BHUTAN Country SnapshotThe World Bank Group

OCTOBER 2015

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1Bhutan Country Snapshot

ECONOMIC OVERVIEWBHUTAN

2014

Population, m 0.77GDP US$, bn 1.82GDP per capita, US$ 2,380GDP per capita, US$ PPP 7,867Sources: National Bureau of Statistics, Bhutan, World Development Indicators, 2014

Continued large investments in hydropower projects support economic growth in 2015. On the expendi-ture side, investment remains strong, government consumption and capital spending are supported by higher revenues from the start of Dagachhu power project and grants from the Government of India, while private consumption has resumed along with bank credit. Bhutan’s significant dissaving is illus-trated by a large current account deficit. Private-sector development and asset diversification are keys to reduce its vulnerability to donor finance and address rising youth unemployment.

Recent developments

Gross domestic product (GDP) growth in 2014-15 is estimated at 6.3 percent. Drivers of growth include continued construction of hydropower dams, the five-year plan implementation in full swing through increased capital spending financed

by grants and tourism.1 On the demand side, while private consumption was supported by the relax-ation of credit restrictions, investments have re-mained robust in hydropower and construction in particular. Growth of gross capital fixed investment is estimated at 10 percent, masking a larger expan-sion in the hydropower sector. Real export earnings grew at 3.3 percent, supported by tourism expan-sion, but was outpaced by rapid import growth (11.5 percent).

The fiscal deficit in 2014/15 was 2.5 percent of GDP. Civil service wages and allowances increased by 19 to 23 percent, respectively, but the impact on spending was partly offset by a stabilization of non-wage current and capital expenditures in real terms. Domestic revenues as a share of GDP have declined over the last three years, from 22 percent to an estimate of 19.9 percent in 2014/15. Grants, 70 percent of which come from India, finance about 27 percent of the budget. Bhutan’s public and pub-licly guaranteed external debt, two-thirds of which is from commercially profitable hydro projects, stood at 99 percent of GDP by the end of June 2015. Domestic debt stood below 5 percent of GDP.

Bhutan runs a growing current account deficit (26 percent of GDP at end June 2014/2015), to which the hydropower sector contributed 15 percentage points. It is essentially financed by do-nor resources, to which India contributes the most through loans and grants financing hydropower projects. International reserves had slightly de-clined to $958 million by June 2015, while remain-ing at a very comfortable level of about 10 months

of imports, reflecting prudent management.

Consumer price inflation in Bhutan has slowed to 3.4 percent in July 2015 from 6.3 percent in January, driven by the decline in oil prices and India’s easing of inflation. (Bhutan has a fixed exchange rate with India from which it imports most of its consumption.)

1  Fiscal year in Bhutan spans from July 1st to June 30th.

-2%

0%

2%

4%

6%

8%

10%

12%

2007-2008 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15

Agriculture, livestock, and forestry Industry Services Net taxes on products

Sectoral contribution to GDP growth

2

Outlook

Economic activity in 2015-2016 is expected to accelerate with real GDP growing at 6.8 per-cent, driven by massive hydropower construc-tion, a marked acceleration in capital spending funded by grants from India and a relaxation of credit controls. Tourism arrivals could disap-point during the first semester of 2015, following the Nepal earthquakes and associated decline in bookings. Agriculture is projected to grow at its historic rate of 2 percent. Economic growth will only pick up at end 2018, when new hydropower projects will come on stream. Domestic demand will be driven by hydropower investment and, to a lesser extent, government consumption. Consumer inflation will closely follow India’s tracks. The cur-rent account deficit is expected to continue grow-ing over the next years, driven by the construction of hydropower projects. The current account defi-cit outside the hydropower sector is forecasted to remain stable, supported by a robust growth in the tourism sector. Fiscal policy is assumed to remain in balance, supported by donor grants, with cur-rent spending contained, and capital spending fol-lowing the patterns of the five-year plan disburse-ments. The revenue effort is expected to weaken slightly, unless new measures to strengthen the

tax base are introduced. The risk of Bhutan’s exter-nal debt distress continues to be moderate. This is based on the commercial viability of the hydropow-er projects, the risk-sharing agreement with India for hydropower loans, Bhutan’s strong track record of project implementation, rapid growth in energy demand from India, committed donor support, and Bhutan’s high level of international reserves.

Challenges

The outlook is positive but macroeconomic pressures on domestic demand must be man-aged. The impact of the ongoing turbulence in global financial and exchange markets is expected to remain moderate on Bhutan’s economy, mostly through higher imported inflation and lesser tour-ism earning in the event of a global economic slow-down. While debt risk is still moderate, the rapid build-up over the recent years cautions against any additional non-concessional borrowing, given that Bhutan’s debt-carrying capacity will only improve in the long run reflecting significantly higher elec-tricity exports when hydropower projects come on stream. Efforts to deepen the financial sector must be sustained to provide the country the basis for financing sound and sustainable development and diversification.

2012 2013 2014 2015 f 2016 f 2017 f

Real gross domestic product 3.6 3.9 6.3 6.8 7.2 5.6 Private consumption 8.8 9.6 6.6 6.6 6.6 6.6 Government consumption -5.2 6.5 14.0 4.9 5.9 7.4 Gross fixed capital investment -11.7 -11.7 10.0 14.9 6.7 1.0 Statistical discrepancy (%GDP) 0.1 0.1 0.2 0.1 0.1 0.2 Exports, goods and services 3.1 6.8 3.3 2.6 7.2 9.7 Imports, goods and services -2.3 10.1 11.5 6.5 6.7 4.6

GDP, at market prices 3.6 3.9 6.3 6.8 7.2 5.6 Agriculture 2.6 2.5 2.0 1.8 1.8 1.8 Industry 5.1 5.4 8.6 9.5 10.1 10.8 Services 1.3 3.2 4.7 4.7 4.8 4.9

CPI inflation, period average 10.4 8.8 4.7 5.0 5.0 5.0Current account balance (%GDP) -23.5 -25.3 -26.3 -26.0 -27.0 -22.0Fiscal balance (%GDP) -4.2 -2.6 -2.5 -3.7 -1.8 -1.1Notes: e: estimates; f: forecasts; * In annual percentage change percent, unless otherwise noted; ** Fiscal years. Sources: National Statistical Bureau, Royal Monetary Authority, Ministry of Finance, World Bank forecasts

3Bhutan Country Snapshot

RECENT SECTOR DEVELOPMENTSMonetary and financial sectors

Following the rupee crisis, credit quality ap-pears to have been impacted since 2012 with an increase in non-performing loans, which clouds the otherwise positive developments for the sector. The financial sector and the Royal Mon-etary Authority’s (RMA) supervision capacity is un-derdeveloped, and the sector is substantially cash-based, lacking in investment opportunities, heavily reliant on banking and traditional collateral-based lending, but it is developing with the support of government and development partners. Bhutan is working to build financial inclusion and has drafted a Financial Inclusion Policy that is expected to be adopted shortly. Some of the key measures under-taken in 2014 include operationalization of mov-able collateral registry, drafting of Non-Deposit

24.61%

3.34% 0.93%

16.43%

2.62%

4.88% 15.73%

14.11%

17.33%

Housing Sectoral Loan (June 2015)

Transport

Loan against share

Personal loan

Others

Agriculture

Trade/commerce

Manufacturing/Industry

Service/Tourism

Credit distribution (2015) - Monetary monthly Bulletin

Taking Microfinance Regulation and Master Plan for Capital Markets.

