## 1.      Bhutan has made substantial socio-economic progress in recent years, supported

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---

### Overview and PRSP objectives
- Major socio-economic progress supported by governance improvements.
- Poverty headcount ratio fell from 36 percent in 2000 to 23 percent in 2007.
- Bhutan is on track to meet (or has already met) most Millennium Development Goals (MDGs).
- The Tenth Five-Year Plan (10FYP) serves as the Royal Government of Bhutan’s Poverty Reduction Strategy Paper (PRSP) with the overarching objective to sustain progress and reduce poverty further.
- PRSP target: lower the poverty headcount ratio to 15 percent by 2012/13.
- Strategic objectives in the PRSP:
  - Revitalizing industry
  - Strengthening national spatial planning
  - Synergizing rural-urban development
  - Expanding strategic infrastructure
  - Investing in human capital
  - Fostering an enabling environment through good governance
- Core planning principles reflect Gross National Happiness (GNH): broad-based and sustainable growth, quality of life, conservation of natural environment, preservation of culture, good governance.
- 10FYP preparation: consultative and participatory; consolidated dzongkhag plans; approved by Parliament in January 2009.

### Macroeconomic performance and policy stance
- Recent performance:
  - Real GDP growth averaged about 9 percent during the 9FYP.
  - Per capita GDP rose to around US$1800 in mid-2008, from $835 in 2002.
  - Inflation has averaged about 5½ percent since 2004 (when the CPI was rebased).
  - Foreign reserves covered about 9-12 months of imports.
- Drivers of growth: political stability, prudent management, and hydropower development (Tala project tripled electricity generation capacity).
- Policy assessment:
  - Monetary policy anchored by an exchange rate peg to the Indian rupee; successful in delivering low and stable inflation.
  - Fiscal policy coped with hydropower-related volatility; current fiscal balance near balance or in surplus.
  - Public debt rose due to hydropower borrowing, but sustainability risks mitigated by project implementation record, commercial viability, and donor support.
- Outlook and projections:
  - 10FYP forecasts an average growth rate of 7¾ percent, driven by construction (new hydropower projects) and services.
  - International reserves projected to decline to 7 months of imports during the 10FYP, supported by adequate external financing primarily from official sources.
- Macro risks:
  - Domestic: potential overheating from large civil service wage increases and low real interest rates.
  - External: spillovers from global crisis affecting India, tourism, commodity industries, and possible shortfalls in aid flows.
  - Staff recommendation: prepare contingency plans to enhance PRSP flexibility.
- Fiscal guidance:
  - 10FYP forecasts an average fiscal deficit of about 3 percent of GDP (same as 9FYP).
  - Budget guided by the Ministry of Finance’s Budget Policy and Fiscal Framework Statement (BPFFS) with multi-year targets updated several times a year.
  - Public financial management reforms encouraged: implement multi-year rolling budget, strengthen oversight institutions, bolster public procurement.
- Downside fiscal risks:
  - Revenue side: foreign grants are targeted to nearly double during the 10FYP — this may be optimistic given donor constraints and rising per capita income.
  - Expenditure side: projected rapid slowing in non-interest current spending may not materialize.
  - Domestic financing needs remain substantial with risks of crowding out the private sector due to limited non-bank financing.
  - Recommendation: improve revenue generation via tax base broadening and tax administration improvements; develop a debt management strategy and related institutions/processes.
- Monetary and financial stability:
  - Credit creation has been running at about 35-40 percent per year; a cautious monetary stance is essential to avoid excess demand and a rising trade deficit.
  - Monetary policy must remain consistent with the exchange rate peg.
  - Strengthen bank supervision and enforce prudential regulations to prevent a real estate bubble.
  - Introduction of government T-bills recommended to kick-start securities market, regularize domestic borrowing, and serve liquidity management.
  - Passage of pending financial legislation encouraged (Royal Monetary Authority (RMA) Act and Financial Services Act).

