Bhutan: Capital Market Development

Sovereign Project | 46300-001

Summary

Impact: A well-functioning financial system that supports basic capital and investment needs as well as Bhutan's longer-term economic objectives.

Outcome: A deeper and more stable capital market.

Outputs:

(i) Restructuring and enhanced ICT capacity of NPPF. The first output will support NPPF to assess reorientation of its business plan since NPPF will have to discontinue retail lending from June 2014. This would entail developing modalities for alternative investment of pension funds in line with international best practices conducive to the Bhutanese environment. This output will also enhance the information and communication technology (ICT) capacity of NPPF through procurement of a $120,000 Data Center and Disaster Recovery System that will crucially ensure user data security and mitigate risks such as database corruption, hardware failures, and those due to natural disasters.

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Project Name Capital Market Development
Project Number 46300-001
Country Bhutan
Project Status Approved
Project Type / Modality of Assistance Technical Assistance
Source of Funding / Amount
TA 8280-BHU: Capital Market Development
Technical Assistance Special Fund US$ 1.25 million
Strategic Agendas Inclusive economic growth
Drivers of Change Governance and capacity development
Private sector development
Sector / Subsector Finance - Money and capital markets
Gender Equity and Mainstreaming
Description

Impact: A well-functioning financial system that supports basic capital and investment needs as well as Bhutan's longer-term economic objectives.

Outcome: A deeper and more stable capital market.

Outputs:

(i) Restructuring and enhanced ICT capacity of NPPF. The first output will support NPPF to assess reorientation of its business plan since NPPF will have to discontinue retail lending from June 2014. This would entail developing modalities for alternative investment of pension funds in line with international best practices conducive to the Bhutanese environment. This output will also enhance the information and communication technology (ICT) capacity of NPPF through procurement of a $120,000 Data Center and Disaster Recovery System that will crucially ensure user data security and mitigate risks such as database corruption, hardware failures, and those due to natural disasters.

(ii) Establishment of regulatory and supervisory framework for fund management industry. The second output will assist RMA in setting a regulatory and financial supervisory policy that strikes the right balance in formulating effective fund management industry regulations and rules that would enhance effective regulation and supervision of fund management companies thereby ensuring the stability of the Bhutanese financial system. Training will also be provided to enhance RMA staff expertise both at the management level and the departmental level in terms of drafting fund management industry regulations as well as ensuring effective implementation of these regulations.

(iii) Formulation of a capital market master plan. The third output will assist RMA, MOF, RSEBL, brokerage firms, fund management companies, and other capital market intermediaries to formulate a master plan that charts the future direction of the Bhutanese capital market for the next 10 years from 2013 through 2022. This master plan aims to develop the Bhutanese capital market by providing clarity of vision and objectives to the capital market stakeholders as well as recommendations to be implemented in the medium- and long-term. The master plan would also provide support to establish the foundation of a corporate bond market and that of a fund management industry. It is intended to ensure that the capital market is well-positioned to support Bhutan's economic development and wealth creation among the urban and rural populace.

(iv) Establishment of regulatory and supervisory framework for Domestic Credit Rating Agency. The fourth output will assist RMA in setting a regulatory and supervisory framework (including an operating license regime) for establishing a Domestic Credit Rating Agency (DCRA) in Bhutan. The output would also support the credit rating agency regulators both at the management and the supervisors level to enhance their capacity building in understanding and introducing the appropriate level of regulation and supervision for rating agencies. The eventual establishment of a DCRA would add an important dimension to the capital market by catalyzing the enhanced supply and demand of equities and bonds as well as promoting entry of foreign investment funds.

(v) Strengthened public debt management. The fifth output will strengthen public debt management practices within MOF by building on work initiated by the World Bank (i.e. formulation of a public debt management reform plan in November 2011) with a focus on implementing a medium-term debt management strategy that would focus on debt monitoring (including forecasting debt repayments), timely short-term bond issuance according to maturity profiles and currency denominations to stagger payment streams over the medium-term to avoid spikes in debt payments and asset liability mismatches, and encompass measures to develop and maintain an efficient market for government securities that would be pivotal in helping to create a liquid domestic debt market. Support will also be provided to ensure MOF's successful issuance of rupee denominated bonds in India to alleviate the rupee liquidity crunch facing the country.

