Countries and Regions

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p. 4 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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IV. Country Performance and Assistance Levels

A. Lending Level Proposed

20. An indicative lending level of $28.2 million, or an average of $9.4 million per year, is programmed for 2004-2006 (Appendix 1, Table A1.10). However, the proposed ADF lending levels are subject to the outcome of the annual performance-based allocation (PBA) exercises and overall ADF resource availability. The assessment of country-specific criteria shall be the basis for triggering high, base, or low lending scenarios each year (Appendix 1, Table A1.12). Depending on ADF resources availability in 2004, the ADF lending program will need to be reviewed. The issue will be revisited and confirmed during the Country Program Confirmation Mission. The 2005 and 2006 ADF lending program will depend on the outcome of the discussions regarding ADF replenishment.

21. A two-step criterion is used to determine the ADF allocation. It comprises country performance assessment common criteria and country-specific criteria. For the former category, Bhutan performed well and was ranked in the first quintile of ADF recipient countries. For the latter category however, the overall assessment, based on country-specific performance triggers contained in the 2001 CSPU, indicated a base case scenario in part reflecting less than optimal portfolio management of ADB projects and delays in privatization. A new set of country-specific criterion has been included in this CSPU and forms part of the overall policy dialogue with the Government. The country programming mission (CPM) discussed the issues of financial sector reforms, private sector development and diversification of the economy with the Government. Performance against these criterion would, in part, form the basis for the allocation of ADF resources in 2005.

22. There are 6 loan projects in the pipeline for 2004-2006 of which 4 projects are classified as poverty interventions. The lending program will assist the Government in reducing rural poverty by expanding market access, increasing coverage of road network, and urban housing development for low and medium income groups. To stimulate private sector investment and facilitate employment generation, a new program for small and medium enterprise (SME) is included in the three-year assistance program. To facilitate deepening and consolidation of financial sector reforms, a follow-on financial sector reform program loan is included in the CSPU. To open-up additional rural areas, promote development of export-oriented micro enterprises, and provide market access to farmers an integrated rural development project has been included in the CSPU. Assistance will also be provided for the rural electrification and industrial estate and dry port development projects. To promote cross-border trade, parts of the road expansion project will be funded through the SASEC initiative.²⁰ The concept papers for the lending products are in Appendix 2.

B. Nonlending Program

23. The nonlending program comprising 15 projects (4 PPTAs, 4 economic, thematic, and sector work TAs, and 7 institutional development TAs) is planned, for a total amount of $4.05 million in 2004–2006 (Appendix 1, Table A1.11). This is equivalent to an average of about $1.35 million per year. Concerted efforts will be required to augment TA resources through cofinancing. The TA program excluding PPTAs is largely focused on institutional strengthening of the power sector, Bhutan's most important sector, and the financial sector which facilitates private sector development. The concept papers for nonlending products and services are in Appendix 3.

C. Summary of Changes to Lending and Nonlending Program

24. The Government confirmed to the CPM its preference to use grant assistance from bilateral development partners for the health sector. Furthermore, the Government does not plan to "borrow" funds from ADB for the education sector. Therefore, no further ADB involvement in these sectors is proposed for the CSPU (2004-2006). As a corollary, the proposed 2004 PPTA for Quality Improvement of Education has been dropped. The Government also advised that it is receiving grant assistance for decentralized institutional development and for information communication technology and thus does not plan to “borrow” from ADB for those areas.

25. The following changes have been effected after consultation with the Government during the March 2003 Country Program Mission (CPM): Rural Electrification Network Expansion Project has been upgraded from standby to firm category for 2003; the 2004 standby project Subregional Infrastructure Development and Trade Promotion has been renamed as Industrial Estate and Dry Port Development Project, and upgraded to the firm category for 2004. The Transport Network Expansion Project has been renamed Road Network Expansion Project which will be processed as planned for 2005 and a new initiative for SME has been included. Two new projects have been included for 2006: the Financial Sector Reform Program, and the Integrated Rural Development Project.

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