with support from the Global Environment Facility and other donors. Income from the Trust Fund is used to support the commitment to preserving 23 percent of the land area as wildlife parks and sanctuaries and 60 percent of the land under forest cover. A similar Trust Fund is being established for maintaining its cultural heritage, and the government is soliciting donor support. D. IDA's ROLE IN BHUTAN's DEVELOPMENT 41. Bhutan has drawn relatively little on the World Bank Group. IDA is almost the smallest donor in Bhutan in terms of resource transfers. IDA commitments over the past 10 years through fiscal 1999 have been only $19 million, with disbursements of $12 million. In the past five years IDA has provided only 1 to 2 percent of total aid disbursements. This follows from Bhutan's external aid policy of limiting the number of donors overall and in any sector and of drawing on bilateral grant aid first, followed by UN agencies for technical assistance, and only then turning to international financial institutions. The policy is part of an effort to reduce the transaction costs of dealing with donors. Bhutan is not a member of IFC or MIGA. Past IDA Support 42. IDA has been assisting Bhutan very selectively since the early 1980s, initially with support for institution building and calcium carbide production. The last CAS was discussed with the Board in July 1993 and emphasized economic policy advice, education, and forestry. During the early 1990s, Bhutan made good use of IDA's expertise in primary education and forestry and in preparing an economic report and a Power Development Master Plan. IDA has also managed a Global Environment Fund grant and supervised a GEF trust fund for national forest protection. For the most part IDA has provided such support only when other donors could not put together a timely combination of knowledge, expertise, and financing as requested by the government. Bhutan's management of these projects overall has been superior, with good impact and relatively few implementation problems. 43. OED has reviewed Bhutan five projects since 1991. All five were rated satisfactory. Three were rated as having a substantial impact, and the other two a modest impact. None of the projects was judged unlikely to be sustainable, but for three sustainability was judged to be uncertain. Borrower performance was judged satisfactory in all five, and IDA performance likewise, with the exception of the supervision of the second forestry project. IDA's past involvement has led to a few lessons. What appears to have worked well is project impact. An important lesson in project design and implementation is the need to work closely with the government in assessing the availability of technical and managerial staff for project work and supervision. Finally, the experience suggests a larger role for knowledge transfer independently of project lending. 44. In 1997, Bhutan requested IDA to support the adoption of new approaches to rural access roads and small town infrastructure. This has led to the projects that accompany this CAS. This request also led to a deeper dialogue between IDA and the government on Bhutan's development strategy and framework. This country assistance strategy is an outcome of this dialogue. -14- IDA's Assistance Strategy 45. IDA's strategic goal is to assist Bhutan-in ways that are driven by Bhutan and in partnership with other donors-in realizing its development vision of translating rapid economic growth into social transformation and poverty reduction. IDA's strategy is set against Bhutan's favorable medium-term growth prospects, its comfortable macroeconomic balances, and considerable exports and aid inflows. The strategy is also set against a development vision that reflects a well-articulated, nationally owned development framework. Bhutan is unusual in South Asia in that its public administration is strong, corruption is low, and basic institutions (schools, health posts, district offices, road maintenance) work well to produce quality outcomes. These conditions give shape to IDA's comparative advantage in Bhutan in providing high- quality global knowledge and practical expertise. The Bank has fixed costs in preparing and processing IDA projects, and given the availability of substantial alternative assistance to Bhutan, using scarce IDA resources for knowledge assistance over lending preparation will be more cost-effective. Accordingly, IDA 's country assistance strategy will emphasize knowledge transfersfirst, then lending. 46. Knowledge Transfer. IDA will increasingly place its global knowledge resources at the disposal of the government without tying them to IDA credits. The government has asked for regular consultations, without lending, on aspects of its long-term health and education strategies. It has also asked for help on macroeconomic aspects of development policy, which would build on IDA's routine participation in IMF Article IV consultations. Discussions have begun with the Royal Monetary Authority on a detailed study of the financial sector to help develop a financial sector strategy. Bhutan lacks a solid analytical basis for measuring rural and urban poverty, which would be useful to inform and accelerate its development strategy of inclusive social transformation. IDA will urge the govemrnent to carry out a baseline living standards survey, and will be prepared to provide technical staff or other assistance for this important purpose. Possible program lending would need to be preceded by a public expenditure review, and IDA will offer assistance in this area. Bhutan has requested assistance for the development of accounting and auditing standards and skills. These tasks will involve open- ended assistance, either through the ongoing dialogue or through special tasks that may or may not involve specific studies (Table 2). IDA is working with the government to broaden the training of government officials, including greater access to World Bank Institute courses and inviting promising Bhutanese civil servants to Washington for intermships of up to nine months. Table 2: Proposed IDA Analytical and Advisory Assistance and Lending to Bhutan, FY00-02 . AAA Starts' . Lending Ongoing Health Operational Planning Education II Forestry - Forestry IlIl ~~~'' ~ F~'~ ~~----~~-'~-'~-~-~~~~---~~ ------.-.r . ----..-- . _- ...... .................. _.___...... __ .__._ FY00 . Post-Secondary Education Strategy Urban Development Country Assistance Strategy Rural Access Roads Financial Sector Strategy FY01 S Poverty Analysis _ Public Expenditure Analysis ___ . _ FY02 ,-- ~ 1/ FY00 includes ongoing activities begun in FY00. AAA assistance is seen as open-ended in that it will respond to the needs of the govemment as and when needed, and will therefore continue while it is justified in terms of the knowledge transfer needs of the government. -15- 47. Other areas for a knowledge-intensive role for IDA include issues relating to school curriculums, long-term health finance, rural road capacity development, options for employment generation, policy frameworks for economic and sector development, and Bhutan's deficiencies in economic data (Table 3; Annex Al). Such a knowledge-based partnership would involve prcividing Bhutan with access to the Bank's global knowledge and expertise with the help of visiting IDA missions, World Bank Institute courses (including distance learning), and technical assistance through IDA-supported projects. 