fDf FUB 71f Bhutan Development Planning in a Unique Environment /l, 1 5 i.. I /~j __.1_ 7/ * .. i t-wv /---- --- - -- IL K 'I I . 1 - 0 N ''L \'hi 1 --- --- / I, * -. \ - . a . . f . ,. , . .. : <~~~~~~~~-3, .. - --.'.S , -, A WORLD BANK COUNTRY STUDY Bhutan Development Planning in a Unique Environment The World Bank Washington, D.C., U.S.A. Copyri,ht ©) 1989 The World Bank 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing January 1989 World Bank Country Studies are reports originally prepared for intemal use as part of the continuing analysis by the Bank of the economic and related conditions of its developing member countries and of its dialogues with the governments. Some of the reports are published informnally with the least possible delay for the use of governments and the academic, business and financial, and development communities. Thus, the typescript has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. Any maps that accompany the text have been prepared solely for the convenience of readers. The designations and presentation of material in them do not imply the expression of any opinion whatsoever on the part of the World Bank, its affiliates, or its Board or member countries conceming the legal status of any country, territory, city, or area or of the authorities thereof or conceming the delimitation of its boundaries or its national affiliation. The material in this publication i6 copyrighted. Requests for permission to reproduce portions of it should be sent to Director, Publications Department at the address shown in the copyright notice above. The World Bank encourages dissemination of its work and will normnally give permission promptly and, when the reproduction is for noncomunercial purposes, without asking a fee. Permission to photocopy portions for classroonm use is not required, though notification of such use having been made will be appreciated. The complete backlist of publications from the World Bank is showvn in the annual Index of Publications, which contains an alphabetical title list and indexes of subjects, authors, and countries and regions; it is of value principally to libraries and institutional purchasers. The latest edition of each of these is available free of charge from the Publications Sales Unit, Department F, The World Bank, 1818 H Street, N.W, Wash- ington, D.C. 20433, U.S.A., or from Publications, The World Bank, 66 avenue d'Iena, 75116 Paris, France. Library of Congress Cataloging-in-Publication Data Bhutan : development planning in a unique environment. p. cm. -- (A World Bank country study) ISBN 0-8213-1179-4 1. Bhutan--Economic policy. I. International Bank for Reconstruction and Development. II. Series. HC440.25.B49 1989 338.9549'8--dc19 89-5278 CIP TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS ................................ v Chapter I. COUNTRY BACKGROUND AND ECONOMIC OVERVIEW ................ . 1 Chapter II. SECTORAL DEVELOPIM4TS DURING THE FIFTH PLAN PERIOD 8 A. AGRICULTURE .......................................... 8 B. FORESTRY .............................................. 15 C. MANUFACTURING Alp MINING ............................. ..17 D. POWER ................................................ 18 E. ROADS AND WATER SUPPLY ................................. 19 F. COMMUNICATIONS AND TOURISM .............................. 21 G. EDUCATION ............................................ 22 H. HEALTH .................................................. 24 Chapter III. DEVELOPMENT PLANNING AND STRATEGY ........................... 26 A. EXPERIENCE WITH PRIOR FIVE-YEAR PLANS ................ 26 B. THE SIXTH FIVE YEAR PLAN ............................... 30 1. The Planning Process ................................ 30 2. Objectives, Financial Dimensions and Sectoral Allocations ................................ .... 32 C. AGRICULTURE AND FORESTRY ............................... 35 D. MANUFACTURING AND MINING .............................. 42 E. POWER ................................................ 45 F. PUBLIC WORKS ......................................... 47 G. EDUCATION ............................................ 48 H. HEALTH ............................................... 50 Chapter IV. LONGER-TERM DEVELOPMENT ISSUES AND AID REQUIREMENTS 52 A. CONSERVATION AND RESOURCE MANAGEMENT ........... 52 1. Introduction .......................................52 2. Policies and Programs ............................. 54 3. Planning and Institutions ......................... 57 B. INSTITUTIONAL ISSUES .................................. 59 1. Decentralization .................................... 59 2. Public Administration and the Civil Service ...... 62 C. ECONOMIC PROSPECTS AND THE NEED FOR EXTERNAL ASSISTANCE .................................. 64 STATISTICAL APPENDIX ........................................ ............ 75 The, report is based on a mission that visited Bhutan in October and November of 1987. The mission members were Messrs. Cornelius Jansen (Mission Leader). Jeremy Berkoff. Nigel Roberts, and Mateen Thobani. The report was revised following discussions with the Government in April 1988 and the availability of new information on the Sixth Plan and other economic events. In addition, some changes in the balance of payments, fiscal and monetary data were incorporated following an IMF mission in May 1988. -iv- CURRENCY EQUIVALENTS US$1 = Nu 13.0 (April 1988) Nu 13.0 = US$0.8 The Bhutanese ngultrum is pegged to the Indian rupee at par. FISCAL YEAR April 1 - March 31 prior to March 31, 1987 April 1, 1987 - June 30, 1988 for 1987/88 July 1 - June 30 following July 1, 1988 ABBREVIATIONS ADB - Asian Development Bank ADP - Area-based Development Program BDFC - Bhutan Development Finance Corporation BHU - Basic Health Unit BNPP - Bhutan National Potato Program BRO - Border Roads Organization CARD - Centre for Agricultural Research and Development CIAT - Centro International de Agricultura Tropical CIMMYT - Centro International de Mej oramiento de Maiz y Trigo FAO - Food and Agriculture Organization GDP - Gross Domestic Product HYV - High Yield Variety ICAR - Indian Council for Agricultural Research ICIMOD - International Centre for Integrated Mountain Development IDA - International Development Association IFAD - International Fund for Agricultural Development IRRI International Rice Research Institute PHC - Primary Health Care PWD - Public Works Department UNCDF - United Nations Capital Development Fund UNDP - United Nations Development Program UNICEF - United Nations International Children's Emergency Fund WFP - World Food Program SUMMARY AND CONCLUSIONS Background i. Efforts to develop a modern economy in Bhutan date from the early 1960s. A small, isolated kingdom in the Eastern Himalayas, Bhutan at that time produced enough to feed and house its people, although life expec- tancy and literacy were quite low. Coming late to the development scene, Bhutan was eager to avoid mistakes committed elsewhere. While strongly dependent on foreign aid, it was determined to follow its own set of priorities, keep public finance on an even keel, build up a well trained but lean bureaucracy, and prevent environmental damage from overexploita- tion of the forests or uncontrolled growth of tourism. Using traditional social institutions, the Government has made efforts to involve the people in planning and implementation at the local level. As a result of these factors, development in Bhutan has been remarkably free from serious economic, social or cultural disruption. ii. Agriculture and livestock account for the livelihood of about 85 percent of the population and 41 percent of the GDP. Due to the rugged mountainous terrain only a small proportion of the total land area is fit for cultivation. While gains in agricultural production through inten- sification and cash crop development are feasible, the main push for development will have to come from other rectors. Forestry has con- siderable potential; forests cover over ha,lf of the territory, and present exploitation, contributing some ten percent of GDP, is still well below long-term sustainable yield levels. Even more important for the country's development is the hydro-electric potential which has begun to be tapped, such as through the recently completed 336 MW Chhukha project. Most of the output of that project is exported to India, but as a low-cost source of energy it also opens important possibilities for relatively capi- tal-intensive processing of Bhutan's forestry and mineral resources. Cement and calcium carbide production have started but there are other possibilities as well. Most of the output would be exported to India but there are also marketing possibilities in Bangladesh and Nepal. WIth these natural resources and a small population (official estimate 1.3 mil- lion), Bhutan has favorable long-term development potential. iii. The official estimate of 1986 per capita GDP at $16O, which would make Bhutan one of the poorest countries in the world, is probably too low, possibly the result of an inaccurately estimated population and difficulties of measuring subsistence output and barter transactions. Furthermore, there are difficulties in fully reconciling differences between fiscal and calender years. Nutritional intake (about 2,500 calories per day) and availability of housing, land, livestock and fuel all point to higher per capita income. The rate of growth of the economy is also unclear. While more detailed works are being done, available evidence suggests that agriculture has not grown rapidly on the whole, -vi- but other, smaller sectors, notably forestry and power, have grown rapidly in recent years- Construction activity has also been high. Altogether, GDP growth between 1981 and 1986 has been satisfactory, probably close to the 6.3 percent annual growth rate and certainly well ahead of the 2-2.3 percent population growth rate. With the large increase in electricity from Chhukha, GDP is estimated to have grown by 14 percent in 1987 and projected to grow by 10 percent in 1988. iv. Development expenditures have been large. During the Fifth Plan period, Government capital expenditures have amounted to 26 percent of GDP and current expenditures, of which about half has a developmental charac- ter, accounted for another 14 percent of GDP. Current revenues have grown rapidly (22 percent per year) and now almost cover current expenditures. Capital expenditures have been financed entirely by foreign aid. The availability of aid from India has played a particularLy important role. In the early 1960s, India was virtually the only donor,; since then other bilateral donors and international agencies have come to account for about one quarter of the inflow. Aid has been provided on lenient terms, about 77 percent during the Fifth Plan period (1981/82-1986/87) on a grant basis and the remainder on highly concessional terms. The Sixth Plan v. Bhutan's series of development plans started in 1961 with over- wheLming emphasis on establishing a basic road network. Development outlays increased significantly with each new plan; compensating for the longer period of the Fifth Plan, the Sixth Plan is about 66 percent larger than the Fifth Plan and six times larger than the Fourth in nominal terms. Meanwhile, emphasis shifted from transport infrastructure towards power, industry and the social sectors. vi. The objectives of the Sixth Plan (1987/88-1991/92) are a continua- tion of those of the Fifth Plan and emphasize economic self-reliance, people's participation in the development process, improvement of rural conditions, government administration, development services, and human resource development. Objectives such as these are found in many plans, but the Sixth Plan is notable for efforts to reflect these objectives in the proposed spending patterns and development schemes. The emphasis on self-reliance results in a large share for manufacturing, mining, and power projects to exploit markets in neighboring countries, especially India, in oLder that Bhutan's large fiscal and current account deficits be reduced. The stress on human resources and development services leads to significantly increased shares for education and health. The strengthen- ing of Government administration, begun during the Fifth Plan by a major reorganization of the bureaucracy, timely auditing of accounts, and strin- gent procedures for government employees, is to be consolidated and fur- ther extended. Rural conditions are expected to be improved by increasing agricultural productivity through increased agricultural expenditures and -vii- promotion of rural water supplies, sanitation, basic health units and improvements in-rural housing. The promotion of people's participation is a consolidation and refinement of decentralization efforts begun during the Fifth