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14th Round Table Meeting Enhancing Happiness and Sustainable Development through Partnerships

ENHANCING HAPPINESS AND SUSTAINABLE

DEVELOPMENT THROUGH PARTNERSHIPS

Background Paper for the

14th Round Table Meeting of Bhutan’s Development Partners

12th to 14th March 2019

Prepared by the Joint Task Force (JTF) for the 14th RTM

Royal Government of Bhutan and United Nations System in Bhutan



Contents

ACRONYMS AND GLOSSARY OF BHUTANESE TERMS ............................................ I

EXECUTIVE SUMMARY .................................................................................................... V

1. INTRODUCTION............................................................................................................ 1

2. BHUTAN’S DEVELOPMENT CONTEXT .................................................................. 3

2.1 NATIONAL DEVELOPMENT FRAMEWORK .................................................................... 3

2.1.1 Guiding Principles of GNH ................................................................................... 3

2.1.2 Sustainable Development Goals and Integration into the National Development

Framework ......................................................................................................................... 5

2.2 STATE OF THE ENVIRONMENT ..................................................................................... 6

2.3 DEVELOPMENTS IN THE ECONOMY ............................................................................. 7

2.4 SOCIO-CULTURAL PROGRESS ...................................................................................... 8

2.5 GOVERNANCE DEVELOPMENTS................................................................................. 10

3. 12TH FIVE YEAR PLAN: TOWARDS LDC GRADUATION AND THE 2030

AGENDA FOR SUSTAINABLE DEVELOPMENT ......................................................... 14

3.1 OVERVIEW OF THE 12TH FIVE YEAR PLAN ................................................................. 14

3.1.1 Key elements ........................................................................................................ 14

3.1.2 Fiscal Projection, Resource Needs and Allocation ............................................. 15

3.2 ADDRESSING CRITICAL DEVELOPMENT CHALLENGES AND OPPORTUNITIES ............... 17

3.2.1 LDC graduation, probable impacts and vulnerabilities ...................................... 17

3.2.2 Economic resilience and transformation ............................................................. 19

3.2.3 Environmental resilience ..................................................................................... 22

3.2.4 Enhancing human capital and productive capacity............................................. 25

4. PARTNERSHIPS AND FINANCING FOR SUSTAINABLE DEVELOPMENT .. 29

4.1 FINANCING LANDSCAPE ............................................................................................ 29

4.2 STRENGTHENING PARTNERSHIPS FOR DEVELOPMENT ............................................... 30

4.3 UTILISING AND EXPLORING INNOVATIVE FINANCING MECHANISMS ........................ 31

5. CONCLUSION .............................................................................................................. 33

REFERENCES ....................................................................................................................... 34

i


Acronyms and Glossary of Bhutanese Terms

AAAA Addis Ababa Action Agenda

ADB Asian Development Bank

AKRA Agency Key Result Area

ANER Adjusted Net Primary Enrolment Rate

BESF Bhutan Economic Stabilisation Fund

BHU Basic Health Unit

BIMSTEC Bay of Bengal Initiative for Multi-Sectoral Technical and Economic

Cooperation

BIOFIN Biodiversity Finance Initiative

BLSS Bhutan Living Standard Survey

BTFEC Bhutan Trust Fund for Environmental Conservation

BWSI Bhutan Water Security Index

CCPA Child Care and Protection Act 2011

CEDAW Convention on the Elimination of all Forms of Discrimination Against

Women

CMI Common Minimum Infrastructure

CoP Conference of Parties

CSI Cottage and Small Industries

CSO Civil Society Organization

DDG Dzongkhag Development Grants

DoRF Division of Responsibility Framework

Druk Gyalpo King of Bhutan

DSA Debt Sustainability Analysis

DVPA Domestic Violence Prevention Act 2013

Dzongkhag District

ECCD Early Childhood Care Development

ECIU Energy and Climate Intelligence Unit

EDP Economic Development Policy

EU European Union

EVI Economic Vulnerability Index

ii


FDI Foreign Direct Investment

FYP Five Year Plan

FY Financial Year

Gewog Lowest unit of public administration comprised of a block of villages

GC Gewog Centre

GCF Green Climate Fund

GEF Global Environment Facility

GHG Greenhouse gas

GNH Gross National Happiness

GNHC Gross National Happiness Commission

GDP Gross Domestic Product

GNI Gross National Income

GoI Government of India

GER Gross Enrolment Ratio

GES Guaranteed Employment Scheme

GLOF Glacial Lake Outburst Floods

GPMS Government Performance Management System

G2C Government-to-Citizen

GST Goods and Services Tax

HAI Human Assets Index

HDI Human Development Index

ICT Information Communication Technology

INR Indian Rupee

IMF International Monetary Fund

KPI Key Performance Indicator

LDC Least Developed Country

LG Local Government

LGKRA Local Government Key Result Area

LIC Lower Income Country

MoAF Ministry of Agriculture and Forests

MoF Ministry of Finance

MMR Maternal Mortality Rate

iii


MPI Multidimensional Poverty Index

NAMA Nationally Appropriate Mitigation Action

NAPA National Adaptation Programme of Action

NCD Non Communicable Diseases

NCWC National Commission for Women and Children

NDC Nationally Determined Contribution

NEWH Northern East-West Highway

NFE Non-Formal Education

NKRA National Key Result Area

NSB National Statistics Bureau

NU Ngultrum (Bhutanese currency)

ODA Official Development Assistance

OPGW Optical Ground Wire

PCB Penal Code of Bhutan

PEFA Public Expenditure and Financial Accountability

PFP Project Finance for Permanence

PHCB Population and Housing Census of Bhutan

PPP Public Private Partnerships

PSL Priority Sector Lending

RAF Resource Allocation Formula

RBP Results Based Planning

REDCL Rural Enterprise Development Corporation Limited

REDD Reducing Emission from Deforestation and Forest Degradation

RGoB Royal Government of Bhutan

RTM Round Table Meeting

SAARC South Asian Association for Regional Cooperation

SAPA Sectoral Adaptation Plan of Action

SDG Sustainable Development Goal

SEN Special Education Needs

TDS Tax Deducted at Source

Triple C Coordination, Consolidation, and Collaboration

TVET Technical and Vocational Education Training

iv


UN United Nations

UNCTAD United Nations Conference on Trade and Development

UNDESA United Nations Department of Economic and Social Affairs

UNFCCC United Nations Framework Convention on Climate Change

UNGA United Nations General Assembly

USD United States Dollars

WTO World Trade Oganisation

v


Executive Summary

The 14th Round Table Meeting (RTM) is taking place at an important juncture in Bhutan’s

development journey. With the theme “enhancing happiness and sustainable development

through partnerships”, this RTM is geared towards strengthening and broadening partnerships

for development as Bhutan’s embarks on its 12th Five Year Plan (FYP). As the last plan towards

graduation from the United Nations Least Developed Countries (LDC) category, the 12th FYP

is critical to ensuring that Bhutan’s development gains to date are consolidated, that last mile

challenges are overcome, and that progress towards achieving the 2030 Agenda for Sustainable

Development and its 17 Sustainable Development Goals (SDGs) is sustained.

Guided by its Gross National Happiness (GNH) philosophy, Bhutan follows a holistic and

responsible approach to sustainable development. Since 1961, significant socio-economic

progress has been made while maintaining a pristine environment and vibrant cultural heritage,

along with strengthened institutions for good governance. Given high levels of synergy

between GNH and the SDGs, integration of the latter into the national development framework

has been fairly seamless and continues to be fostered.

While the Constitution mandates at least 60 percent of the country to be maintained under forest

cover, today more than 70 percent of the land area is forested. Bhutan is among the top ten

biodiversity hotspots in the world, and as a net sequester of carbon it has committed to remain

carbon neutral for all times. However, managing co-benefits and trade-offs, along with

balancing conservation and development, is a difficult challenge. Bhutan is also highly

vulnerable to climate-induced disasters and other hazards which pose serious threats to its

nature-dependent livelihoods and hydropower- and agriculture-based economy. The additional

burden of adaptation and mitigation entail huge costs that necessitate the support of the

international community.

Over the past decade, the Bhutanese economy grew at an average rate of seven percent. Gross

Domestic Product (GDP) in 2017 was recorded at USD 2.4 billion, and GDP per capita at USD

3438. However, hydropower-led growth has not resulted in a commensurate share of sectoral

employment, and agriculture continues to be the largest employer despite much lower returns.

Increasing youth unemployment, in particular high female youth unemployment, is an urgent

challenge. As a landlocked country with a weak private sector, low levels of productivity, a

narrow economic base, and high reliance on a single export commodity and market, Bhutan

continues to face serious impediments to achieving economic transformation.

Given high investments in the social sectors, Bhutan today is in the medium Human

Development Index (HDI) category. Increased access to health and education services have

resulted in improved life conditions including life expectancy and literacy rates, and poverty

reduction has been significant. Gender equality and empowerment is promoted as a cross-

cutting theme in the country’s socio-economic development, and the resilience and vibrancy

of local communities and culture continues to be enhanced. Still, issues of quality,

inclusiveness and sustainability remain. Multidimensional poverty is prevalent, especially in

rural areas, and the gap between the rich and poor is widening. Lifestyle diseases are on the

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rise at a time when chronic malnutrition in children and neonatal mortality are yet to be fully

addressed.

Building on good governance foundations laid by successive monarchs, Bhutan continues to

strengthen democratic institutions at local and national levels. Efforts to enhance the legislative

framework for good governance, including decentralisation processes, are ongoing, through

harmonisation of laws and addressing gaps in policy, among others. Government Performance

Management System (GPMS) and Public Expenditure and Financial Accountability (PEFA)

standards are being utilised to improve public service delivery and accountability. The roles of

Civil Society Organisations (CSO) and the media have become increasingly important,

especially since Bhutan’s peaceful transition to a Democratic Constitutional Monarchy in 2008.

Nevertheless, a need exists to improve capacities of governance actors across the board,

including the need to improve women’s participation in both political and higher decision-

making positions.

Going forward, Bhutan’s 12th FYP seeks to achieve a “just, harmonious and sustainable society

through enhanced decentralisation”, and will allocate greater responsibility, accountability and

resources to Local Governments. Underpinned by GNH principles as well as the SDG principle

of “leaving no one behind”, the 12th FYP will advance a holistic and an inclusive development

agenda that promotes economic prosperity while reducing inequality and protecting the

environment.

Following a results-based planning framework, the 12th Plan has 17 National Key Result Areas

(NKRAs) encompassing economic resilience, poverty and inequalities, climate change and

disaster risk management, social inclusion, strengthening governance and institutions, among

others. A number of high-priority multi-sector interventions or “flagship programmes” are

expected to further facilitate economic diversification and employment generation, and address

issues concerning drinking water, healthcare, and public services. Strong emphasis is placed

on coordination, consolidation, and collaboration across all sectors and development actors to

ensure efficient implementation of the Plan.

While all national key result areas and SDGs are important and will be pursued, Bhutan needs

to ensure that critical last mile challenges are well-addressed before graduation in 2023.

Although meeting the Human Assets Index (HAI) and the Gross National Income (GNI)

criteria for LDC graduation, it has not met the Economic Vulnerability Index (EVI) criterion.

A vulnerability profile underscores that while progress is visible, Bhutan faces complex and

costly challenges of building its resilience to unique vulnerabilities. A sound transition strategy

that pays special attention to these persistent and emerging challenges is thus a critical

requirement.