48.. Donor Coordination. The government is interested in greater harmonization of donor support and in discussing the merits of a more program-oriented approach. The Comprehensive Development Framework, which Bhutan' s development vision and implementation have anticipated, provides a natural foundation for this (Box 4). As part of its effort to help the government enhance the efficiency and development impact of donor assistance, IDA will seek to build stronger partnerships with Bhutan and other donors on this foundation. Box 4: Bhutan 2020 and the Comprehensive Development Framework Bhutan's development practices have anticipated the Comprehensive Development Framework. The emphasis on development as social transformation, the need for ownership of the development strategy, and the emphasis on participation, inclusiveness, and a well-defned framework for donor partnerships are all themes that resonate with Bhutan 2020. Each pillar of the Comprehensive Development Framework is reflected in current practice in Bhutan or in Bhutan 2020: * Good governance. The government has a long-standing reputation for honesty and professionalism. Training is a key focus. Large numbers of civil servants at all levels are studying abroad in highly regarded programs. Decentralization is increasing transparency, voice, and information flow, with development decisions increasingly made at the geog (community) and dzongkhag (district) levels. A greater role for the elected National Assembly and Cabinet is enhancing these crucial values at the central level. * Market fundamentals. The government is modemizing the legal system to meet the needs of a market economy and finalizing a digital GPS-based land survey and titling system. A stringent new bankruptcy law and a high-level committee have boosted enforcement of foreclosures. Competition has been introduced in the banking system, and a new private commercial bank, with Citibank equity involvement, will compete with the government-owned commercial bank. * Inclusion. Bhutan is making a concerted effort to increase access to education and health care. Girls now constitute over 45 percent of primary school students. Infant and maternal mortality rates have dropped sharply. Health clinics are well equipped, with dedicated and well-trained staff committed to both preventive and curative medicine. Bhutan has a long-established school for the blind, and accommodation for the deaf is now also being made in the school system. After an initial overreaction in the 1980s to ethnic tensions, the government is working to create a society in which all nationals benefit equally from development. * Communications and transport. The government continues to improve its road, trail, and ropeway network, with an emphasis on maintenance-increasingly through the private sector-and improved access to remote areas. A communications network now covers all 20 dzongkhags. In rural development Bhutan is diversifying into new export crops. * Environmental and human sustainabiity. Bhutan is making substantial contributions to the global environment through reforestation and biodiversity protection and the export of hydropower to India. Forests cover over 70 percent of the land area-over a quarter of the land area is dedicated in perpetuity as national parks and nature reserves-and there is a growing movement toward community forestry. The government is also focusing on solar power and mini- and micro-hydels. In addition, the government is at the forefront of cultural preservation worldwide. Tourism is limited to sustainable levels, and school textbooks are geared to local values. Source: Bhutan 2020: A Vision of Peace, Prosperity, and Happiness, Royal Government of Bhutan, May 1999. Table 3: BHUTAN'S SELECTED DEVELOPMENT PRIORITIES TO BE ASSISTED BY IDA Bhutan's Development Vision and IDA Inputs Bhutan's Development Vision and IDA Inputs Long-term Outcomes _ _ Long-term Outcomes NR E LPENT777 7 77777 B Blanced& uitabie eeent f:: Maximizing Gross National Happiness . Broader support available in future Ensure that the benefits of development are shared equitably among all income groups and regions through regular consultations and so astopr t,n ..................o...... .iya limited project, sector program, or 1. Urbanization ecnomy-wide program ledin. Timely responses to rapid urbanization so * Rural Access and Secondary Towns A. 7a e_ - as to minimize negative effects. Credits (FY00) Maximize happiness of all Bhutanese to enable them to achieve their full& innate potental. . Focus on rural development. . . ... . ... . ... . .. . , ....................................................................................... ... ....... ...... I. Education * Further commercialize agriculture. . Achieve universal enrolment as soon as . Support through Second Education . Establish at most four regional growth possible. Credit for basic education centers (as focal points for social . Continually improve the quality & * RGoB request for regular consultations infrastructure & services as well as for relevance of education. (without lending) on post-secondary govt services) after assessing their . Improve access to educaton. education strategy. environmental impact . Develop private schools. * Dialogue on school curriculum, * Priority Area: Eastem Bhutan. secondary and post secondary * Expand existing centers education planning*. Improve urban desin & planning. * Provide primary health care services for . RGoB request for regular consultations Further develop institutions, human resources & a system of govemance to promote self-reliance all. (without lending) on long-term health & par cipar L .........p .ses .........c.s.. . Improve quality of health care. strategies. 1. Resource Mobilization & . Introduce innovatve methods of financing . Dialogue on long-term health financing. Developnent Financing health care (e.g. user fees for services on * Reduce reliance on extemal assistance in . Round Table meetng. an 'abififto pa bai) the long-term.* Economic/Budget advice in the context a n ..oi i .t e .a.g ...)a,, .s ,...................... . ,,,,,,, ... .....................,., ...,..., ..., .................................. ........................................ ............. ....................... 3. Economic Growth and Developnent * Explore new sources of revenues & levy of the consultations requested by RGoB . Maintain the momentum of development * RGoB request for consultations on user fees for social services on an 'ability on macroeconomic, financial, education . Diversify the economy so as to promote macroeconomic & financial issues. to pay' basis. & health issues. self reliance. * Poverty data and analysis. . Revenues * Advice on accounting & audit standards . generate productive employment * Public expenditure review. * Private Schools Health 4. Private Sector * Improve the nation's tax base.'s_tax_base. . Continue to create an enabling * Non-lending support to financial sector. ; So t environment for the pnvate sector. .Ensure the nation's response to challenges ahead embody theprinciplesof environmental . n ' .m n .o .h pr vat .e tr ......................................................................................................... 5. Transport, Communications and sustainability&presere the natural environment. Information 1. Forest Regeneration & Biodiversity . Further development of physical . Forest protedion & regeneration remains . Bhutan Trust Fund (focus on national infrastructure guided by detailed a priontv in the future but with more parks & biodiversity) assessment of environmental & social sensitivity to maintaining biodiversity. . Third Forestry Credit in support of impact assessment while maintaining a Make full inventory of biodiversity resource environmentally sustainable forest friendly & constructive relations with base development and use neighboring countries. Note: Shows only those priorities for which IDA anticipates providing a) Surtace transport. Improve public either transport system. knowledge or financial assistance. * Develop dry ports at strategic Source: Excerpted from Annex Al. locations on the border with India. b) Civil aviation. * Improve intemational air services. c) Telecommunications. * Expand services to rural population. . Prioritv: Prepare & activate an Information Technology (IT) strateg -16- -17- 49. Lending. Based on the government and IDA's joint assessment of Bhutan's needs for development assistance, lending is likely to be at very modest levels and under very special circumstances. This is a continuation of our past approach, under which lending to Bhutan has been a small fraction of its nominal performance-based annual IDA allocation of SDR 10 million. The current program does not propose additional credits during FYOO-02 (see Table 2): such credits would be triggered by specific government requests for IDA assistance, usually when an appropriate blend of funding and expert advice is not available from other donors. When provided, IDA credits will remain focused on the priority poverty-reducing areas of human development and infrastructure. In addition to standard project lending and sector program lending, several factors make Bhutan a potentially good candidate for alternative economy-wide program lending, including its comprehensive development vision, well-specified performance benchmarks, strong public institutions, and careful public expenditure stance. 