The liquidity position of Bhutan’s banking sec-tor has improved significantly since the rupee crisis. The credit-to-deposit ratio of the banking system jumped from 68.1 percent in December 2010 to 97.8 percent in September 2013 and eased to 88 percent in September 2014. Credit increased by only 10.9 percent (September 2014, year-on-year), mainly driven by strong demand from the housing, personal, manufacturing, and trade/com-merce sectors.

Compared to the past years of stickiness in in-terest rates, the financial sector experienced some movement in their interest rates during the year. This could be due to implementation of a “base rate” mechanism in 2012 as well as tight liquidity in the financial system. Interest rates for time deposits, savings, and lending – both short-term and long-term – have increased although mar-ginally during 2014, and this is indicative of a move towards a more market interest rate regime.

Bank credit to the private sector stood at 48 percent of GDP in FY2014. That was unchanged from FY2013 but there has been a reduction from 51.5 percent in FY2012 owing to effects of credit restrictions following liquidity crunch in previous years. However, the ratio is above the South Asia Region average of 45.8 percent of GDP (FINSTATS 2014).

In order to address the tight banking-sector liquidity sit-uation that affected Bhutan since early 2012, RMA un-dertook several measures to contain rapid credit growth. By the end of the September 2014, the market was estimat-ed to be in surplus liquidity by around Nu 19.7 billion. The Statutory Liquidity Require-ment position of the financial sector improved to 41.8 per-cent (minimum requirement of 20 percent) in September 2014 as compared to 34.6 percent in September 2013. Following the lessening of the liquidity crisis, RMA in 2014

4

eased lending restrictions on vehicle and housing finance, and also lifted foreign exchange restric-tions on the import of furniture and alcohol from India and third countries.

Asset-liability mismatches continue to be a con-straint for longer-maturity credit. There contin-ues to be a huge asset-liability mismatch (using very short-term deposits to lend long-term) in the banking system that still poses challenges for li-quidity management. Banking-sector liquidity has been tight due to: (i) relentless growth in Indian rupee imports, necessitating an equivalent drain on local currency liquidity in the banks; (ii) a re-duction in general deposit levels held with banks due to volatility and withdrawals by corporate en-tities, as well as direct inter-corporate transactions bypassing financial intermediaries; and (iii) heavy reliance on bank-loan capital to finance public- and private-sector investments rather than tapping al-ternative finance, including the capital market. Un-der two-year Asian Development Bank (ADB) tech-nical assistance for Supporting Financial Stability (2013-2015), the RMA, in collaboration with the fi-nancial institutions, issued draft Macro-Prudential Regulations to improve the timely recognition of fi-nancial vulnerabilities and deal with asset-liability mismatches (framework and regulation on liquid-ity management).

Both the long-term capital and short-term fi-nancial markets are impaired by an inadequate supply of debt instruments (for which govern-ment is a major source in most countries) and the absence of a yield curve based in large part on such instruments. Moreover, it is difficult to conduct monetary policy effectively without an ad-equate supply of Treasury bills (T-bills). The gov-ernment plans to address this serious problem by adopting a new public debt policy that will allow for some government borrowing to meet monetary policy and capital market development purposes as well as to meet cash needs. Other actions will be taken to ensure that the supply of T-bills can be more stable, more predictable, and sufficiently large to allow more effective conduct of monetary policy.

The World Bank is supporting the development of a comprehensive Financial Sector Development & Implementation Plan (FSDIP, also known as the Master Plan). The FSDIP identifies and address

key financial-sector issues which, if not addressed, would sharply undercut progress toward meeting these objectives. Building and maintaining a sound and effective financial sector is fundamental to achieving satisfactory economic growth with equi-ty as Bhutan’s future becomes increasingly linked to a globalized world.

Poverty and Statistical Capacity Building

Bhutan is a star performer in poverty reduc-tion, with only 12 percent of the population below the national poverty line in 2012, com-pared to 23 percent in 2007. Bhutan ranks third among least poor countries in South Asia behind Maldives and Sri Lanka, with only 1.7 percent of the population below the $1.25 international poverty line in 2012, compared to 4 percent in 2010. This remarkable progress is founded on robustly high per-capita annual GDP growth of 5 percent. Bhutan outpaces countries in its cohort in poverty reduc-tion in the world.

Bhutan’s statistical system has limited human resources, an absence of legal framework, data weaknesses and limited data coordination. However, notable progress has been made in reme-dying data weaknesses in select areas such as price data collection and dissemination using a map portal. The National Statistics Bureau (NSB) has successfully completed the update of the National Statistics Development Strategy (NSDS) report in December 2014 with extensive consultations. The NSB is also successfully switching to Computer-Assisted Personal Interview (CAPI) paperless sur-veys to improve the efficiency and quality of data collection. The tablets have been used for the col-lection of Bhutan Labor Force Survey (2015) and Enterprise Survey (2015).

5Bhutan Country Snapshot

The World Bank is supporting the formulation and implementation of the NSDS and the country move to CAPI-based technology for surveys. It is also the key partner for poverty assessments.

Private Sector

The private sector remains small and, while 15-to-24 year olds represent a fifth of the Bhutanese pop-ulation, unemployment among the youth remains relatively high. Bhutan’s private-sector potential is still to be realized, with industry concentrated in ferro-alloys and a few food and beverage manufac-turing activities, subsistence agriculture remaining dominant, and the tourism sector heavily regulat-ed. State-owned enterprises (SOES) operate in key strategic areas of the economy, including energy, banking, manufacturing, transport, telecommuni-cations, and infrastructure. SOES contributed 42 percent of government revenues in 2014-15.

Bhutan’s current comparative advantage stands in hydropower, tourism, agribusiness, a stable and low-corruption political environment, reasonably good human capital with a widespread knowledge of English and an educated workforce, access to low-cost and reliable electricity, preferential ac-cess to the large Indian market, and easy access to skilled and unskilled labor from India. Against these advantages, private-sector development is limited by the absence of scale economies, limited access to finance, mismatched skills of the labor force, a burdensome investment climate, and the lack of adequate infrastructure.

Despite reforms, Bhutan’s ranking in the ease of doing business has slightly decreased to 125 (out of 189 economies) in 2015, from 122 in 2014, suggesting that more needs to be done. The coun-try committed in 2013 to improve the business cli-mate in Bhutan and move the country into the top 100 in the Doing Business global ranking.

To spur private-sector development, a number of policies and laws have been formulated. These include the Economic Development Policy (EDP), the amended foreign direct investment policy and rules and regulations, and the licensing policy. Forthcoming policies and laws include the indus-trial infrastructure development policy (govern-ing economic zones), the mineral development policy, the public-private partnership (PPP) policy, the renewable energy policy, the micro, small and medium enterprises (MSME) policy, the consumer protection bill, the enterprise registration bill, and amendment to the existing Company Act. With the support of the World Bank, Bhutan launched its first Information Technology Park in 2012 as a PPP. In the investment climate space, the National Land Commission recently introduced a new com-puterized land information system connecting the Thromde with the cadaster and the Bhutan Power Corporation improved process efficiency for ob-taining electricity connections.

The World Bank is supporting the government in its efforts to improve the investment climate re-form agenda through comprehensive program-matic technical assistance and development policy lending, for example in the areas of business regis-tration, land registration, and the issuance of con-struction permits, and through the introduction of new eGovernance solutions.