(vi) Supporting capacity for upcoming Strengthening Economic Management Program. The sixth output will provide resources to support implementation of key reform actions under the upcoming Strengthening Economic Management Program which will be considered by the Board in early 2013. The output will facilitate a stable and sustainable high growth rate over the medium to long term by curtailing excessive domestic credit growth, limiting rapid expansion of public spending, and enhancing the scope for liquidity management. This output also includes activities helping the government in exploring the possible subscription of an international sovereign credit rating.

Project Rationale and Linkage to Country/Regional Strategy The proposed TA will focus on capital market development which supports the government's finance sector objective of ensuring diversification of sources of growth and fostering private sector development as per its Tenth Five-Year Plan (2008-2013) and its long-term strategy framework (Bhutan 2020 Vision). Furthermore, the proposed TA is also consistent with ADB's Interim Country Partnership Strategy (2012-2013) and ADB Strategy 2020. Under the Interim CPS (2012-2013), ADB adopts good governance (by strengthening the government's financial and economic management) as one of its strategic thrust and pillars. Private sector development has also been identified as one of the key cross-cutting themes in the Interim CPS (2012-2013). The Strategy 2020 includes support for capital market development as one of the ADB's core operational priorities, as it can facilitate private sector development and infrastructure development, which rely on the availability of long-term local currency funds for viable financial structures.
Impact A well-functioning financial system that supports basic capital and investment needs, as well as Bhutan's longer-term economic objectives
Project Outcome
Description of Outcome A deeper and more stable capital market
Progress Toward Outcome Ongoing.
Implementation Progress
Description of Project Outputs

NPPF restructured and its ICT capacity enhanced

Regulatory and supervisory framework for fund management industry established

Capital market master plan formulated

Regulatory and supervisory framework for domestic credit rating agency established

Public debt management strengthened

Capacity for proposed Strengthening Economic Management Program supported

Status of Implementation Progress (Outputs, Activities, and Issues) The contract with the consulting firm, Aries Group Ltd, and various individual consultants are now ongoing. In addition, several training sessions have been held. Equipment has been procured under the TA. Several individual consultants have been recruited in support of the BHU: Strengthening Economic Management Program.
Geographical Location
Summary of Environmental and Social Aspects
Environmental Aspects
Involuntary Resettlement
Indigenous Peoples
Stakeholder Communication, Participation, and Consultation
During Project Design
During Project Implementation
Business Opportunities
Consulting Services A team of 7 international consultants will provide a total of 17.5 person-months of consulting services. Consulting services will commence in December 2012 and conclude by December 2014. The selection of the consultant firm for 5 consultants will be based on the submission of a simplified technical proposal and effected by the standard quality- and cost-based selection process (quality cost ratio of 80:20) while 2 consultants will be engaged individually (i.e. the Bond Expert and Banking Sector Expert). The consultants will be engaged by ADB in accordance with the Guidelines on the Use of Consultants by ADB and its Borrowers (2010, amended from time to time). The individual consultants will be recruited by following the Individual Consultant Selection (ICS) method. All procurement will be done in accordance with ADB's Procurement Guidelines (2010, as amended from time to time).
Responsible ADB Officer Syed Ali-Mumtaz H. Shah
Responsible ADB Department South Asia Department
Responsible ADB Division Public Management, Financial Sector and Trade Division, SARD
Executing Agencies
Ministry of FinanceRoyal Government of Bhutan
Thimphu, Bhutan
Attention: Director
Timetable
Concept Clearance 02 Nov 2012
Fact Finding -
MRM -
Approval 14 Dec 2012
Last Review Mission -
Last PDS Update 09 Mar 2015

TA 8280-BHU

Milestones
Approval Signing Date Effectivity Date Closing
Original Revised Actual
14 Dec 2012 29 Jan 2013 29 Jan 2013 31 Dec 2015 - -
Financing Plan/TA Utilization Cumulative Disbursements
ADB Cofinancing Counterpart Total Date Amount
Gov Beneficiaries Project Sponsor Others
1,250,000.00 0.00 0.00 0.00 0.00 0.00 1,250,000.00 14 Dec 2012 833,137.14

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