50. Project lending would follow IDA's long-standing project partnerships in education and forestry. IDA has been supporting Bhutan's secondary education vision through two credits co- financed with the Swiss Development Corporation, and is well positioned to assist in developing a tertiary education model. Sector-based program lending would build on the blend of project and sector program lending embedded in the two projects that accompany this CAS, including the future possibility of time-slice financing based on comprehensive donor coordination. Economy-wide program lending-against the general effectiveness of development assistance in Bhutan-is also a possibility under discussion with the government, provided that economic conditions (including a drop in foreign aid or export earnings) require such support. A review of public expenditures, a baseline poverty assessment, macroeconomic monitoring in collaboration with the IMF, and a Poverty Reduction Strategy Paper would need to precede such lending. The government is considering the pros and cons of such support. 51. To ensure that lending remains demand-driven, IDA has been in dialogue with the government on these options, discussing the merits and costs of each approach and its fit with Bhutan's development vision. This dialogue is very mindful of Bhutan's constraints in absorbing the external resources already available and its desire to modernize with "deliberate speed" to avoid the social, cultural, and environmental costs of overly rapid growth. But it is also mindful of the high payoff in social transformation from additional investments in basic social and physical infrastructure. While focusing strategically on knowledge transfers, IDA will continue to explore knowledge-intensive and innovative opportunities for financing such high- value added investments in social and physical infrastructure. The projects accompanying this CAS are two examples of such opportunities. 52. Development Outcomes. IDA's strategy of knowledge transfers and limited lending must be and is an integral part of the comprehensive development frarmework derived from the government's vision, as enunciated in its Bhutan 2020. The performance indicators for IDA's strategy are therefore also derived from the milestones the government has set for itself, as described in Annex Al. These milestones are of course not specific to IDA's limited assistance, but in each case represent the interaction of donor assistance derived from the development fiamework and Bhutan's implementation of such assistance. The government has set these milestones after extensive consultations. Regular and extensive field visits by officials at all levels, combined with the small population (fewer than 100,000 households), mean that the government has a sophisticated and detailed knowledge of conditions and needs across the whole of Bhutan. As such, the government's milestones represent a blend of realistic targets over the nmedium term-by which IDA would measure its performance-and stretch goals in the short -18- run that indicate the clear direction the government wishes to pursue (and which may sometimes be quite attainable given Bhutan's small population.) 53. Consultations. IDA has engaged in numerous consultations with all levels of Bhutanese society throughout the preparation of this assistance strategy. Discussions with government and civil society in Thimphu and in rural areas were held by teams covering education, forestry, urban development, infrastructure, and social development, with two extensive field visits by Bank anthropologists, including to the South, to learn about and discuss the social and ethnic aspects of Bhutan's development. Bhutan 2020 and the Eighth Five-Year Plan are founded on exhaustive, open, and highly participatory consultations at all levels of society, including the chimis (elected members of the National Assembly) and gups (elected village leaders, who are an integral part of each dzongkhag's local government). E. BHUTAN' S DEVELOPMENT PARTNERSHIPS 54. Bhutan differs from most other aid-dependent countries in that the government has a strong vision and a strong sense of development priorities-and of the comparative advantages of various donors-and deternines on this basis where technical and financial assistance is most needed and which donor can best provide it. The admirably small government means that donor missions can impose a high cost in scarce government officials' time. The government has been exceptionally proactive in managing donor assistance, fitting aid into a well-defined framework, rather than allowing donors to drive its development programs (Table 4). The government has actively encouraged very close liaison between donors and facilitated this objective by limiting the number of donors, both overall and within each sector. In forestry and education, for example, IDA and Switzerland have effectively been operating as a single donor. This well thought-out framework has also emphasized partnerships with relatively small donors, with the exception of India, which has remained Bhutan's major development partner over the past 40 years. Other important partners include Austria, Denmark, Germany, Japan, the Netherlands, Switzerland, the Asian Development Bank, the European Commission, UNDP, and UNICEF. Among other important initiatives, UNDP has organized the donor Round Table Meetings, chaired jointly by the government, UNDP, and IDA. 55. The congruence between Bhutan's vision and the approach suggested by the Comprehensive Development Framework provides unique opportunities for strengthening the partnerships between the government and the donor community, including IDA. There is already a strong foundation on which to build. Bhutan 2020 includes detailed and quantified milestones or benchmarks for all the government's priority areas, from population, health, and education to decentralization and participation (Annex Al). The government is working to establish harmonized procedures, including for procurement and disbursement. 