As such, the 12th Plan will see concerted effort at addressing urgent issues with crosscutting

implications on Bhutan’s sustainable development. These are mainly vulnerabilities arising

from structural issues in its economy, susceptibility to the impacts of climate change, and

underlying issues in the social sector that have an immediate as well as long-term bearing on

productive capacity.

vii


Therefore, special efforts will be made to enhance the productive capacity of the Bhutanese

economy through expansion of investments in private sector, entrepreneurship, promotion of

cottage and small industries, tourism, organic agriculture, and agro-based industries. Greater

investments will also be made to harness the demographic dividends offered by a youthful

population, by improving learning outcomes, inculcating innovative and creative mindset, and

enhancing employability. And to ensure that development gains to date are not derailed by the

adverse impacts of climate change, national and innovative capacity will be enhanced to

understand climate change pathways more intricately among the sectors; to develop local

solutions; and to secure the investments required in dealing with climate change impacts.

Although Bhutan’s financing landscape has undergone significant changes over the decades,

with domestic resource contribution growing from plan to plan, Official Development

Assistance (ODA) continues to be critical. Based on a total outlay of NU 310,016 million for

the 12th Plan, domestic resources are expected to fully cover current expenditure but will only

cover about 21 percent of capital expenditure. With grants projected to fund about 54 percent

of capital expenditure, a fiscal deficit of NU 29,243 million is anticipated, requiring external

borrowings and exploration of additional avenues to finance this gap.

To ensure effective implementation of the 12th FYP towards smooth and sustainable graduation

and sustained achievement of GNH and the SDGs, Bhutan will therefore need to strengthen

development cooperation and multiples levels of partnership. In line with the Addis Ababa

Action Agenda (AAAA), this will include partnerships with the private sector, civil society,

Local Governments, and bilateral, regional and international cooperation. It will also entail the

further exploration and utilisation of a range of financing windows and innovative mechanisms.

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1. Introduction

Background

The Kingdom of Bhutan is a Democratic Constitutional Monarchy, nestled in the fragile

mountainous ecosystem of the eastern Himalayas. With a population of 727,1451 and a total

land area of 38,394 square kilometres, it is a small country landlocked between China to the

north and India to the south, east and west.

Aided by geography, Bhutan remained largely isolated from the rest of the world up until the

second half of the 20th century. Having embarked onto planned socio-economic development

in 1961, Bhutan today is in the medium Human Development Index (HDI) category, and is set

to graduate from the United Nations Least Developed Countries (LDC) category by 2023.

Such rapid progress has occurred under the wise and skillful guidance of its successive

monarchs and the generous support of its development partners. While the principles of Gross

National Happiness (GNH) have shaped Bhutan’s approach to development since the early

decades of development, it has integrated the closely aligned Sustainable Development Goals

(SDGs) into its development framework since their adoption in 2015.

Development in Bhutan is carried out in five-year planning cycles, and today it is into its 12th

Five Year Plan. Despite tremendous achievements in its socio-economic indicators and the

maintenance of a pristine environment, Bhutan still faces serious impediments to ensuring

economic resilience and a sustainable development pathway.

As the 12th Five Year Plan (FYP) represents Bhutan’s last plan towards LDC graduation, the

next five years are especially critical for ensuring that hard-earned development gains are

consolidated, that last mile challenges are overcome, and that progress towards achieving the

2030 Agenda for Sustainable Development and its 17 SDGs is sustained.

It is at this juncture in Bhutan’s development journey that the 14th Round Table Meeting (RTM)

is set to take place. Initiated in the early 1980s as an important forum for policy dialogue and

aid coordination, this RTM is geared towards strengthening and broadening partnerships for

development over the 12th Plan. Its key objectives are to:

i. Sensitise development partners on the 12th FYP: the last plan as an LDC to address the

last mile challenges and consolidate development gains;

ii. Take stock of Bhutan’s developmental progress, challenges and future priorities,

including smooth graduation;

iii. Acknowledge and appreciate the contribution of development partners, while also

assessing remaining financing gaps, and strengthening foundations for continued and

future partnerships in Bhutan’s socio-economic development;

1 Population and Housing Census of Bhutan (PHCB). National Statistical Bureau, RGoB, 2017.

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iv. Leverage the opportunity presented by the 2030 Agenda and the SDGs to set out a joint

vision of Bhutan’s socio-economic development through effective partnerships; and

v. Explore possible financing windows and opportunities for Bhutan in its efforts on the

path of Sustainable Development and in line with the Addis Ababa Action Agenda

(AAAA).

Purpose and outline

Against this backdrop, this report has been prepared to provide an overview of Bhutan’s current

development situation, including its successes, challenges, aspirations and way forward. It is

intended as a resource for dialogue with development partners, and complements the

presentations and panel discussions that are slated to take place during the RTM.

Structured broadly around the theme of the RTM—Enhancing happiness and sustainable

development through partnerships—the report is also situated within the context of Bhutan’s

12th FYP and imminent graduation from LDC status. As such, it begins with an overview of

Bhutan’s national development framework, and presents situational briefs in key areas that

represent common and core elements of both GNH and the SDGs.

It then underlines key elements of the 12th FYP including its resources needs and projections,

before delving into some detail on addressing last mile challenges and opportunities during the

plan period. This warrants a brief look into the probable impacts of LDC graduation, and

identification of key issues and strategies intersecting economic resilience, environmental

resilience, and human capital and productive capacity.

Lastly, it discusses prospects for strengthening and broadening partnerships for sustainable

development, including a brief look at innovative finance mechanisms.

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2. Bhutan’s Development Context

2.1 National Development Framework

2.1.1 Guiding Principles of GNH

Since the inception of planned development in 1961, Bhutan has sought to balance economic

growth with environmental sustainability, social progress, and cultural vibrancy, underpinned

by a framework of good governance. Known as Gross National Happiness (GNH), this holistic

and inclusive approach to development continues to guide Bhutan’s socio-economic progress.

His Majesty the Fourth Druk Gyalpo, Jigme Singye Wangchuck, first gave expression to this

term in the early 1970s to convey the idea that economic growth alone does not define progress,

and that collective wellbeing and happiness is most important.

While the values and ideas behind GNH date back to Bhutan’s Legal Code of 1729—which

essentially stated that if the Bhutanese State cannot create happiness for its people, there is no

purpose for its existence2—its core dimensions were grounded in the country’s early

experience of planned development. Especially after the first decade of establishing basic

infrastructures such as schools, health clinics and roads, Bhutan’s Five-Year Plans (FYP) put

increasing emphasis on priority areas that were later articulated as the four pillars of GNH.

Today, GNH is enshrined in the Constitution of Bhutan, making it the collective responsibility

of the state and polity to ensure that unbridled economic growth does not compromise the

social, ecological and spiritual wellbeing of the country. Over the years, operational aspects of

GNH have been strengthened with the introduction of the GNH Index in 2008 and the GNH

Policy Screening Tool in 2009. These are increasingly being utilised in the formulation and

monitoring of Bhutan’s recent FYPs, policies and programmes.

Based on biennial surveys, the GNH Index facilitates assessment of wellbeing conditions

across the nine domains of health, education, living standards, ecological diversity and

resilience, good governance, psychological wellbeing, time use, community vitality, and

cultural diversity and resilience. GNH assessments are gradually being used towards evidence-

based decision-making, with the GNH Index incorporated into the 12th FYP. As shown in the

sample in Box 1, most of the GNH indicators based on the 2015 survey results have been

integrated into the national key result areas of the Plan.

While these indicators serve as evaluative tools to track developmental progress over time,

other tools are also desirable and essential to help steer decisions and activities along a GNH-

oriented path. As such, all draft government policies go through the GNH Policy Screening

Tool, to ensure that policies contribute to the overall happiness and wellbeing of the people.

In this regard the approach taken is that even if a programme or activity does not contribute to

strengthening a GNH domain, it should at least not have a negative impact. At times, it may

also become necessary to put in place mitigation measures to ensure minimum negative act, if

certain activities have to be carried out despite their potential negative side-effects.3

2 Report on the 13th Round Table Meeting, “GNH for the Global Goals”, 15-16 March 2017, RTM Joint Task

Force, RGoB. 3 Ibid.

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Box 1: GNH Indicators Integrated in 12th Five-Year Plan Targets

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2.1.2 Sustainable Development Goals and Integration into the National Development

Framework

Bhutan’s pursuit of GNH has inspired policy makers and policy frameworks around the world,

including the 2030 Agenda for Sustainable Development with its 17 integrated and indivisible

Sustainable Development Goals (SDGs). The global community’s acceptance of this broad and

inclusive development agenda—which sets standards for society as a whole to aspire and

adhere to—was a significant milestone for a nation that has long championed the need for a

higher purpose for development, as expressed by its GNH vision.

As GNH and the SDGs both advocate a holistic approach to development, place people and

planet at the centre, and share a common vision of prosperity, peace and harmony where no

one is left behind, there is strong consonance between the two.4 Bhutan’s pursuit of GNH

therefore enables smooth integration of the SDGs into the national development framework,

with the five-year plans providing a natural avenue through which to pursue the SDGs.

The 11th FYP (2013-2018) was found to be highly aligned with the SDGs5, and the SDGs

further served as a guiding basis in the preparation of the 12th FYP. With the 12th Plan key

performance indicators (KPIs) drawing on SDG targets and indicators, the level of alignment

continues to be high. The table below shows that 16 of the 17 SDGs are directly related to the

17 national key result areas.

Table 1: 12th FYP NKRAs and SDGs Alignment

17 National Key Result Areas 16 Sustainable Development Goals

NKRA_1. Macroeconomic Stability Ensured Goal 8, 10 & 17

NKRA_2. Economic Productive Capacity Enhanced Goal 7, 10, 12

NKRA_3. Poverty Eradicated and Inequality Reduced Goal 1 & 10

NKRA_4. Culture and Traditions Preserved and Promoted ---

NKRA_5. Healthy Ecosystem Services Maintained Goal 6

NKRA_6. Carbon Neutral, Climate and Disaster Resilient Development Enhanced Goal 9 & 13

NKRA_7. Quality of Education and Skills Improved Goal 4

NKRA_8. Food and Nutrition Security Enhanced Goal 2

NKRA_9. Infrastructure, Communication and Public Service Delivery Improved Goal 16

NKRA_10. Gender Equality Promote, Women and Girls Empowered Goal 5

NKRA_11. Productive and Gainful Employment Created Goal 15

NKRA_12. Corruption Reduced Goal 16

NKRA_13. Democracy and Decentralization Strengthened Goal 16

NKRA_14. Healthy and Caring Society Enhanced Goal 3

NKRA_15. Liveability, Safety and Sustainability of Human Settlements Improved Goal 11 & 12

NKRA_16. Justice Services and Institutions Strengthened Goal 16

NKRA_17. Sustainable Water Ensured Goal 6

4 While the SDGs advocate the pursuit of development in its three dimensions—social, economic and

environment—in a balanced and integrated manner, GNH encompasses those dimensions as well the additional

dimension of culture. 5 A Rapid Integrated Assessment of the 11th FYP illustrated that of the 143 relevant SDG targets, 134 were aligned

with the indicators of the 11th FYP.

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Efforts are underway between the Gross National Happiness Commission (GNHC)6 and the

National Statistics Bureau (NSB) to incorporate relevant SDG indicators into the National

Statistical System. A data ecosystem review carried out in 2016 and 2017 established

immediate needs of Bhutan’s statistical system to meet the data expectations of the SDGs. In

this regard, investment in human resource capacity, institutional arrangements, and an enabling

legal and policy environment are essential to raising the quality, frequency, disaggregation,

utility and analysis of critical data in Bhutan.