Plan. The effort to improve the mobilization of internal resources was also initiated during the Fifth Plan and is an integral part of the objective of self-reliance. Domestic financing is projected to finance 35% of Sixth Plan expenditures as compared to 31% under the Fifth Plan, which itself was a strong improvement over earlier Plans. vii. Total expenditures during the Sixth Plan are projected at Nu 9.5 billion ($730 million), in nominal terms about 66 percent more than Fifth Plan expenditures including the Chhukha project, and perhaps 25 percent more in real terms. Current expenditures amounting to 41 percent of the total are to be mainly financed by current revenue (29 percent) and a moderate amount of domestic borrowing (5 percent). Capital expenditures are to be entirely financed by foreign aid. While the financing is still uncertain, it is likely that India would remain the dominant financier, although its share of contribution is projected to fall significantly as compared to the Fifth Plan. Domestic revenue projections imply a 15 percent annual growth rate which seems reasonable in view of past favorable revenue growth and large receipts from the Chhukha project. viii. The Plan's overall strategy aims at accelerated development of industry, mining, and power based on the Bhutan's abundant hydroelectric potential and mineral and forestry resources. Exports of electricity and mining and forests products should find ready markets in India and Bangladesh. Developments of the t.aditional sectors, which account for most of the employment and present output, should meantime proceed as fast as constraints in institutions, knowledge base, and manpower permits; merely allocating more funds to these complex sectors will not speed up their development. As nower, industry, mining and ancillary activities grow, they should start providing increasing employment opportunities for the excess labor that is bound to develop over time in the traditional sectors, while, increased foreign exchange earnings should allow a gradually decreasing dependence on aid and provide increased resources for maintenance and social sectors. By and large, this overall development strategy is sound; its success, however, requires more rapid progress in feasibility studies and in technical assistance agreements. Basically, it is investment opportunities, not resource availability, which is the binding constraint on the progress of Bhutan's development. ix. Agriculture, the chief source of livelihood in Bhutan, has yet to achieve development momentum. Production is mostly carried out using traditional methods and is mostly for subsistence purposes. Cereals production has not kept pace with demand and cereals imports have been rising. Livestock numbers have increased but feed availability has not which has resulted in a drop in livestock productivity. Cash crops -viii- (apples, oranges, cardamom) have increased significantly and have poten- tial for rapid further growth but they are still too small to influence the overall picture. Constraints on development are the limited availability of cultivable and pasture land, shortcomings in knowledge about the couatrv's farming systems and their potential, logistic dif- ficulties, and shortages of skilled manpower and managerial experience. Recognizing these constraints, the Sixth Plan's objectives are inten- sification and higher productivity through scientific management and new technologies rather than extension of agriculture and livestock into new areas. Only indicative production targets are set in the Plan and the objective of self-sufficiency in foodgrains is realistically restated as "increasing self-sufficiency". Bhutan's long-term comparative advantage does not lie in rice, but in maize and potatoes in non-irrigated areas and valuable cash crops for export in irrigated areas. In view of high production cost and heavy demands on irrigation water, self-sufficiency in rice is neither viable nor necessarily desirable. Despite consumer preference it is sensible to devote increased attention to non-irrigated basic foods such as maize and potatoes and envisage long-term diversifica- tion of irrigated agriculture through irrigated cash crops which could be exported with much higher returns than irrigated rice cultivation can provide. To achieve these objectives the Plan proposes development programs for areas with good potential and strengthening of agricultural services. x. The area-based programs in the Plan are a response to the diver- sity in agricultural conditions in Bhutan. They cover about 25 percent of all arable land and include a variety of components (land use planning, irrigation, feeder roads, development of relevant technologies, agricul- tural extension, animal health services, input supply, marketing, process- ing). The main concern would be the limited attention which is given to rainfed farming, reflecting the programs' focus on high potential areas otLen suitable for irrigation as well as the lack of defined technologies for rainfed farming. Since irrigation has only limited applicability in Bhutan, more attention is needed for potatoes, wheat and particularly maize, the largest cereal crop. A strong adaptive research program for maize should receive high priority. A further concern is the danger of duplications and inconsistencies between the area pro,grams. To guard against this, the Government needs to strengthen the Central planning role in agriculture. xi. One of the area programs focuses on livestock development emphasizing cross breeding, improved animal health care and introduction of individual land ownership to promote pasture and fodder development. These necessary and useful steps will be unable however to establish a satisfactory balance between herd size and feed availability. The reason is the lack of land resources. Eventually, there will be no real alterna- tive to direct culling of unproductive animals if livestock growth is to -ix- be constrained, productivity increased, and serious ecological damage averted. - xii. Agricultural extension services have suffered from lack of exper- tise and ability to provide useful advice to farmers. A first step towards improvement is the clear shift in the Plan in favor of applied research; several agencies in fact have already made an excellent start in evolving packages that are replicable and profitable to the farmer. The main government entity at the local level, the dzongkhag (district) administration, is hard to reach for many farmers. To remedy this, the Plan proposes the establishment of development service centers in each subdistrict (gewog)l/ offering in one location agricultural and social services. As will be discussed later, this solution should first be tested on a small scale to explore its cost effectiveness. A service which should assume increasing importance as commercialization of agricul- ture proceeds is agricultural credit. The recent establishment of the Bhutan Development Finance Corporation (BDFC), with agricultural credit as one of its major activities is an attempt to meet the credit requirements of the sector. xiii. Forests, next to hydro-electricity Bhutan's main natural resource, require careful management because of the country's vulnerable ecology. Concern about this has guided the Government's approach to forestry. While most of the forest cover has remained intact, indiscriminate felling ini. the 1970s in certain logging areas by private logging companies and by the rural population along roads and main inhabited valleys was leading to barren hillsides and erosion. To counter these effects, the Government halted most private logging in 1979 and reorganized the sector to intro- duce a better pattern of exploitation and to encourage increased domestic processing. Foreign aid from various sources including IDA has been helping the Covernment in these efforts. Now on a sounder basis, forest exploitation lias recovered to the 1979 level and is poised for further growth. Eventually, harvesting capacity can be increased manifold without exceeding natural regeneration. India and to a lesser extent Bangladesh provide a readyr market and electricity should be available in Bhutan to permit processirg at: competitive prices. xiv. As against tL.`se major opportunities the Plan remains fairly cautious and gives insufficient emphasis to the need for a comprehensive resource assessment to establish the pace at which exploitation could, or should proceed in the longer-term. Greater urgency also needs to be given to complementary updating of legislation dictating access to the forests since there is evidence that this is over-restrictive and has been a major 1/ Bhutan is administratively divided into 18 districts or dzongkhags and subdivided in 192 subdistricts or gewogs. contributing factor to the problems of some manufacturing units. Increased forestry develonment should, however be undertaken through a strategy of sustainable regeneration which also gives due importance to the maintenance of plant and wildlife species in addition to protecting soil erosion. xv. As earlier discussed, Government strategy in manufacturing and mining is based on development of Bhutan's natural resources, particularly minerals, forests, agro-based products and hydropower. The main mineral is limestone but Bhutan also has deposits of gypsum, marble, coal, graphite and other minerals. Manufacturing and mining output currently account for only 4 percent of GDP, most of it concentrated in a few larger nublicly owned enterprises. Given the limited entrepreneurial capacity in the country, most development projects are in the public sector, but Government is making increased efforts to push the private sector through the BDFC, encouragement of training schemes, private sector participation in existing public enterprises and development of industrial estates. The Sixth Plan share for industry and mining is to rise from 7 to 17 percent of total plan oaLtlays. About two-thirds of the investment is for a 1500 tons per day cement factory which will mainly produce for the Indian market and perhaps also for the Bangladesh market. Other project pos- sibilities are an expansion of the new calcium carbide plant, product diversification based on calcium carbide, and several forest and agro-based products and perhaps other mineral--based products; most or all of the output of such projects would be for export, mostly to India and other neighboring countries. Whether and when these projects will be carried out and with what chance or success is as yet unclear. With the exception of the cement plant, most projects appear still to be in a quite early stage of preparation. To achieve momentum in this crucial sector it is important that the Government gives increased attention to the required feasibility studies and to timely financial and technical assistance arrangements. xvi. Power. The completion of the Chhukha project is having a major effect on the Bhutan economy: it is expected to reduce the current account deficit with India by 40%, raise government revenues during the Sixth Plan by 50-60 percent and has permitted a reduction in domestic power rates thus boosting the profitability of energy-intensive projects. The Sixth Plan envisages a medium-sized hydro-electric plant (60 MW) in eastern Bhutan to help households and local industries, including the second cement plant and to boost electricity exports to India. This project, although more costly than initially estimated, has a favorable rate of return. The plan further envisages extending transmission lines and building mini-hydropower plants in remote areas. In line with its objective of improving rural conditions, the Government intends to accelerate rural electrification. The cost per household of the proposed scheme appears very high, however, with solar panels a cheaper but still -xi- expensive alternative. The Government needs to proceed cautiously here and explore other, less costly ways of improving rural conditions. xvii. During the Sixth Plan period efforts should be made to prepare for the next generation of large power projects. The potential for substan- tial power generation at competitive cost is there. The task at hand is to establish, with appropriate donor assistance, conclusive river flow and geological cata to permit site selection with due regard for ecological concerns and to initiate the preparation of the major project studies. xviii. Roads. A major step in Bhutan's development was the construction of a good basic road network covering 2250 km of roads over extremely difficult terrain. This network has linked up most areas of economic activity and facilitated social contacts as well as the carrying out of government administration. In remote areas, the Government mobilized community labor