56. UNDP has pioneered the concept of a sustainable development partnership with the government and has assisted it in bringing coherence to donor activities, partly through its substantial assistance for strengthening government planning and program management capacities. The Netherlands is supporting an innovative environment partnership with Bhutan, Costa Rica, and Benin. Sector-by-sector aid coordination meetings are held among the donors resident in Thimphu, with participation from the nonresident donors (Japan, the Asian Development Bank, the International Monetary Fund, and IDA), when possible. -19- Table 4: Bhutan's Comprehensive Framework of Ongoing Development Assistance Dev. Partner Governance Education Health Forestry Environment Rural Dev't Roads Urban Dev Power Telecomm Bhutan Trust Fund Basochu Austria Denmark Decentralization, Integrated Primary Land use & Environ. Agro-industries Thimphu & Strengthen Royal Health Planning Phuntsholing Audit Authority, Tax Care, Essental Bhutan Trust Fund Administration Drugs & Safe Water Assistance Germany Tech. & Vocational Upgrading Health Conserv. & Promotion of cash Education Posts Sust. crops management___________ ___ ____ India Teacher Salaries, Malatia Eradication Construction & Tala, Kunchu, Radio School Construction maintenance Bunakha transmission Japan Paro Rural Dev. Paro roads and bndges | Micro-hydels Microwave _______ ___ __ ______ Tel. Network Netherlands Decentralization Biodiversity, Bhutan Cash Crops, Rural roads Solar Power Trust Fund Horticulture Develop., management Zhemghang Rural Dev. Norway Bhutan Trust Fund Rural_Dev Switzerland Strengthen Royal Audit Primary/secondary Sustainable Promotion of Cash Bridges & Trails Authority Teacher training Use, Crops, Livestock (with IDA) Protection & Dev., Natural mgt. Of forest Resource Training Center ADB Strengthen Min. of Tech. & Vocational Forest Irrigation Support Highway maintenance Town Rural EU______________ Finance Education development planning Development Electrification EU Livestock/Agri. Ext. Service GEF Bhutan Trust Fund IDA Round Table, Econ. & Prim. & Lower Sec. Consultatons on Sustainable GEF supervision of Support RGoB Prog. of Secondary Telecomm Budget Advice Teacher Training long-term health Use, Bhutan Trust Fund improving rural access, Towns corporatization finance and Protection & initially in Zhemghang, infectious disease Mgt. Of Trashigang, Forests Trashiyangtse & Lhuentse UNDP Round Table, Planning National Parks & Promotion of Cash & Budgeting, Aid Biodiversity Crops Coord., Priv. Sector Dev., Modemization of Legal System UNICEF Prim. & Lower Sec. Immunization, MCH, Teacher Trng., Prim. Family Planning __Educ, Adult Literacy WFP School Meals Food-For-Work WHO Disease Prevention, Human Res. Dev.- WWF __Bhutan Trust Fund -20- F. RISKS 57. Bhutan faces two kinds of development risk. First, it is subject to vulnerability arising from its external environment-the heavy reliance of the economy on power exports to India and on financial support from India and foreign aid in general. The relationship with India continues to be one of principled partnership, with no emerging political problems that would suggest increased vulnerability. The development effectiveness of aid in Bhutan suggests that the country will continue to receive substantial aid flows, but Bhutan's growing foreign exchange reserves could lead some donors to reallocate aid flows to other countries and create some uncertainty about the size of future aid flows. The government's long-term goal is to reduce its reliance on foreign aid. Macroeconomic stability and creditworthiness are not themselves likely to be of concern over the medium term because of Bhutan's history of fiscal prudence, its strong balance of payments position with very little debt (all concessional), and the nominal anchor provided by the currency peg to the Indian rupee. 58. Second, and perhaps much more important, Bhutan faces the risk of rising social and political tensions from rapid population and economic growth, particularly if growth does not yield universal improvements in living standards. GDP and employment growth will remain a function of how well Bhutan strikes a balance between economic growth and strong national concerns about preserving its environment and maintaining its culture. These issues of long-term social and political vulnerability-of how to match the gains from 6-7 percent GDP growth to rising expectations of welfare improvements and expanding employment opportunities-are thus of greater concern. More immediately, unrest in the south related to Nepali-speaking minorities has attracted considerable attention. The government is attempting to negotiate a just settlement of the refugee issue together with the Nepalese government. In the east, the incursion into Bhutan of rebels opposing the Indian government in Assam poses risks, but the government is working with the Indian government to contain such incursions. James D. Wolfensohn President February 22, 2000 By Shengman Zhang Annex Al Page 1 of 9 BHUTAN's Development Priorities ;Gs RGoB i 'R RGGQD :4061 0.20 ~ DesIredL LogTriPerform 00A1InusLeOnr Central Devel- Maximizing Gross Broader support available in the future, opment Concept National Happiness. through regular consultations and limited project, sector program, or economy-wide program lending. Past Iniuts: IDA has supported the vision and values via technical assistance, traditional project lending in forestry, education and calcium carbide production. A. Human Maximize happiness of all Existing policy instruments - Development Bhutanese to enable them Royal Decree of Population, 1995 to achieve their full & Health Trust Fund launched. innate potential. Health Sector Master Plan launched. Youth Welfare Trust Fund launched. Hydropower Dev. Master Plan (1990-2010). Horticulture Master Plan. Master Plan for Cottage, Small and Medium Industries. Telecommunications Master Plan ._____._____ .___ Postal Services Master Plan 1. Population Reduce population Reduce pop. growth rate to UNICEF growth. (a) 2.08% per annum by 2002 UNFPA (b) 1.63% per annum by 2007 (c) 1.31% per annum by 2012 Promote smaller family Reduce av. # of children per woman from 5 to 2 by 2012. size nationally. Implement proposed National Population Policy. Introduce pop. educ. & awareness programs for all adolescents & adults. 2. Education Achieve universal enrol- Achieve RGoB request for regular consultations Primary and lower ment as soon as possible. (a) universal Primary School enrolment by 2002. (without lending) on post secondary education secondary education & (b) full enrolment at Jr. High School (Class 8) by 2007. strategy. teacher training (c) full enrolment at High School (Class 10) by 2012. Dialogue on school curriculum, secondary & IDA Full Bhutanization of post secondary education planning. Switzerland (a) primary school curriculum is largely completed. UNICEF (also adult Continually improve the (b) secondary school curricula by 2007. Education II ($13.2 mill.) March 1998 literacy) quality & relevance of Introduce operational distance education program by (ongoing) Annex Al Page 2 of 9 BHUTAN's Development Priorities education. 2007. Past Inputs: Primary Education ($4.2 mill.) India (teacher salaries & Achieve the full adult literacy rate for all developing April 1988 school construction) countries by 2017. (Primary, lower secondary & teacher training). Improve access to educa- Establish a National University by 2007. WFP (School Meals) tion. Establish Doethang Engineering College by 2002. Implement proposed Education Sector Master Plan. ADB/Germany (technical & vocational Develop private schools. education) 3. Health Provide primary health Increase life expectancy to current av. for all developed RGoB request for regular consultations UNICEF/WHO/ care services for all. countries by 2012. (i.e. 77 years). (without lending) on long-term health Denmark (primary Achieve current av. of doctor/pop. for all developing strategies. health care) countries by 2007. (1.2 per 1000 persons). Improve quality of health Introduce operational telemedicine by 2002. Dialogue on long-term health financing. India (malaria eradica- care. By 2007, reduce to curr. av. for all developing countries tion) (a) Infant Mortality Rate (from 71 to 60). (b) Maternal Mortality Rate (from 3.8 to 1.8 per 100,000 Germany (upgrading live births). health services) Introduce innovative (c) Under-5 Mortality Rate (from 96.9 to 84). methods of financing Introduce operational system of private health care by health care (e.g. user fees 2007. for services on an 'ability (d) HIV prevalence below 1% of adult population. to pay basis). 4. Economic Maintain the momentum of Install 2,000 MW of hydropower by 2012. RGoB request for consultations on India/Austria Growth and development Install 3,000 MW of hydropower by 2017 macroeconomic & financial issues. (hydropower) Development Increase value of horticultural exports 200% by 2007 & Poverty data and analysis. 