### Policies to support growth
- Staffs emphasize productivity-enhancing reforms to achieve 10FYP growth objectives:
  - The 7¾ percent average annual growth target is about 1-1½ percentage points above staffs’ medium-term estimate.
  - Heavy reliance on hydropower increases vulnerability to volatility.
  - Agriculture productivity is critical to hit the poverty reduction target, which assumes agriculture growing at an average annual rate of 4 percent (more than twice the baseline projection).

A. Private sector environment
- Acceleration of private sector growth is essential for meeting growth and employment objectives.
- PRSP measures: financial sector deepening, trade liberalization, regulatory reform, industrial development, foreign direct investment.
- Importance placed on raising agricultural productivity to generate rural income-earning opportunities.
- Financial sector priorities in the PRSP supported by staffs:
  - Strengthen prudential supervision.
  - Develop non-bank financial markets.
  - Modernize financial infrastructure.
- Risks and recommendations:
  - Address asset-liability mismatches and potential non-performing loans from rapid credit growth.
  - Proceed with government T-bills and pending financial legislation.
  - Monitor that entry of new financial institutions does not excessively accelerate credit growth given stability concerns.
- Employment and skills:
  - Hydropower creates few jobs and limited manufacturing/agriculture employment opportunities.
  - Rising school enrollment has produced better-educated youth but often lacking specific technical/vocational skills.
  - PRSP should scale up efforts to improve skills match and strengthen ties between education and private sector development.

B. Sustainable development of infrastructure
- Implementation capacity is a major challenge for ambitious infrastructure targets; private sector involvement will be important.
- Recommendations:
  - Develop legal framework for public-private partnerships (PPPs) as first step for risk management and governance.
  - Ensure policy, planning, and monitoring institutions are in place, with capacity building for procurement, financial management, and environment.
  - Strengthen oversight institutions: Royal Audit Authority, Parliamentary Accounts Committee, Anti-Corruption Commission.
  - Strengthen public procurement systems and staff capacity to enhance transparency and efficiency.
  - Ensure adequate capacity in environmental sectors and the National Environment Commission to manage environmental risks.
- Hydropower specifics:
  - Bhutan’s estimated potential capacity: 23,760 MW; only 5 percent tapped so far.
  - PRSP proposes adding 10,000 MW of capacity by 2020 (double the original target for that time frame).
  - PRSP aims to expand rural electrification from 57 percent to 100 percent by 2013 (original target 2017).
  - Staffs support energy sector institutional strengthening (restructuring and upgrading of Department of Energy) and capacity building for environmental and social impact assessment and management.
  - Suggestion: consider regulations for the safe operation of dams as containment structures are used in future investments.
  - Note: Most labor employed in Bhutan’s hydropower sector is from India, and new projects are almost entirely financed externally.
- Roads and transport:
  - PRSP emphasizes road construction; 10FYP targets imply a three-fold increase in workload for concerned departments.
  - Staffs encourage enhanced coordination among entities, formulation of a national road policy, review of sectoral master plan, and preparation of a detailed sector investment plan.
  - Introduce asset management practices and build capacity of road sector agencies.

C. Agriculture
- Agriculture and natural resources account for one-fifth of GDP but employ almost half the labor force; boosting performance is critical for poverty reduction.
- PRSP focus: improve productivity through better research, management, and farm mechanization.
- Additional areas to address:
  - Reduce post-harvest losses.
  - Improve access and transportation.
  - Develop basic branding for Bhutan products.
  - Develop linkages to export markets and create transparent interfaces between international demand and rural suppliers.

### Social sector issues
- Health:
  - PRSP emphasizes universal access to basic health services as central to poverty reduction.
  - RGoB focuses on expanding health infrastructure, strengthening human resources, and enhancing technology.
  - Health services are provided free, but health care costs are rising sharply due to expansion to secondary/tertiary care, increased technology use, and growth in non-communicable diseases.
  - PRSP supports sustainability and equity in health delivery and notes potential contribution of greater private sector participation.
  - Staffs recommend careful assessment and monitoring of sustainability and equity implications of private sector participation to ensure poorest and remotest communities are not excluded.
  - Recommendation: analyze who benefits from existing health expenditures to improve or protect equity.
  - RGoB is encouraged to pay more attention to demand-side factors limiting utilization of existing health services.

