Countries and Regions

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p. 2 of 4 BACK | NEXT I. Current Development Trends and Issues II. Implementation of the Country Strategy and Program III. Portfolio Management Issues IV. Country Performance and Assistance Levels

Country Strategy and Program Update 2004-2006: Bhutan

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II. Implementation of the Country Strategy and Program

A. Progress under the Poverty Partnership Agreement

9. The poverty reduction partnership agreement (PPA) between the Government and the ADB was signed on 23 October 2001 with the overall objective of improving the living standards in Bhutan. The country’s development philosophy of Gross National Happiness is consistent with ADB’s overarching development objective of poverty alleviation, and the strategic and thematic thrusts of this CSPU. Based on the findings of a pilot survey under the ADB-assisted Household Income and Expenditure Survey (HIES), and using the benchmark of a minimum caloric intake of 2,124 calories per person per day, an absolute poverty line has been computed showing 29% of the population of rural areas and 2.4% of the urban population as poor. While the Government has not adopted an explicit poverty reduction strategy, it is committed to achieving the Millennium Development Goals (MDGs) by signing the PPA with ADB and by adopting an integrated rural development program comprising, amongst others, agriculture support services, improved rural access, and targeted food-aid programs. In order to measure the progress towards the achievement of MDGs, the Government with ADB assistance is strengthening research and diagnostic work and is undertaking the 2003 integrated living standards survey. To better assess the magnitude and situation of urban poverty, an urban poverty study is being launched. An ongoing ADB technical assistance⁵ is providing support for baseline poverty data. A follow-on technical assistance project⁶ will assist in developing specific capacities to monitor and measure the impact of poverty reduction policies, both at the national and sub national levels. This will facilitate improving targeting efficiency and design of poverty alleviation initiatives.

10. Available data suggests that Bhutan remains on track in its efforts to achieve the MDGs. Bhutan intends to achieve the universal primary education MDG by 2007, about 8 years before the target date. The primary school gross enrollment rate increased from 67% in 1990 to 72% in 2000. Significant improvements have been achieved for such MDGs as decreased infant and maternal mortality rates, lower child malnutrition and better access to clean drinking water (Appendix 1, Table A1.1). While health care coverage is high—90%—the Government plans to improve delivery of health services. ADB is assisting the Government reduce poverty in the medium-term by supporting program and projects relating to basic skills development, rural electrification, urban infrastructure, rural roads, private sector development, and integrated rural development.

B. Progress in the Country Strategy and Program Focus Areas

1. Private and Financial Sector Development

11. Promotion of private sector and enhancing competitiveness and governance of the financial sector are two main areas that need to be addressed on an urgent basis. The NFYP places high priority on the development of the private sector whose growth remains hampered by a small domestic market, high transport costs, shortage of term financing, and inadequate social and physical infrastructure. To facilitate a private-sector friendly enabling environment, the Government in December 2002 approved a foreign direct investment policy as recommended by ADB⁷. The tariff structure was simplified in 2002 and the weighted average tariff rate was lowered to 15%. Sales tax and customs duty on a wide range of domestic and commercial goods was abolished and the customs duty on spare parts for all vehicles was reduced from 30% to 10%. To facilitate import procedures for the private sector, the authority for issuing import licenses was transferred in July 2002 from the Ministry of Finance to the Ministry of Trade and Industry. In February 2002, the Government approved a proposal to build, with ADB assistance, a dry port for trade facilities and services and identified five industrial estates to ease the acute shortage of land for industrial development. A business facilitation cell in Bhutan was inaugurated in November 2002 as part of the ADB-sponsored South Asia Subregional Economic Cooperation (SASEC) activities.

12. Key challenges in Bhutan's financial sector continue to be the need to improve market competitiveness, strengthen the legal and regulatory framework and develop market-oriented human resource capability. The development of standardized accounting and auditing procedures, efficient payment mechanisms, and new non-bank financial institutions would also strengthen the financial sector. The ADB-assisted financial sector review⁸ provides a road map to help develop more effective financial markets and financial instruments. In 2002, the Government implemented new prudential regulations, and established a Monetary Operations Committee, to formulate and implement policy instruments for a sound financial system. A key development in the capital market in June 2002 was the floating of shares for the newly opened Bhutan Beverages Company Ltd., which was over-subscribed by 2.5 times. Based on ADB recommendations⁹, in July 2002, an annuity-based, multi-tiered retirement plan—the National Pension and Provident Fund—was established as an autonomous body governed by the National Pension Board. In 2002, ADB continued to provide technical assistance¹⁰ for the strengthening of the financial sector including strengthening of its regulatory regime by providing technical assistance¹¹ to the Royal Monetary Authority.