2.2 State of the Environment

Environmental conservation has long been at the centre of Bhutan’s development policies,

given Bhutanese society’s traditional reverence for the natural environment and reliance on

climate-sensitive activities. Besides being embodied in its GNH philosophy, environmental

stewardship is explicitly identified in the Constitution as a fundamental duty of every

Bhutanese citizen and of the Government.

While maintaining at least 60 percent of the country under forest cover for all times is a

constitutional requirement, currently about 71 percent is forested. Protected areas form a

conservation network covering more than 51 percent of the country, which include 10 protected

areas, one botanic park and seven connecting biological corridors. As such, Bhutan has one of

the highest proportions of protected areas in the world, and is also among the top ten global

biodiversity hotspots with approximately 6000 species of flora and 1900 species of fauna.7

With more than 34 conservation policies, legislations, regulations, plans and programmes

introduced to date, Bhutan pursues a sustainable development path which is also in keeping

with its commitment to relevant global processes. According to the Energy and Climate

Intelligence Unit (ECIU), sequestration by Bhutan’s forests is estimated at 6.3million tons of

CO2, while current emissions are estimated at 2.2 million tons of CO2 as of 2013. Bhutan is

therefore a carbon sink with its forests absorbing three times more CO2 emissions than it emits.

While it first declared its commitment at Copenhagen to remain a net carbon sink in perpetuity

at the 15th Conference of Parties (COP) to the United Nations Framework Convention on

Climate Change (UNFCCC) in 2009, it reaffirmed this pledge at COP 21 in Paris in 2015.

Bhutan reiterated its commitment to remain carbon neutral and pursue low-emission and

climate-resilient development in its Nationally Determined Contribution (NDC) to tackling

climate change. Given its fragile mountain ecosystem and vulnerability to climate change

impacts, both adaptation and mitigation strategies are emphasised in its NDC. These strategies

and action plans cover a wide range of sectors and draw on existing legislation, policies and

strategies.

To date, Bhutan has largely managed to ensure the sustainability of essential ecosystem

services such as clean air, water, and other natural resources for livelihood and sustainable

development, and is today globally recognised as a champion of the environment.

Nevertheless, management of co-benefits and trade-offs, along with balancing of conservation

6 GNHCs is the national planning and coordination agency in Bhutan. 7 National Forest Inventory Report, Volume I. Minsitry of Agriculture and Forests (MoAF), 2017.

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and development, is an important challenge that Bhutan faces. The growing demands of the

population to further advance socio-economic development places increasing pressures on its

natural environment and resources. Bhutan also remains highly vulnerable to climate-induced

disasters and other hazards which pose serious threats to its highly nature-dependent

livelihoods and its hydropower- and agriculture-based economy. These environmental

vulnerabilities which are inextricably intertwined with its economic resilience are discussed

further in Section III of this report.

2.3 Developments in the Economy

Bhutan is one of the smallest economies in the world, with Gross Domestic Product (GDP) in

2017 recorded at NU 164.6 billion or approximately USD 2.4 billion. However, growth has

been impressive, with the economy growing at an average rate of seven percent over the past

decade, mainly due to investments in the hydropower sector. GDP per capita increased from

USD 2464 in 2013 to USD 3438 in 2017.8

Structural changes to the economy have also taken place. While agriculture dominated growth

in the early decades of development, contributing to about 41 percent of GDP as compared to

18 percent by the industrial sector, today it accounts for 17.4 percent as compared to 40.6

percent by the industrial sector. With major industries being state-owned, government

expenditure and investment continues to drive growth. By and large, the share of the services

sector has remained steady.

However, with structural change largely driven by the hydropower sector, Bhutan’s economy

has not experienced a corresponding shift in sectoral share of employment. Even as the

agriculture sector contributes only 16.5 percent to GDP9, it remains the largest employer with

over 57 percent of the labour force.10

Overall unemployment was only a little over two percent in 2017, but youth unemployment

remains high, having increased from 10.7 percent in 2015 to 12.3 percent in 2017. Female

youth unemployment is higher (13.2 percent) than male youth unemployment (11.2 percent)11

Inflation, while remaining in the single digits, increased from a historic low of 3.22 percent in

2016 to 4.96 percent in 201712 with both food and non-food inflation rising. External

imbalances remain large but have begun to decline. Owing to a decrease in merchandise trade

deficit and increase in capital and financial inflows, Bhutan’s overall balance of payment

improved during the Financial Year (FY) 2017/2018. Fiscal deficit during FY2017/2018 was

recorded low at 1.1 percent of GDP, thereby reducing the pressure on current account deficit.13

The current account deficit—which is mainly reflective of the large investments related to

hydropower projects—improved from 24.2 percent of GDP in FY 2016/2017, to 19 percent in

FY 2017/2018. As such, foreign currency reserves remain sufficient to finance 13 months of

8 National Accounts Statistics. National Statistical Bureau (NSB), RGoB. 2018 9 Ibid. 10 Bhutan Living Standards Survey. NSB, 2017. 11 Labour Force Survey Report 2017. Ministry of Labour and Human Resources (MoLHR), RGoB. 12 National Accounts Statistics, op.cit. 13 RMA Annual Report 2017-2018, Royal Monetary Authority of Bhutan.

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imports. In terms of trade, India remains Bhutan’s largest trading partner, accounting for close

to 85 percent of its total exports, followed by Bangladesh, Italy and the Netherlands.14

During the FY 2017/18, Bhutan’s total outstanding external debt stood at USD 2.65 billion,15

amounting to roughly about 115 percent of estimated GDP.16 Of this, 73.5 percent constituted

INR debt (INR 133.19 billion) and the rest (USD 699.82 million) were convertible currency.

Hydropower project-related expenses accounted for about 89.7 percent of the INR debt, and

the remaining was incurred to meet balance of payments deficit with India. Of the total

convertible currency debt, concessional public debt constituted 95.7 percent and the remaining

was related to private sector.17

As in 2014 and 2016, the World Bank-IMF joint Debt Sustainability Analysis (DSA) of 2018

concludes that Bhutan’s risk of debt distress is moderate. While debt levels are high,

vulnerabilities are contained by ‘unique mitigating circumstances’ i.e. a large share of the debt

is linked to hydropower loans from the Government of India (GoI); and most hydropower

projects are constructed under the inter-governmental agreement in which GoI covers both the

financial and construction risks of these projects, and buys surplus electricity at a price

reflecting cost plus a 15 percent net return.18

With debt flows from these projects projected to remain the bulk of the debt stock going

forward, the risks stemming from non-hydropower debt are low, as the stock of non-

hydropower debt-to-GDP is modest and owed mostly to the Asian Development Bank (ADB)

and the World Bank, contracted on highly concessional terms.19

Over the decades, through a combination of prudent fiscal and monetary policy and large

investments in hydropower, Bhutan has experienced significant economic growth making it

one of the fastest growing economies in the world. However, given slow progress in

diversifying its narrow economic base, continuing high reliance on external aid and

hydropower-related inflows, and increasing trend in youth unemployment among other factors,

Bhutan’s economic vulnerability has persisted and remains difficult to overcome. This is

discussed further in section III.

2.4 Socio-cultural Progress

As indicated by its impressive human development indicators, Bhutan has consistently

prioritised investment in the social sectors to improve wellbeing conditions for its people. With

a Human Development Index (HDI) of 0.612 in 2017, Bhutan is in the medium HDI category

and is ranked 134th out of 189 countries.20

14 Ibid. 15 Ibid. 16 Bhutan Development Update. The World Bank, November 2018. 17 RMA Annual Report 2017-2018, op.cit. 18 https://www.imf.org/en/Publications/CR/Issues/2018/10/30/Bhutan-2018-Article-IV-Consultation-Press-

Release-Staff-Report-and-Statement-by-the-46319 19 Ibid. 20 Human Development Indices and Indicators: 2018 Statistical Update. UNDP, New York, 2018.

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Life expectancy increased from 32.4 in 1960 to 69.5 in 2015.21 Infant mortality rate saw

significant reduction from 70.7 deaths per 1000 live births in 1994 to 30 in 2012.22 Maternal

mortality rate (MMR) also dropped from 380 deaths per 100,000 live births in 1994 to 86 in

201223. The proportion of births attended by skilled health providers increased from 23.7

percent in 2000 to 74.6 percent in 201624, and further to 89 percent in 2016.25

Bhutan’s health system today consists of 211 Basic Health Units (BHU), 52 sub-posts and 551

outreach clinics at the primary level, 26 hospitals at the secondary level, and three referral

hospitals at the tertiary level, spread across the country. Traditional medicine services are also

provided from 61 units and one national traditional medicine hospital. Today, the Constitution

mandates the State’s provision of free basic public health services in both traditional and

modern medicines.

While it is a constitutional requirement for the state to provide education up to the 10th standard

free of cost, education today is provided free up to the 12th standard. Additionally, needs- and

merit-based scholarships support numerous students at institutes within and outside the country

for higher levels of education.

Bhutan’s education system is comprised mainly of general education, monastic education, and

non-formal education. The current formal, modern education system has expanded from about

11 schools in the 1960s to 880 schools and other educational institutes in 2018, spanning from

early childhood care education to tertiary and Technical and Vocational Education Training

(TVET).26 Special effort has been made since the early years in providing TVET to cater to the

diverse needs of the labour market.

Adjusted Net Primary Enrolment Rate (ANER) stood at 96.8 percent in 2018, while Gross

Enrolment Ratio (GER) for basic (Class PP-X) was 103 percent and GER for secondary (Class

VII-XII) was 89.3 percent. General literacy rate was recorded at 71.4 percent, with over 78

percent for male and close to 64 percent for female.27

In addition to improvements in health and education outcomes, an expansion in rural road

network and efforts at commercialising agriculture, coupled with the royal Kidu28 programme,

made critical contributions to alleviating poverty conditions in the country. Income poverty

reduced from 23.2 percent to 8.2 percent in 2017 at the national level.29 Likewise, rural poverty

reduced considerably from 30.9 percent in 2007 to 11.9 percent in 2017. Bhutan’s national

21 Annual Health Bulletin. Ministry of Health, RGoB, 2018. 22 Annual Health Bulletin. Ministry of Health, RGoB, 2018. (NHS 1994 & 2012). 23 Annual Health Bulletin, 2018, op.cit. 24 Ibid. 25 Annual Health Bulletin. Ministry of Health, RGoB, 2017. 26 Annual Education Statistics 2018. Ministry of Education, RGoB, 2018. 27 Ibid. 28 Kidu or wellbeing of the people is traditionally a royal prerogative, and is enshrined in the Constitution as a

fundamental responsibility of His Majesty the King. 29 Poverty Analysis Report 2012 & 2017. National Statistical Bureau, RGoB.

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Multidimensional Poverty Index (MPI) also recorded significant improvement with an MPI

index of 5.8 percent in 2017 as compared to 12.7 percent in 2012 to.30

Significant investments have also been made in promoting gender equality and empowerment

of women and girls as a cross-cutting theme in Bhutan’s socio-economic development. In

addition to the Constitution’s guarantee of equal fundamental rights of women and men, and

its explicit recognition of the Convention on the Elimination of all Forms of Discrimination

Against Women (CEDAW) and other relevant conventions, the protection of women and girls

is strengthened by the Child Care and Protection Act 2011 (CCPA), the Penal Code

(Amendment) of Bhutan 2011 (PCB), and the Domestic Violence Prevention Act 2013

(DVPA).

The importance of women in development have been further articulated in its five-year plans,

with gender mainstreaming gaining momentum over the 10th FYP and further identified as a

national key result area in the 11th and 12th FYPs. A Gender Equality Policy has been drafted

and gender-responsive budgeting has been initiated. Efforts to produce gender-disaggregated

data and analysis to facilitate gender mainstreaming have also progressed, and the National

Commission for Women and Children (NCWC) was strengthened to enable implementation of

the various legislation.