to improve foot and mule trails and constructed foot suspension bridges. The Sixth Plan envisages further extension of the network through the five major river valleys and to all major development sites and strengthening of the Public Works Department's road construction and maintenance capability. During the Plan period, the Department is to take over an increased portion of the Indian Border Roads Organization's responsibilities for construction and maintenance. Specifically, the Department is to take over responsibility for road maintenance in the central part of the country. The emlphasis in the Plan however appears to be on construction, not maintenance. This subject requires the Govern- ment's serious attention. xix. Water Supply, Sanitation, Housing. Lack of clean drinking water is a main factor in Bhutan's high morbidity. The Government is undertak- ing water supply schemes in the larger urban centers and is considering a modern sewerage system in Thimphu. Supported by UNICEF and the local population, almost 1,000 village water supply schemes were implemented during the Fifth Plan period. The Sixth Plan intends to raise the availability of safe drinking water to 40 percent of the villages, intro- duce improved sanitation to 30 percent of the villages and introduce improved cooking stoves which will leave rural homes free from smoke in all villages. The Government also intends to develop packages of techni- cal and financial assistance for villagers who want to improve their homes or build new ones. All. these schemes should rate high in terms of raising the well-being of the people as well as their productivity. Given the likely savings in wood9 some subsidy may be warranted but the project needs to be cautiously formulated with a view to limiting the subsidy. In addition to the high cost, particularly for the housing/home improvement scheme, there are likely to be constraints in staff and problems of materials supply. -xii- xx. Telecommunications, Transport, Tourism. Telecommunications within Bhutan have remained difficult; the communication system does not effec- tively reach all of the country and the equipment in use is antiquated. Studies are being made to introduce modern telephone exchanges in larger urban centers, establish links between regions and extend the communica- tions network to all administrative centers down to the gewog level. Bhutan's access to the outside world, cumbersome at present, is to be vastly improved through an international satellite link, and by doubling Thimphu's telex capacity from 20 to 40 lines. xxi. Road transport has developed along with the road network. The private sector is carrying all freight and an increasing part of passenger traffic. Government regulates fares, sets standards and takes care of transport on unprofitable routes. The Sixth Plan intends to proceed further along these lines. International traffic is to be improved by the recent purchase of an 80-seat jet plane capable of providing regular service to other countries in the region. While probably not justified on economic grounds alone, the purchase of the plane also satisfies other, not strictly economic objectives of the Government. For tourism the new airplane is a boon, since access to Bhutan by air has been difficult. Government however, has been circumspect in the development of tourism out of concern for the effects of tourism on the country's ecology, culture, religious practices and society. No expansion of tourist facilities is foreseen in the Plan although the private sector is likely to set up several new tourist hotels. In view of Bhutan's undoubted tourist poten- tial, the trade-off of the Government's conservationist approach in terms of exchange earnings and employment creation is heavy. The Government is urged to consider a more positive approach to the sector, one which will still safeguard the environment and social and cultural conditions yet permit more rapid tourism growth. xxii. Education. A common feature in the review of all economic sectors is the shortage of technical and administrative personnel. This pervasive shortage is the single most serious constraint on the development of the economy: the employment of large numbers of expatriate staff can only provide a partial solution. The establishment of a formal education system dates back only to 1961 and the still low levels of literacy and school enrollment are a reflection of this. The Government has been making a significant effort to develop education and the Sixth Plan envisages more than doubling the amount devoted to education in nominal terms. The emphasis of the Plan--on improvement in the quality of primary education, significant increase in the number of secondary school graduates and expansion of technical education--appears appropriate. Earlier versions of the program were very ambitious given the administra- tion implementation capacity, shortage of manpower and speed at which financing can be arranged. With the recent cutback in capital expendi- tures, the program size is probably appropriate. The Government's deci- sion to increase the number of Bhutanese teachers particularly at the primary level, and to provide inservice training promises to alleviate the current shortage of Bhutanese teachers by the year 2000. The recent upgrading of the teacher stream within the civil service structure is therefore to be welcomed. Technical education not only needs expansion but also increased efficiency; full utilization of facilities at the two existing institutes probably should precede efforts to expand into mechanical engineering and to build new institutes. Efforts are underway to address the needs in this sector, including expanding primary education and strengthening training programs. While the Sixth Plan calls for more than doubling the budgetary allocation for education, administrative and staffing constraints limit how much could be productively utilized. xxiii. Health. Bhutan's health indicators, although improving, are still poor, with women and children most seriously at risk. Due to shortages of medical personnel and scarcity of health infrastructure in rural areas, at most 50 percent of the population receive effective health care. Health services to those who are covered is quite good; personnel are impressively motivated and the peripheral health care system well run despite shortages of supervisory personnel and drug supplies. xxiv. The Sixth Plan document rightly emphasizes the need for primary health care but the allocation of expenditures appears slanted towards hospital, or tertiary care. Under the Plan, current expenditures would rise dramatically to over 80 percent of total health expenditures, with half of these devoted to hospital care. Of the capital component, diminished in real as well as in relative terms, half again is to be devoted to the hospital system. Primary health care is thus being squeezed out by the requirements of the hospital system. While the Government, correctly perceives the hospital program as part of its basic health network, it may still be advisable to concentrate on extending primary health facilities in order to best tackle the dominant health problems facing the population. Longer-Term Issues xxv. Pressures on the natural environment. Bhutan has been exemplary in its concern for the country's ecology. As a result, Bhutan has been able to retain its natural environment largely intact. Pressures are building up rapidly, however, and these already have adverse local effects. Population growth is bound to accelerate as infant mortality drops; livestock population is growing even more rapidly. There is no scope for absorbing such increasing numbers of people and animals in rural areas without the potential of eventual serious harm to the environment. Intensification and diversification of agriculture is proving more complex and slower than earlier assumed while labor absorption by other sectors still offers only modest scope. Under these circumstances, rising numbers tied to the land will eventually mean the end of the present labor shortages in agriculture and, as has happened in so many other countries, -xiv- initiate a process of land fragmentation, encroachment on marginal lands and increased use of neighboring forests as a source of firewood, timber, and animal feed. The balance between crop land, forest land and livestock population is in danger of being lost on an increasing scale with serious danger to the environment. A new generation of problems is cropping up requiring new approaches. Since there is still time for correction, there is no need yet to sound the alarm. Nevertheless, it will be useful if action is taken now, before it is too late, in at least the following areas: - Population planning: A program is needed to mitigate the social and economic effects of accelerated population growth which could lead to fragmentation, extension of cultivation to submarginal land, and eventual landlessness and unemployment. A family planning program could mitigate this; - Control of livestock population: Actions to develop the live- stock sector will need to be complemented by direct action to control herd size; - Control of forest exploitation: In addition to regulation of commercial extraction, measures are needed to stimulate better use of the forest by the rural population; - Reafforestation: Complemented by improved fertilizing, manur- ing, stall feeding, fodder growing, etc., reafforestation should help reduce pressure on the forest; - Improved management of pasture lands: Development of grazing lands should be accompanied by establishing individual rights to grazing land and/or providing incentives to communities to improve collectively the management of grazing lands and sur- rounding forest areas; - Improvement of data collection and establishment of an environ- mental/land use coordinating unit. xxvi. Development Administration. An important asset in Bhutan's development efforts is the tradition of self-help by local communities. After four Plans which emphasized centrally-planned and executed activities, the Fifth Plan initiated a transfer of responsibility for small-scale development activities to the dzongkhags. A full 40 percent of Fifth Plan outlays (if one excludes the large commercial and industrial projects of the Plan) were to be planned for by the dzongkhags and their populace, and carried out with the voluntary labor contributions of local beneficiaries. To support this decentralization process, about 25 percent .of Government staff were administratively transferred to dzongkhag con- trol. Self help did cut the cost of local developments and as a result -xv- the pace of construction of schools, health units, feeder roads, and water supplies accelerated. In the process, villagers became better aware of how Government can or cannot assist them, and more moderate and dis- criminating in their demands. xxvii. While the Government has been satisfied with the general progress, predictably, a decentralization effort on this scale encountered problems. Dzongkhag administrations were often ill prepared for their increased responsibility. Critical shortages in planning, engineering and account- ing skills emerged. Some development activities were poorly chosen, designed or executed and by mid-Plan, cut-backs had to be made in some types of activities. Financial flows from Thimphu were at times erratic and financial management lax. Aware of these problems, the Government took corrective measures. It re-centralized certain programs, cut back on others, intensified in-field scrutiny of potential projects and tightened fiscal controls. xxviii. The Sixth Plan aims at further decentralization but recognizing staffing and other constraints, local development targets have now been set at more realistic levels. As mentioned before, the Plan will make a start with establishing development service centers clustering schools, health units and agricultural services at one site in each gewog. Since the costs and benefits of the proposed centers are uncertain the Govern- ment has decided to start with only ten centers in the Sixth Plan period. xxix. As a further step towards decentralization, the Government is also considering dividing the country into four regions; in one proposal these regions would take on all regional planning, leaving the dzongkhags to concentrate on implementation. The argument is that regionalization would permit better use of scarce skills and better integration of development activities on the basis of the four major watersheds. The proposal carries the danger of creating an additional administrative tier at considerable cost without effectively reducing Thimphu's central con- trol, while at the same time diminishing once more the participation of local people in the