Bhutan : Strengthening Policy Formulation and Implementation

Project Name

Strengthening Policy Formulation and Implementation

Project Number

54141-001

Country / Economy

• Bhutan

Project Status

Active

Project Type / Modality of Assistance

• Technical Assistance

Source of Funding / Amount

TA 6527-BHU: Strengthening Policy Formulation and Implementation

Source	Amount
Technical Assistance Special Fund	US$ 750,000.00

TA 6527-BHU: Strengthening Policy Formulation and Implementation (Supplementary)

Source	Amount
Technical Assistance Special Fund	US$ 650,000.00

Operational Priorities

• OP1: Addressing remaining poverty and reducing inequalities
• OP2: Accelerating progress in gender equality
• OP6: Strengthening governance and institutional capacity

Sector / Subsector

• Public sector management / Economic affairs management

Gender

Effective gender mainstreaming

Description

The knowledge and support technical assistance (TA) Strengthening Policy Formulation and Implementation will help the Royal Government of Bhutan (the government) build its institutional capacity in the areas of policy formulation and implementation for effective debt management and robust macro- economic analysis including private sector participation. The TA is aligned with two operational priorities (OP) of ADB Strategy 2030, (i) (OP1) addressing remaining poverty and reducing inequalities including spatial disparities; and (ii) (OP6) strengthening governance and institutional capacity through innovative and sustainable solutions to strengthen the country's capacity in macroeconomic coordination and debt management. The proposed TA is also included in the Country Operations Business Plan (COBP) 2020-2022.

Project Rationale and Linkage to Country/Regional Strategy

1. Bhutan's hydropower led growth has slowed. Bhutan's impressive annual average economic growth of 7.0% since the late 1980s has slowed down in the last two years ( 3.8% growth rate in fiscal year (FY) 2018 and 4.4% in FY2019). This year, Bhutan's economy was expected to rebound from two consecutive years of lackluster growth but the prospects were dampened with the impact of the COVID-19 pandemic and growth is projected to further slide to 1%. The high growth till 2017 was primarily driven by public sector led hydropower development, a major source of government revenue but the sector has very low employment. Additionally, the high import content of hydropower construction has resulted in a large external imbalance and high foreign currency debt, at over 100% of GDP.

2. Public sector dominates Bhutan's growth. The dominance of the public sector in the economy is reflected in the large number of state-owned enterprises (SOEs) and government linked companies. The SOEs generate about 40% of government revenues and almost half of all jobs outside agriculture. In contrast, the private sector remains underdeveloped and mainly engaged in low-scale, low-productivity investments even though the government has introduced reforms and provided incentives to improve the regulatory environment for business operations. Currently, there is limited platforms to initiate policy dialogue and carry out analysis- aiming particularly at improving ease of doing business in which Bhutan needs drastic improvement - to accelerate private sector growth and enhance contribution of private sector in the country's development process.

3. Government effectiveness is laudable but needs improvement. Bhutan has made significant progress in state-building and institutional development. It has established core institutions and expanded access to basic services resulting in impressive gains in human development including poverty reduction from 23% in 2007 to 8.2% in 2017. Currently, the government does not have a sound macroeconomic model to track and forecast key macroeconomic variables and an early economic warning system that can ensure appropriate timely macroeconomic policies and decisions. Furthermore, there is a weak vertical and horizontal coordination mechanism between the central agencies and local governments in terms of macroeconomic forecasting and planning.

4. Improvements in government effectiveness could help in stimulating private sector participation. There is an urgent need for Bhutan to refocus its policy framework to meet the requirements of a country on graduating from a least developed country status, in which the private sector is expected to play an increasing role. The government will have to keep up its momentum to enable greater participation of the private sector.

5. Government underscores strengthening Institutional capacity. The 12th Five Year Plan (FYP) targets for economic growth and job creation while also minimizing social and climate related vulnerabilities at the same time. The government is undertaking reforms to strengthen domestic resource mobilization efforts including adoption of a public finance management strategy that places priority on mobilizing domestic revenue to compensate for declining external grants.

6. ADB experiences and Lessons. In 2012, ADB supported the government with the TA Enhancing Development Management for Sustainable and Inclusive Growth. Lessons and evaluation of the TA interventions indicate that continued capacity strengthening in the areas of macroeconomic analysis (including enhancing private sector participation) and macroeconomic forecasting, fiscal planning and effective debt management is required to enhance effectiveness, efficiency and success of development projects and programs.

Impact

Bhutan's macroeconomic coordination strengthened

Project Outcome

Description of Outcome

Macroeconomic planning and debt management improved

Progress Toward Outcome

1. Special report on Overcoming COVID-19 in Bhutan: Lessons from coping with the pandemic in a tourism-dependent economy is ready for publication by end of December 2021 2. Consultancy for debt management system (single source DFI; software-Meridien). The activity will be completed Dec 2022.

3. Done 3 trainings on debt management system

Implementation Progress

Description of Project Outputs

Macroeconomic forecasting and debt management system strengthened

Integrated knowledge management and institutional capacity-building program in research and analysis improved

Status of Implementation Progress (Outputs, Activities, and Issues)

Hired international consultant to assess and develop a suitable macroeconomic/econometric model or a dynamic stochastic general equilibrium (DSGE) model for Bhutan. The consultant trained relevant government officials and stakeholders led by the Department of Macroeconomic Affairs, MOF in developing and using a macroeconomic model. The consultant worked with the Department of Macroeconomic Affairs, MOF in close collaboration with the Macroeconomic Framework Coordination Technical Committee (MFCTC) with members from multiple sectors, GNH Commission, the National Statistics Bureau, and the Royal Monetary Authority among others. Under the guidance of consultant two workshops on Strengthening Macroeconomic Forecasting and Modelling in Bhutan was supported.Capacity for GESI and project administration for ADB funded projects was done from 3-5 November 2021.

Geographical Location

Nation-wide

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

(2) Individual International consultants

(4) Individual National consultants

Procurement

(1)Debt management system upgradation (single source selection)

Contact

Responsible ADB Officer

Lhendup, Sonam

Responsible ADB Department

South Asia Department

Responsible ADB Division

Bhutan Resident Mission (BHRM)

Executing Agencies

Ministry of Finance

Timetable

Concept Clearance

20 May 2020

Fact Finding

26 May 2020 to 27 May 2020

MRM

-

Approval

26 Jun 2020

Last Review Mission

-

Last PDS Update

20 Dec 2022

Funding

TA 6527-BHU