Meanwhile, emphasis continues to be placed on enhancing the resilience and vibrancy of local

communities and culture. Based on a traditional notion of interdependence and a value system

guided by Tha Damtshig and Ley Jumdrey31, various forms and practices of community

participation continue to fulfil critical community needs related to farm work, management of

natural resources, social support, spiritual fulfilment, among others. Preservation and

promotion of culture has consistently been given dedicated focus in Bhutan’s five years plans,

with budgetary support towards strengthening both tangible and intangible forms of culture.

Bhutan’s GNH Index includes indicators to facilitate assessment of the strength of various

aspects of Bhutanese culture and communities.

Bhutan therefore records significant achievements across a wide facet of human development

conditions as briefly summarised above. Nevertheless, critical gaps remain, and emerging

issues in health and education as well social issues associated with young people need to be

addressed as a matter of priority. These remaining and emerging social vulnerabilities are

elaborated in section III.

2.5 Governance Developments

Good governance is indispensable to Bhutan’s aspiration to be a GNH society. While all other

aspects of GNH as postulated by the four-pillar formulation and the nine-domain measurement

30 Bhutan: Multidimensional Poverty Index. National Statistical Bureau, RGoB, and Oxford Poverty Human

Development Initiative, University of Oxford, 2017. 31 The concept of Tha Damtshig encompasses values of mutual trust, duty and commitment to others in society,

while Ley Jumdrey represents the notion that all actions have consequences so that good begets good and vice

versa.

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framework are critical, their impact and effectiveness will ultimately depend on whether

governance is well or poorly executed.32

Building on the foundations laid by His Majesty the Third Druk Gyalpo Jigme Dorji

Wangchuck—who established the National Assembly in 1953 and an independent Judiciary in

1967—His Majesty the Fourth Druk Gyalpo Jigme Singye Wangchuck continued to take the

good governance agenda forward.

To enhance participatory governance at the grassroots, decentralisation processes were

initiated in 1981 and 1991 at the Dzongkhag and Gewog levels respectively. In a gradual yet

deliberate approach, the Fourth Druk Gyalpo devolved executive powers to an elected Council

of Ministers in 1998; initiated the drafting of the Constitution in 2001 while holding public

consultations during the process; and voluntarily abdicated in 2006 in favour of the current

Druk Gyalpo, His Majesty Jigme Khesar Namgyel Wangchuck. All these processes culminated

into Bhutan’s peaceful transition to a Democratic Constitutional Monarchy in 2008.

Since then, the foundations for democratic institutions at local and national levels continue to

be strengthened, to ensure that the Judiciary upholds justice and the rule of law; the Election

Commission of Bhutan facilitates free and fair elections; the Royal Civil Service Commission

nurtures an efficient civil service; the Royal Audit Authority ensures judicious use of public

resources; and the Anti-Corruption Commission checks and roots out corruption.

Besides enhancing the legislative framework for good governance with the enactment of new

laws, amendment of existing ones, and ratification of international conventions, the

Government in the past years also instituted a National Law Review Task Force to address the

proliferation and duplication of laws in the country, and to harmonise conflicting provisions

with the Constitution and other laws.

Efforts are underway to address gaps in the legal and policy framework, for example, with the

drafting of a National Policy for Persons with Disability. To strengthen the justice sector,

efforts at further specialisation and regulation of the growing legal profession are ongoing,

among others. To consolidate efforts and strengthen coordination in implementing

decentralisation plans and programmes, a National Decentralisation Policy is under

formulation.

In 2018, Bhutan marked the completion of ten years of democracy, and successfully conducted

the third National Council and third Parliamentary elections, with the new Government

assuming office in November 2018. The 2018 elections resulted in the election of seven women

candidates into the National Assembly, two into the National Council, along with the

appointment of two Eminent Members bringing the total number of women in Bhutan’s Third

Parliament to 11. Of this, one is a cabinet minister.

32 The understanding of good governance in the Bhutanese context is that it is participatory; promotes rule of law;

and ensures transparency, accountability, efficiency, effectiveness, responsiveness, and inclusiveness. Public trust

in the various institutions of governance is also important, as is the employment of strategic vision whereby public

officials take a long-term perspective in their approach to matters of public interest.

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While this is a significant improvement from the previous term when only six women served

in Parliament, progress in improving women’s participation in both political and higher

decision-making positions remains slow. Women constitute 36.42 percent of the total of 28,070

civil servants, and representation at the executive levels with influence on policy and decision-

making is especially low at only 11.6 percent.33

However, State and Government commitment to gender equality and women’s empowerment

is strong, as reflected in the Constitution, priorities of successive five-year plans, and with the

establishment of the NCWC. A Gender Equality Policy under formulation is expected to help

address institutional and socio-cultural barriers to women’s full participation in society.

Efforts to facilitate the direct participation of people at the grassroots continue with the 12th

FYP’s objective to achieve a “Just, Harmonious and Sustainable Society through enhanced

Decentralization”. The devolution of authority and responsibility from the Central to the Local

Government (LG) is reflected in the Plan-to-Plan increase in budgetary allocation as well as

administrative responsibilities to the LGs; and with the provision of Dzongkhag Development

Grants (DDG) facility for Dzongkhags and annual grants for Gewog.

As these processes are taken forward, key considerations include the need to strengthen

capacities of local actors to effectively manage the practical implementation of decentralised

resources, and to mainstream crosscutting issues into local plans and budgets, to name a few

examples.

Towards improving public service delivery, recent years have seen the introduction of the

Government Performance Management System (GPMS) as a means to ensure accountability

of all public institutions and public servants in their provision of effective and efficient

services. To ensure sound public financial management, annual budgets have been aligned with

annual performance targets under the GPMS. Public Expenditure and Financial Accountability

(PEFA) standards have been used to assess public finance management, in addition to

following regular reporting requirements.34

The Government-to-Citizen (G2C) Project continues to function under the direction of the

Prime Minister’s office, with 123 services made accessible online and 15 mobile applications

in place. To increase access and enable citizens to utilise essential services such as banking,

postal and G2C services from their own place of residence, a total of 200 community centres

were established in almost all Gewogs across all Dzongkhags.35

Bhutan is also witnessing the increasing role of Civil Society Organizations (CSO) in the

country, since the enactment of the CSO Act in 2007 and subsequent endorsement of related

regulations. Today Bhutan has 44 registered CSOs36 working across a range of areas

encompassing social, environmental, economic, governance and other themes.

Some of the critical areas of governance to which CSOs contribute include civic education in

media and democracy, building capacities to improve women and girls’ political participation,

33 Civil Service Statistics, December 2017. RCSC, RGoB. 34 Public Financial Management Performance Report. Ministry of Finance, RGoB. 2016. 35 Eleventh Five Year Plan Terminal Report. GNHC, 2018. 36 https://www.csoa.org.bt/csoaims/public/pbinfo/listofcsos

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growth and vibrancy of the media, corruption, young people’s engagement and participation in

their communities, to name a few. While public recognition of CSOs have grown over the

years, understanding civil society space continues to be a work in progress, and capacities

across the whole spectrum of CSOs require strengthening.

Likewise, the role of the media in its various forms has been playing an increasingly vital role

in Bhutanese society, especially with the onset of democracy. Among other forms of state

support, the establishment of the Bhutan Media Foundation by Royal Charter in 2010 is aimed

at fostering “the growth of a strong, responsible media capable of playing an important role in

the social, economic and political growth of the nation37.

Strengthening capacities of media professionals as well as of media consumers, especially with

the proliferation of social media, is one of many challenges pertaining to the nation’s fourth

estate.

Today, Bhutan is the 25th least corrupt country in the world (out of 180 countries and territories

in 2018)38, and is the 19th most peaceful country in the world (out of 163 countries in 2018)39—

indicating its overall good state of governance.

37 http://www.bmf.bt/about-us/about-bmf/ 38 https://www.transparency.org/country/BTN 39 Global Peace Index 2018: Measuring Peace in a Complex World. Institute for Economics & Peace, Sydney.

June 2018.

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3. 12th Five Year Plan: Towards LDC Graduation and the 2030

Agenda for Sustainable Development

In its first Voluntary National Review Report to the United Nations High-Level Political Forum

in July 2018, Bhutan reported that the 12th FYP will be its first major step towards

implementing the SDGs. With the 73rd Session of the United Nations General Assembly

(UNGA) endorsing Bhutan’s graduation from the LDC category by 2023, the 12th FYP

assumes further significance as the “last mile plan” towards graduation and represents a key

strategy in ensuring that the transition is both smooth and sustainable.

3.1 Overview of the 12th Five Year Plan

The RGoB is embarking on an ambitious 12th FYP, which has been prepared through a highly

consultative process involving government agencies, local governments, private sector, civil

society organizations, political parties, youth, and other relevant stakeholders. The Plan draws

inspiration from the Royal Addresses made by His Majesty the King, and is guided by the

national development philosophy of GNH. Constitutional obligations, the range of issues and

challenges identified and reiterated through reviews of the 11th FYP period and raised during

the consultative meetings, and Bhutan’s commitment to internationally agreed development

goals, are all taken into consideration.

3.1.1 Key elements

The goal of the 12th Plan is “to maximise GNH”, and with clear synergies with the SDGs it is

underpinned by the principle of “leaving no one behind”. It will therefore advance a holistic

and an inclusive development agenda that promotes economic prosperity while reducing

inequality and protecting the environment. As with the 11th Plan, the 12th FYP is based on the

Results Based Planning (RBP) framework and articulates outcomes and outputs that need to

be achieved within the plan period to realise its overall objective of, a “just, harmonious and

sustainable society through enhanced decentralisation.”

National priorities are presented in the form of 17 NKRAs that will address wide-ranging issues

encompassing economic resilience, poverty and inequalities, climate change and disaster risk

management, social inclusion, strengthening governance and institutions, among others. The

NKRAs are presented in the table below:

Table 2: National Key Result Areas—12th Five Year Plan

1. Macroeconomic Stability Ensured

5. Healthy Ecosystem Services Maintained

9. Infrastructure, Communication and Public Service Delivery Improved

13. Democracy and Decentralization Strengthened

2. Economic Diversity and Productivity Enhanced

6. Carbon-Neutral, Climate- and Disaster- Resilient Development Enhanced

10. Gender Equality Promoted, Women and Girls Empowered

14. Healthy and Caring Society Enhanced

3.Poverty Eradicated & Inequality Reduced

7. Quality of Education and Skills Improved

11. Productive & Gainful Employment Created

15. Liveability, Safety and Sustainability of Human Settlements Improved

4. Culture & Traditions Preserved & Promoted

8. Food and Nutrition Security Ensured

12. Corruption Reduced 16. Justice Services and Institutions Strengthened

17. Sustainable Water Ensured

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The Plan will enhance decentralisation through the provision of greater financial planning and

administrative responsibilities and authorities to empower Local Governments (LG). LG plans

are formulated in close alignment with the national planning framework, with LG Key Result

Areas (LGKRAs) formulated to achieve one or more relevant national key result areas.

Key priorities of LGs include local economic growth and job creation; poverty reduction or

eradication; improving inclusivity and learning outcomes in education; addressing shortages

and capacity gaps in essential health and sanitation services; improvement of essential

infrastructures including rural health clinics, schools and roads; preservation and promotion of

intangible culture and heritage; and development of essential human resources and capacities

to manage the increased responsibilities and financial resources accompanying the move to

enhance decentralisation.