Education

Bhutan’s education expenditures are strong. Public education expenditure stood at 7.5 per-cent of GDP and 15.2 percent of total government spending in 2013-2014 (Ministry of Finance, June 2015). These figures are among the highest in the South Asia region. The Constitution (2008) pro-vides for the state to ensure free education up to Grade 10 for all children of school-going age, and to make technical and professional education gener-ally available, and higher education equally acces-sible to all on the basis of merit. At the same time, this progress has led to a refocus by development partners on other priorities, which may make it dif-ficult to sustain high education spending.

Bhutan has achieved the Millennium Develop-ment Goals (MDGs) in education. Bhutan has es-tablished and built up an organized public educa-tion system since the 1960s. This diversified sector

6

now includes over 650 schools and institutes, more than 180,000 students and nearly 9,000 teach-ers. Notably, gender parity has been achieved up to Grade 10. Females constitute nearly 50 percent of enrollment in higher secondary education and nearly 40 percent at tertiary level. The gross enroll-ment ratio was 78 percent at secondary level and 30 percent at tertiary level in 2013.

A key issue is that despite high enrollment and significant levels of public financing, learning levels remain low. Poverty remains key among constraints on enrollment and attendance, as cor-roborated by data from the Poverty Analyses, dem-onstrating that Gewogs, where fewer children at-tend school, tend to be those with comparatively higher poverty rates. This is mainly due to the high out-of-pocket expenditure for households. Sector-wide, the majority of education service delivery is through the public sector. The exception is higher secondary education (HSS, Grades 11-12), where 50 percent of the students are in private institu-tions. The Royal University of Bhutan is the main reference point for the quality assurance and ac-creditation framework The 11th Five Year Plan (FYP-11) expansion targets for tertiary education are ambitious, but essential for Bhutan to build up a human resource base to support a knowledge-based economy. Student intake is to increase to 15,000 (from just over 5,000 currently). To keep this from overburdening public expenditures, a greater role for the private sector is seen, but this raises new issues of quality and relevance.

The World Bank is not directly engaged in the health and education sectors in Bhutan. A recent World Bank public finance study notes that health and education will be among the fastest growing

sectors in Bhutan in terms of needs and demand, and that fruitful partnership with the private sec-tor both for service provision and purchasing need to be explored.

Health

Bhutan has sustained its investments in health over the last two decades and made remark-able progress. In 2013-14, public health expen-diture stood at 4 percent of GDP and 8 percent of government spending, higher than other South Asian countries. The expansion of the network of health facilities now ensures that 90 percent of the population live within three hours walk to a health facility, there are 25 traditional medicine units at Basic Health Units, and there are more than two functioning ambulances at each district hospital.

Access to health services is satisfactory, with their utilization and quality requiring improve-ment. The Constitution (2008) provides that the state will provide basic public health services free of cost to all citizens. As of now, all health services (barring a handful of dental, cosmetic, and other services) continue to be provided by the govern-ment for free. Nevertheless, some outreach centers are very remote and require health workers, the unsung heroes of the country’s public health sys-tem, to endure long walking hours (or even days) prior to reaching the remote facilities.

Although the burden of non-communicable dis-eases is growing, the health services continue to spend most of their resources at district level on the traditional infectious diseases such as common cold, diarrhea, skin diseases, and conjunctivitis. In addition, alcoholism remains a significant health

7Bhutan Country Snapshot

challenge. Though malnutrition and stunting have shown improvement in recent years, they are nev-ertheless still high. The Royal Government of Bhu-tan finalized the draft of the National Food and Nu-trition Security policy during 2012. The final report of the “Nutrition in Bhutan: Situational Analysis and Policy Recommendations” was published in June 2014.

The World Bank is not directly engaged in the health and education sectors in Bhutan. A recent World Bank public finance study notes that health and education will be among the fastest growing sectors in Bhutan in terms of needs and demand, and that fruitful partnership with the private sec-tor both for service provision and purchasing need to be explored.

Social Protection

There is no formal system of social protection in Bhutan. The lack of safety nets particularly for those outside of public-sector jobs leaves the ma-jority of the population vulnerable to shocks and risk. Employment opportunities for youth are lim-ited, particularly at higher-level managerial jobs (skills and job mismatch in market). The change in social structures and rapid urbanization is likely to leave many elderly rural poor without informal or social safety nets. Fourteen percent of households reported a decline in income due to a shock in the last 12 months. Poor households, rural households, and households attached to informal jobs experi-ence more shocks, with many of these shocks being related to climate.

The coverage of Bhutan’s pension system is limited to civil servants and joint-sector com-panies. These groups encompassed a little under 7 percent of the population in 2012. In addition, the armed forces are covered under a separate scheme. The participation in National Pensions and Provi-dent Fund extends across some part of the formal-sector workforce beyond higher-income groups, and a similar proportion of the elderly are receiv-ing some benefits from the system. This influences the decisions of Bhutan’s young people entering the labor market, with a majority of youth focused on the limited opportunities in the public sector.

Employability of Bhutanese youth is a key pri-

ority. Employment opportunities for youth are limited. This is particularly the case with access to higher-level managerial jobs due to a skills and job mismatch in the market. Similar imbalances and mismatches exist due to individual prefer-ences for jobs in urban areas, jobs that are white-collar and jobs in the public sector. However, the number of these types of jobs is limited. As such, the unemployed are relatively better educated and come from wealthier families. In addition to these relatively well-documented issues, there are indi-cations that a number of other, less obvious but nevertheless pressing challenges exist. In particu-lar, informal employment (over 75 percent, accord-ing to the latest Bhutan Labor Force Survey, BLFS) and underemployment appear to be widespread, especially in rural areas. Additionally, chronic or long-term unemployment might be a problem at least for certain parts of the Bhutanese labor force. The government target is to bring down the youth unemployment rate to 5 percent or less by the end of the next plan period (2013-2018). In 2014 com-pared to 2013 the unemployment rate dropped to 2.6 percent with youth unemployment rates to 9.4 percent (BLFS 2014). However urban unem-ployment has slightly increased, especially among women, the young and well educated. Within this context, the Ministry of Labor and Human Resourc-es has decided to develop a strategy to provide more equity of social protection to those who work across different sectors, and to provide support to senior citizens outside of the formal sector.

There are some existing specialized grant pro-grams such as scholarships, and welfare schemes distributed by His Majesty the King of Bhutan, or a few non-governmental organizations (NGOs), but few are integrated into social assistance, social in-surance, or labor market program schemes. There is also little coordination across them. There is low coverage of target groups, as most of the poorest 20 percent have no social protection coverage. Other support to the elderly exists only through family and social networks.

The World Bank is supporting the development of a Social Protection and Labor Strategy, which focuses on assistance to expand and improve the BLFS as well as to pilot CAPI paperless surveys. An in-depth study of the labor market will soon be released.

8

Agriculture

Bhutan is predominantly an agriculture-based society. The agriculture sector is dominated by smallholder subsistence farmers who occupy the majority of the arable land and produce most of the crop and livestock products. As per the BLFS 2013, the agriculture sector provides livelihood to 56.6 percent of the total population, contributing to 13.8 percent of the total GDP.

While the contribution of the agriculture sec-tor to GDP has been declining, it continues to be an important sector. It is particularly important as a source of employment and a force in reducing poverty. However, the sector’s growth remained insufficient to adequately address poverty and at-tain food security. Immigration from rural to urban areas, particularly by youth and men looking for a more modern life style, has resulted in the femini-zation of the agriculture sector particularly in the lagging areas.