### Education reforms and access
- Significant curriculum reforms and learning support programs have been initiated, particularly in the three core subjects of Dzongkha, English, and Mathematics.
- The RGoB’s decision to raise the basic education norm to Grade 10 has contributed to a dramatic increase in the number of students continuing their education to the higher grades.
- The challenge of providing further education and employment opportunities to school leavers is of paramount concern.
- Initiatives underway and planned during the PRSP period include:
  - Establishment of the Royal Education Council, a think-tank charged with seeking innovative approaches to education sector reform.
  - Increased harmonization efforts by Bhutan’s development partners supporting education system development.

### Monitoring and Evaluation Framework — progress and gaps
- Progress in poverty measurement and diagnostics:
  - The RGoB has completed three rounds of household surveys: the Household Income and Expenditure Survey 2000 and the Bhutan Living Standards Survey (BLSS) 2003 and 2007.
  - These surveys provided poverty estimates and poverty profiles used to inform the PRSP.
  - The PRSP documents main characteristics of poverty, including the dominance of rural poverty and steady decline in the headcount rate since 2000, and progress on other human development indicators.
  - Ongoing poverty mapping aims to produce reliable poverty estimates at the dzongkhag and gewog levels to help identify poorer areas for poverty alleviation programs.
- Outstanding challenges:
  - Establishing comparable poverty estimates over time is critical to track outcomes of the PRSP.
  - Deepening the link between analysis and policy through more determinants of poverty and sectoral decomposition of growth is needed to fine-tune and prioritize reforms and assess growth and distributional impacts of policies and programs.

### Results-based planning and institutional roles
- The 10FYP lays out specific social and economic quantitative targets largely consistent with articulated policy priorities and has been incorporated to make national development planning and budgeting more dynamic, efficient, and responsive.
- The new approach enables more need-based and objective resource allocations for local governments.
- The PRSP introduces formula-based resource allocations to local governments to increase accountability for planning outcomes.
- The PRSP describes an institutional framework for results-based planning; staffs encourage the RGoB to further elaborate responsibilities for monitoring and evaluation (M&E), noting that the National Statistical Bureau (NSB) could play a critical role.
- The PRSP recognizes that improving the M&E system requires better coordination between local and national government.

### Statistical capacity building
- High quality and more user-friendly databases are foundational for effective results-based planning.
- The National Statistical Bureau (NSB) recently prepared a National Statistics Development Strategy (NSDS), intended to be implemented over the 10FYP period.
- Successful implementation of the NSDS will enhance results-based planning by building capacity and producing comprehensive and reliable databases.
- Staffs urge the RGoB to secure funding and accelerate NSDS implementation.
- Improvements that support decentralized data systems will be critical to support local level planning introduced in the PRSP.

### Conclusion and policy implications
- Recent performance:
  - Bhutan has enjoyed rapid economic growth in recent years through sound macroeconomic management, good governance, and hydropower development.
  - The authorities have focused on growth and poverty reduction while preserving cultural heritage and promoting environmental sustainability.
  - The planning process has been highly inclusive, and the democratic transition has been underpinned by extensive consultations.
- To achieve the PRSP’s ambitious goals, continuation and deepening of policy and institutional reforms and addressing capacity constraints are needed.
- Key policy priorities highlighted for greater attention in the PRSP:
  - Calibrating macroeconomic policies to support sustainable, rapid economic growth, and managing downside macroeconomic risks.
  - Improving the enabling environment for growth across sectors to facilitate achievement of PRSP goals.
  - Further strengthening monitoring and evaluation of the PRSP.
- Staffs commend the strong development performance to date and the institutional changes implemented through the democratic transition; maintaining a good macroeconomic environment, promoting private sector led growth, and ensuring effective use of public resources in expanding infrastructure are essential to mitigate risks and continue poverty reduction.