A number of high-priority multi-sector interventions or “flagship programmes” will also be

implemented to address issues related to economic diversification, employment generation,

drinking water, healthcare, public services, among others. Based on national significance and

potential for high socio-economic impact, these programs will complement the efforts of both

central and local government, and will require multi-sectoral coordination. Flagship

programmes will have detailed blueprint with clear plan of action, dedicated resources, and

clear assignment of responsibilities to implementing agencies40, and will be monitored closely

by the Prime Minister’s Office and the Cabinet.

To ensure further alignment with the GNH approach and SDGs integration, the 12th Plan will

also advance the mainstreaming of crosscutting themes such as environment, disaster

management, gender equality and women’s empowerment, vulnerable groups, among others,

across all agencies and at the local government level.

Further, the 12th Plan takes into consideration sophisticated and nuanced challenges to Bhutan’s

sustainable development, including those of underlying implementation, data, financing and

process-related issues. As such there is strong emphasis on the “Triple C”—coordination,

consolidation, and collaboration—across all sectors and development actors in order to

enhance efficient implementation of policies and programmes. The RGoB is therefore

committed to implementing an ambitious development agenda based on GNH and the SDGs.

3.1.2 Fiscal Projection, Resource Needs and Allocation

The total outlay for the 12th FYP is NU 310,016 million, representing an increase of 38 percent

over the total expenditure for the 11th FYP. Of this, 62.5 percent or NU 193,895 million is for

current expenditure, and NU 116,121 million is for capital expenditure. The total resource

envelope—estimated at NU 280,773 million—comprises domestic revenue of about NU 217,

728 million and grants amounting to NU 63,044 million.41 Revenue from domestic resources

is expected to fully cover the current expenditure and finance at least 21 percent of capital

40 Report on the 12th Five Year Plan to the First Session of the Third Parliament. GNHC, January 2019. 41 The total grant for the plan period is estimated at NU 63,044 million, of which external grant is NU 61,651

million and internal grant from trust funds is NU 1,393 million. Grant constitutes 22.4 percent of the total

resources and will finance at least 54 percent of the capital expenditure. Sources of external grant includes the

GoI which forms major portion of the external grant. Other sources are the EU, Japan and UN agencies.

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expenditure. Grants will finance another 54 percent of the capital expenditure, leaving a gap of

25 percent.

In all, a fiscal deficit of NU 29,243 million, amounting to 2.4 percent of GDP, is projected.

Measures to finance the fiscal deficit will include external borrowing estimated at NU 4,074

million during the 12th Plan period, on highly concessional terms; and through issuance of

government bond and treasury bills. Besides the continued adoption of Public Private

Partnerships (PPP) in the implementation of public infrastructure works, efforts at accessing

trust funds, green climate fund and other new external grant financing windows will be scaled

up, as also covered in subsequent sections of the report.

Table 3: Fiscal Projections—12th FYP

Source: Draft 12th Five-Year Plan, GNHC 2018.

The fiscal policy in the 12th Plan is aimed at ensuring sustained economic growth by broadening

tax base and rationalising capital and recurrent expenditures. Average fiscal deficit is to be

maintained below three percent of GDP; at least 80 percent of total government expenditure is

to be covered through domestic revenue; tax to GDP ratio is to be maintained at 12 percent;

and non-hydro debt is to be maintained below 35 percent of GDP. Towards these ends, a

medium-term revenue strategy will be adopted to strengthen domestic revenue mobilisation,

through measures such as replacing the sales tax regime with Goods and Services Tax (GST),

introducing new taxes, and revising existing tax rates.

Of the total capital outlay, NU 1 billion will be transferred to the Bhutan Economic

Stabilisation Fund (BESF)42. In order of priority, the remaining will be spent on spill-over

projects from the 11th FYP, flagship programmes (NU 15 billion), programmes or projects that

contribute to the direct achievement of NKRAs and Agency Key Result Areas (AKRAs) at the

42 The purpose of the BESF is to insulate the domestic economy from economic shocks. Its establishment was

endorsed by the National Assembly in 2017.

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central government level (NU 50 billion) and programmes or projects contributing to

achievement of NKRAs and LGKRAs at the local government level (NU 50 billion).

Based on a Division of Responsibility Framework (DoRF), past expenditure trends and

resource availability, the capital grants for LGs have been increased by 100 percent from NU

25 billion in the 11th FYP. The capital grants for LGs are allocated through a Resource

Allocation Formula (RAF) and also based on Common Minimum Infrastructure (CMI). The

RAF includes criteria such as population, area, multidimensional poverty index, transport cost

index, and the GNH Index.

3.2 Addressing critical development challenges and opportunities

As the last plan towards LDC graduation and the first major step towards implementing the

SDGs, the 12th Plan will see concerted effort at addressing urgent issues with crosscutting

implications on Bhutan’s sustainable development. These are primarily the vulnerabilities

arising from structural issues in the economy, susceptibility to the impacts of climate change,

and underlying issues in the social sector that have an immediate as well as long-term bearing

on productive capacity.43

3.2.1 LDC graduation, probable impacts and vulnerabilities

Since the introduction of the category of Least Developed Country (LDC) by the United

Nations General Assembly (UNGA) in 1971, Bhutan has been categorised as an LDC i.e. a

low-income country with low levels of human assets and high vulnerability to economic and

environmental shocks. Having made remarkable socio-economic advancements over the

decades, Bhutan was found eligible for graduation from this category for the first time at the

2015 triennial review of the list of LDCs as it met and also exceeded the graduation thresholds

in the income and human assets criteria.44

An ex-ante assessment of the probable impacts of graduation for Bhutan, conducted by the UN

Department of Economic and Social Affairs (DESA)45, suggests that overall, major impacts

are not expected given the country’s trade structure and nature of its main development

partnerships. A summary of this assessment is presented in Box 1.

In the meantime, however, Bhutan continues to face serious structural challenges especially in

addressing its economic vulnerability and exposure to shocks. Although meeting the Human

Assets Index (HAI) and the Gross National Income (GNI) criteria, Bhutan has not met the

Economic Vulnerability Index (EVI) criterion. Additionally, a vulnerability profile prepared

by UNCTAD—examining Bhutan’s structural progress against the indicators incorporated in

these three LDC criteria—concludes that “Bhutan is economically more vulnerable than it

43 These are the key elements that the RGoB has identified as some of the last mile challenges towards LDC

graduation and in gearing up to implement the SDGs, in its first VNR to the UN HLP in 2018. 44 At the time of the 2015 review, Bhutan’s GNI per capita was USD 2,277, exceeding the graduation threshold

of USD 1,242, and its HAI score was 67.9, also exceeding the graduation threshold of 66.0. Its EVI, however,

remained above the maximum threshold of 32.0 with a score of 40.2. 45 The impact assessment is undertaken as an input to the triennial review in 2018 in conjunction with, and as a

supplement to, the report on Bhutan’s vulnerability profile which is prepared by the United Nations Conference

on Trade and Development (UNCTAD).

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appears to be on the methodological and statistical grounds the United Nations presently leans

on.”46

This assessment identifies a “Bhutan paradox”, wherein progress is visible and makes the idea

of graduation a natural milestone, and yet, it faces the complex and costly challenge of building

its resilience to unique vulnerabilities, especially if graduation entails lesser concessionary

support from development partners.

With Bhutan now confirmed for graduation from LDC status by 2023, the development of a

sound transition strategy that will ensure smooth and sustainable graduation is therefore a

matter of priority. Such a strategy will need to take into careful consideration the persistent and

emerging challenges that Bhutan continues to face, some of which are highlighted in the

following sub-sections.

46 Vulnerability Profile of Bhutan, Draft, 11 December 2017. Prepared by UNCTAD for the 2018 review by the

Committee for Development Policy of the List of Least Developed Countries.

Box 2

As Bhutan’s major exports are to India, Bangladesh and Nepal under bilateral and regional trade

agreements, loss of preferential market access for LDCs is unlikely to have a major impact on market

access for its current exports. The impact on possible diversification of current exports into new markets

such as the European Union (EU), Hong Kong, Singapore, and Thailand, is also unlikely to be significant

as tariffs would remain around the same level.

However, diversification of export sectors to potential markets could face some challenges with a

possible loss of trade preferences, as a significant tariff increase is expected for certain products in the

EU and Thailand after graduation. Preferential market access may also be affected for professional

services and tourism, which have been identified as export sectors with significant potential, as Bhutan

could lose the opportunity to benefit from the World Trade Organisation (WTO) Service Waiver. The

extent of this and other impacts pertaining to WTO obligations are however not very clear, as Bhutan is

still in the process of WTO accession.

In terms of development cooperation and Official Development Assistance (ODA) inflows, significant

impact is not expected due to LDC graduation. Budgetary support remains highest from the Government

of India, for which considerations are different. Graduation is also not expected to influence financial

assistance and technical support from external financing sources such as the World Bank and the Asian

Development Bank. Overall, LDC status is also not necessarily a deciding factor for all development

partners, with the scaling down process already underway in consideration of the country’s advancement

away from a lower income country (LIC) status.

It is possible, however, that interest rates may increase for approved projects that currently benefit from

development loans with concessional rates by Japan. Bhutan’s access to LDC-specific funds from the

UNFCCC may also be impacted as these are phased out after graduation. As for multilateral assistance,

support from the UN system is expected to slow after graduation given that LDCs are beneficiaries of

several targeted technical cooperation programmes and other forms of special support measures. It

would, however, continue to have access to mechanisms dedicated to other developing countries.

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3.2.2 Economic resilience and transformation

Key issues

As previously mentioned, Bhutan continues to face serious structural impediments to

overcoming vulnerabilities and achieving economic transformation. Given its small size,

landlocked situation, and remote location from regional and global markets, it suffers from

diseconomies of scale, and exorbitant costs and difficulties in diversifying its narrow economic

base.

With growth fuelled primarily by the hydropower sector—which in turn is driven by

government investment and state-owned entities in executing the required construction and

electricity-generation works—Bhutan’s economic growth is highly capital-intensive.

Therefore, despite its high share to growth, the creation of meaningful employment

opportunities for the local labour market by the sector has been rather limited.

Meanwhile, although long identified as the “engine of growth”, the private sector continues to

be constrained by a lack of appropriate infrastructure and access to finance, coupled with

limited market access and skilled labour. Such conditions are aggravated by a lack of policy

coherence, coordination and slow progress in the implementation of major programmes.

As such, Bhutan’s economy remains undiversified and much of Bhutan’s labour force

continues depend on the agriculture sector. However, the latter is for the most part still at a

subsistence-farming level, providing limited returns and productive opportunities, while also

remaining susceptible to instabilities arising from limited market access, climate-change

impacts and human-wildlife conflicts.

Given its small population, Bhutan’s domestic market has limited scope for expansion, and

efforts to broaden its narrow economic base towards strengthening its export capacity remains

a challenge. Although its export composition has seen an increase in higher value-added

products over the decades, it is concentrated to a narrow range of commodities47, with the top

export commodities constituting an average 81.5 percent of the total export between 2012-

2016. This makes Bhutan’s trade prospects highly susceptible to exogenous shocks, with

potentially detrimental impact on its overall economy.

Bhutan is also vulnerable to global price fluctuations as it is not in a position to set prices for

its commodities, given the negligible value and volume of its trade in the context of regional

and global markets. Most of its manufacturing industries are highly energy-intensive in nature,

exposing them to risks of natural shocks on the hydropower sector. With about 60 percent of

total export constituted by electricity and mineral products48, product diversification is low—

this severely limits opportunities for technical transferability and expansion of productive

capacities to new product categories.