A range of policies are needed to improve ru-ral life and maintain rural population. Physical access to rural areas and between rural areas and markets needs to be improved, while dispersed and small-scale production hinders adoption of good agricultural practices. Greater access to credit and technology is needed, and sustainable approaches to pest and wildlife encroachment are also necessary. Other issues include loss of agriculture land for oth-er development, lack of infrastructure such as irri-gation, farm roads and post-harvest storage, labor shortage, and the scarcity of existing market trad-ers and wholesalers.

The agriculture sector contributes to imple-

mentation of FYP-11. To achieve eradication of national poverty to less than 5 percent and rural poverty below 10 percent, the sector needs to grow at an annual rate of 4 percent. FYP-11 is expected to adopt a multi-dimensional approach to develop the lagging regions. To achieve this, the Ministry of Agriculture and Forestry has a mandate to im-prove: food security and nutrition; rural livelihoods to overcome poverty; and sustainable management and utilization of natural resources.

The World Bank is supporting rural development through an International Development Associa-tion-financed Remote Rural Community Develop-ment Project, which focuses on increasing agricul-ture productivity and access to community assets in remote areas. An Agricultural Growth and Nutri-tion Security Project (funded by Global Agriculture Food Security Program, GAFSP) is being prepared.

Environment

Environmental conservation is a cornerstone of Bhutan’s unique development approach. Bhu-tan remains endowed with dense and virtually un-touched forests, abundant water resources and di-verse wild species. The country’s vast endowment reflects its commitment to maximizing Gross Na-tional Happiness (GNH). Nevertheless, it confronts chronic pressures primarily related to land degra-dation and biodiversity loss due to development and population growth. Land degradation can stem from inappropriate agriculture production and mining practices, overgrazing, and excessive forest harvesting, as well as solid waste disposal in and around population centers. Threats to biodiversity include illicit forest harvesting, human-wildlife

9Bhutan Country Snapshot

conflict, poaching, and habitat fragmentation aris-ing from land development projects.

A particularly important element is the need for integrated water management. Despite the positive outlook for water availability, incipient challenges relate to the sustainability of urban wa-ter supply systems and functionality of existing ru-ral water supply schemes. Ongoing soil erosion and deforestation threaten watershed conditions and their functional integrity. Concerns about water quality stem from the rise in domestic and indus-trial waste generation, along with improper dis-posal and runoff from agricultural fields and urban centers.

The government has taken several important steps to preserve the environment. Bhutan’s environment policies include: (i) mandating in the Constitution a minimum forest cover of 60 percent of the country’s total land area; and (ii) increasing the proportion of land under protected area status to around 50 percent at present from 26 percent in 2000. The Bhutan Trust Fund for Environmen-tal Conservation (BTFEC) is working towards the adoption of more modern governance and business practices. With grants made possible by BTFEC, conservation projects began to be implemented in the high-altitude northern areas that form part of the fragile eastern Himalayan ecosystem. The wildlife crime unit within the Department of For-est and Park Services is in the process of upgrad-ing the Bhutan Forest Enforcement Database into an online reporting system on wildlife offenses and expanding programs for raising public awareness and sensitivity to forest and wildlife crime. Envi-ronmental sustainability is at the core of Bhutan’s five-year plans, including the 11th Plan currently under implementation.

The World Bank is supporting: (i) through a Global Environment Facility (GEF) project, the improve-ment of the operational effectiveness and institu-tional sustainability of the BTFEC and the manage-ment of the conservation of high-altitude northern areas; (ii) through a regional IDA project, the build-ing of capacity, institution, knowledge and incen-tives to collaborate in tackling regional wildlife conservation threats; and (iii) the Reducing Emis-sions from Deforestation and Forest Degradation (REDD+) agenda and through it the National Forest Inventory (Bhutan REDD Readiness).

Cultural Heritage and Tourism

Bhutan has taken important steps to preserve its cultural heritage. The country’s rich cultural assets, both tangible and intangible, are highly val-ued as intrinsic sources of community vitality and socioeconomic development, and their protection is a key focus of Bhutan’s Gross National Happiness, as well as the government’s five-year development plans, its “Vision 2020”, and the Constitution.

Despite that, non-monumental cultural assets such as traditional villages, their immediate natural landscapes, and the skills and ways residents have been using both to build and maintain community life for centuries are in-creasingly under threat from a number of un-precedented challenges and influences. These range from unplanned urban expansion and adop-tion of imported materials and methods for build-ing construction to neglect or simply abandon-ment through urban migration. Such loss has had a direct impact on people’s happiness. According to the 2010 GNH Index, only 37 percent of people in rural areas report being happy. The factors that contribute most to the happiness of rural Bhuta-nese are cultural diversity, community vitality, and good governance (Centre for Bhutan Studies 2010). It may also have major economic implications for the country, given the decay of valuable human, cul-tural, and environmental attributes of Bhutanese

10

traditional villages, and the loss of their future eco-nomic workforce.

To combat the socioeconomic and cultural loss of such assets and the resulting weakening of community vitality, the government is in the process of approving the Heritage Sites Bill. The bill represents a significant new approach to how the country defines, promotes, and protects its cultural assets, by stewarding not only monu-ments and intangible cultural expressions, such as handcrafts and music, but also the wider social, environmental, and economic settings – traditional villages and their surroundings – in which physical structures are located and expressions have been shaped and performed for centuries.

The government is also in the process of re-viewing its tourism policy. Despite its worldwide reputation as a “high-value, low impact” destina-tion, overarching issues of limited accessibility, high seasonality, lack of product diversity, ineffec-tive marketing, travel packaging, and the dual tariff system for international and regional tourists are negatively affecting most tourism stakeholders in some way. Action and change at all levels are felt to be required to ensure that Bhutan remains a sus-tainable, inclusive, and high-quality destination in the long-term.

The World Bank is assisting the government to pre-pare a plan for the implementation of the Heritage Sites Bill and to revise the draft tourism policy, with a focus on valuation of traditional way of life, envi-ronmental conservation, and distribution of tour-ism benefits to some of the poorest communities in the country, which tend to live in traditional houses and villages across the country.

Disaster Risk Management

Bhutan is highly prone to disasters and climate-related risks. Its rugged topography, geographic and climatic features make it prone to flooding, landslides, glacial lake outburst floods, drought, and earthquakes. Over the past 40 years, several earthquakes above a magnitude of 6 on the Richter scale have occurred. According to the World Bank report on Natural Disaster Hotspots (2005), 31.3 percent of Bhutan is in risk areas, and 60.8 percent of population is at high mortality risk from multiple hazards.

The frequency and intensity of extreme weather events appears to be increasing. The country has become increasingly vulnerable to glacial lake out-burst floods, other flooding, drought, forest fires, and loss of vegetation/biodiversity. Heavy sea-sonal monsoon rains and glacial melt contribute to flooding and landslides. Of the 2,674 glacial lakes in Bhutan, 25 have been identified as potentially dangerous. This poses not only a threat to the de-velopment of hydropower in the country but also a threat to food security.