planning process. An alternative might be to set up or strengthen regional pools of technical staff and equipment, under the direction of Thimphu and for the support of local development activities. It should also be realized that development of transport and communica- tions as foreseen in the Plan should improve contact between Thimphu and the local administrations, and that this would reduce the potential benefits from a regionalization of development management. Realizing the proposal's potential problems, the Government has decided to establish one such region on an experimental basis. xxx. The overriding constraint in development management remains the shortage of qualified staff at all levels. Through substantial training efforts and the use of expatriate personnel, Government has been able to double the size of the civil service in the last ten years; but because -xvi- development expenditures increased even faster--six times over in nominal terms--staff shortages have persisted. In the midst of this expansion drive, Government has remained determined to keep the bureaucracy as lean as possible and has carried out repeated retrenchment exercises aimed at eliminating inessential tasks or tLransfering them to the private sector, and at terminating unqualified staff. Economic Prospects and Foreign Aid xxxi. The conclusion of the report is that Bhutan has favorable develop- ment potential in the long--term and moderately good growth prospects, 4 or 5 percent a year, in the medium-term. The Sixth Plan is well tuned to national priorities. It contains useful approaches to increase agricul- tural productivity on which most of the population depends and to improve general conditions in the countryside. It should lead to increased forestry and power output and exports. It furthermore aims at substantial improvements in quality and coverage of the education system which is critically important for alleviation of Bhutan's trained manpower shortages. If complemented by substantially more work to prepare projects and programs, particularly in the mining and manufacturing sectors, it is a good instrument to remove major development constraints and to lay the groundwork for acceleration of growth in production and export earnings and in eventually creating modern sector employment to siphon off future excess labor in the traditional sectors. xxxii. With the Governmentts current account expected to be roughly in balance over the Sixth Plan, financing of the capital component of the Plan depends on the availability of foreign aid. Relations with India, other countries and multilateral organizations indicate that donors may indeed be prepared to provide this aid. Aid levels in the Fifth Plan averaged $89 million a year, 77 percent in the form of grants and 80 percent of the total contributed by India. Aid from other donors (hard-currency aid) played an increasing role (27 percent of the total by the end of the Plan). Hard-currency loans during the Plan, all of them on highly concessional conditions, totalled $95.5 million contributed by IFAD, Kuwait Fund, ADB and IDA. Of this amount, $73 million remained undisbursed by the end of the Plan. xxxiii. For the external financing of the Sixth Plan, the Government is looking for annual disbursements averaging $91 million. According to tentative understandings, India may be expected to contribute over half of this and various UN agencies and bilateral donors 29 percent on a grant basis. The remainder would be contributed through concessional loans in both hard-currencies and rupees. xxxiv. As to the need for aid commitments in the next few years, its level depends strongly on the rate of progress made in project prepara- tion. The pipeline of undisbursed aid is quite small in the case of the -xvii- most important donor, India--$29 million according to the Plan documents. Most Indian project aid will thus have to come from new commitments and it is the state of readiness of the relevant projects which will determine how rapidly final commitments can be made. In the case of hard-currency loans, the undisbursed pipeline is relatively large, $73 million at the beginning of the Plan as compared to a total volume of disbursements required in this category of $64 million. Given the recent rise in dis- bursements in this category, disbursements from the pipeline should help finance most of the expected hard-currency loan assistance. In view of the usual lag between commitments and disbursements, annual commitments of about $15 million appear indicated. Such a level should be adequate to help carry out new undertakings towards the end of the Plan and in the years beyond. Whether these commitments can in fact be made will again depend on the state of project readiness. xxxv. If the Plan is to be successfully completed, aid must also have the required composition and, more specifically, reflect the shift in emphasis in the Plan in favor of industry and mining and the social sec- tors, particularly education. More work is clearly needed to prepare suitable projects. Again, project readiness rather than aid availability will dictate the pace of donor assistance and of overall investment in Bhutan. Successful implementation of the Plan also requires better use of technical assistance, and more systematic effort by the Government as well as by donors to ensure that technical assistance experts do provide train- ing to local counterparts. Aid coordination is assuming increased impor- tance as the number of donors and aid agencies is increasing. In agricul- ture, for instance, there are many projects with parallel objectives; donors and Government should attempt to share experiences and ensure that approaches to the solution of sectoral problems are coordinated. Proper management of donor assistance also requires more clarity about the responsibilities of respective government agencies in the negotiation and use of aid and increased coordination efforts between donors, with govern- ment guidance, to minimize overlap and improve transfer of experience. xxxvi. Due to the fact that aid in the aggregate has covered all capital cost, both foreign exchange costs and local costs, the balance of payments with India and with the rest of the world has been in satisfactory condi- tion and rupee and hard currency reserves are at comfortable levels. Hard currency debt service is high when compared with the very low level of hard currency earnings, but is unlikely to present a problem as long as reserves are carefully husbanded and permitted to grow further. PART I: BHUTAN: COUWNTRY ECONOMIC MEMORANDUM Chapter 1: COUNTRY BACKGROUND AND ECONOMIC OVERVIEW The purpose of this report is to provide an understanding of the development potential and the development problems of Bhutan as it starts the implementation of its Sixth Five Year Plan (1987/88-1991/92). By way of introduction, Chapter I providts background information on the country and its economy as well as a brief discussion on recent economic develop- ments. Chapter II contains a somewhat more detailed review of develop- ments in each of the main sectors through the Fifth Plan period which ended March 1987. Chapter III discusses the objectives of the Sixth Plan, overall and sector by sector. Chapter IV reviews a few long-term issues of development in Bhutan, notably the need for careful management of Bhutan' s scarce land resources and the problems related to adapting the country's institutions to the requirements of development. The chapter concludes with a discussion of the need for foreign aid and for improved foreign aid coordination. * * * 1.01 Bhutan is a small, isolated, landlocked Buddhist kingdom in the- eastern Himalayas. With a population officially estimated at 1.3 million, Bhutan has an area of about 46,500 square kilometers and is bordered by the Tibet region of China and the Indian states of Sikkim, West Bengal, Assam, and Arunachal Pradesh. For administration purposes, the country is divided into 18 districts (dzongkhags) and 192 subdistricts (gewogs). Bhutan's terrain is among the most rugged in the world, with rivers swiftly flowing from high mountains to valleys covered with dense forests. Within distances of 100-150 km, land rises from an altitude of less than 160 m above sea level in the south to elevations of more than 7,000 m above sea level in the north. The variation in climate is correspondingly extreme. Most of the population lives between altitudes of about 1,000 to 3,000 m in the hills of the Inner Himalayas, with a generally temperate climate and a numbedr of relatively broad river valleys. These valleys, along with some sections of flatland below the southern foothills, account for most of the readily cultivable land in Bhutan. Most of the rest remain in its natural state, with about one-third of the country's total surface barren or under snow and about half under natural forest. Only about five percent of the land is cultivated or inhabited. 1.02 Bhutan's efforts to develop a modern economy are of recent date. The decision to close the border with Tibet in 1960 also was the beginning of closer ties with India which became Bhutan's main partner in matters of defense, infrastructure development, trade and aid. While uadeveloped at that time, Bhutan was not destitute. Its small population obtained suffi- cient food from agriculture and livestock for its subsistence and had -2- ample supplies of timber and stone for its housing needs. Few Bhutanese were--or are--landless, homeless or hungry. They enjoyed a rich cultural heritage with unique architecture, music, sports, and religious observan- ces. Ties within the society were strong and free of overt signs of strife. The natural environment was largely unspoiled. Although mor- bidity and mortality were high, and literacy low, Bhutan was in many ways a successful pre-modernT economy which survived well into the second half of this century. 1.03 Since then Bhutan has established through successive five-year plans a basic network of infrastructure facilities and economic and social services. Where no motorable roads existed, the country now has an East-West road axis with North-South branches through the main river valleys. A postal services network was established while a microwave link with India and scheduled ai8 flights to Calcutta and Dhaka connect the country with the outside world. The Chhukha Hydro Power Project (336 MW) has begun to harness the country's enormous hydroelectric potential, permitting power exports to India as well as the possibility of estab- lishing energy-intensive industries using domestic mineral resources such as cement, calcium carbide, and forestry products for which India and other neighboring countries could provide a ready market. While still unable to reach the entire population, the number of schools and health units has increased impressively from a very small basis. 1.04 Coming late to the development scene, Bhutan has been eager to avoid some of the errors committed elsewhere. Conscious of the fragility of the Himalayan ecology and the potential damage from deforestation, the Government moved decisively in 1980 to control commercial logging prac- tices. Similarly tourism, a sector with potential, is closely supervised to avoid damage to Bhutan's unique cultural heritage. And while Govern- ment rapidly built up the civil service to enable it to carry out an increasing volume of development tasks it made efforts all-the while to keep the bureaucracy lean. With foreign aid it has been able to keep finance on an even keel and it has made increasing efforts to involve the private sector wherever possible. Using traditional social institutions and customs, the Government also has increasingly involved people at the local level in the planning and implementation process. As a result of all this, development in Bhutan has thus far been less disruptive economi- cally, socially and culturally, than in many other countries. 1.05 Bhutan's per capita GDP of about $160 appears to underestimate the true standard of living in the country, possibly due to an overestimated population and difficulties in measuring output in a subsistence rural economy with much barter. Nutritional surveys have indicated a daily per capita intake of about 2500 calories, some 25 percent higher than for South Asia as a whole. Despite this higher nutritional standard, some of Bhutan's social indicators are worse than those of its neighbors. Life expectancy at birth is only 46 years for males and 49 years for females, -3- whereas the infant mortality rate is 142. The incidence of disease is quite high with the highest incidences being reported for diar- rhoea/dysentery, respiratory tract infections, worms, skin infections and malaria. The primary school enrollment rate is approximately 20 percent for children aged six to eleven years. There is, however, evidence to show that these social indicators have improved over this decade--life expectancy and the school enrollment rate were estimated to be 43 years and 15 percent respectively in 1980. It appears that these figures have been underestimated throughout probably because of an inaccurately estimated population. 