*Source: IMF staff report content in _cr10181.*

### 1.      Bhutan has made substantial socio-economic progress in recent years, supported

### _cr10181 - 1.      Bhutan has made substantial socio-economic progress in recent years, supported

### Overview and PRSP objectives
- Major socio-economic progress supported by governance improvements.
- Poverty headcount ratio fell from 36 percent in 2000 to 23 percent in 2007.
- Bhutan is on track to meet (or has already met) most Millennium Development Goals (MDGs).
- The Tenth Five-Year Plan (10FYP) serves as the Royal Government of Bhutan’s Poverty Reduction Strategy Paper (PRSP) with the overarching objective to sustain progress and reduce poverty further.
- PRSP target: lower the poverty headcount ratio to 15 percent by 2012/13.
- Strategic objectives in the PRSP:
  - Revitalizing industry
  - Strengthening national spatial planning
  - Synergizing rural-urban development
  - Expanding strategic infrastructure
  - Investing in human capital
  - Fostering an enabling environment through good governance
- Core planning principles reflect Gross National Happiness (GNH): broad-based and sustainable growth, quality of life, conservation of natural environment, preservation of culture, good governance.
- 10FYP preparation: consultative and participatory; consolidated dzongkhag plans; approved by Parliament in January 2009.

### Macroeconomic performance and policy stance
- Recent performance:
  - Real GDP growth averaged about 9 percent during the 9FYP.
  - Per capita GDP rose to around US$1800 in mid-2008, from $835 in 2002.
  - Inflation has averaged about 5½ percent since 2004 (when the CPI was rebased).
  - Foreign reserves covered about 9-12 months of imports.
- Drivers of growth included political stability, prudent management, and hydropower development (Tala project tripled electricity generation capacity).
- Policy assessment:
  - Monetary policy anchored by an exchange rate peg to the Indian rupee; successful in delivering low and stable inflation.
  - Fiscal policy coped with hydropower-related volatility; current fiscal balance near balance or in surplus.
  - Public debt rose due to hydropower borrowing, but sustainability risks mitigated by project implementation record, commercial viability, and donor support.
- Outlook and projections:
  - 10FYP forecasts an average growth rate of 7¾ percent, driven by construction (new hydropower projects) and services.
  - International reserves cover projected to decline to 7 months of imports during the 10FYP, supported by adequate external financing primarily from official sources.
- Macro risks:
  - Domestic: potential overheating from large civil service wage increases and low real interest rates.
  - External: spillovers from global crisis affecting India, tourism, commodity industries, and possible shortfalls in aid flows.
  - Staff recommendation: prepare contingency plans to enhance PRSP flexibility.
- Fiscal guidance:
  - 10FYP forecasts an average fiscal deficit of about 3 percent of GDP (same as 9FYP).
  - Budget guided by the Ministry of Finance’s Budget Policy and Fiscal Framework Statement (BPFFS) with multi-year targets updated several times a year.
  - Public financial management reforms encouraged: implement multi-year rolling budget, strengthen oversight institutions, bolster public procurement.
- Downside fiscal risks:
  - Revenue side: foreign grants are targeted to nearly double during the 10FYP — this may be optimistic given donor constraints and rising per capita income.
  - Expenditure side: projected rapid slowing in non-interest current spending may not materialize.
  - Domestic financing needs remain substantial with risks of crowding out the private sector due to limited non-bank financing.
  - Recommendation: improve revenue generation via tax base broadening and tax administration improvements; develop a debt management strategy and related institutions/processes.
- Monetary and financial stability:
  - Credit creation has been running at about 35-40 percent per year; a cautious monetary stance is essential to avoid excess demand and a rising trade deficit.
  - Monetary policy must remain consistent with the exchange rate peg.
  - Strengthen bank supervision and enforce prudential regulations to prevent a real estate bubble.
  - Introduction of government T-bills recommended to kick-start securities market, regularize domestic borrowing, and serve liquidity management.
  - Passage of pending financial legislation encouraged (Royal Monetary Authority (RMA) Act and Financial Services Act).

### Policies to support growth
- Staffs emphasize productivity-enhancing reforms to achieve 10FYP growth objectives:
  - The 7¾ percent average annual growth target is about 1-1½ percentage points above staffs’ medium-term estimate.
  - Heavy reliance on hydropower increases vulnerability to volatility.
  - Agriculture productivity is critical to hit the poverty reduction target, which assumes agriculture growing at an average annual rate of 4 percent (more than twice the baseline projection).