300% by 2012. Public expenditure review. Japan (micro-hydals) Diversify the economy so Increase share in GDP of as to (a) manufacturing to 30% by 2012. Past Inputs: ADB (economic advice) (i) reduce vulnerabilities. (b) tourism to 25% by 2017 Calcium Carbide ($9 mill.) May 1985. (ii) promote self reliance. Achieve a three-fold increase in real income of farmers by 2012. Increase revenues from tourism 100% by 2012 & 150% by Annex Al Page 3 of 9 BHUTAN's Development Prioritles 2017 (iii) generate productive Implement Tourism and Industrial Dev. Master Plans employment. presently in preparation. 5. Private Sector Continue to create an Simplify licensing arrangements. Non-lending support to financial sector UNDP (institu- enabling environment for Introduce unambiguous commercial law. tional/Legal framework) the private sector. Implement proposed long-term strategy for the ADB (financial sector Increase this sector's role development of the private sector. privatization) in the nation's future dev. Create jobs to attract young people. Expand opportunities for small businesses, especially outside service- oriented activities. Improve access of private firms to capital technology & know-how. 6. Transport, Further development of Implement proposed Civil Aviation Master Plan and Master Rural Access Project in support for RGoB's IDA (rural access) Communications physical infrastructure Plans for Road Sector and Surface Transport presently program of improving rural access in districts and Information guided by detailed under preparation. with poorly developed infrastructure (e.g. assessment of environ- Zhemghang, Trashigang, Trashiyangtse & mental & social impact Lhuentse). assessment while main- Dialogue on rural road capacity development. taining friendly & con- structive relations with neighboring countries. (i) Surface transport. Ensure that 75% of rural pop. live within half-day's walk India (road construction Improve public transport from nearest road by 2012. & maintenance) system. Upgrade current national trunk roads to take 30-ton trucks Japan (Paro roads) by 2007. Switzerland (bridges & Complete second transnational highway by 2017. trails) Construct dry ports at WFP (Food for Work) (a) Phuentsholing by 2002 Develop dry ports at (b) Gaylegphu by 2007 strategic locations on the (c) Samdrup Jongkhar by 2007. border with India. Introduce domestic air services by 2002 (service to Annex Al Page 4 of 9 BHUTAN's Development Priorities eastern Bhutan is high priority). (ii) Civil aviation. Establish improved extemal air links with full instrument landing system capacity by 2017. Introduce national television by 2000. Improve & strengthen Ensure all major villages & settlements have a post office international air services. by 2002. Develop & establish a comprehensive IT strategy by 2002. IDA (telecomm.) (iii) Telecommunications. IDF for Corporatization of telecommunications. Japan (microwave, Expand all services to the Introduce by 2000, fully operational telephone network) rural population. (a) Intranet services & email systems. India (radio transmis- (b) access to Internet. sion) Prioritv: Prepare & activate an Information Technology (IT) strategy. B. Culture & Heri- Interpret the rich cultural Existing policy instruments - tage heritage in a dynamic & Heritage Fund launched. India/Austria (Dzong development-oriented renovation) manner to ensure that it maintains its relevance for Netherlands/Denmark a society in transforma- (Cultural support) tion. Make inventory of the Complete inventory by 2007. nation's culture & heritage. Preserve, conserve & Prepare Culture & Heritage Act by 2002. promote the culture & heritage. Promote the traditional Prepare Construction Code by 2002. architectural style. C. Balanced and Ensure that the benefits of Existing policy instruments - Equitable dev. are shared equitably Royal Decree on Water and Sanitation, 1992193. Development among all income groups Long-term Human Settlement Development Master Plan & regions so as to (1999-2020) launched. promote justice, unity & harmony. Annex Al Page 5 of 9 BHUTAN's Development Priorities I~~~Go0~~~~s ~RGOW8- Bkuta 2020 DsIe4LhgTen Ptoifri a~Mlsoe lA~Inxt odDnv 1. Urbanization Timely responses to rapid Formulate growth center strategy by 2002. Rural Access and Secondary Towns Credits IDA/ADB (town urbanization so as to (FY00). development) minimize negative effects of this problem. Japan (Paro rural dev.) Focus on rural UNDP/Switzerland/ development. Germany/Netherlands Further commercialize (cash crops). agriculture. Establish at most four Complete urban dev. plans for Thimphu & Phuentsholing Denmark (urban dev.) regional growth centers by 2002. (as focal points for social Complete dev. plans for other major towns by 2002. infrastructure & services as well as for gov't services) after assessing their environmental impact. Priority Area: Eastern Bhutan. Expand existing centers Improve urban design & planning. 2. Access to basic Ensure equitable access Implement proposed Rural Electrification Master Plan. ADB (rural electrifica- services and infra- to Electricity Provision of electricity to tion) structure. (a) 50% of rural pop. by 2012. Netherlands (solar (b) 75% of urban pop. by 2020. power) Provision of potable water supplies to Potable water (a) 80% of rural pop. by 2002 & 90% by 2007. Denmark (safe water) (b) 90% of urban pop. by 2002. Safe sanitation Provision of safe sanitation to 75% of rural pop. by 2002 & 90% b 2 07. 3. Vulnerable & Rapid responses to the Program to limit population in ecologically fragile areas. disadvantaged needs of vulnerable & rou s. disadvantaged groups. 4. Equitable Prevent the growth of Introduce a Personal Income Tax (PIT) by 2000. Denmark (Tax Development income inequalities. See above. assistance) Develop a progressive sYstem of income taxes. Annex Al Page 6 of 9 BHUTAN's Development Priorities D. Governance Further develop Existing policy instruments -. institutions, human DYT Chatrims, 1981 resources & a system of GYT Chatrims, 1992. govemance to promote Decentralization Guidelines, 1993. self-reliance & Human Resources Development Master Plan (1997-2020). participatory processes. 1. Management of Progressively respond to Revise Decentralization Guidelines by 2002. Development new needs and require- ments. Switzerland/ Denmark/ Compact civil service with Establish national Monitoring and Evaluation System by ADB (strengthen adequate highly qualified 2002. institutions) professionals. 2. Law & System continues to Measures to make the system of law proactive in terms of UNDP (modernize legal Jurisprudence evolve in response to the the capacity to anticipate change & the appropriate legal systems) needs of a society in instruments needed. change, even though it remains anchored in Buddhist principles. 3. Decentralization Devolution of new powers Enhance the capacity of DYTs & GYTs to prepare their Netherlands/ Denmark & Participation & responsibilities to the own plans by 2005. (decentralization) dzongkhag and geog Establish financial practice and guidelines for Geog funds levels, by 2007. Establish well-equipped Gup offices in all Geogs by 2007. Implement Local Development Funds in (a) 100 Geogs by 2007, and (b) all Geogs by 2012. Introduce Geog development funds in all Dzongkhags by 2017. 4. Human HRD strategy is guided by Implement Long-Term Manpower Development Plan. Resources the HRD Master Plan Development (1997-2002) which is (HRD) presently under review to cover a 20-year period. Thailand/ Reduce the nation's Establish an independent unit for manpower planning by Netherlands/ reliance on expatriates, 2002. India/Colombo Plan especially in the private Capacity of RIM for management training to be fully (specialized technical & Annex Al Page 7 of 9 BHUTAN's Development Priorities tb.-t7 O.:0_ L t 1A sector. developed by 2007. vocational training) Provide tertiary training Establish Doethang Engineering College by 2002. locally also. Establish a National University by 2007. 