1.06 While the Government is taking measures to improve statistical information, there is presently no reliable picture of the size and the rate of growth of the various economic sectors. This is particularly true for the traditional sectors such as agriculture. Over half of Bhutan's estimated GDP of $213 million in 1986 originated from agriculture (includ- ing livestock) and forestry, with maize and rice being the major crops (Table I.1). Pulses, chillies and oilseeds are grown at lower elevations while apples, potatoes and oranges are gaining in importance as cash crops. Agriculture is still mainly carried out with traditional methods, largely for subsistence. No major breakthrough in productivity has occurred as yet. Agricultural growth has probably been moderate, although somewhat ahead of population growth. In line with the early stage of development of the economy, manufacturing, mining, and electricity accounted for only eight percent of GDP, although electricity output alone is expected to account for over ten percent of GDP in 1988 with the com- pletion of the Chhukha hydropower project. Four firms--a 100,000-ton capacity cement plant, a distillery complex, a wood processing plant and a fruit processing plant--account for almost four-fifths of value-added in manufacturing. Construction, which accounted for about 13 percent of GDP during the early 1980s has at least temporarily been diminishing in impor- tance as the Chhukha project and a few other development projects were reaching completion. Services account for the remaining one-third of GDP. Overall, GDP growth in the 1980s has been satisfactory. While the 6.3 percent annual growth rate implied by the national accounts statistics may be overstated, GDP growth has certainly been well ahead of the 2-2.3 percent annual population growth rate. Due to conservative fiscal and monetary policies and increasing support from bilateral and multilateral donors, Bhutan has enjoyed a steady increase in its standard of living with low inflation and growing international reserves. -4- Table I.1: OUTPUT COMPOSITION AND GROWTH Output Structure Annual Growth (% of GDP) Of Output (Z) 1981 1986 1981-1986 Agriculture and Livestock 43.0 41.4 5.9 Forestry 5.3 9.9 19.0 Mining 0.3 0.6 19.9 Manufacturing 3.7 3.6 4.7 Electricity 0.1 3.6 105.2 Construction 13.1 8.8 -2.9 Wholesale and Retail Trade 11.7 10.8 5.0 Transport 2.5 2.6 7.7 Finance, Insurance and Real Estate 10.6 7.2 3.5 Government Services 11.7 13.3 4.3 Less: Imputed Bank Charges -2.1 -1.6 0.5 GROSS DOMESTIC PRODUCT 100.0 100.0 6.3 Source: Statistical Appendix Table 2.1A and Central Statistical Office. 1.07 Development expenditures in Bhutan are high compared to the size of the overall economy. Between 1981/82 and 1986/87, Government capital expenditures averaged 26 percent of GDP. Besides investments in facilities for general public services which accounted for a quarter of these expenditures, Government has concentrated on investments in agricul- tural and forestry projects, the building up of the school system, public works (highways), a few industrial plants and the Chhukha power project. Government current expenditures accounted for another 14 percent of GDP and about half of these were also development-related. The financing of these relatively large expenditures was possible only because of the availability of foreign aid. Government revenue, although growing rapidly (15 percent a year), covered only 86 percent of current expenditures and was therefore unable to help finance the capital budget.l/ The following table (Table I.2) summarizes overall budget performance in the last five years. 1/ An unaccounted feature is the important contribution of the local population in the form of community labor; this contribution can be regarded as a proxy for cost recovery of government services (elemen- tary schools, basic health units, rural roads and water supplies). Table I.2: OVERALL BUDGET PERFORMANCE (1981/82-1986-87) Annual Growth 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 % (Nu. million) Revenue 124 138 197 278 264 340 22.4 Recurrent Expenditures 169 213 223 304 442 510 24.7 Current Account Deficit 45 75 26 26 178 170 25.3 Capital Expenditures 267 275 476 454 776 968 29.4 Overall Deficit 312 350 502 480 954 1,138 29.5 Financed By: Grants 300 360 478 512 706 782 21.1 Other External Assistance 5 9 7 15 132 170 102.4 Use of Domestic Balances 8 -19 17 -47 116 16 (Percent of GDP) 1/ Overall Deficit 2.3 216 27.0 23.0 33.8 23.9 Use of Domestic Balances 0.6% -1.2 0.9% -2.3 4.1 0.5 1/ Since GDP data were not available by fiscal year, the appropriate calender year figures were averaged. The figure for 1986/87 is an average of the 1986 and 1987 estimates. e Source: Statistical Appendix Tables 5.1, and 2.1. 1.08 As the above table shows, the overall deficit has been huge in relation to GDP, a mirror of the unusually large availability of foreign aid. Use of domestic balances or domestic borrowing has been negligible until recently and in some years the Government actually experienced an overall surplus and was able to add to its financial reserves. With the upsurge of capital expenditures in the last two years, domestic financing became somewhat more important. This is not likely, however, to be the beginning of a new trend. The electricity exported to India through Chhukha will lead to large rupee receipts (about Nu 250 million a year net of debt service) which should bring public finance back to overall equi- librium. 1.09 The most important element in the financing of the development effort is the relationship with India. In 1959, Bhutan began accepting Indian offers of economic assistance and started building its first road link from the Indian border to Paro and Thimphu. Since then, Bhutan's relations with India have been close. Trade with India is free, and the Indian rupee circulates freely in Bhutan; over 90 percent of Bhutan's -6- foreign trade is with India. In the early years of development, India accounted for virtually all of the aid received by Bhutan. Since then other sources of aid have gained in importance as Bhutan joined the United Nations (1971), various U.N. agencies, the International Monetary Fund and the World Bank (1982), and the Asian Development Bank (1983) and estab- lished contacts with several bilateral donors. Indian aid currently ,accounts for about three quarters of total aid receipts and aid from other sources, particularly IDA; IFAD, the ADB, and the Kuwait Fund, for the rest. There are also relatively large private aid transfers. Aid terms have been generous: some 77 percent of aid received in the last five years was extended on a grant basis while the remainder was lent on highly concessional terms. Aid, moreover, typically covers all or most of project cost including local currency expenditures. This fact and the large volume of aid have enabled Bhutan to add every year to its interna- tional reserves despite the large size of its trade (30-35% of GDP) and current account (40-45% of GDP) deficits with India and the rest of the world. Bhutan's level of convertible international reserves was equal to 34 months worth of hard currency imports in 1986/87; Indian rupee reserves were equal to eight months of rupee imports. Table I.3: SELECT ECONOMIC INDICATORS 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 Current Account Deficit (% of GDP) 1/ 45.1 47.1 50.3 42.9 38.7 41.3 International Reserves ($M equiv.) 33.6 35.5 40.7 46.3 50.9 62.9 Indian rupees ($M equiv.) 23.5 27.0 30.3 32.1 30.3 34.6 Hard Currency ($M equiv.) 8.1 8.5 10.4 14.2 20.6 28.1 Inflation (% Annual Change) 13.7 15.6 6.1 0.7 10.0 4.8 Nominal Exchange Rate (Nu/$) 8.9 9.6 10.3 11.9 12.2 12.8 1/ Since GDP data were not available by fiscal year, the appropriate calendar year figures were averaged. The figure for 1986/87 is an average of the 1986 and 1987 estimates. Source: Statistical Appendix Tables 2.1, 3.1, 3.8, 7.1 and 7.3. 1.10 After stagnating for several years, the value of exports to all countries grew by 17 percent per year during 1984/85-1986/87 to $25 inil- lion (13 percent of GDP). While exports to third countries remained insignificant, exports to India consisting mainly of cement, timber, some -7- other forestry products and cardamom grew significantly (Statistical Appendix Table 3.4). Imports from India, did, however, grow even more rapidly and so the trade deficit widened, with the current account deficit in 1986/87 reaching over 40 percent of GDP (Statistical Appendix Table 3.1). Imports consisted primarily of fuel and manufactured goods accounted for over 35 percent of GDP. 1.11 Export prospects to third countries need further exploration. While overseas export prospects seem remote except in the case of a few specific products (cardamom), there are distinct possibilities for export to Bangladesh of cement, forestry products, other mineral products and, perhaps certain agro-based products. The recent agreement with India about routes through India should facilitate trade with Bangladesh. There are also some possibilities for developing trade with Nepal. 1.12 Since its introduction in 1974, the Bhutanese ngultrum has been pegged to the Indian rupee at par. Bhutan's prices move closely with those of India and consumer price inflation has been averaging 9.4 percent per year between June 1980 and June 1987. Since 1980, the nominal trade-weighted exchange rate has varied by less than two percent, reflect- ing the close monetary and trade links with India. Given the predominance of Indian goods and services in total transactions and the free trade regime and open border between the two countries, there is no reason for the time being to re-evaluate the policy decision of pegging the ngultrum to the Indian rupee. -8- Chapter 2: SECTORAL DEVELOPMENTS DURING THE FIFTH PLAN PERIOD (1981/82-1986/87) 2.01 No production data exist prior to 1981 and while there have been significant developments and improvements in data collection in the eighties, much remains to be done. The Government, with the assistance of UNDP, initiated another effort to improve national accounts in 1987 and it is hoped that by 1990 more reliable sectoral production and trade data will become available, along with data on aggregate demand that currently do not exist. As pointed out later data collectr-g efforts of various agencies need improved coordination and uniform standards and estab- lishment of a central statistical office to achieve this merits considera- tion. In the meantime, care must be taken before drawing strong conclu- sions from an analysis of existing data. A. AGRICULTURE 2.02 Agriculture (crops and livestock) continues to dominate the economy, accounting for 41 percent of GDP and about 90 percent of employ- ment. According to the most recent (1984) agricultural survey, about 126,300 ha are cultivated of which 24 percent receive irrigation. Average farm size is generally thought to be about 0.8 ha and production remains largely subsistence-based. The rugged terrain and complex agriculture lead to high production costs with labor often short at peak periods. According to official estimates, agriculture retained its share of GDP during the Fifth Plan. The basis for these estimates is, however, weak and agricultural growth may well have been over-stated. This is indicated by Table II.1. Foodgrain production has risen slowly and, though produc- tion of cash crops has grown rapidly, it seems unlikely that 5 percent growth has been maintained in the clop sector. Livestock numbers have risen (Table II.2), but this is as much a matter for concern as for satis- faction (see Chapter IV) and it is unclear that livestock productivity has grown proportionately. 