A. Private sector environment
- Acceleration of private sector growth is essential for meeting growth and employment objectives.
- PRSP measures: financial sector deepening, trade liberalization, regulatory reform, industrial development, foreign direct investment.
- Importance placed on raising agricultural productivity to generate rural income-earning opportunities.
- Financial sector priorities in the PRSP supported by staffs:
  - Strengthen prudential supervision.
  - Develop non-bank financial markets.
  - Modernize financial infrastructure.
- Risks and recommendations:
  - Address asset-liability mismatches and potential non-performing loans from rapid credit growth.
  - Proceed with government T-bills and pending financial legislation.
  - Monitor that entry of new financial institutions does not excessively accelerate credit growth given stability concerns.
- Employment and skills:
  - Hydropower creates few jobs and limited manufacturing/agriculture employment opportunities.
  - Rising school enrollment has produced better-educated youth but often lacking specific technical/vocational skills.
  - PRSP should scale up efforts to improve skills match and strengthen ties between education and private sector development.

B. Sustainable development of infrastructure
- Implementation capacity is a major challenge for ambitious infrastructure targets; private sector involvement will be important.
- Recommendations:
  - Develop legal framework for public-private partnerships (PPPs) as first step for risk management and governance.
  - Ensure policy, planning, and monitoring institutions are in place, with capacity building for procurement, financial management, and environment.
  - Strengthen oversight institutions: Royal Audit Authority, Parliamentary Accounts Committee, Anti-Corruption Commission.
  - Strengthen public procurement systems and staff capacity to enhance transparency and efficiency.
  - Ensure adequate capacity in environmental sectors and the National Environment Commission to manage environmental risks.
- Hydropower specifics:
  - Bhutan’s estimated potential capacity: 23,760 MW; only 5 percent tapped so far.
  - PRSP proposes adding 10,000 MW of capacity by 2020 (double the original target for that time frame).
  - PRSP aims to expand rural electrification from 57 percent to 100 percent by 2013 (original target 2017).
  - Staffs support energy sector institutional strengthening (restructuring and upgrading of Department of Energy) and capacity building for environmental and social impact assessment and management.
  - Suggestion: consider regulations for the safe operation of dams as containment structures are used in future investments.
  - Note: Most labor employed in Bhutan’s hydropower sector is from India, and new projects are almost entirely financed externally.
- Roads and transport:
  - PRSP emphasizes road construction; 10FYP targets imply a three-fold increase in workload for concerned departments.
  - Staffs encourage enhanced coordination among entities, formulation of a national road policy, review of sectoral master plan, and preparation of a detailed sector investment plan.
  - Introduce asset management practices and build capacity of road sector agencies.

C. Agriculture
- Agriculture and natural resources account for one-fifth of GDP but employ almost half the labor force; boosting performance is critical for poverty reduction.
- PRSP focus: improve productivity through better research, management, and farm mechanization.
- Additional areas to address:
  - Reduce post-harvest losses.
  - Improve access and transportation.
  - Develop basic branding for Bhutan products.
  - Develop linkages to export markets and create transparent interfaces between international demand and rural suppliers.

### Social sector issues
- Health:
  - PRSP emphasizes universal access to basic health services as central to poverty reduction.
  - RGoB focuses on expanding health infrastructure, strengthening human resources, and enhancing technology.
  - Health services are provided free, but health care costs are rising sharply due to expansion to secondary/tertiary care, increased technology use, and growth in non-communicable diseases.
  - PRSP supports sustainability and equity in health delivery and notes potential contribution of greater private sector participation.
  - Staffs recommend careful assessment and monitoring of sustainability and equity implications of private sector participation to ensure poorest and remotest communities are not excluded.
  - Recommendation: analyze who benefits from existing health expenditures to improve or protect equity.
  - RGoB is encouraged to pay more attention to demand-side factors limiting utilization of existing health services.