The government adopted the Disaster Manage-ment Act in 2013 to strengthen the disaster management system. The act decentralizes di-saster management activities, empowers the nodal institutions with the legal status to implement di-saster reduction strategies, and emphasizes a con-sultative process at the village level. The Depart-ment of Disaster Management under the Ministry of Home & Cultural Affairs – the national coordinating agency – is formulating a comprehensive National Disaster Risk Management Strategy for Bhutan. It is expected to result in the formation of a National Disaster Management Authority under the leader-ship of the prime minister. Key challenges include: (i) strengthening preparedness and early warning systems: (ii) mainstreaming disaster risk manage-ment, including in construction; and (iii) strength-ening disaster response capacity.

An important aspect of disaster risk mitigation, climate adaptation, and early warning systems is improved capacity for hydro meteorological monitoring and forecasting. The importance of hydromet services is well recognized in FYP-11. In Bhutan, the main agency responsible for these services and for weather, hydrological, and flood forecasting is the Department of Hydromet Ser-vices (DHMS) under the Ministry of Economic Af-

11Bhutan Country Snapshot

fairs. DHMS was established in 2011. It is a rela-tively new agency in significant need of capacity strengthening. At present, there is no legal or regu-latory framework for delivering hydromet services or a national framework for climate services. Most of the existing observation network is manual with limited capacity for real-time monitoring. Capac-ity for snow, permafrost, and glacier monitoring within DHMS is only now beginning. Bhutan at present features only 24-hour weather forecasts; there is a need to improve the lead time to better prepare communities. Also, the current practice issues flood forecasts only when the water level is high. While DHMS’s activities are being supported by several development partners, such as the U.N. Development Program and Japan International Cooperation Agency, there is substantial room for strengthening DHMS to support its transforma-tion into a modern service delivery agency that can support disaster risk mitigation, and also provide climate services in various sectors such as agricul-ture, water resources, and hydropower.

The World Bank is active in disaster risk manage-ment through: (i) a Policy and Human Resources Development grant for improving resilience to seis-mic risk; (ii) technical assistance on “strengthening disaster preparedness and climate resilience”; and (iii) supporting the government in preparing a Pi-lot Plan for Climate Resilience (PPCR) and improv-ing hydromet services.

Urban Development

Bhutan is undergoing a rapid transition from a rural economy to an urban society. The aver-age annual urban population growth rate has been around 4 percent since 2007. The Bhutan National Urban Strategy (NUS, 2008) projects that by 2020, the country will be most likely 60 percent urban-ized. As Bhutan evolves into a more urbanized so-ciety, the government has recognized the country’s unique challenges in urban development – the rap-id rate of urbanization and the limited availability of serviced land.

The urbanization rate across the country is skewed toward the Western region. Thimphu and Phuentsholing are the two most favored des-tinations for migrants. These cities, especially Thimphu, are experiencing urban sprawl and den-sification with consequent rise in demand for mu-

nicipal services. Through the enactment of the Lo-cal Government Act (2009) and the approval of the Municipal Finance Policy (2012), the government has established four autonomous cities (Thimphu, Phuentsholing, Gelephu and Samdrup-Jokhar). Un-der the proposed National Urban System, these ur-ban centers would play an important role as future engines of growth.

Bhutan is relatively well positioned to meet the challenge of rapid urbanization, given its low population. Nevertheless, urban institutional and governance systems need to be strengthened. Spa-tial planning is also needed, as lack of affordable and housing for lower-income groups is becoming a critical issue. Another important issue related to the rapid urbanization is to provide jobs for an in-creasingly urban youth population.

The World Bank is supporting the government through the Second Bhutan Urban Development Project and its additional financing. That provides resources for sites and services development in northern Thimphu and for municipal finance and management systems development in the four cit-ies, as well as for related capacity building. The World Bank is also supporting the formulation of an inter-governmental resource framework for urban local governments. Finally, the World Bank is supporting improving green urban public trans-port (see Transport section below).

Energy

Hydropower development has underpinned the rapid growth of Bhutan’s economy. The total installed capacity of existing hydropower plants is 1,488 megawatts (MW). Of total annual power gen-erated, 80 percent is exported to India after meet-

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ing domestic consumption. Power exports account for the largest source of national revenue in the form of taxes and dividends, generating more than 40 percent of government revenue. Power exports also contribute to 25 percent of GDP, and hydro-power infrastructure development contributes an-other 25 percent of GDP through the construction sector.

Bhutan’s hydropower generation potential rais-es the prospect of tremendous development op-portunities for the country: fast-increasing ex-port revenue, sustained economic growth, and rapid poverty reduction.

Generation projects have been implemented in partnership between the Government of Bhutan and the Government of India under three different development models:

• The Inter-Governmental model: The Govern-ment of India is responsible for mobilizing the project’s funding and implementing the project until the time of commissioning. The project ownership is then transferred to the Government of Bhutan, with a certain amount of debt repayment to the Government of India. The Government of India buys all the electric-ity generated in surplus of domestic consump-tion, at a price determined on a cost-plus basis, guaranteeing a net return of 15 percent to the Bhutanese government above debt repayment and the project’s operating cost.

• The Joint-Venture model: Projects are devel-oped and commissioned under a Joint venture of Bhutan and India Public Sector Undertak-ings (PSUs) under a 50/50 percent owner-ship, with 70 percent being financed by loans raised by the PSUs, and 30 percent equity par-ticipation, out of which the Bhutanese share is financed from grants provided by the Govern-ment of India.

• The PPP model: So far, two PPP projects have been developed with the support of the ADB and the Government of Austria.

Bhutan has also begun to develop renewable energy to diversify the energy supply base through wind, solar, biomass, and small and micro hydropower. Wind-power projects have the potential to generate clean energy to supplement hydropower in winter dry seasons. Bhutan also has

biogas development potential as an alternative en-ergy source to replace fuel wood for cooking in ru-ral areas. Rural households depend heavily on fuel wood, which emits indoor air pollutants and poses a health hazard. To promote renewable energy, a national policy must be established and financial and fiscal incentives provided to help overcome the entry and financial barriers for development.

The World Bank is assisting the government in carrying out an assessment of the macroeconom-ic, environmental and social (E&S) impacts of the current and future hydropower development in Bhutan. The requested assistance aims to help the government prepare a realistic action plan for implementation of hydropower projects based on absorptive capacity of the economy and social-eco-nomic impacts. The World Bank is also supporting the development of a vision for hydropower devel-opment in Bhutan.

Transportation

Transportation is the biggest infrastructure problem encountered by firms in Bhutan, ac-cording to Bhutan’s 2010 Investment Climate As-sessment. In rural areas transport connectivity is also a key determinant of affordable access to basic social and economic services. The Bhutan Living Standards Survey (2012) reports that transpor-tation services alone account for approximately 23 percent of the cost incurred when households sought health care to address sickness or injury. In the broader economic context, roughly 40 percent of all firms and 70 percent of large firms surveyed had experienced losses due to ground transporta-tion difficulties. Bhutan’s landlocked geography, absence of rail connections, and limited air connec-

13Bhutan Country Snapshot

tivity make the road and bridge network’s reliabil-ity particularly vital to providing the access that households and businesses require.

Bhutan has achieved significant milestones in the transport sector. Investments under the 10th Five-Year Plan have helped increase connectivity towards the official goal of having 85 percent of the population within half a day’s walk from the nearest road. Parliament in 2012 passed the Road Act, which empowers the Department of Roads (DOR) to coordinate various institutions working in the roads sector. These accomplishments show a strong government commitment to develop-ing Bhutan’s transport sector and the institutions that will sustain it into the future. Recent achieve-ments, supported by World Bank projects, include: (i) 67 kilometers (km) of new roads; (ii) 24 km of improved roads; and (iii) seven newly constructed motorable bridges. Project beneficiaries have ex-perienced a 62 percent reduction in travel time to reach socio-economic facilities (schools, clinics, etc.).