5. Resource Reduce reliance on New hydropower schemes come on stream in 2006. Round Table meeting. UNDP/IDA Mobilization & external assistance in the Economic/Budget advice in the context of the Development long-term. Examining feasibility of introducing sales tax on goods & consultations requested by RGoB on Financing Explore new sources of services & property tax. macroeconomic, financial, education & health revenues & levy user fees Examining possibility of revising the structure of royalties issues. for social services on an on forestry products. Advice on accounting and audit standards. 'ability to pay' basis. Implement proposed Education Sector Master Plan. Revenues Introduce operational system of private health care by 2007. Private Schools Already embarked on a major program of tax reform. Health Improve the nation's tax base. E. Environmen- Ensure the nation's Existing policy instruments - tally Sustainable response to challenges Forest & Nature Conservation Act of 1995. Development ahead embody the National Forestry Master Plan (1996-2010). principles of National Environment Strategy. environmental National Biodiversity Action Plan. sustainability & preserve National Environmental Action Plan under preparation. the natural environment. 1. Forest Forest protection & Continually maintain at least 60% forest cover. Bhutan Trust Fund for Environmental Conser- Major donors of Bhutan Regeneration & regeneration remains a vation (focus on national parks & biodiversity). Trust Fund: GEF/WWF/ Biodiversity Driority in the future but Forestry Dev. III ($5.4 mill.) July 1993 Netherlands,/ with more sensitivity to (ongoing). Denmark/Austria/ maintaining biodiversity. Past Inputs: Norway (biodiversity) Forestry Dev. l ($5.5 mill.) April 1984. IDA/Switzerland/ GTZ Forestry Dev. ll ($1.1 mill.) April 1988. (forestry) 2. Conservation & Make full inventory of the Inventorying of biodiversity resource base continues Bhutan Trust Fund for Environmental UNDP/Denmark Development nation's biodiversity through 2002 and beyond. Conservation (biodiversity) resource base. Switzerland/ Annex Al Page 8of 9 BHUTAN's Development Priorities Germany/ IDA(conservation & sustainable manage- ment) 3, Greening of the Priorith: Include the Adapt System of National Accounts to include the compi- Denmark (assistance to National Accounts. contribution to the lation of environmental satellite accounts by 2002. National Environment economy by the Commission) environment & by ecological services in the calculation of GDP. 4. Institutionalize High Priority: Institutional- EIA unit already established in National Environment Denmark/UNDP (Insti- Capacities for ize capacities for con- Commission (NEC). tutional assistance) Environmental ducting ElAs at all levels Implement proposed EIA Legislation. Impact of government. Environment Assessment Process (EAP) approved by Assessments NEC in Feb.1999. (ElAs). Introduce (a) mandatory ElAs for all large-scale projects by 2002, and (b)EIAs for all physical infrastructure projects by 2007. Extend capacity to conduct ElAs to Dzongkhag level by 2007. Prepare fully elaborate (a) standards for water quality & environmental health by 2002 and (b) air quality standards by 2007. 5. Watershed Preparation of Manage- Management ment Plans for watershed Denmark (land use & areas as follows: environment planning) High Priority: Wang Chu Puna Tsang Chu, Mangde Complete by 2002. Chu, Kuri Chu and Complete by 2007. Dangme Chu 6. Environmental New environmental legis- Denmark (Institu- Legislation lation sensitive to ethical, tional/technical religious & cultural values assistance) as well as traditional systems of resource National Environment Protection Act approved by Parlia- management. ment in July 1999, Need legislation that Annex Al Page 9 of 9 BHUTAN's Development Priorities RGoBWs RGo' A9_s f '_ consolidates & builds on existing legislation. Need initiatives to review related legislation with a view to updating them, if necessary (e.g. Inheri- tance Act, Land Act, Live- stock Act). Notes: DYY: Dzongkhag Yargye Tshogchung Dzongkhag District GEF: Global Environment Facility Chu River/Water. GYT: Gewog Yorgye Tshogchung Chatrim Rules and regulations. Geog Administrative unit under a Dzongkhag. Gup Elected leader of the geog RGoB Royal Government of Bhutan RIM Royal Institute of Management Social indicators for Bhutan are from RGoB and may differ from that in the World Bank Central Databases. With regard to performance indicators, data for high income countries is used for developed countries while data for lower & middle income countries is used for developing countries. Bhutan at a Glance AnnexB1 POVERTY and SOCIAL South Low. Bhutan Asia Income Development diamond' 1998 Pooulation, mid-vear (millions) 0.76 1.305 3.515 Life expectancy GNP Per capita (Atlas method, US$i 480 430 520 GNP (Atlas method, US$ billions; 0.36 555 1,844 Average annual arowth. 199248 Population (%) 2.9 1.8 1.7 GNP Labor force (%) 2.3 2.3 1.9 GNP Gross per primary Most recent estimate (latest year avallable, 1992-981 capita e enrollment Poverty t% of pooulation below national poverty line, Urban population (% of total populationJ 15 27 31 Life exDectancv at birth (vears) 66 62 63 Infant mortality (per 1.000 live births) 71 77 69 Child malnutrib'on (% of children under 5) 38 53 .. Access to safe water Access to safe water (% of population) 64 81 74 Illiteracy (% of Population aae 15+1 46 49 32 Gross primary enrollment (% ofschool-ape Dopulation. 72 100 108 Bhutan Male .. 109 113 Low-income group Female * 90 103 _ KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1977 1987 1997 1998 Economic ratios, GDP (US$ billions) 0.28 0.40 0.43 Gross domestic investment/GDP .. 30.5 48.1 47.3 Exports of qoods and services/GDP .. 21A4 33.0 33.2 Trade Gross domestic savings/GDP .. 17.2 38.8 37.9 Gross national savinqslGDP .. 10.1 35.8 36.5 Current account balance/GDP .. -34.0 -14.1 -10.8 Domestic Interest pavments/GOP .. 0.2 0.6 0.5 Investment Total debt/GDP .. 14.4 30.3 27.8 Savings Total debt service/exports .. 1.0 6.0 6.3 Present value of debt/GDP .. Present value of debt/exDorts Indebtedness 1977-87 1988-98 1997 1998 1999403 (average annual growth, GDP 7.9 6.1 7.8 7.1 7.1 Bhutan GNP per capita 7.2 2.0 2.6 2.4 3.1 --- --- Low-income group Exports of qoods and services .. STRUCTURE of the ECONOMY 1977 1987 1997 1998 Growth rates of output and investment (I) (% of GDP at factor cost) 8C Aqriculture 46.0 37.8 38.2 Industry . 27.4 36.5 36.5 4 Manufacturinq 5.8 11.4 11.6 4 Services 26.6 25.8 25.4 20 Private consumption 65.2 35.8 36.2 -20 93 94 95 93 97 98 General aovemment consumption . 17.6 25.5 25.8 GDI 0-GDP Imports of aoods and services . 34.6 42.3 42.6 I (average annual growth, '197747 1988-98 1997 1998 Growth rates of exports and Imports (%) Agriculture 6.2 3.1 3.1 3.4 2- Industrv 14,8 9.0 3.8 7.3 Manufacturina 11.6 12.2 3.6 13.0 1 Services 6.7 7.0 16.1 7.2 Private consumotion .. . , i General aovernment consumption . Gross domestic investment 4.7 9.9 0.3 7.5 9 9S 96 9 Imports of roods and services .. . xpons --Imports Gross national product 9.4 5.0 5.7 5.5 Note: 1998 data are preliminary estimates. The diamonds show four kev indicators in the countrv (in bold) compared with its income-group averaqe. If data are missina, the diamond will be incomplete BRhlutani Ann,lex B] (coit 'd) PRICES and GOVERNMENT FINANCE Domestic prices 1977 1987 1997 1998 f (% change) 20 Consumer prices .. 4.8 7.4 9.0 15r^ * Implicit GDP deflator .. 8 6 14 7 5 9 15 0 Governmenf finance 1 (% of GOP, includes current grants) 0 CulTent revenue 18.5 19.9 93 94 95 96 97 98 Current budget balance . 0 6 3.3 GDP defator - -CPI Ovierall surplusideficit . . -2 3 3.2 TRADE (U.S$ millions) 1977 1987 1997 1998 Export and import levels (US$ millions) Total exports (fob) 29 99 111 162 Electrcity . . 21 37 Agric. Prods .. 