*Source: IMF staff report content in _cr10181.*

### 21.      The RGoB continues to accord high priority to increasing both access to and the

### The RGoB continues to accord high priority to increasing both access to and the quality of education in Bhutan.

### Education reforms and access
- Significant curriculum reforms and learning support programs have been initiated, particularly in the three core subjects of Dzongkha, English, and Mathematics.
- The RGoB’s decision to raise the basic education norm to Grade 10 has contributed to a dramatic increase in the number of students continuing their education to the higher grades.
- The challenge of providing further education and employment opportunities to school leavers is of paramount concern.
- Initiatives underway and planned during the PRSP period include:
  - Establishment of the Royal Education Council, a think-tank charged with seeking innovative approaches to education sector reform.
  - Increased harmonization efforts by Bhutan’s development partners supporting education system development.

### Monitoring and Evaluation Framework — progress and gaps
- Progress in poverty measurement and diagnostics:
  - The RGoB has completed three rounds of household surveys: the Household Income and Expenditure Survey 2000 and the Bhutan Living Standards Survey (BLSS) 2003 and 2007.
  - These surveys provided poverty estimates and poverty profiles used to inform the PRSP.
  - The PRSP documents main characteristics of poverty, including the dominance of rural poverty and steady decline in the headcount rate since 2000, and progress on other human development indicators.
  - Ongoing poverty mapping aims to produce reliable poverty estimates at the dzongkhag and gewog levels to help identify poorer areas for poverty alleviation programs.
- Outstanding challenges:
  - Establishing comparable poverty estimates over time is critical to track outcomes of the PRSP.
  - Deepening the link between analysis and policy through more determinants of poverty and sectoral decomposition of growth is needed to fine-tune and prioritize reforms and assess growth and distributional impacts of policies and programs.

### Results-based planning and institutional roles
- The 10FYP lays out specific social and economic quantitative targets largely consistent with articulated policy priorities and has been incorporated to make national development planning and budgeting more dynamic, efficient, and responsive.
- The new approach enables more need-based and objective resource allocations for local governments.
- The PRSP introduces formula-based resource allocations to local governments to increase accountability for planning outcomes.
- The PRSP describes an institutional framework for results-based planning; staffs encourage the RGoB to further elaborate responsibilities for monitoring and evaluation (M&E), noting that the National Statistical Bureau (NSB) could play a critical role.
- The PRSP recognizes that improving the M&E system requires better coordination between local and national government.

### Statistical capacity building
- High quality and more user-friendly databases are foundational for effective results-based planning.
- The National Statistical Bureau (NSB) recently prepared a National Statistics Development Strategy (NSDS), intended to be implemented over the 10FYP period.
- Successful implementation of the NSDS will enhance results-based planning by building capacity and producing comprehensive and reliable databases.
- Staffs urge the RGoB to secure funding and accelerate NSDS implementation.
- Improvements that support decentralized data systems will be critical to support local level planning introduced in the PRSP.

### Conclusion and policy implications
- Recent performance:
  - Bhutan has enjoyed rapid economic growth in recent years through sound macroeconomic management, good governance, and hydropower development.
  - The authorities have focused on growth and poverty reduction while preserving cultural heritage and promoting environmental sustainability.
  - The planning process has been highly inclusive, and the democratic transition has been underpinned by extensive consultations.
- To achieve the PRSP’s ambitious goals, continuation and deepening of policy and institutional reforms and addressing capacity constraints are needed.
- Key policy priorities highlighted for greater attention in the PRSP:
  - Calibrating macroeconomic policies to support sustainable, rapid economic growth, and managing downside macroeconomic risks.
  - Improving the enabling environment for growth across sectors to facilitate achievement of PRSP goals.
  - Further strengthening monitoring and evaluation of the PRSP.
- Staffs commend the strong development performance to date and the institutional changes implemented through the democratic transition; maintaining a good macroeconomic environment, promoting private sector led growth, and ensuring effective use of public resources in expanding infrastructure are essential to mitigate risks and continue poverty reduction.

*Source: IMF staff report excerpt (paragraphs 21–28).*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10181.pdf_