Further improving urban public transport ser-vices is a priority. Bhutan has achieved a great deal in providing urban bus services in the capi-tal of Thimphu since beginning formal services in 1999 with a fleet of two buses. Services have ex-panded greatly and now include a fleet of 32 buses that carry approximately 6,000 people per day. In addition, City Bus Co.’s management has achieved many positive results, such as reducing the oper-ating subsidy required per bus, piloting the use of e-ticketing, and devising a system for handling customer grievances. These accomplishments are considerable for an IDA-eligible country in the South Asia region. Despite past accomplishments, there is both a need and an untapped potential for Thimphu to derive more from urban public transport services. The need arises from the rapid changes that Bhutan’s urban areas are experienc-ing. Between 1990 and 2010, the number of Bhu-tanese living in urban areas nearly tripled. The population of Thimphu has expanded even faster. In 2000 roughly 43,479 people lived in Thimphu versus approximately 122,242 people today. Ac-cess to private vehicles has increased considerably throughout this time. The special development of Thimphu reflects reliance on private vehicles, as do individual travel behaviors. For example, the 2012 Bhutan Living Standards Survey found that

less than one-third of urban households in Bhutan reported using public transport in a given month. There is a need to provide higher quality alterna-tives to private motorized transport.

Improving the affordability and resilience of roads and bridges is equally a priority against the back-ground of Bhutan’s challenging terrain. Bhutan’s DOR within the Ministry of Works and Human Settlements manages roughly 1,894 km of Bhutan’s 2,438-km highway network along with approxi-mately 300 bridges and approximately 2,000 ad-ditional km of “gewog” roads that were previously managed by Dzongkhag (i.e. district) administra-tions. Planning for maintenance activities along Bhutan’s road and bridge network has not followed a technically rigorous process to date. While DOR maintains lists of its road and bridge assets, these do not include up-to-date information on condi-tion. There is also no formal, network-wide linkage between budgets and condition or vulnerability across DOR’s network. This has inhibited DOR from systematically targeting investment resources to-wards assets that are particularly vulnerable or otherwise in need of maintenance to prevent great-er rehabilitation expenditures in the future.

The World Bank has completed an assessment of the implications of implementing green transpor-tation, including advice on electronic vehicles ini-tiative options, enhancing the city public transpor-tation system, knowledge sharing, and a household survey on travel behaviors.

The World Bank is preparing a $4.7 million grant-funded urban public transportation project from the Global Partnership on Output-Based Aid.

The World Bank helps develop a better road asset management system, using a grant from the Global Facility for Disaster Reduction and Recovery. This effort entails: (i) developing an asset management system to track the condition and vulnerability of roads and bridges and; (ii) improving DOR’s capa-bilities on specific technical design topics through a knowledge exchange with Japan.

The World Bank is assisting with a Regional IDA trade and connectivity project to reduce trade and communication costs through improvement of transport and information and communications technology (ICT) connectivity.

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Governance, Public Financial Management and Procurement

Bhutan outperforms its neighbors on Trans-parency International’s Corruption Perception Index. In 2012, Bhutan moved up the index, from 38th to 33rd, in recognition of additional steps it has taken to strengthen its anti-corruption legal framework, including passage of the 2011 Anti-Corruption Act, the establishment of an Anti-Cor-ruption Commission (ACC), and further strength-ening of rules governing asset declaration by public servants in 2012. In 2013, Bhutan rose to 31st in the index. A key element for improving governance has been an ambitious government-to-citizen program to provide services electronically through commu-nity centers, a particularly important development in light of geographical barriers. Similarly, with support from the International Finance Corpora-tion (IFC), the government has developed a govern-ment-to-business e-portal to provide a comprehen-sive inventory of licenses and other information on business processes.

Public financial management (PFM) reforms are part of national priorities. Bhutan over the years has been making progress in the area of ac-counting, budget execution oversight, control, and reporting. Parliamentarians increasingly pay at-tention to the budget approval process and also in reviewing the audit observations through public accounts committee. Recently, the National Assem-bly Act of Bhutan was amended to allow reference of the budget bill to a committee. The government continues to take steps to strengthen PFM in the country. The public at large has also become more demanding in terms of transparent and efficient government. Nevertheless, further improvement is needed on oversight of public-sector entities, predictability in funds available for expenditures, the quality and timeliness of budget reports and fi-

nancial statements, implementing the standards on auditing and accounting, PFM information systems, availability of professionally qualified staff, and ef-fectiveness of internal audits.

Significant progress has been achieved on pub-lic procurement reforms. Among the outcomes are: (i) introduction of the procurement rules and regulations and standard Bidding Documents for Goods, Works and Services in April 2009; (ii) es-tablishment of the Public Procurement Policy Divi-sion in August 2008; (iii) establishment of central procurement web portal where all rules/regula-tions, standard bidding documents, and relevant procurement news are available for the stakehold-ers; (iv) the putting in place of career path and recruitment tools for a procurement profession; (v) the generally well-functioning procurement market; (vi) a strong framework for control and audit, spearheaded by the Royal Audit Authority and the ACC; (vii) set up and full operation of the Government Procurement and Property Manage-ment Division to conduct centralized procurement and framework agreement of common items; and (viii) formation of an independent review body to handle procurement grievances.

The World Bank has provided an Institutional De-velopment Fund (IDF) grant to help the govern-ment improve financial management in the public and private sectors by strengthening internal audit in the public sector, assisting in the implementa-tion of Bhutanese Accounting Standards, and sup-porting the government in establishment of Bhu-tanese Institute of Chartered Accountants. The World Bank has also provided a grant from a global multi-donor trust fund to Royal Audit Authority to support the implementation of International Stan-dards for Supreme Audit Institutions.

Because of this progress, the World Bank is mov-ing towards use of country systems for all procure-ments up to the International Competitive Bidding Thresholds in Bhutan from end FY2014-2015.The Alternative Dispute Resolution Act of Bhutan, 2013 has come into being and formal arbitration exper-tise needs to be built in the country. In endeavoring to professionalize the procurement function, Bhu-tan has enrolled more than 300 government staff in the World Bank’s Certificate Program in Public Procurement.

15Bhutan Country Snapshot

The World Bank is supporting the establishment of a Multi-Donor Fund for Public Financial Manage-ment in the country, co-funded by the European Commission and the Austria Development Agency. This fund will serve a programmatic approach to PFM reforms in Bhutan.

THE WORLD BANK PROGRAM IN BHUTANThe Board endorsed the new Country Partner-ship Strategy (CPS) on September 23, 2014. The overarching goal of the new CPS (FY2015-2019) is to support Bhutan’s aspirations to achieve sustain-able and inclusive growth. The proposed CPS will be aligned with FYP-11 and will organize its activi-ties under three results areas: (i) improving fiscal and spending efficiency; (ii) increasing private-sec-tor growth and competitiveness; and (iii) support-ing green development. The bulk of IDA financing is expected to continue in the form of development policy lending, supplemented by a limited number of specific investments in key areas, particularly in-frastructure, and a robust analytic program.