12 Manufactures Tctal imporns (cif) 101 131 136 oI1 ID I| Fuel and energy Capital goods 92 93 94 95 96 97 98 Export price index (1995=100) Import price index (1995=100) .Exports E Imports Terms of trade (1995=100) BALANCE of PAYMENTS 1977 1987 1997 1998 } (US$ millions) Current account balance to GDP ratio I%) Exports of goods and services 50 121 146 Imnports of goods and services . 144 183 203 Resource balance .. -95 -62 --57 Net income - 0 0 0 -15 Ilet current transfers . 0 6 11 -20 Current account balance -95 -56 -47 -25 Financing items (net) . 79 78 92 - Changes in net reserves 16 -22 -45 -35 Memo: Reserves includinq ooJd (US$ millions) . 176 218 Conversion rate (DEC, locaW/US$) 8.7 13.0 36 3 41 3 EXTERNAL DEBT and RESOURCE FLOWS 1977 1987 1997 1998 j'US$ millions) I Compositon of total debt, 1998 (USS millions) Total debt outstanding and disbursed 0 40 121 120 IBRD 0 0 0 0 IDA 0 9 23 24 2 Total debt service 0 1 7 9 IBRD 0 0 0 0 IDA 0 0 0 0 Composition of net resource flows Official grants . . 74 85 Official creditors 0 16 14 2 Private creditors o O -2 -2 Foreign direct investment . 0 0 0 Portfolio equity 0 0 0 0 58 World Bank program Commitments 0 0 0 14 A - IBRD E - Bilateral Disbursements 0 5 1 1 B - IDA 5 - o0 er multilateral F - Private Principal repayments 0 0 0 0 Net flows 0 5 1 1 Interest payments 0 0 0 0 Net transfers 0 5 1 0 Data on National Accounts and Debt is in calendar year, all other data is in fiscal year 11117199 Development Economics Annex B2 Bhutan - Selected Indicators of Bank Portfolio Performance and Management Indicator 1996 1997 1998 1999 1/ Portfolio Assessment Number of Projects under implementationa 2 2 2 2 Average implementation period (years)b 5.60 6.60 2.70 3.65 Percent of problem projectsa, c by number 0.00 0.00 0.00 0.00 by amount 0.00 0.00 0.00 0.00 Percent of projects at riska, d by number 0.00 0.00 0.00 0.00 by amount 0.00 0.00 0.00 0.00 Disbursement ratio (%)e 17.16 15.75 9.18 3.76 Portfolio Management CPPR during the year (yes/no) No No No No Supervision resources (total US$) 110.10 127.47 64.53 150.26 Average Supervision ('000 US$/project) 55.05 63.73 32.26 75.13 Memorandum item Since FY80 Last five FYs Projects evaluated by OED by number 5 3 by amount (US$ millions) 22.76 10.76 Percent rated U or HU by number 0.00 0.00 by amount 0.00 0.00 a. As shown in the Annual Report on Portfolio Performance (except for current FY) b. Average age of projects in the Bank's country portfolio. c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP). d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the year: investment projects only. 1/ As of November 1999. Generated by the Operations Information System (OIS) Annex B3 Page I of I Bhutan - Bank Group Program Summary, FY 2000-2002 Proposed IDA Base-Case Lending Program, FY 2000-2002a Strategic rewardsb Implementationb F:Y Project US$(AM) (HIMIL) risks (H/M/L) 2000 RURAL ACCESS ROADS 10.0 M L URBAN DEVELOPMENT 12.0 M L Subtotal 22.0 Total, FY 2000-2002 22.0 a. This table presents the proposed program for the next three fiscal years. Based on the CAS, which emphasizes knowledge transfers over resource transfers, no furither credits are currently planned but will be considered if requested by the Royal Government of Bhutan and if prepared, will come to the Board for approval under nonnal procedures. b. For each project, indicate whether the strategic rewards and implementation risks are expected to be high (H), moderate (M), or low (L). Annex B4 Page I of I Bhutan-Summary of Nonlending Services Product FY Cost (US$000) Audiencea Objectiveb Recent completions Country Economic Memorandum FY97 89 Govt, Bank, Knowledge donor, public generation, dissemination public debate, problem solving Underway in FY00 Country Assistance Strategy FY00 125 Govt, Bank, Knowledge donor, public generation, dissemination public debate, problem solving Global Environment Fund FY00-02 43 Govt, Bank, Problem donor solving Health Operational Planning FYOO-02 225 Govt, Bank, Knowledge donor generation, public debate Forestry AAA FYOO-02 180 Govt, Bank, Knowledge donor generation, problem solving Planned for FY00 and beyond 1l Post-Secondary Education Strategy FYOO-02 210 Govt, Bank, Knowledge donor generation, problem solving Poverty Analysis FYO1-02 130 Govt, Bank, Knowledge donor, public generation, dissemination public debate, problem solving Financial Sector Strategy FYOO-02 180 Govt, Bank, Knowledge donor generation, problem solving Public Expenditure Analysis FYOI-02 130 Govt, Bank, Knowledge donor generation, problem solving a. Government, donor, Bank, public dissemination. b. Knowledge generation, public debate, problem-solving. 1/ AAA assistance is seen as open-ended in that it will respond to the needs of the government as and when needed, and will therefore continue while it is justified in terms of the knowledge transfer needs of the government. Annex B5 Page 1 of 1 Bhutan: Social Indicators Latest single year Same regionlincome group South Low- 1970-75 1980485 1992-98 Asia income POPULATION Total population, mid-year (millions) 0.44 0.54 0.76 1,305 3,515 Growth rate (% annual average) 1.4 2.0 2.9 1.8 1.7 Urban population (% of population) 3.5 .. 15.0 27.3 30.7 Total fertility rate (births per woman) .. .. 5.8 3.5 3.2 POVERTY (% of population) National headcount index .. .. Urban headcount index Rural headcount index .. .. INCOME GNP per capita (US$) .. 290 480 430 520 Consumer price index (1995=100) .. 38 109 117 122 Food price index (1995=100) .. .. INCOIMEICONSUMPTION DISTRIBUTION Gini index Lowest quintile (% of income or consumption) .. .. Highest quintile (% of income or consumption) .. .. SOCIAL INDICATORS Public expenditure Health (% of GDP) .. .. 3.6 Education (% of GDP) .. .. 3.5 Social security and welfare (% of GDP) .. .. Gross primary school enrollment rate M% of' age group) Total 35 .. 72 100 108 Male .. .. .. 109 113 Female 90 103 Access to safe water (% of population) Total .. .. 64 81 74 Urban .. .. 75 84 Rural .. .. 54 80 Immunization rate (% under 12 months) Measles .. 43 84 81 80 DPT .. 52 87 87 82 Child malnutrition (% under 5 years) .. .. 38 53 Life expectancy at birth (yearsJ Total 46 .. 66.0 62 63 Male .. .. 65.9 62 62 Female .. .. 66.1 63 64 Mortality Infant (per thousand live births) 142 .. 71 77 69 UJnder S (per thousand live births) .. .. 97 100 97 Adult (15-59) Male (per 1,000 population) .. .. .. 413 557 Female (per 1,000 population) .. .. .. 423 513 Maternal (per 1,000 live births) 7.7 .. 3.8 Sources: 1999 World Development Indicators CD-ROM, World Bank and Royal Government of Bhutan. Annex B6 Page 1 of 2 Bhutan - Key Economic Indicators Actual Estimate Projected Indicator 1994 1995 1996 1997 1998 1999 2000 2001 2002 National accounts (% of GDP) Gross domestic product 100 100 I00 100 100 100 100 100 100 Net indirect taxes 4 4 3 3 5 5 5 5 5 Agriculture 40 39 39 36 36 36 36 36 35 Industry 28 33 32 35 35 35 35 35 38 Services 27 24 26 25 24 24 24 24 22 Total Consumption 55 51 62 61 62 61 60 59 56 Gross domestic fixed investment 52 51 47 46 45 45 45 46 46 Government investment 14 14 15 15 15 15 15 15 16 Private investment 38 37 32 31 30 30 30 31 31 Change in stocks 3 2 1 2 3 4 4 4 3 Exports of goods & services 30 37 34 33 33 33 33 33 35 Imports of goods & services 39 42 44 42 43 42 42 41 40 Gross domestic savings 45 49 38 39 38 40 40 41 44 Gross national savingsa 42 41 31 36 36 38 38 40 43 Memorandum items GDP (US$ million at current prices) 271 317 342 404 428 446 492 538 594 GNP per capita (US$, Atlas method) 360 390 420 460 480 540 570 600 640 Real annual growth rates (%) GDP at market prices 8.1 6.8 5.5 7.8 7.1 7.0 7.0 7.1 7.2 GDP at factor cost 6.4 7.4 6.1 7.3 5.8 6.0 6.0 6.1 6.2 Gross Domestic Income . . .. . . .. . . Real annual per capita growth rates (%) GDP at market prices 5.0 3.7 2.4 4.7 4.0 3.9 3.9 4.0 4.1 Total consumption . . . .. Private consumption .. .. . .. . .. Balance of Payments (millions of US$) Exports ofgoods & services 84 90 121 121 146 146 154 163 180 Merchandise FOB 63 70 98 99 III 109 114 121 134 Imports ofgoods & services 130 132 164 183 203 243 269 299 328 Merchandise FOB 93 97 111 131 136 165 185 209 231 Resource balance -47 -42 -43 -62 -57 -97 -115 -135 -148 Net current transfers 7 8 6 6 11 10 11 11 11 Current accountbalance (incl. grants) 17 18 43 18 39 38 19 7 3 Net foreign direct investment 0 0 0 0 0 1 2 2 3 Long-term loans (net) 6 3 11 12 -1 6 6 3 0 Official 8 5 13 14 2 6 5 3 0 Private -2 -2 -2 -2 -2 0 0 0 0 Other capital (net, incl. errors & ommissi -10 -6 -29 -8 7 -4 0 9 14 Change in reservesb -13 -14 -25 -22 -45 -4t -26 -21 -20 (Continued) Annex B6 Page 2 of 2 Bhutan - Key Economic Indicators (Continued) Actual Estimate Projected Indicator 1994 1995 1996 1997 1998 1999 2000 2001 2002 Memorandum items Resource balance (% of GDP) -17.6 -14.3 -13.0 -166 -13.7 -22.2 -24.6 -26.2 -26.1 Real annual growth rates (%) Merchandise exports (FOB) Primary Manufactures Merchandise imports (CIF) Public finance (% of GDP)' Current revenues 21.2 20.3 19.6 18.5 19.9 19.3 19.8 19.9 20.6 Current expenditures 19.8 20.6 18.2 17.9 16.7 16.8 17.8 18.2 18.4 Current surplus (+) or deficit(-) 1.5 -0.3 1.5 0.6 3.3 2.5 2.0 1.8 2.2 Capital expenditure 20.6 18.8 21.1 20.0 14.0 18.2 19.3 19.7 19.9 Foreign financing .. 