Regions and Countries

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Bhutan

Economic performance

Economic growth: Bhutan’s economy continued to grow strongly in 2000, with real GDP expanding by 6.1 percent, up from 5.9 percent in 1999. Large hydropower and industry sector projects expanded construction activities; once these projects are commissioned, more rapid industry sector growth, particularly in electricity, is expected.

Employment: Since an estimated 85 percent of the population lives in rural areas, agriculture remains the major employer, accounting for 75 percent of total employment. The Government (public administration and defense), the second largest employer, accounted for only 4.7 percent of total employment. Excluding agriculture, the private sector employed 2.9 percent of Bhutan’s workforce in 1999. The Government is addressing the policy and institutional constraints, and is establishing the National Technical Training Authority and the National Employment Board.

Inflation: Consumer price inflation declined markedly in FY2000 (ending 30 June) to 3.6 percent from 9.2 percent in FY1999 largely because of a drop in prices of edible oil. Money supply growth remained at 21.4 percent in FY2000 as in the previous year. The increase in money supply, however, did not translate into an increase in the inflation rate because of a rise in the monetization of the economy.

Fiscal balance: The Government continued to cover its expenditures from current revenues in FY2000. Inflows of foreign grants were insufficient to cover development expenditures. Thus, the overall budget deficit grew to 3.9 percent of GDP, up from 1.8 percent in the previous year.

External sector: The dollar value of exports grew by 5.6 percent in FY2000 after a decline of 5.0 percent in the previous year. Import growth moderated to 14.1 percent in FY2000 from 19.3 percent in the previous year. The trade account deficit widened slightly from 15 percent of GDP in FY1999 to 17 percent of GDP in FY2000; the current account deficit rose from 25 percent of GDP to 29 percent of GDP during the same period. Capital flows, mostly in the form of aid for infrastructure investments, covered the current account deficit, resulting in an overall balance-of-payments surplus of more than 8 percent of GDP, compared with 11 percent in the previous year. This increase in foreign exchange reserves gave Bhutan enough foreign currency at the end of the fiscal year to cover 19 months of imports. External debt, mainly from multilateral development agencies, continued to be small. At the end of FY2000, total public external debt was 40 percent of GDP. Debt service in FY2000 was about 5 percent of merchandise export earnings.

Domestic policies: The National Assembly passed several important bills, including Pesticides Act; Environment Assessment Act; Negotiable Instruments Act; Companies Act; and Sales Tax, Customs and Excise Act. In addition, the Personal Income Tax Act was submitted for further public discussion, with implementation planned for FY2002.

ADB operations

Operational strategy: ADB’s new operational strategy for Bhutan, finalized in 2000, aims to reduce poverty and improve the quality of life. ADB will support this goal by promoting economic growth and social inclusion through physical and social infrastructure, and private sector development; employment creation; and improved economic management. The impact of private sector-led development on income and employment generation could be strengthened with more efficient financial intermediation; road transport development and expanded power transmission and distribution systems; and strengthened vocational, technical, and basic skills training.

Policy dialogue: Policy dialogue with the Government focused on promoting private sector development; improving the efficiency of public service delivery and cost recovery; and protecting the environment. ADB will continue to support the Government’s efforts to provide an enabling environment for private sector development by rationalizing and strengthening banking and financial institutions; continuing liberalization of foreign trade and exchange, and investment regulations; liberalizing interest rates to reflect the true underlying cost of resource mobilization, intermediation, and risk; and preparing transparent legislation and regulatory procedures. Financial viability and sustainability of power operations will be pursued by making the Department of Power a corporate entity. ADB also supports the ongoing efforts to improve domestic resource mobilization, including cost recovery of public service delivery, particularly in the health and urban services.

Loans and technical assistance: In 2000, ADB approved two loans totaling $19.6 million for health care reform and road improvement. The health care reform program will strengthen the financing, management, and regulatory framework of the health sector. The road improvement project will improve the East-West Highway, thereby increasing access to health, education, and other essential services and helping bring poor communities into the economic mainstream. ADB also approved five technical assistance grants totaling $2.0 million.

Project implementation: Since joining ADB in 1982, Bhutan has received 17 loans, of which 7 were active at the end of 2000. Contract awards totaled $10.2 million, bringing the cumulative figure to $57.8 million. The contract award ratio was 29.4 percent, higher than the ADB-wide average of 21 percent. Disbursements during the year totaled $6.9 million, bringing cumulative disbursements to $54.1 million. The disbursement ratio was 16.3 percent, lower than the ADB-wide average of 20.5 percent.

A country portfolio review in 2000 showed that while project implementation in Bhutan has improved, several issues still exist: limited involvement of executing agencies at early stages of the project cycle, particularly in designing technical assistance; slow utilization and liquidation of imprest accounts; and transfer of project staff because of extended out-of-country training and as a consequence of the ongoing reorganization of ministries. ADB and the Government agreed on a time-bound action plan to improve portfolio performance by enhancing the ownership level during the project feasibility study and throughout the project cycle. In 2000, ADB assisted the Government in its first study on poverty. The poverty assessment benchmarks and analysis will become the basis for developing institutional capabilities to plan, monitor, and evaluate future poverty interventions.

   

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