2. Energy

13. The power sector continues to be the Government's largest source of revenue, providing 45% of total national revenues and accounting for about 11% of GDP by July 2002. ADB assistance to the power sector includes rural electrification and institutional and capacity development for sector restructuring, including the establishment of a policy and legal framework to restructure the power sector.¹² In July 2002, the Government separated the Department of Power (DOP) into three agencies: the Bhutan Power Corporation (BPC), the Department of Energy, and the Bhutan Electricity Authority (BEA). This was consistent with ADB recommendations, and a step toward strengthening institutional capacity, planning, and legal infrastructure. Through the new framework, BEA will function as the regulatory body for enforcing rules and regulations and the BPC will be responsible for the utility functions of the Department. The Department of Energy will remain the planning and policy body of the energy sector. ADB also recommended that the Druk Hydropower Corporation (DHPC) be established to consolidate all Government-owned power stations as profit centers. DHPC will include system dispatching and trading as a distinct division or profit center and will facilitate private sector participation in hydropower generation when appropriate policies and a legal framework are in place. To facilitate achievement of these objectives, ADB plans to provide, in 2003, TA for the establishment of DHPC and strengthening of BEA. Through the NFYP, the Government plans to electrify 15,000 households in 20 districts to achieve 100% electrification by 2020. In support of this, in 2003 ADB will be processing a loan to electrify about 8000 households. A number of bilateral development partners are also providing assistance for the development of the power sector (Appendix 1, Table A1.5). Through its SASEC initiative, ADB will continue to support regional electricity exchange during the CSPU period.

3. Transport

14. The Government prepared and submitted a draft road act to the National Assembly for enactment during its 2003 session. This was consistent with ADB recommendations,¹³ and a step towards strengthening institutional capacity, planning, and legal infrastructure. The Government recognizes that road sector performance can be improved through private sector participation and is considering privatization of the mechanical division of the Department of Roads’. The Government has given the development of road infrastructure the highest priority in the NFYP. This is because it recognizes the importance of an efficient, reliable road network in a landlocked country where about 30% of the gweogs are connected to feeder roads, and another 30% are only partially connected. The inadequate road system keeps many farmers dependent on subsistence agriculture with no, or limited, access to markets, education, and health care. Bhutanese have articulated the development of farm and feeder roads as the highest priority need through their GYTs and DYTs. During the CSPU period (2004–2006), ADB’s sectoral engagement will comprise policy dialogue, to facilitate the continuity of sectoral reform, and technical and project assistance. Policy dialogue will include measures for phased introduction of road user charges and earmarking of road user revenues for sustainable sectoral development. Recognizing the need to expand Bhutan's road network to promote economic growth that reaches the rural poor, in 2003, ADB is processing a project preparatory technical assistance (PPTA)¹⁴ to provide a follow-up loan for the ongoing Road Improvement Project.

4. Social Development

15. The Government will establish a housing corporation responsible for formulation and implementation of housing programs during the NFYP. Estimates of housing demands based on eight principal urban centers show that more than 1,500 dwelling units per year are needed over the next 10 years. An ADB TA¹⁵ will support the Government's goals for the housing sector as set out in its 2002 National Housing Policy: to provide safe, basic, and affordable housing; to enable greater home ownership among low- and middle income households in the urban areas; and to develop a transparent and well-functioning land and housing market. Recognizing the increasing imbalance between market demand and the credentials of secondary education graduates, the Government plans to increase emphasis on vocational and technical education during the NFYP. Teaching specialized, marketable skills to youth has become increasingly important, considering that the 2002 unemployment rate of 1.9% is expected to almost double during the NFYP period. Through its ongoing support,¹⁶ ADB is assisting in the development of marketable skills for youth and thus, facilitating labor absorption.

5. Subregional Cooperation

16. Bhutan was a participating member of ADB's recently concluded SASEC regional technical assistance (RETA) program. Through this RETA, Bhutan participated in all five sectors identified by the participating countries: energy and power; transport; the environment; tourism; and trade, investment, and private sector cooperation. Bhutan chaired the environment group. It participated in the finalization meeting of country advisers held at ADB headquarters in October 2002. Bhutan is also a member of the follow–on RETA¹⁷. The Government plans to rationalize its trade and tariff regime so it can participate in the South Asian Preferential Trading Arrangement. It plans to improve trade and transit arrangements with India and Bangladesh and to negotiate preferential trading arrangements with Nepal and Thailand.

C. Highlights in Coordination of External Funding and Partnership Arrangements

17. The Eighth Round Table Meeting of Bhutan’s development partners was held in Geneva, Switzerland, 18-19 February 2003. Major development themes discussed were decentralization, poverty, and the NFYP. Coordination among multilateral and bilateral development partners continues (Appendix 1, Table A1.5). ADB is actively coordinating with other development partners to assist the Government in meeting the development objectives of the NFYP.

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