19.1 21.6 18.0 13.9 15.7 17.4 17.8 17.6 Monetary indicators M21GDP 24.6 27.2 30.1 32.7 39.2 44.6 49.8 55.2 61.0 Growth of M2 (%/) 21.5 29.9 30.4 30.9 41.7 30.0 29.0 28.0 28.0 Private sector credit growth / total credit g .. .. .. .. .. .. Price indices (1980 =100) Merchandise export price index Merchandise import price index Merchandise terms of trade index Real exchange rate (US$/LCU)d Real Interest Rates - Consumer price index (% FY change) 5.9 8.2 9.3 7.4 9.0 9.2 7.0 7.0 7.0 GDP deflator (% CY change) 9.3 9.8 11.4 14.7 5.9 7.8 8.0 8.0 8.0 a. Includes net unrequited transfers excluding official capital grants. b. Includes use of IMF resources. Note that a minus sign (-) indicates an increase in assets. c. Refers to Consolidated Central Government accounts d. "LCU" denotes "local currency units." An increase in US$/LCU denotes appreciation. Data on National Accounts and Debt is in calendar year; all other data is in fiscal year. Due to large exchange rate devaluations in 1997 and 1998, there is a big jump in the 1999 GNP per capita projection. Annex B7 Page 1 of 1 Bhutan - Key Exposure Indicators Actual Estimate Projected Indicator 1994 1995 1996 1997 1998 1999 2000 2001 2002 Totaldebtoutstandingand 105 106 114 121 120 126 131 134 134 disbursed (TDO) (US$m)' Net disbursements (US$mn)' 6 3 11 12 (1) 6 5 3 0 Total debt service (TDS) 8 10 7 7 9 7 7 7 7 (US$m)a Debt and debt service indicators (%) TDO/XGS' 124.9 117.3 94.4 99.5 82.0 85.9 85.3 81.8 74.3 TDO/GDP 38.6 33.3 33.4 29.8 28.0 28.2 26.6 24.8 22.5 TDS/XGS 9.0 10.9 5.8 5.9 6.4 5.0 4.6 4.3 3.8 Concessional/TDO 90.7 93.0 95.7 96.2 100.0 .. IBRD exposure indicators (%) IBRD DS/public DS 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Preferred creditor DS/public 14.7 12.2 21.4 21.1 18.3 28.8 29.6 31.0 31.9 DS (%)C IBRD DS/XGS 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 IBRD TDO (US$m)d 0 0 0 0 0 0 0 0 0 Of which present value of 0 0 0 0 0 0 0 0 0 guarantees (US$m) Share of IBRD portfolio (%) .. .. .. .. .. .. IDA TDO (US$m)d 21 23 23 23 24 25 29 33 36 IFC (US$m) Loans 0 0 0 0 0 0 0 0 0 Equity and quasi-equity Ic 0 0 0 0 0 0 0 0 0 MIGA MIGA guarantees (USSm) 0 0 0 0 0 0 0 0 0 a. Includes public and publicly guaranteed debt, private nonguaranteed, use of IMF credits and net short- term capital. b. "XGS" denotes exports of goods and services, including workers' remittances. c, Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks, the IMF, and the Bank for International Settlements. d. Includes present value of guarantees. e. Includes equity and quasi-equity types of both loan and equity instruments. Annex B8 Page I of I Status of Bank Group Operations in Bhutan Operations Portfolio Difference Between expected Original Amount in US$ Millions and actual Last PSR Fiscal disbursemnents a/ Supervision Rating b/ Project ID Year Borrower Purpose IBRD IDA Cancel. Undisb. Orig Frm Rev'd Dev Obj Imp Prog Number of Closed Projects: 5 Active Projects BT-PE-9582 1994 GOB FORESTRY Ill 0.00 5.40 0.00 3.41 3.03 .89 S S BT-PE-9574 1998 ROYAL GOV'T OF BHUTAN EDUCATION II 0.00 13.69 0.00 12.81 2.43 0.00 S S Total 0.00 19.09 0.00 16.22 5.46 .89 Active Projects Closed Projects Total Total Disbursed (IBRD and IDA): 2.64 21 .00 23.64 of which has been repaid: 0.00 .91 .91 Total, now held by IBRD and IDA: 19.09 16.37 35 .46 Amount sold : 0.00 0.00 0.00 Of which repaid : 0.00 0.00 0.00 Total Undisbursed : 16.22 0.00 16.22 a. Intended disbursements to date minus actual disbursemenits to date as projected at appraisal. b. Following the FY94 Annual Review of Portfolio perfor=miice (ARPP), a letter based system was introduced (HS = highly Satisfactory, S = satisfactory, U unsatisfactory, RU = highly unsatisfactory): see proposed Improvements in Project and Portfolio Performance Rating Methodology (SecM94-901), August 23, 1994. Note Disbursement data is updated at the end of the first week of the month. Generated by the Operations Information System (OIS) Annex B9 Page I of I Bhutan-CAS Summary of Development Priorities Reconciliation Country Country Bank priorityj of country and Network area performancea Major issueb priorioyc Bank priorttiesd Poverty Reduction & Economic Management * Poverty reduction Good Rural poverty High High * Economic policy Excellent Diversify High High econ. * Public sector Good Cap.building High High * Gender Good Women's Moderate Moderate participation in the formal sector Human Development Department * Education Excellent Basic educ. High High * Health, nutrition & population Good Improving High High quality of health care & pop. growth • Social protection Good Social Moderate High Ongoing inclusion of dialogue all groups Environmentally & Socially Sustainable Development i Rural development Fair More rural High High access roads; agric. services * Environment Excellent Forest manag. High High & conserv. * Social development Good Decentral. & High Moderate Other donors participation Finance, Private Sector & Infrastructure * Financial sector Fair Liberalization Moderate High Ongoing dialogue • Private sector Fair Privatization Moderate Moderate * Energy & mining Good Hydropower High Moderate Other donors development * Infrastructure Good Road High High maintenance, rural mobility & urban planning a. Use "excellent," "good," "fair," or "poor." b. Indicate principal country-specific problems (e.g., for poverty reduction, "rural poverty;" for education, "female secondary completion;" for enviromment, "urban air pollution"). c. To indicate priority, use "low," "moderate," or "high." d. Give explanation, if priorities do not agree; for example, another MDB may have the lead on the issue, or there may be ongoing dialogue. Template created by the Operations Information System (OIS) MAP SECTION , ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~IBRD 30467 _ FLEVATION IN MLTERs. ~~~~ ~ ~ ~~~~ ~~~90 00 90'30 91 009,30 92-'00 t '29,"">e 5000 ~~~~~~~~~~~28,30- BHUTAN MM30 ,( _,p3. ,,2 ¢ E _. M 0 . ' ' ., ' _, u 4, \. NATIONAL PROTECTED AREAS <*> NATIONALNAL CATECTEDPAREA z - z . . @ H:( M t L'~~~~~~A Y .............. $;._.... ,RIVERS NTOA AIA 1 .1 .7- + tP 4 2 ,4 ;l .,< - ,{ ._aF <_,-. t t AIRPORT S O HERTOWNS~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~0 OTHR TWN > \ r' \ ~~~~~~~~~~~~~2 UNPA EDROADS NTERNATIONALBOUNDARES~~~~~~~~~~~~- - - - N P V E R A D I T RN TI N A B U N A R E 89 001 89 10 r .t A fftt * t§SAtnwns E | KJ y 0 vf 0 lingma:1hu° ai0 stb tPe~~~~~~~~~~~~~~~~~~~~~~~~0?o 0 3 4 t > E .c"4; ,,. <;; F < I g S SANOCUP (.N JE |UTiqAN ; <- * is~~~~~~~~~~~~~~~bo / r9 W~~~~~~~~~~~~~~~~~~~~~~~ ( HIfN WILDLIFE SANCTUARY ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ Lh.t 89900'~~~~~~~~~~~~ ~ ~ ~~~~ ~ ~ ~~~~~~~~~~~~~~~~ K,U3e' 900090ms910091 6'Yongtn J* T,~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ETL3Tlr