2.03 Only limited progress, therefore, appears to have been made towards achieving the Fifth Plan objectives of increased food self-sufficiency, higher productivity and rising rural incomes. This was perhaps inevitable given constraints which include limited areas of arable and pasture land, restricted knowledge of the country's farming systems -9- and their potential, logistic difficulties, and severe shortages of skilled manpower and managerial experience. Expectations were undoubtedly set too high and the complexities of intervening in the subsistence economy are only now being realized, a fact reflected in the programs proposed for the Sixth Plan. Crop Production 2.04 Production of paddy and wheat has increased moderately due to some increase in planted areas (Table II.1). For paddy, this is mainly a response to expanding irrigation since double cropping has only recently been introduced on very small areas in Punakha and Wangdi and rainfed paddy is limited to areas in the south. According to the draft Review of the Fifth Plan, new irrigation (7,810 ha) and renovation (10,730 ha) schemes equivalent to no less than 60 percent of the wetland area were completed during the Fifth Plan. If so, a 4,500 ha increase in the paddy area appears disappointing. The low figure may reflect delayed response to irrigation,l/ supply difficulties, and possibly some over-statement of areas newly irrigated. Particular problems have been encountered in the south and hopes that Gaylegphug would emerge as the major rice growing area have now been abandoned. 2.05 Paddy yields have shown little long term change. High Yielding Varieties (HYVs) account for no more than five percent of the area (even in the prosperous western valleys) and chemical fertilizers have made little impact. 2/ Constraints on HYV adoption include cost, limited proven yield advantage under local conditions, taste (important in a subsistence economy), and the use of rice straw as the major winter feed. The Centre for Agricultural Research and Development (CARD) is now focusing on medium straw varieties and the inclusion of genetic characteristics from local varieties. The three southern districts account for about 40 percent of all wetland. Despite high rainfall, yields remain low due perhaps to poor soils, shortage of suitable varieties, vulnerability to pests and diseases and interruptions in irrigation supply. Wheat yields also remain low, despite the widespread adoption of sonolika (an introduced HYV). Much of wheat goes for alcohol and farmers only give limited attention to 1/ Experience under the IFAD I project in four westerr valleys (Paro, Thimphu, Punakha and Wangdiphodrang) suggests that farmers are cautious in taking advantage of new potential but that response con- tinues to build over-time. 2/ Total application of chemical fertilizer rose to about 1,850 tons by the end of the Fifth Plan compared to a target of 2,500 tons. Use is heavily concentrated on commercial farming activities. -10- Table II.1:. Crop Production Estimates 1981 1983 1986 198/ Survey Survey Estimates 5th Plani Tar&ets Area '0)00 ha Paddy 28.0 30.6 32.5 37.0 Wheat/Barley 12.3 14.4 15.4 16.6 Maize 56.8 58.4 57.1 52.4 Buckwheat/Millet -15.5# 20.6 20.0 15.0 Sub-Total: Food Grains 112.6 124.0 125.0 121.0 Potatoes 3.7 4.1 4.9 5.1 Chillies 0.6 1.0 1.0 2.8* Mustard 2.9 5.0 5.2 5.5 Beans & Pulses 4.0 3.2 3.2 5.3 Sub-Total: 4 Annual Crops 11.2 13.3 14.3 18.2* Oranges 6.2 7.9 8.7 8.0 Apples 1.5 1.6 1.6 1.9 Cardamom 5.9 8.5 7.6 6.6 Sub-Total: 3 Perennial Crops 13.6 1&.0 17.9 16.5 Yield : tons/ha Paddy 2.0 2.1 2.2 2.3 Wheat/Barley 1.1 1.1 1.1 1.4 Maize 1.4 1.5 1.5 1.6 Buckwheat/Millet 0.8 0.8 0.8 0.8 Potatoes 6.8 7.8 8.0 9.8 Chillies 2.0 3.7 3.7 na Mustard 0.6 0.7 0.7 0.7 Beans & Pulses 0.6 0.8 0.8 0.7 Oranges 4.1 4.9 4.9 o.6 Apples 2.2 2.2 2.3 4.6 Cardamom 0.6 0.3 0.4 0.6 Production : '000 tons Paddy 57.4 65.0 71.5 84.5 Wheat/Barley 13.3 16.0 17.1 22.5 Maize 80.7 87.3 84.7 85.1 Buckwheat/Millet 12.3# 16.8 16.0 12.7 Sub-Total: Food Grains 163. 7 1 85.1 189.3 204.8 Potatoes 24.9 32.6 39.1 50.0 Chillies 1.2 3.6 3.6 11.2* Mustard 1.9 3.4 3.5 3.9 Beans & Pulses 2.4 2.6 2.6 3.6 Oranges 25.6 38.7 42.6 53.0 Apples 3.3 3.5 3.7 b.8 Cardamom 3.3 3.0 2.7 4.1 * Including other vegetables. # Probably an underestimate Source: Department of Agriculture and IMF staff estimates. The 1986 estimates are not based on a systematic survey. Note: Official estimates and plan targets sum production of paddy rather than rice with that of other grains. To convert paddy production to rice, these estimates should be multiplied by a milling out-turn of perhaps 60-70 percent. the crop. Nevertheless, provided paddy can be harvested early and suffi- cient manure can be applied to the land, wheat is a promising second crop on irrigated land and its adoption is increasing. Elsewhere it is a rainfed winter crop with some potential. 2.06 The major food crop in national terms is maize which dominates rainfed and tsheri (shifting cultivation) main season cropping. Though it is replaced by paddy on newly irrigated land, and efforts have been made to reduce tsheri, it would be surprising if these had not been more than offset by new encroachment of farming on hitherto uncultivated, ;marginal land: the area planted to maize may therefore be understated (Table II.1). Yields have stagnated since few new varieties have been introduced (hybrids have not been successful) and an ill-developed market provides farmers with few incentives to generate surpluses. Similar lack of progress has affected buckwheat (grown as a main season crop at higher altitudes and as a winter rainfed crop lower down), pulses and oilseeds. More attention could be given in particular to pulses and oilseeds since they could be useful in both irrigated and rainfed cropping patterns and, in the case of oilseeds, also represent an import substitute. 2.07 The Fifth Plan foodgrain production target of 204,000 tons was probably not achieved. Assuming that the 1986 estimate is correct (Table II.1) then output increased between 1981-86 by nearly three percent per year. However, the 1981 survey appears to have underestimated produc- tion, of minor grains and considerable uncertainty attaches to these production figures. Whatever the true position, production remained insufficient to satisfy domestic needs. Imports by the Food Corporation of Bhutan of rice and wheat, together with its distribution of World Food Program supplies of rice and soya-fortified bulgar, reached almost 18,000 tons in 1986/87 compared to 10,000 tons in 1982/83 (Table II.2). Assuming a rice milling out-turn of 65 percent, these are equivalent to about 6.5 percent and 10 percent of foodgrain production in 1982 (average of 1981 and 1983) and 1986 respectively. No statistics are available on non-Government grain imports, but they may well also have increased in response to a rising expatriate population and other factors, and are offset by only minor seasonal cross border exports of maize and other grains. Overall, therefore, no progress appears to have been made towards self-sufficiency during the Plan period. -12- Table II.2: FOOD IMPORTS (tons) 1982/83 1983/84 1984/85 1985/86 1986/87 Food Corporation of Bhutan (FCB) Rice 5,843 6,033 5,388 7,211 11,282 Wheat 2,725 2,123 2,599 2,450 3,350 Sugar 1,381 1,800 1,824 2,749 3,574 Salt 2,755 2,326 3,598 5,689 3,516 Oil - 240 306 557 874 World Food Program (handled by FCB) Rice 189 119 2,289 128 1,810 Wheat 896 749 656 - - Soya-fortified Bulgar 345 2,986 1,256 213 1,185 Wheat Soya Blend 161 150 461 136 300 Dry Skimmed Milk 192 249 435 24 508 Oil 110 364 348 117 390 Fish 173 120 304 44 224 Pulses 106 79 203 35 26 Source: FCB and WFP.. 2.08 The most striking development during the Fifth Plan was the expan- sion of cash crop production: apples and potatoes in the interior, oran- ges along the southern border. Perhaps most interest is attached to potatoes since, in contrast to fruit crops, potato cultivation can be integrated into subsistence crop rotations. Provided disease can be managed and markets developed, this crop has great potential for increas- ing incomes of ordinary farmers, often in areas (e.g. the far north) where alternatives are limited and have low returns. Other vegetables also show promise though so far cultivation is minimal. Apple is normally an investment crop, often by non-residents, while orange orchards are owned by a wider range of farmers. Production of apples and oranges will con- tinue to increase rapidly since many plantations are immature. Bhutan remains well placed to serve markets in India but it may be advisable to limit area expansion until longer-term market absorptive capacity has been tested. Cardamom is a traditional export but restrictions on access to forest land may explain some decline in recent years. Specialist, high -13- value crops (asparagus, strawberries, mushrooms, herbal medicinal products etc.) show promise but affect few farmers. Livestock 2.09 Livestock numbers and output have increased steadily but produc- tivity remains low and in some instances may be declining. Cattle are owned by more than 90 percent of rural households and are an integral element in the rural economy. Other animals are of lesser importance although at high altitudes yak are the basic means of livelihood for a small traditional transhumant population, and at lower altitudes many farmers keep some pigs, poultry and pack horses. A network of veterinary dispensaries has been established with development policy concentrating on the introduction of exotic cross breed animals. Initially, imported animals were distributed directly to farmers, but this has been replaced by the establishment of domestic breeding capacity based mainly at govern- ment livestock farms. Table II.3 LIVESTOCK NUMBERS ('000) Annual Percentage 1981 1986 lncrease Cattle 275.2 340.3 1.8 Yak 28.9 35.7 1.8 Sheep/Goats 27.0 43.8 4.2 Poultry 152.5 211.3 2.8 Pigs 55.5 88.6 4.1 Source: Dept. of Animal Husbandry. 2.10 Cross-breeding has had some impact but the advantages of new introductions have not always been evident under harsh local conditions. For cultural and ri-sk avoidance reasons, farmers are often unwilling to dispose of surplus animals so that rising numbers put increasing pressure on available feed, in particular during the winter. Government programs to distribute grass seed and fodder trees, and to promote managed pas- tures, have had limited effect and have probably been more than offset by rising numbers, leading to a reduction rather than an increase in average productivity. In contrast to cattle, there is considerable potential for increasing numbers of poultry and some other minor livestock, while a promising start has been made in southern districts with intensive fish production integrated with ducks and pigs. If sources of feed can be diversified, possibly with promotion of maize-based cropping systems, the expansion of poultry in particular could be significantly accelerated. -14- B. FORESTRY 2.11 Besides the hydroelectric power potential, forests are the most important natural resource of Bhutan. Despite low extraction levels, forest; play an important part in the economy. They are a source of fuelwood and timber that is consumed freely or at nominal cost by the rural population. They contribute about 5 percent of total Government revenue (through royalties, sales by the Bhutan Logging Corporation and the Forestry Department, and excise duties and sales taxes) and are estimated to account for about 15-20 percent of the value of merchandise exports. Forestry's share of output has almost doubled from 5.3 percent of GDP in 1981 to 9.9 percent in 1986. Present annual wood extraction is about 0.6 million cubic meters, of which 0.5 million is for local use. The present rate of extraction of standing volumes is only about 4.5 percent of the estimated long-term sustainable yield. Of this, almost two thirds is made up of fuelwood consisting mainly of dead wood and waste material. Development of the forestry industry requires substantial investments in infrastructure, transportation, and extraction and process- ing equipment as well as the introduction of sound management practices. Eventually, however, harvesting could be increased several times over without outpacing natural regeneration. India, and to a lesser extent Bangladesh, provide a ready market for timber and wood products and the electricity becoming available should permit processing in Bhucan at competitive cost levels. 