With its high reliance on India as its main trading partner—accounting for close to 85 percent

of trade as previously mentioned—Bhutan’s export industries are highly vulnerable to price

47 Besides electricity, Bhutan’s export basket composition at the product level is dominated by a limited range of

products including Ferrosilicon, Steel, Portland Cement, Calcium Carbide, Silicon Carbide, Cardamom,

Dolomite, and Gypsum. 48 RMA Annual Report, op.cit.

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fluctuations and other developments in India. The latter’s recent introduction of the GST

resulted in disruptions to cross-border trade and had adverse effects on Bhutan’s cement and

other key export industries.

All this is aggravated by the inherent constraints of being a landlocked mountainous country.

Bhutan is less competitive in regional and international markets given high transportation costs

imposed by its difficult terrain, and underdeveloped trade infrastructure facilities.

A critical concern for Bhutan’s overall macroeconomic stability in the medium- to long-term

is its increasing current account deficit, arising from its high trade imbalance and the

consequent pressure on limited foreign currency reserves. Dependence on imports remains

high, including high dependence on an expatriate labour force. Although recording an

improvement during FY 2017/18, as noted in previous sections of this report, both trade and

current account deficits continue to remain elevated at 16.4 percent and 19 percent of GDP

respectively.49

As the narrow economic base and limited product diversity indicate, the Bhutanese economy

for the large part lacks innovation and creativity which are some of the key determinants of

growth. It also suffers from a generally weak culture of research and entrepreneurship.

Moreover, as previously mentioned, youth unemployment is a critical concern at 12.3 percent

in 2017, with female youth unemployment at a worse off level than male youth unemployment.

This increasing trend of youth unemployment, at a time when the country is experiencing a

demographic dividend, has occurred despite the initiation of policies and strategies such as the

Guaranteed Employment Scheme (GES) and several entrepreneurship trainings.

As this is a trend that is likely to continue with an increasingly educated, urbanised and youthful

population50, it is critical that Bhutan invests in creating more jobs, in accelerating youth

entrepreneurship, and in improving the productive capacity of the economy as a matter of

national priority. As such, diversification of the economy beyond the hydropower sector will

need to be carried out in areas with high potential for job creation, and to facilitate absorption

of the growing number of educated young people entering the labour market each year.

Opportunities

In this respect, significant measures have been taken in recent years. One is the revision and

adoption of the Economic Development Policy (EDP) 2016, which identifies “Five Jewels” or

sectors that have the potential for export, revenue generation and employment creation. These

are hydropower, agriculture, cottage and small industries, tourism, and mining. The EDP 2016

also emphasises the promotion of a rational and scientific temperament, dignity of labour, spirit

of adventure, entrepreneurship, creativity and innovation with ethics and hard work.

Another is the launch of the Priority Sector Lending (PSL) scheme in 2018 to facilitate the

growth of Cottage and Small Industries (CSI). Given that access to finance is one of the most

binding constraints to private sector development, loans are provided to CSIs with preferential

interest rates of eight or 8.5 percent. Prior to this, the Rural Enterprise Development

49 Ibid. 50 The youth literacy rate has reached 93 percent in 2017, and half of the Bhutanese are below 28 years of age.

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Corporation Limited (REDCL) was instituted to foster non-formal rural economic growth, with

the provision of collateral-free loan at an interest rate of four percent.

The Fiscal Incentives Act of Bhutan 2017 was enacted to complement the EDP 2016. As a

means to stimulate economic growth, foster private sector development, and generate

employment, it grants both direct and indirect tax exemptions and concessions. These include

income tax holiday, reinvestment allowance, tax rebate, income exemption, additional

expenditure deduction, Tax Deducted at Source (TDS) exemption, sales tax exemption,

customs duty exemption, and concessional customs duty. The general incentives are applicable

to all sectors of the economy, while the priority sectors identified under EDP including the

“five jewels” are eligible for sector specific incentives.

In 2016, Bhutan adopted a Public Debt Policy as part of efforts to ensure effective debt

management so that debt financing is sustainable and contributes to Bhutan’s economic

growth. Given Bhutan’s rising debt level, the policy aims to proactively guide investments,

ensure that financing decisions are prudent, and that public debt is maintained at a sustainable

level. It takes into consideration Bhutan’s debt dynamics—which as earlier mentioned is driven

primarily by investments in hydropower—to set debt thresholds that allow for optimisation of

hydropower resources while reducing undue debt burden from indiscriminate borrowing for

projects that may not necessarily generate financial returns. As such, the threshold for Non-

hydro External Debt is not to exceed 35 percent of GDP during a five-year period.51

In recent years, critical Information Communication Technology (ICT) infrastructure have

been laid out and strengthened. These include Optical Ground Wire (OPGW), fibre optics and

internet connectivity across all districts in the country. Government intranet system and

national data centre have also been developed. Today, more than 85 percent of the population

have access to Internet, and more than 95 percent of households have mobile coverage.52

To generate employment and to promote a knowledge-based society, the first TechPark was

established utilising PPP modality in addition to development partners’ support. While the park

also serves as an innovation hub for start-up businesses, further investments are being made in

start-up innovation camps and towards creating a start-up space in the capital, Thimphu.

Similar initiatives have also been introduced in several education institutions.

Other critical infrastructure includes the building and expansion of the road network across the

country, given that it remains the key means of transportation and is essential for the Bhutanese

economy. In all, more than 18,395 km of roads have been constructed across the country, vastly

improving internal connectivity. Over the 11th FYP period, a total of 18,051 Gewog Centre

(GC) roads were blacktopped and 2952 bridges were constructed.53 The ongoing widening of

the 385 km of the Northern East-West Highway (NEWH) is due for completion within the 12th

FYP period.54 Today, 93 percent of households live within 30 minutes of a road head.55

51 Public Debt Policy. Ministry of Finance, RGoB, 2016. 52 Eleventh Five Year Plan Terminal Report, op.cit. 53 Ibid. 54 Draft 12th Five Year Plan, op.cit. 55 PHCB 2017, op.cit.

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In addition, air transport has been strengthened with the expansion and improvement of the

Paro International Airport, improvements to the three domestic airports, and with the

establishment of a helicopter service. Other ongoing essential infrastructure developments

include the construction of four industrial parks and dry ports.56

Strategies

Building on these opportunities to address fundamental structural issues with the Bhutanese

economy, efforts will be intensified to build resilience and enhance productive capacity of the

economy. In order to promote new sources of economic growth, exports will need to be

diversified into value-added goods and services, with increased participation of vibrant, small

and medium enterprises. Towards these ends, the 12th FYP will implement strategies and

programmes that contribute to achieving NKRAs 2, 9 and 11 by improving innovation,

developing entrepreneurship, and promoting job-creating industrialisation.

The opportunities provided by the existing policy measures and ongoing investments will be

harnessed over the 12th FYP to expand investments in tourism, organic agriculture, and CSIs,

as well as to set up an entrepreneurship ecosystem with the participation of corporate and

private sectors to facilitate innovation of green jobs and attract green investments. In addition

to the 12th Plan’s regular programmes aimed at diversifying the economy, enhancing

productive capacity and creating gainful employment, and improving infrastructure and

connectivity, additional initiatives will be taken to facilitate these broad strategies.

For instance, a ‘Start-up and Cottage and Small Industries Development Flagship Programme’

will provide comprehensive support to set up new production and manufacturing CSIs

including up-scaling existing CSIs. The ‘One Gewog One Product Flagship Programme’ will

provide income-generating opportunities and enhance livelihood of rural communities across

all Dzongkhags by building local capacities.

The ‘Tourism Development Flagship Programme’ will create enabling policies, quality

infrastructure, services and products to promote Bhutan as an attractive travel destination. And

the ‘Digital Drukyul Flagship Programme’ will harness the power of ICT to make public

service delivery professional, convenient and faster through end-to-end integration of citizen

services such as education, healthcare and business.

3.2.3 Environmental resilience

Key issues

Despite Bhutan’s conscientious efforts at pursing a sustainable development approach, the

pressures of population growth and economic development—including growing demands for

water, energy and food—coupled with the impacts of climate change are becoming more

apparent.

Changes in land use have occurred mainly with the conversion of arable land and forests for

construction of farm roads, electricity transmission and distribution lines, industries and

urbanisation. Bhutan’s richly forested areas are experiencing degradation. Water shortages in

local areas is a growing occurrence even as the country records one of the highest per capita

56 Bhutan’s VNR Report, op. cit.

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water resource availability in the world. Crop yields and food production are at risk from the

adverse impacts of increasing temperatures and emerging desertification.

Meanwhile, urban areas are increasingly facing issues with water supply and quality. Air

quality is also deteriorating due to pollution, particularly in urban centres as well as industrial

areas along the country’s southern borders, and greenhouse gas emissions are on the rise.

Increasing waste generation and its poor management is another critical issue with potential

consequences for public health and the natural environment.

With its mountainous terrain and volatile ecosystems, Bhutan’s already fragile ecology faces

additional stress from the increasing frequency and intensity of climate change induced

disasters. It remains susceptible to multiple natural hazards including Glacial Lake Outburst

Floods (GLOF), flash floods, landslides, windstorms, forest fires, localised changes in rainfall

patterns, and increasing droughts during the dry season.

Climate change is projected to magnify the intensity and frequency of these hazards, which in

turn will affect a range of sectors. For instance, changes in water distribution and GLOF could

lead to decreasing crop yields, undermine hydropower generation, and cause infrastructure

damage. In addition, Bhutan potentially faces severe and widespread damage from

earthquakes, given that the entire country lies near a major earthquake fault in one of the most

seismically active regions of the world.

Such impacts have already been demonstrated with Bhutan’s experience of—for example—a

severe GLOF from the Luggye Tsho in Lunana in 1994; the high-intensity Cyclone Aila in the

Bay of Bengal in 2009 and its effects in Bhutan; an unusually intense monsoon flooding and

related landslides in 2016; and moderate earthquakes in 2009 and 2011. These events

collectively resulted in the loss of lives, injuries, major damages to agricultural lands and

essential infrastructure, and economic loss.

In addition, its vulnerability to external shocks caused by natural hazards is aggravated by

inappropriate land use and construction practices. A lack of awareness of resilience-building

issues and preparedness-planning is a related factor. As highlighted in UNCTAD’s

vulnerability profile of Bhutan57, the increasing urbanisation in the country has been haphazard

with insufficient planning and enforcement of regulations, owing in part to a lack of appropriate

technical expertise in disaster-resistant construction practices. Capacity to mitigate impacts of

possible disasters and to respond to such events, especially at local levels, also remains a major

concern.

Given its small economy, population and land area, such climate-induced and potentially

manmade disasters could jeopardise Bhutan’s hard-earned development gains in an instant.

Building its resilience to the impacts of climate change and scaling up efforts at disaster

preparedness are therefore matters of urgency.

Opportunities

As previously mentioned, Bhutan has in place a robust set of national policies and legislation,

57 Vulnerability Profile of Bhutan, Draft, 11 December 2017. Prepared by UNCTAD for the 2018 review by the

Committee for Development Policy of the List of Least Developed Countries.

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as well as strategies to adapt to and mitigate climate change impacts, in keeping with various

international commitments. It is party to all three Rio Conventions and has submitted its first

NDC, which provides the main policy direction and priority areas for climate change action in

the medium to long term. A draft Climate Change Policy has also been developed to strengthen

coherence and coordination among the concerned agencies based on national and sectoral

priorities.

Several national surveys and studies have been conducted in recent years, providing critical

information for advancing conservation and sustainable management of the country’s rich

biodiversity, ecosystem and natural resources. These include Bhutan’s first-ever

comprehensive national forest inventory, a nationwide survey on water resources inventory,

and comprehensive nation-wide tiger and snow leopard surveys. Efforts are underway to

integrate the Bhutan Water Security Index (BWSI), developed in 2015, into national and local

plans and programmes. Further, a 2016 National Integrated Water Resource Management Plan

has been prepared since 2016.