Bhutan’s IDA-17 allocation is about $56 million over three years, given that Bhutan has one of the highest Country Policy and Institutional As-sessments in the IDA cohort. Although Bhutan is not yet creditworthy for the International Bank for Reconstruction and Development, it has exceeded the gross national income per capita threshold a couple of years ago and will soon move towards a blend status which should enable Bhutan to obtain higher levels of financing. The program is small but active, with four IDA operations under implemen-tation: (i) Development Policy series of two opera-tions ($20 million each); (ii) Urban Development II ($12 million) and additional financing ($17 mil-lion); (iii) Remote Rural Community Development ($9 million); (iv) Bhutan is a small participant in the regional IDA wildlife project ($2.85 million) with a total commitment of $41.9 million of IDA (plus $20 million of development policy credit). Bhutan also has about 12 other trust funded-operations, including a GEF sustainable financing for biodiver-sity and several grants on disaster management, REDD+, hydromet, corporate governance, PFM, in-tergovernmental fiscal relations, ICT, tourism and cultural heritage, hydropower environmental and

social impact assessment, urban public transport, financial sector (FIRST), South-South knowledge exchange, and statistical capacity building.

The first Development Policy Credit (of a series of two) was declared effective in July 2015 for a total of $20 million. The next IDA operations are: (i) the regional connectivity project (National IDA of $13 million, with additional regional IDA) to be prepared in FY2016 and delivered in FY2017 Q1; (ii) the second Development Policy Credit is to be prepared in FY2016 and delivered in FY2017 Q1.

Bhutan Portfolio performance is moderately satisfactory with no problem projects. Imple-mentation challenges relate to the capacity of civil servants being stretched in the absence of dedicat-ed project management units. The disbursement ratio for IDA as of September 2015 is 37 percent and for trust funds is 63 percent. Significant prog-ress has been made in the enhanced use of coun-try systems. We are increasingly moving towards a programmatic approach in managing our portfolio, consolidating around a few themes, task team lead-ers and joint missions.

The World Bank also provides key knowledge support to Bhutan. Recent analytic work includes a Human Development Public Expenditure Re-view, a review of higher education, a green growth study, a poverty assessment, a debt sustainability assessment, financial sector stocktaking, an invest-ment climate assessment, and an assessment of the macroeconomic, environmental and social impact of hydropower that served to underpin the most recent budget support operation to improve the policy framework governing private-sector devel-opment. A Bhutan Development report, focusing on the government-stated priority of achieving self-reliance, is underway.

INTERNATIONAL FINANCE CORPORATION (IFC)The IFC has a total committed investment port-folio in Bhutan of about $34 million. The portfo-lio consists predominantly of IFC’s equity partici-pation in Bhutan National Bank (BNB) and support for the expansion of a local hotel. IFC, using some of its own funds and mobilizing funds from the ADB and GAFSP, will provide $12 million in equity and

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debt assistance to a hazelnut plantation project in Bhutan. IFC’s first debt assistance of $10 million to a local hotel was made in 2003 and successfully liq-uidated in June 2015.

The advisory portfolio includes advice in struc-turing PPPs, improving Bhutan’s investment climate and enhancing access to financial ser-vices. IFC successfully completed a post-transac-tion advisory engagement with the Thimphu Mu-nicipality for the development of a multi-level car park PPP project. The engagement involved advis-ing municipal and government officials in manag-ing PPP projects using the case of the ongoing proj-ect. IFC is also providing assistance to the Ministry of Economic Affairs and Druk Holding and Invest-ments to help them consider setting up a power trading company in India.

IFC continues to explore areas of assistance in the hydropower, tourism, manufacturing, agri-business, health, and education sectors, among others. IFC’s advisory support on investment cli-mate reforms, infrastructure development through PPPs and the financial sector is expected to con-tinue.

MULTILATERAL INVESTMENT GUARANTEE AGENCY (MIGA)On October 21, 2014, Bhutan became the 181st member of MIGA. In light of Bhutan’s recent mem-bership, MIGA has not provided guarantee cover-age for investment in Bhutan to date.

17Bhutan Country Snapshot

BHUTAN: SECOND URBAN DEVELOPMENT PROJECT AND ADDITIONAL FINANCING (BUDP2) (P090157)KEY DATES:Initial: Approved: April 29, 2010 Effective: August 24, 2010Closing: December 31, 2015

Additional:May 16, 2014

June 30, 2019

FINANCING IN MILLION USDOLLARS*:

Financier Financing Disbursed UndisbursedIDA 12.01 6.23 5.39Royal Government of Bhutan 0.7 0Project Cost 12.71Additional financing 17.4Total Project cost 30.11*As of September 2014

PROJECT BACKGROUND:The Kingdom of Bhutan has experienced rapid social and economic development over the past two decades, and this socio-economic transition is fueling rapid urbanization. Meeting the challenges of urban development, management, and finance is now a key developmental agenda of the government of and its international development partners. The World Bank started its support with the Bhutan Urban Development Project (1999-2006), which helped develop urban infrastructure systems in 10 secondary towns. The government showed strong interest and appreciation of the Bank’s policy advice through the project and technical assistance to prepare the National Urbanization Strategy (2008) and the Thimphu City Development Strategy. On the government side, the Local Government Act of 2009 and Municipal Finance Policy (2012) provide the framework for the roles and responsibilities of urban local governments. In that context, the ongoing BUDP2 focuses on supporting urban/municipal development in Thimphu (the capital and Bhutan’s largest city) and Phuentsholing (second largest city and a commercial hub), as well as technical assistance for the urban local governments and the Ministry of Works and Human Settlement.

PROJECT DEVELOPMENT OBJECTIVE AND BRIEF COMPONENT DESCRIPTION:The project development objectives are to (i) support Bhutan’s municipal reform program by strengthening municipal finance and management services in Thimphu and Phuentsholing; and (ii) improve infrastructure services in northern Thimphu where no formal services are currently available.

The BUDP2 consist of three components: (i) municipal finance and management; (ii) Thimphu Northern Area Development; and (iii) capacity building. Component 1 ($1.5 million) aims at strengthening the institutional systems of Thimphu and Phuentsholing Thromdes, or city corporations. The support for the city-specific reforms is being done broadly through strengthening both the local revenue administration systems and processes, and the expenditure management systems and financial management systems and processes of the two city corporations. This component also supports government policy reforms aimed at setting up a policy framework for municipal financing. Component 2 ($9.3 million) supports the development of basic infrastructure systems in two “local area plans” in northern Thimphu, including roads, storm-water drainage, water supply, sewerage, and street lighting, as well as support for increasing low-income housing units in these areas. Under Component 3 ($1.2 million), resources are being provided for training programs, equipment, technical assistance, and studies based on the needs of Thimphu and Phuentsholing Thromdes. This component aims to significantly upgrade each city corporation’s capacities in various aspects of their internal work processes and service delivery to citizens through training of operational staff and provision of relevant equipment.

RESULTS: [TARGET VALUES AT END OF PROJECT] ■ Increase in local revenue collection: 50 percent by Thimphu and 40 percent by Phuentsoling. ■ New building permits issued for serviced plots: 175 (in two Thimphu “local area plans” being developed). ■ Number of households with new piped water and sewerage connections: 600 (in two Thimphu “local area plans”). ■ Number of municipal staff trained: 250 (with 150 in Thimphu and 100 in Phuentsholing)

KEY PARTNERS: Ministry of Works and Human Settlement, Ministry of Finance; Thimphu and Phuentsholing Thromdes

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BHUTAN: REMOTE RURAL COMMUNITIES DEVELOPMENT PROJECT (RRCDP) (P123820)KEY DATES:Approved: October 2, 2012Effective: November 15, 2012Closing: May 31, 2018

FINANCING IN MILLION USDOLLARS*:

Financier Financing Disbursed UndisbursedIDA 9.00 6.025 2.9Total Project Cost 9.00 0*As of September 2015

PROJECT BACKGROUND:The Remote Rural Communities Development Project (RRCDP) project area covers 26 geogs, or village administrative units, and six dzongkhags or districts, in southwestern and south central Bhutan. The RRCDP is designed to improve living conditions and incomes in the country’s poorer and more remote rural areas. The populations in these areas currently rely on subsistence agriculture, and lack roads, irrigation, technologies, and community and social infrastructure that would allow them to improve their incomes and social integration.