2.12 In 1979, the Government nationalized most logging in an attempt to eliminate practices of indiscriminate felling and insufficient forest management. Although the overall extraction rate was low, there was over-exploitation along the roads and the main inhabited valleys. To counter this, the Forestry Department was assigned to undertake felling and thereafter auction logs to private sawmills or undertake direct export (although some private logging under license has continued). The export of logs and sawn timber was also to be gradually restricted to encourage the establishment of local wood processing industries and to increase value-added in Bhutan. As a result of these policy changes, there was initially a substantial decline in timber extraction since the Forestry Department's extraction capacity was limited (Table II.4). By 1986, however, after the Bhutan Logging Corporation had assumed responsibility, total commercial logging had recovered to earlier levels. While forestry development could be increased manifold, this should be undertaken through a strategy of sustainable regeneration which also gives due importance to the maintenance of plant and wildlife species in addition to protecting soil erosion. -15- Table II.4: Production of Logwood ('000 Cubic Meters) 1981 1982 1983 1984 1985 1986 Commercial Logging Bhutan Logging Corporation 25.3 49.9 85.8 67.2 46.6 122.4 Other Commercial 23.4 53.0 55.1 52.6 48.8 53.0 Logging for House Construction & Public Works 28.6 72.3 41.2 54.2 56.1 59.2 TOTAL 77.2 175.2 182.0 174.0 151.5 234.6 Source: Department of Forestry 2.13 Despite the cautious approach to exploitation, unhealthy forests and poor management have created problems, notably a severe ongoing bark beetle epidemic and defoliation of firs along many of the ridges. Unless the bark beetle epidemic is checked in time, it could have serious effects on the country's forest resources and environment. It may have been triggered by unhygienic logging practices in coniferous forests,l/ and has killed over 2,000 ha of spruce during 1986 and 1987 and threatens a fur- ther 50,000-100,000 ha in the same vicinity. There is evidence that the pest is capable of spreading to other coniferous areas such as those under pine, fir, and cedar. Rescue operations related to this epidemic will lead to a significant increase in output in the short term. More impor- tant, it also requires emergency efforts to combat the spread of the pest, and reduce its populations to normal levels. The Government has begun such a program. 1/ I.e. the practice of leaving logged wood on the ground for extended periods. The bark beetle uses felled timber for breeding place. -16- C. MANUFACTURING & MINING 2.14 Reflecting Bhutan's low level of development, manufacturing and mining output only accounted for 4.2 percent of GDP in 1986, virtually unchanged from its 4.0 percent share in 1981 (Table I.1). Of this, about four-fifths is accounted for by just four enterprises, all in the public sector, producing cement, processed fruit, wood products and alcoholic beverages. A medium-sized plant producing calcium carbide is expected to be completed in the spring of 1988. 2.15 The Government has recently begun an effort to promote private enterprise through establishment of a new lending facility, the BDFC, to make loans for private industrial investment, giving training in manage- ment and entrepreneurial skills, and divesting of or allowing private sector participation in recent large industrial ventures initiated by the Government. As yet the private sector only accounts for a very small percentage of manufacturing, with 70 percent of the firms involved in food processing and employing less than 10 persons. Direct foreign investment is only permitted on a case-by-case basis depending on whether foreign technology and management are required. The Government is considering foreign equity participation in integrated agro-based industries and in the design and manufacture of products with a potential for hard currency exports. 2.16 The bulk of production in both public sector and private sector companies is geared for export to India because of limited domestic demand and the free trade arrangements with India. As yet, there are virtually no exports of manufactured goods to third countries. Thi-ere is, however, potential for exports to Bangladesh (including cement, timber and wood products, other mineral products) and to a lesser extent Nepal and trade routes to these countries across Indian territory are being established. Given Bhutan's relative scarcity of labor and cultivable land vis-a-vis India (and other subcontinential countries) and its abundance of natural resources, Bhutan's comparative advantage lies in resource-based industries including, agro-industry, forestry, mineral-based industry and hydropower. With the commissioning of the Chhukha hydropower project, power-intensive projects have become more attractive. Thus the Govern- ment's intention of concentrating on the development of resource-based industries appears rational. In addition, given the large current account ded.icit in the balance of payments with India, the orientation towards export to the Indian market also makes economic sense, although exports to Bangladesh and Nepal also figure in the Government's industrial strategy. In addition to large projects which, because of lack of entrepreneurship and private capital, would still have to be undertaken by the Government or through joint venture, the number of small projects in the private sector need to be increased. The Government's efforts are in the right direction as is its decision to undertake the Dungsum cement project in eastern Bhutan, which would use domestically available limestone and -17- hydroelectric power to produce 1,500 tons per day for export to India and perhaps Bangladesh and Nepal. D. POWER 2.17 The most dramatic event in the power sector during the Fifth Plan period was the commissioning of two of the four generators of the Chhukha hydroelectric project. With the completion of the last two 84 MW gener- ators in early 1988, the total generating capacity of Chhukha will increase to 341 MW, of which 336 MW would be hydropower and the balance diesel. This would compare to a country-wide generating capacity of about 350 MW. Because Chhukha is a run-of-the-river project, its capacity to generate electricity varies from the equivalent of 100 MW in the winter months to about 340 MW in the summer, according to the flow of the river. However, Chhukha alone is expected to generate about 2 million MWH per year of electricity, thereby contributing large Indian rupee earnings as well as fiscal revenues (para 1.08). The Government expects the net revenue from the project to rise from Nu 170 m in 1987/88 to Nu 250 m in the final year of the Plan. These amounts would increase the total expected budgetary revenues by half. The net financial flow from India related to the project will be equivalent to over 40 percent of Bhutan's 1986/87 trade deficit with India. 2.18 A related achievement of the Fifth Plan was the establishment of transmission lines in the Western Region. Little progress however was made in the Government's rural electrification program or in the improve- ment of the hydrological data base. Outlays for power excluding the Chhukha project were less than half the amount allocated in the Plan. Apart from the state of readiness of projects this was also due to delays in tying up donor finance. 2.19 The Chhukha project was built as a turnkey project by the Indian Government at a cost of about $200 million. Financing was also provided by India, 60 percent as a grant and 40 percent as a 15 year loan, with a three year grace period, at five percent interest. The negotiated price at which the power is sold to India is based on an imputed price for firm and seasonal power that results in a fixed revenue payment by India. An analysis by the mission of the revenues paid and power expected to be received by India suggests that the implicit tariff rate means an approximately equal split between Bhutan and India of the ex-ante economic rent resulting from the project. 2.20 In addition to the tremendous positive impact of the project on the balance of payments with India and fiscal revenues, the increase in cheap power allowed the Government to reduce power rates in Bhutan by half, thus benefiting both households and industry. Since Indian tariffs are significantly higher, this reduction in rates makes power-intensive -18- firms more competitive. Thus the Government's push towards the develop- ment cf energy-intensive firms is a rational strategy. Whereas Bhutan's power capacity of 350 MW is well over the current demand which requires a capacity of only 10-15 MW, the difficulty of transmission of Chhukha power to remote areas makes the continued development of micro-hydro and diesel generation projects economically cheaper in selected areas. However, there has been a decrease in the capacity of micro-power stations mainly due to difficulties in maintenance and the decreased demand for power from these stations in areas served by Chhukha. E. ROADS AND WATER SUPPLY 2.21 Roads. Bhutan's mountainous terrain presents extraordinary dif- ficulties for the construction of a road network. Roads have to be carved into steep hillsides; following the contours of the mountains they are unusually winding with actual road distances often several times the straight line distance. During its long isolation, Bhutan's rulers valued its physical inaccessibility and only in the late 1950s, when Bhutan had decided to develop its economy and seek increased external contacts, a beginning was made with the construction of a road network. The first road was between the border town of Phuntsholing and the capital city Thimphu. This road, 174 km long over extremely difficult terrain, was constructed with the use of compulsory labor in only three years' time. Labor conscription on this scale proved a hardship for the labor-short farm economy as well as a serious disruption of family life and since then the Government has been using imported contract labor on major roads projects and reduced its requirements for community labor contributions. It was also at this time that the Government accepted the cooperation of the Border Roads Organization (BRO) of the Indian Ministry of Transport, which is staffed with para-military personnel and which also works with contract labor. 2.22 Since this early beginning, a road network has been established consisting of an East-West highway, North-South links through major river valleys and connecting roads to dzongkhag headquarters and virtually all sites of economic activity. At the end of the Fifth Plan the road network had a total length of 2,254 km. These roads, while narrow and winding, are well constructed and have only moderate gradients in spite of the large differences in altitude. They are up to the requirements of Bhutan's low traffic density. Adequate maintenance however will require increased Government attention. 2.23 Transport and communications in the more remote rural areas con- tinue to depend on foot trails, mule trails, and foot suspension bridges. Foot suspension bridges over Bhutan's deep river valleys can cut walking times by several days. Local labor has been mobilized to improve and maintain the trails; Government has undertaken the construction of foot -19- suspension bridges. By the end of the Fifth Plan, some 240 of these bridges were in place. 2.24 Construction capacity in Bhutan is critically limited by the shortage of labor and of engineering and supervisory staff. In addition to community labor of 1,700 man years, the Public Works Department (PWD) and BRO employ 2,200 contract laborers; the annual construction capacity is currently 90-100 km per year. Expatriate staff have a major role in all engineering and supervisory activities; their share has been slowly declining as more Bhutanese graduates are becoming availabLe. In view of the scarcity of labor, mechanization of construction work is cost effec- tive, not only in formation cutting, where it has played a large role because of technical necessity, but also in work on the base course and in black topping. 2.25 Water Supply and Sanitation. The lack of clean drinking water and the resulting prevalence of water borne diseases is a major factor in Bhutan's high morbidity. Parasitic diseases account for poor nutritional benefit to Bhutan's rural population from an otherwise satisfactory calorie intake. With UNICEF assistance the Government has given a major push to establishing water supply schemes in rural areas. During the Fifth Plan, 962 schemes were completed despite serious difficulties aris- ing from the lack of skilled workers and engineers and the dependence on imported pipes and other materials. Several schemes have had serious technical difficulties including leakage and in some the water did not flow. While the above completion figure therefore needs to be discounted, there has still been a remarkable achievement. Moreover, there have been substantial improvements in the sense of commitment of local people, the experience of district staff and the quality of central supervision. 2.26 In the six largest urban centers--Thimphu, Phuntsholing, Paro, Gaylegphug, Tashigang and Samdrup Jongkhar--the Government is undertaking water supply schemes with ADB assistance. A feasibility study has been prepared for a modern sewage disposal system in Thimphu. 