Bhutan also prepared and continues to implement its National Adaptation Programme of

Action (NAPA). Interventions to date have resulted in improved water access for over 1000

households in four districts in the country, leading in turn to reduced travel time of women to

fetch water, as well as a decrease in water borne diseases and increase in school attendance.

Weather forecasting and flood warning systems have improved with the installation of 99

automatic hydro-met stations; the water level of Thorthomi Glacial lake was successfully

lowered to reduce the risk of GLOF; and critical landslides caused by increasing intensity and

frequency of rainfall have been stabilised.58

Other initiatives in place include a National Action Programme to Combat Land Degradation,

and the National Biodiversity Action Programme. The Ministry of Agriculture and Forests

(MoAF) has developed Sectoral Adaptation Plan of Action (SAPA) 141 to provide better

sectoral focus in terms of adaptation actions, and a National Adaptation Plan is under

preparation with particular focus on climate water impact.

With the Disaster Management Strategic Policy Framework 2015-2025 under implementation,

initiatives to improve disaster preparedness and response are ongoing at national and local

levels. Efforts at hazard zonation and vulnerability mapping are also underway, as are efforts

to enhance contingency planning with plans developed for some Dzongkhags and the health

and education sectors.

In line with its commitment to “carbon neutral” development, sectoral strategies on waste,

transport and industry have been developed. Greenhouse gas (GHG) mitigation measures have

also been elaborated in the areas of human settlement, industry and energy efficiency. Efforts

are already underway to implement these strategies in the 12th FYP.

For instance, to facilitate implementation of the Bhutan Transport 2040: Integrated Strategic

Vision, the National Transport Policy was updated, and electric vehicles are being prioritised

with the establishment of a network of quick charging stations and other incentives towards

developing a low-emission transport system. A Nationally Appropriate Mitigation Action


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(NAMA) plan for transport, as well as a NAMA on human settlements have also been

developed.59

Strategies

This and other sectoral strategies will be implemented in the 12th Plan, in order to strengthen

Bhutan’s environmental resilience. Activities under these strategies are expected to contribute

to achieving NKRAs 5, 6, 15 and 17 in the 12th FYP, which in turn would enable fulfilment of

various environmental targets under the SDGs in the medium- and long-term.

To be able to do so effectively, national capacities to understand climate change pathways more

intricately among the sectors, and innovative capacity to develop local solutions, need to be

built and enhanced. As such, a need exists for a specific human resource development strategy

under Bhutan’s resilience-building agenda, which by its nature is ambitious and costly.

However, even as climate change presents the single greatest risk of unravelling decades of

hard-earned development gains, securing the required resources to effectively address

challenges posed by environmental vulnerabilities remains a challenge in itself. Given

competing priorities for government expenditure towards the social and economic sectors, it is

essential that Bhutan scale up efforts to explore and mobilise innovative means of financing

and other domestic and international support measures.

Without consistent financial resources in place, it will be very difficult for Bhutan to take

effective climate action. In particular, at least four targets under SDG 15 face the risk of not

being achieved i.e. sustainable management of forests; combatting desertification, drought and

floods; conserving its mountain ecosystem and biodiversity; and reducing the degradation of

natural habitats.

3.2.4 Enhancing human capital and productive capacity

Issues

The development gains mentioned in section II.4. need to be built upon to ensure that quality

socio-cultural dividends reach all in an equitable manner, especially as the challenges in these

areas become more complex and nuanced. Meanwhile, Bhutan needs to address the unfinished

agenda of addressing poverty at disaggregated levels and in its multiple forms.

For instance, poverty in Bhutan is today still a “rural phenomenon” as in the past, with close

to 12 percent of the rural population being poor against 0.8 percent in the urban areas, and with

most of the “extremely poor” or subsistence poor population (1.5 percent) residing in rural

areas. Wide variations persist across Dzongkhags with poverty rates ranging from a high of 33

percent to a low of 0.3 percent in 2017.

Likewise, wide variations exist in the MPI index of urban and rural areas at 1.2 percent and 8.1

percent respectively, with more than 93 percent of Bhutan’s multidimensionally poor residing

in rural areas.60 Bhutan’s Child MPI (C-MPI) further highlights the vulnerabilities of children

with multidimensional poverty found to be highest for children aged 0-9 years in 2017. In

59 Ibid. 60 The share of the population of rural areas is 66.5% and of urban areas is 33.5% (Source: Bhutan MPI 2017).

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addition, the Gini co-efficient increased from 0.36 in 2012 to 0.38 in 2017, indicating an

increase in income inequality.

Further challenges include the need to reach the unreached and to ensure quality of outcomes

in the health and education sectors. For instance, chronic malnutrition still occurs among a

significant proportion of children under age five, with a stunting rate of 21 percent and wasting

at 4.3 percent61, along with considerable differences across regions and wealth quintile, making

food and nutritional security a challenge especially for the poor in many remote communities.

Neonatal mortality also remains high, accounting for more than 55 percent of under-five

deaths62—again with those in the lower-income, less-educated groups and remoter areas being

most affected.

At the same time, changes in lifestyle and dietary habits have led to an increase in non-

communicable diseases (NCD) such as cardiovascular diseases, cancer, respiratory diseases

and diabetes, estimated to account for 60 percent of all deaths in the country.63 Besides

communicable diseases and the increase in NCDs, acute health emergencies and pandemics

are potential threats arising from natural disasters, climate and environmental changes. This

“triple burden of disease” adds to Bhutan’s health financing with implications on its

sustainability as it also has to ensure the provision of free basic healthcare.

Similarly, ensuring equitable and quality access to education at all levels remains a challenge.

For instance, providing for the early care and development of young children—to ensure a

healthy start to life and to contribute to better learning outcomes—is currently challenged by a

host of factors. These include, among others, wide variation in access to Early Childhood Care

and Development (ECCD) centres across districts; low-quality learning experiences, and

limited services for children with disabilities or at risk of disabilities.64

Within the larger education system, a limited number of schools are equipped for Special

Education Needs (SEN) and inclusive education, and these facilities are also challenged with

critical capacity and resource gaps. And while gender gaps have closed at the primary and

secondary levels, gaps persist at tertiary levels with a Gender Parity Index (GPI) of 0.82.

Enrolment in vocational and technical education is also dominated by males, with female

enrolment at about 24 percent only.65

Overall, with increasing numbers of Bhutanese students—including graduates from vocational

and tertiary institutions—not adequately prepared to enter the workforce, quality of education

is a major concern for Bhutan, as acknowledged by the Bhutan Education Blueprint66 and as

underscored by a review report of the National Council’s Special Committee for Education.67

61 National Nutrition Survey 2015. Ministry of Health, RGoB and UNICEF. 62 Bhutan Every Newborn Action Plan 2016-2023. Ministry of Health, RGoB, UNICEF and WHO. 63 WHO NCD country profile, 2018. 64 Draft ECCD Investment Case Study. Ministry of Education, RGOB, 2017. 65 Annual Education Statistics 2018. Ministry of Education, RGOB. 66 Bhutan Education Blueprint 2014-2024: Rethinking Education. Ministry of Education, RGOB. 2014. 67 A Review Report on the Quality of Education. Prepared by the Special Committee for Education, National

Council, November 2016.

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Meanwhile, with increasing globalisation and pervasiveness of ICTs, Bhutan’s vast

improvements in human development are often accompanied by subtle tensions. These include

a weakened sense of belonging and affinity to local communities and cultural heritage, with

several symptomatic trends including increasing incidences of crime, substance abuse and

mental unrest often associated with young people.

Therefore, despite impressive progress, such issues of quality and inclusiveness present

potential impact on long-term health outcomes, employability, and ultimately the nation’s

economic and social progress. In order to reach the unreached and to leave no one behind, these

remaining and emerging challenges will need to be addressed more strategically in the 12th

FYP. As gainful employment is critical for poverty reduction and social inclusion,

strengthening Bhutan’s human capital is of paramount importance.68

Considering the integrated and indivisible nature of the GNH pillars and domains, as well as

of the SDGs, it will be important to ensure that efforts going forward are reinforced by

strategies aligning economic/employment, environmental and social policies. As such, learning

outcomes need to be enhanced to match the demand and supply of skills, especially for youth,

in addition to improving working conditions and supporting capacity for job creation especially

among SMEs.

Opportunities

As mentioned, Bhutan has consistently prioritised investment in the social sectors including in

the modern education system, over the decades of planned development. Towards improving

quality of education, strategic frameworks such as the Bhutan Education Blueprint 2014-2024

are in place.

With government recognition of ECCD as a foundation for children’s holistic development and

wellbeing, an ECCD investment case report was prepared to facilitate an integrated approach

to providing quality childcare and early learning opportunities for children. As of 2018, the

gross enrolment ratio in ECCD was 23.4 percent, with 8,499 children enrolled in 340 ECCD

centres across the country.

The establishment of Central Schools, Extended Classrooms, and expansion of primary and

secondary schools are other efforts at improving quality as well as to rationalise the increasing

costs of education. To ensure that students are appropriately educated and trained for the job

market, the quality and relevance of TVET education is also being looked into, with the

development of a TVET Blueprint. An Education ICT Master Plan (iSherig) 2014-2018 was

implemented to enhance students’ computer literacy and IT skills.

Opportunities for students from economically disadvantaged families—to continue tertiary

education—include the Students Loan Scheme for Tertiary Education instituted in 2014. A

national review of the school curriculum was also undertaken in efforts to make improvements

and make it more relevant.

While huge gaps remain, there has been a slight increase in the number of schools and institutes

catering to students with disabilities. As of 2018, there are 18 schools with SEN programme


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and two specialised institutes across 12 Dzongkhags. In addition, the Draktsho Vocational

Training Centre for Special Children and Youth (a non-governmental organisation) provides

basic education and vocational skills training through its two vocational training centres, and

helps with students’ transition into regular schools and vocational institutes.

Bhutan’s Non-Formal Education (NFE) programme is recognised for its success in providing

adult literacy programmes, and today it continues to be an effective programme catering to

over 6000 learners across 560 NFE centres; while over 400 adult learners are also pursuing the

continuing education programme in three Continuing Education centres.69

Current analysis underscores the need for Bhutan to now give greater focus to investing in

young people’s health, education and skills development to harness the demographic dividend

that it is currently experiencing—as by 2040 the demographic dividend window is projected to

close with the working-age population declining, among other trends.70

Strategies

Against this backdrop of issues and opportunities in the social sector, the 12th Plan will make

concerted effort at developing human capital and enhancing productive capacity. This will be

done, in particular, through the implementation of strategies and programmes geared towards

achieving NKRAs 7 and 11, to improve learning outcomes, inculcate innovative and creative

mindset, and enhance employability.

Key strategies will include investing in the provision of quality and inclusive ECCD

programmes to facilitate wholesome and long-lasting development of children aged 3 to 5

years; strengthening inclusive education across the continuum of the education system to

ensure that no child is left behind; offering diversified and differentiated curriculum to provide

more choices and alternative pathways; and creating clear pathways for seamless transition

from mainstream to vocational education and vice versa.

Priority will also be given to creating an attractive and conducive professional environment for

the nation’s teachers; and promoting value education through a GNH-inspired teaching and

learning environment. Moreover, a culture of research will be promoted across educational

institutes for teachers as well as students, including with the use of ICTs; and

technical/vocational and entrepreneurship programmes will be instituted/strengthened in

schools, colleges and institutes.