PROJECT DEVELOPMENT OBJECTIVE AND BRIEF COMPONENT DESCRIPTION:The main objective of the project is to increase agriculture productivity in remote rural areas by improving access to markets, irrigation, agricultural technologies, and community infrastructure. Improvement in market access would be achieved by investments in farm roads and marketing infrastructure. Agricultural productivity and rural incomes would increase through promotion of improved irrigation and agronomic practices, and rehabilitation of productive assets for key commodities. Community-led investments will improve the access of the poorest people to the critical and missing infrastructure in the selected area. The RRCDP consists of three components:

Rural Infrastructure: Connects the communities to larger roads and regional markets and to improve production potential through improved availability of irrigation.

Community, Marketing and Productive Infrastructure: Covers investments in marketing and post-harvest infrastructure, critical community-level infrastructure, and investments identified by producers to increase agricultural productivity.

Project Management and Institutional Strengthening: Supports project management, including the monitoring and evaluation functions. It covers: (i) technical and financial management; (ii) procurement; and (iii) supervision of compliance with environmental and social safeguards.

RESULTS/KEY ACHIEVEMENTS: ■ Twenty three irrigation schemes have been initiated so far, which is about 50 percent of the target. Of these, six schemes (about 14km) have been completed; an

additional seven schemes are under construction. ■ Seven cardamom propagation houses and one citrus propagation house were constructed. ■ Forty seven community subprojects in 27 chiwogs in the pre-identified nine geogs (two in Chukha and seven in Samtse) have been completed or are ongoing,

benefitting 2,509 households (15,981 people) in total. ■ Construction on one of the five farm roads has started.

KEY PARTNERS: Ministry of Agriculture and Forests

19Bhutan Country Snapshot

BHUTAN: REGIONAL WILDLIFE PROJECT (P126193)KEY DATES:Effective: October 19, 2011Closing: August 31, 2016

FINANCING N MILLION USDOLLARS*: 2.85

Financier Financing Disbursed UndisbursedIDA 2.85 2.29 0.56Total Project Cost 2.85 0*As of September 2015

PROJECT BACKGROUND:The core issue to be addressed by the project is the mitigation of illegal wildlife trade across borders as the supply of wildlife “goods” are sourced from across South Asia (Bangladesh, Bhutan, India, and Nepal) and South East Asia (Laos and Vietnam). The threat of illegal wildlife trade is highest in border-straddling areas. With an initial focus on border habitats, the proposed second phase of the project to be implemented in and by Bhutan would lead to harmonized enforcement standards, develop best practice applications, share successful schemes and conduct knowledge/research across the “supply” region. They represent the only viable measures for substantially and comprehensively reducing illegal wildlife trade.

PROJECT DEVELOPMENT OBJECTIVE AND BRIEF COMPONENT DESCRIPTION:To assist the participating governments of Bhutan and others to build or enhance shared capacity, institutions, knowledge, and incentives to collaborate in tackling illegal wildlife trade and other selected regional conservation threats to habitats in border areas.

ComponentsCapacity building for addressing the illegal trans-boundary wildlife trade $800,000Promoting wildlife conservation in Asia $2.01 millionProject coordination and communication $40,000

RESULTS/KEY ACHIEVEMENTS: ■ Development of one protocol each on a common research agenda, knowledge sharing, collaboration, and division of labor. ■ Implementation of one regional pilot or initiative in wildlife enforcement and conservation. ■ Improvement of Bhutan’s capacity to fight wildlife crime through the development of information/intelligence networks and to boost conservation through better

park management and training to staff in the relevant agency.

KEY PARTNERS: Ministry of Agriculture and Forests

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BHUTAN: IFC’S EQUITY INVESTMENT IN BHUTAN NATIONAL BANKKEY DATES:Approved: 20 December 2012Effective: 31 December 2012Closing: n/a

FINANCING IN MILLION USDOLLARS*:

Financier Financing Disbursed UndisbursedIBRD 5.39IDA 0Other – IFC 28.5 28.5 0Total Project Cost*As of June 30, 2014

PROJECT BACKGROUND:Bhutan faces a set of challenges typical of countries seeking to make a rapid transition from a mostly rural, agrarian society to one characterized by increasing levels of education, a large number of young people looking for more opportunities and, with increased globalization, shifting expectations and aspirations on the part of its population. Strengthening of the banking sector is a key prerequisite for fostering private sector-led growth and poverty alleviation. The IFC’s landmark $28.5 million investment for a 20 percent stake in BNB was its first equity investment in the country. It also was the largest foreign investment in Bhutan to date.

PROJECT DEVELOPMENT OBJECTIVE AND BRIEF COMPONENT DESCRIPTION:The project brings together IFC’s two pillars of investment and advisory services. IFC’s funding will help expand the bank’s outreach into the underserved population of Bhutan. By capitalizing on BNB’s strong platform to reach underserved small and medium enterprises, the expected improved access to finance will help address a key impediment to private-sector competitiveness.

EXPECTED RESULTS:The project will initiate and generate increased access to finance in Bhutan, a frontier market, with a sizeable underserved and rural population. It also will provide BNB with access to international best practices in the areas of information technology, risk management, social and environmental management, and corporate governance.

KEY PARTNERS: BNB, RMA, Ministry of Economic Affairs, Ministry of Finance.

21Bhutan Country Snapshot

BHUTAN: IFC’S INVESTMENT IN ZHIWA LING HOTELKEY DATES:Approved: 20 December 2012Effective: 31 December 2012Closing: n/a

FINANCING IN MILLION USDOLLARS:

Financier Financing Disbursed UndisbursedIBRD 5.39IDA 0Other – IFC 3.5 0 0Total Project Cost

PROJECT BACKGROUND:Zhiwa Ling Hotel has been operational since 2005. It is a locally owned and operated 45-room five-star property located in Paro.. The investment of $3.5 million in the expansion of the Zhiwa Ling Hotel is the first external commercial borrowing availed by a private-sector entity in Bhutan and has involved significant legal work and very close government engagement.

EXPECTED RESULTS:The project will contribute to the development of the tourism sector in Bhutan. More specifically it will: create a demonstration and catalytic effect with regard to attracting private investment into Bhutan in general and to high-end hotels in particular; contribute to job creation; support the government’s ”high value - low impact” approach to expanding the tourism sector in Bhutan by attracting high spending, environmentally conscious and culturally interested visitors to the country; transfer international best practices in hotel management – including service and quality standards, occupational health and safety, and environmental management – from an experienced sponsor to the emerging Bhutanese tourism industry; encourage utilization of a significant proportion of goods and services required by the resort guests from local sources, which will help develop the local supply base and encourage the growth of SMEs;

KEY PARTNERS: Zhiwa Ling Hotel, Paro.