Special effort will be made to strengthen the TVET system, to equip graduates with high quality

technical and vocational skills for employability both within and beyond Bhutan, focusing in

particular on skills development for the production and manufacturing sector. At the same time,

concerted effort will be made to create and nurture an environment of creativity, innovation

and entrepreneurship through the development of a start-up ecosystem.

69 Annual Education Statistics 2018. Ministry of Education, RGOB. 70 Population Situation Analysis of Bhutan 2017. UNFPA Bhutan.

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4. Partnerships and Financing for Sustainable Development

4.1 Financing Landscape

Over the decades, Bhutan’s financing landscape has undergone significant changes in terms of

the magnitude of FYP outlays, as well as in terms of funding sources. While the first two five-

year plans were supported entirely by the Government of India (GoI), the support of other

development partners took off with the third five-year plan, with Bhutan becoming a member

of the United Nations and thereafter its gradual expansion of diplomatic relations and

development cooperation.

Table 4: Change in Outlay and Domestic Revenue Funding over FYP Periods

Five Year Plan Period Outlay (NU in million) RGoB funding

1st plan (1961-66) 107.2 -

2nd plan (1966-71) 202.2 1%

3rd plan (1971-76) 475.2 7%

4th plan (1976-81) 1,106.2 5%

5th plan (1981-86) 4,711.2 9%

6th plan (1987-92) 9,559.2 50%

7th plan (1992-97) 15,590.7 61%

8th plan (1997-2002) 30,151.3 69%

9th plan (2002-08) 70,000 64.6%

10th plan (2008-13) 145,625 60%

11th plan (2013-18) 223,657 63% Source: Draft 12th FYP Document, 2018, GNHC.

Official Development Assistance (ODA) continues to be critical for Bhutan, especially as it

gears up for graduation from LDC status with fundamental structural challenges to address.

While grants are expected to fund about 20 percent of Bhutan’s development programmes in

the 12th FYP, this amounts to about 54 percent (NU 63,044 million) of the budget for capital

expenditure (NU 116,121 million) as previously mentioned.71 In addition, Bhutan will continue

to rely on external borrowings to finance part of the 25 percent resource gap for capital

expenditures in the 12th Plan.

Domestic resource contribution has grown from plan to plan, financing about 63 percent of

total expenditure in the 11th FYP.72 This however, fell short of the 85 percent target set for the

Plan period. Nevertheless, in line with its broader objective to achieve economic self-reliance,

Bhutan continues to prioritise domestic resource mobilisation, including through the

rationalisation of recurrent expenditure, enhancing efficiency of state-owned enterprises, and

encouraging public-private partnerships. Efforts at broadening the tax base are ongoing, which

currently include green tax and sales tax on vehicles and fuels. The utilisation of bonds and

capital market are also being explored.

Since 2002, Bhutan has also made concerted effort at attracting Foreign Direct Investment

(FDI), as a potentially viable source of financing for sustainable development. In 2016, FDI

71 Figures based on resource projections provided in the Draft 12th FYP. 72 Based on information provided in the Draft 12th FYP.

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companies contributed close to NU 1.6 billion in taxes, which constituted about seven percent

of the tax revenue and over five percent of total government revenue.73

Success in attracting global investors has, however, been extremely limited. As such, efforts

are ongoing to increase Bhutan’s attractiveness as an FDI destination including through

investments in essential infrastructure as earlier mentioned, and policy reforms. As identified

in the EDP 2016, revisions to the FDI Policy and its rules and regulations are expected to

liberalise the FDI regime and encourage more foreign investments into areas such as the film,

media and the creative arts, among others.

4.2 Strengthening Partnerships for Development

As previously mentioned, Bhutan’s successes in its socio-economic development have been

possible with the strong support of its development partners. Over the decades, Bhutan has

expanded meaningful ties and engagement with multiple countries and organisations with

which it shares similar ideals, maintaining a good track record in utilising grants, aid and other

forms of support from its partners.

As it continues its journey towards LDC graduation and towards achievement of GNH and the

SDGs, Bhutan will continue to explore opportunities to strengthen the foundations for broader

partnerships. In line with the Addis Ababa Action Agenda (AAAA), this entails multiple levels

of partnerships including with the international community, private sector, civil society and

local governments.

For instance, regional initiatives such as the South Asian Association for Regional Cooperation

(SAARC), the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic

Cooperation (BIMSTEC), among others, present important opportunities through which

Bhutan can address the constraints and risks posed by its geography. Strengthening regional

cooperation will be essential particularly in the context of trade, transit, and energy

cooperation. At the same time, both regional and multilateral cooperation is essential to

working out common and shared solutions to addressing the growing impacts of climate change

and natural disasters, which transcend geographical boundaries.

Likewise, Bhutan remains positively positioned to strengthen cooperation in mutually

beneficial areas across technical and socio-economic fields, with all other development

partners. Within the country, partnerships with the private sector and CSOs have been gaining

ground. The 12th FYP in particular emphasises the importance of the “Triple C”—which is

essentially about mobilising collaborative efforts between public and private sectors,

communities, civil society and academia, to enhance development processes and outcomes.

With increasing recognition of their potentials and their role in the country’s socio-economic

development, the creation of an enabling environment for business and for CSOs are important

considerations of the Bhutanese State. For instance, the Public Private Partnership Policy was

launched to facilitate private sector contributions to public infrastructure development74, and a

PPP unit was also created at the Ministry of Finance (MoF). Examples of small-scale projects

73 FDI Annual Report 2017. Department of Industry, Ministry of Economic Affairs, RGoB. 74 Public Private Partnership Policy. Royal Government of Bhutan, April 2015.

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with private investment to date include the Thimphu Techpark, which is Bhutan’s first IT Park,

and the multilevel car parking project under implementation in Thimphu. Two hydropower

projects have also utilised the PPP model. PPPs are slowly expanding into developing health

and education infrastructures, as well as other services like facilities management.

Many CSOs in the country work on a wide range of development priorities, including poverty

reduction, promoting entrepreneurship especially among women and youth, facilitating the

growth of local economies, addressing the needs of vulnerable populations, to name a few.

While several CSOs work in formal partnership with the Government, many others make

significant contribution by delivering on their respective mandates. In an important milestone

and boost for the civil society sector, His Majesty the King granted a National Order of Merit

Award to 23 Public Benefit Organisations, during the 109th National Day Celebrations, for

their assistance to the Government in reaching the unreached and a range of other contributions

towards fulfilling national objectives.75

Prospects for broader partnerships are also available in the form of various integrated and

innovative financing mechanisms, which Bhutan is exploring as a means to meet its financial

needs as well as to drive positive outcomes across GNH-led key result areas that in turn

contribute to SDG achievement.

4.3 Utilising and Exploring Innovative Financing Mechanisms

While ODA and domestic revenue generation will remain critical for financing development

needs—and the additional resources and partnerships mentioned above will be pursued—

Bhutan also gives priority to leveraging new, innovative and green finance.

As early as 1996, the Bhutan Trust Fund for Environmental Conservation (BTFEC) was

instituted by Royal Charter with a USD 20 million endowment, as a long-term sustainable

financing mechanism for promoting social welfare through biodiversity conservation. BTFEC

is currently focusing on implementing community-based projects with emphasis on supporting

and strengthening the role of CSOs and community-based organisations in managing natural

resources. Its current endowment stands at about USD 40 million.76

More recently, Bhutan also started implementing the Bhutan for Life programme, which is an

innovative green financing mechanism designed to augment its resource requirements for

conservation and to support its commitment to sustainable development. Based on the principle

of Project Finance for Permanence (PFP), the programme is committed to mobilising a USD

40 million transition fund to combat climate change and biodiversity issues in the country’s

protected area system and biological corridors.77

Bhutan also developed and took forward an integrated financing framework through the

Biodiversity Finance Initiative (BIOFIN) project, to ensure sustainable financing of

environment, biodiversity and climate change needs combined in a pro-poor manner.

75 http://www.kuenselonline.com/his-majesty-the-king-awards-individuals-and-organisations-with-national-

order-of-merit/ 76 http://www.bhutantrustfund.bt 77 http://www.bfl.org.bt

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Additional initiatives include the Reducing Emission from Deforestation and Forest

Degradation (REDD)+ Readiness Project, and the Climate Investment Fund.

Going forward, Bhutan is well positioned to mobilise green finance and will continue to

explore additional avenues of pooled funding facilities such as the Global Environment Facility

(GEF), the Green Climate Fund (GCF), among others.

In addition, there is potential for leveraging other forms of innovative finance which are

currently evolving and also being utilised around the world. These fall broadly along four

categories i.e. fintech or technological innovations in the financial sector; responsible

investing; outcome-based financing; and smart taxes.78

The applicability of these financing trends in the Bhutanese context is at an early stage of

exploration—and taking the discussion further to understand the full scope and potential of

these options could materialise into beneficial prospects for diversifying Bhutan’s financing

landscape.

Doing so would not replace, reduce or realign development assistance, but help Bhutan to

identify solutions that mobilise new financing for development more sustainably and with more

predictability. 79

78 Lam Dorji, Ngawang Gyeltshen, Massimiliano Riva. Draft White Paper: Innovative Finance for the SDGs.

(This paper has been prepared by the UNDP in Bhutan in consultation with the RTM Task Team to inform the

14th RTM and follow-up processes and discussions). 79 Ibid.

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5. Conclusion

Guided by its GNH vision, Bhutan has made important strides in its development journey. As

the preceding sections show, much has been achieved within a relatively short span of time.

Bhutanese people today generally enjoy a good quality of life, surrounded by a well-maintained

natural environment, a strong sense of culture and community, and confidence in the

institutions of governance. Bhutan has been and continues to be a source of inspiration for

many peoples and communities around the world.

Still, critical challenges remain. Even as Bhutan’s imminent graduation from LDC status

speaks to its impressive achievements, the persistence of its economic and environmental

vulnerabilities in the face of emerging social issues puts to risk the hard-earned development

gains of the past decades.

Going forward into the 12th FYP, strategic measures are called for to address the issues and

challenges that have become more complex and nuanced, and that demand a greater degree of

coordination and collaboration across sectors, agencies and local governments within the

country. As many of the issues—especially the impacts of climate change and economic

vulnerabilities—transcend national and international boundaries, regional and international

partnerships also remain vital not only for Bhutan’s success but for the collective wellbeing of

the global commons.

Building on the already strong linkages between GNH and the SDGs, and on the high levels of

integration of the SDG targets in the national planning framework, further integration will

continue. While all national key result areas and SDGs are important and will be pursued,

Bhutan needs to ensure that critical last mile challenges are well-addressed before LDC

graduation.

Therefore, special efforts will be made to enhance the productive capacity of the Bhutanese

economy, harness the demographic dividends offered by a youthful population, and build

national capacities to deal with the impacts of climate change.

Over the 12th Plan, this calls for greater investment in private sector, entrepreneurship,

promotion of cottage and small industries, tourism, organic agriculture, and agro-based

industries; improvement of learning outcomes, inculcation of innovative and creative mindset,

and enhancement of employability; and securing investments in Bhutan’s climate sector.

As the resource projections show, Bhutan will not be able to meet the entire financing of the

12th Plan from domestic revenues alone. It will continue to require the generous support of its

development partners to ensure that its strategic priorities over the medium- to long-term can

been fulfilled. At the same time, it will also continue exploring and utilising the full range of

financing windows and innovative mechanisms available.

Bhutan therefore looks forward to strengthening its development cooperation and partnerships

at multiple levels—including bilateral, regional and international cooperation, multi-

stakeholder engagement and partnerships— to ensure smooth and sustainable graduation, and

towards sustained achievement of GNH and the SDGs.

34 | P a g e


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