2.27 Related to rural health concerns is the Government's interest in the introduction of smokeless stoves in rural households. Traditional stoves fill the house with smoke causing serious lung and eye damage. An improved "smokeless" version with proper stove pipe has been developed. By the end of the Fifth Plan, the new stove had been installed in 4,600 rural households. The higher fuel efficiency of these stoves is aLso expected to reduce household demand for firewood, which is important from the environmental point of view. -20- F. COMMUNICATIONS AND TOURISM 2.28 While there have been significant developments in communications, Bhutan's communications systems need to be selectively improved. The postal system has improved; and mail delivery is quite reliable, even if slow to some remote areas. Revenues from philatelic sales are on the wane, apparently because of reduced world-wide interest. At its peak, the hard currency earnings from sales of stamps exceeded last year's earnings from merchandise exports. 2.29 There are 14 telephone exchanges in Bhutan, eight with trunk calling facilities. While all the equipment is obsolete, the system is well maintained, although inadequate. Communications between villages and from village to dzongkhag headquarters usually require walking, some- times for 3 or 4 days, or communicating by wireless. Telex facilities were recently introduced in Bhutan's largest cities, Thimphu and Phuntsholing. Since 1986, a weekly newspaper was introduced and by mid-1988 it had a circulation of 8500, being distributed by mail all over Bhutan within three days of publication. There is a 5 kw radio transmit- ter which broadcasts daily for three hours in three languages. There are plans to increase broadcasting to nine hours per day and construction of a 50 kv station is underway. While freight transport is entirely in the private sector with moderate Government regulation, bus transport is increasingly carried out by the private sector. There are about 30 private operators who pay a royalty on the routes they use. The Government regu- lates all fares and continues to operate certain unprofitable routes. There is an airport at Paro and two 19 passenger Dornier aircraft were purchased by the Bhutanese airline Druk Air during the Fifth Plan period. During the peak tourist season, the aircraft flies to Calcutta five days a week and Dhaka twice a week. While Druk Air has contributed a total of Nu 10.1 million to the treasury since its inception (Statistical Appendix 5.4), the airline makes accounting losses once depreciation is accounted for. The Government has recently decided to buy an eighty passenger jet at a total cost, including spares and financing charge of $28 million. Service to Delhi, Kathmandu and Bangkok is scheduled to begin in October 1988. To accomodate the jet, the airport runway and airport facilities are being expanded. 2.30 Tourism continued to increase during the Fifth Plan period from some 1,300 tourists in 1981/82 to 2,500 tourism in 1986, about one-fifth of whom came for trekking and two-thirds of whom arrived during March, August, September and October. During these peak months, the hotel occupancy rate is very high. To preserve Bhutan's culture, the Government has decided to control tourism by requiring tourists to spend a minimum of seven days, pay a flat rate ($130/day during peak season and $95/day off-season), and travel in pre-formed groups of six or more persons. Nevertheless, hard cucrency tourism receipts in 1986 were $2.5 million or about twelve times the hard currency earnings from merchandise exports. -21- The recent Government decision to make certain sections of monasteries off-limits to tourists is likely to limit the growth of tourism although the purchase of the new jet may more than compensate. G. EDUCATION 2.31 The shortage of trained technical and administrative personnel is the most serious problem affecting development in every sector. Until 1961, access to formal schooling was available only to children who could be sent outside the country for formal education. After 1961, enrollments in state primary and secondary schools began to rise as a result of increased investments in education introduced in the country's First Plan. Since then, Bhutan has made considerable progress in establishing a formal education system. However. the official literacy rate of 15 percent and the official enrollment rate at the primary level of about 20 percent of primary age children and secondary level of about three percent are the lowest in the South Asia region and among the lowest in the world reflect- ing the relatively shott time the country has been able to provide any formal education at all. Caution should be used in interpreting these enrollment rates, however, as they are based on uncertain population estimates. There is some evidence that enrollment rates may be much higher. Recent surveys to establish the number of primary age children in school catchment areas show current enrollment rates on a dzongkhag by dzongkhag basis to be almost twice as high. 2.32 The Government is providing free primary education and considers a main objective to be the improvement of numeracy and literacy in both Dzongkha (the national language) and English (the medium of instruction). As far as secondary and higher level education is concerned, the Govern- ment aims to maintain a balance between the number of educated persons and the employment available to them. The entrance examination to the Junior High Schools is used to hold the number of students to the number of available places. Examinations at the end of secondary schooling deter- mine access to the junior, degree, teacher training and technical col- leges. Altogether, these enroll some 1,100 students. 2.33 During the Fifth Plan, an attempt was made to lessen the inequalities of access to primary education, improve the quality of the system and expand capacity to help meet a growing public demand. By the end of the Fifth Plan, there had been a dramatic expansion in the number of school buildings and enrollment (Table I1.5). In fact, all construc- tion targets were exceeded; however, enrollment targets proved too ambitious. During this period, the Government also introduced, on a pilot basis, a New Approach to Primary Education, which reduces the emphasis on memorization of facts and instead provides a practical curriculum of basic skills applied to daily living. During this period, Government also reorganized the Department of Education to irncrease its efficiency. -22- Table II.5: INCREASE IN SCHOOL CAPACITY AND ENROLLMENT, 1981 AND 1986 Fifth Plan 1981 1986 Target Number of Institutions Primary Schools 119 147 140 Junior High Schools 21 22 22 High Schools 6 8 8 Colleges 0 2 1 Number of Teachers Primary School 726 1,321 1,046 Secondary School 481 613 569 Degree Level 0 n.a 16 Number of Students Primary Schools 34,481 49,485 58,300 Junior High Schools 1/ 1,856 2,203 4,370 High Schools 368 764 813 Colleges 204 422 n.a 1/ Includes some primary school students who are being taught in secondary schools. Source: Dept. of Education and Planning Commission. 2.34 Despite these achievements, there remain several major deficien- cies in the educational system: (i) The educational system does not yet meet the manpower demands and there is a shortage of trained technical and administrative personnel affecting development in every sector, leading to the hiring of large numbers of expatriates. Thirty-six percent of primary school teachers and 57 percent of .;econdary school teachers are expatriates, mainly from India, and are paid 50-75 percent more than nationals. The lack of appropriately trained teachers is one of the key contributers to the low quality of the system. Since Indian primary school teachers generally lack English language skills, the Bhutanese Government is forced to hire Indian secondary school teachers to teach at -23- the primary level. These teachers are not appropriately trained for primary schools and there has been inadequate provision for in-service training and an absence of sufficient guidance and supervision by head- masters and district staff. The problem is worse in remote areas where the teachers are isolated from almost all professional stimuli. (ii) Primary school facilities are inadequate to handle the increasing demand for primary education. The number of primary school students tripled between 1975 and 1985 but has slowed to a growth in gross enroll- ment of only about five percent per year mainly due to lack of facilities. Although new facilities are being built, older buildings are often falling down due to the poor quality of inadequately supervised community con- struction and lack of maintenance. As a result, whole classes are forced out of some buildings, and if children are to get an education at all they must walk long distances or find boarding accommodations near schools that can accommodate them. In addition, the poor quality of education leads to higher repeater and dropout rates. This in turn contributes to low utilization of classrooms in the upper primary grades, where often 10 to 15 students are taught in rooms that could hold 40. (iii) Primary school curriculum has too many subjects and has an overconcentration on content. Consequently, students have to memorize many unrelated facts, thus hinder- ing their ability to learn basic skills. This is further complicated by the demand on students to learn two languages, English and Dzonkha, neither of which is native to the majority of Bhutanese. (iv) The over- crowded and poor primary school facilities and poor quality of teaching result in high dropout rates. At current levels, only 45 percent of those entering pre-primary schooling are expected to ultimately complete the seven year program, and only 7 percent will complete the program in seven years. (v) Although there has been an increase in the female/male enroll- ment ratio, female students make up only 35 percent of all enrollees, with a wide variation across regions. (vi) The high growth of enrollment has put severe strains on the management capacity of the education system, further reducing the effectiveness of the system. H. HEALTH 2.35 Although improving, Bhutan's health indicators are among the poorest in the world. Life expectancy at birth is about 46 years for males and 49 for females, and the infant mortality rate is estimated at 142 per 1000 (and at over 300 per 1000 in some areas). Maternal mortality is also high, with estimates of up to 17 per 1000. Data from the country's health units for 1984-85 indicate that acute respiratory tract infections and diarrheal diseases in the 0-5 year age group are main causes of morbidity and mortality. According to Ministry of Health plan- ning documents, "children and women make up 63 percent of the total population and form the largest 'at risk' group". With only 13 percent of Bhutan's population resident in urban areas, a rural Mother and Child Health (MCH) focus should clearly represent the main theme in the -24- country's health program. Despite all efforts thus far, however, at most 50 percent of the population receives effective health coverage. 2.36 The major constraints to wider coverage are shortages of medical personnel, and the scarcity of health infrastructure in rural areas. Between 1981 and 1986, the number of doctors, nurses and rural health workers grew only minimally, by 15, 20 and 31 respectively.l/ Paramedical courses in Thimphu's health school have often been filled to a mere half of their capacity: although interest in paramedical work is high, many applicants lack the necessary educational qualifications for admission. In addition, only 375 of a planned 1000 village volunteer health workers came forward to be trained in the same period. The recruitment problem is different in this case: village volunteers receive no financial incen- tives from the Government, and exemption from manual labor obligations is not always granted; this plus poor selection procedures and uncertain role definition are thought to discourage potential interest. In terms of rural facilities, only 21 of the Fifth Plan's target of 40 basic rural health units could be completed, due in large part to the Government's decision in 1984 to put a brake on substandard construction. The 65 units now in existence would need to be doubled to achieve reasonable levels of access throughout Bhutan. 2.37 The delivery of health services to those who are covered is quite good, with particularly laudable efforts being made during the Fifth Plan to vaccinate children through the Expanded Program of Immunization; this and a wider availability of clean water through the rural water supply program have contributed to a reduction in child mortality from over 115 at the beginning of the decade. Medical personnel are impressively motivated, and the peripheral health care programs are well-run, though the shortage of mid-level managers has constrained the development of supervisory and monitoring systems. Drug supplies have in the past been inadequate, but this situation is expected to improve with the recent formulation of an essential drug policy and access to donor funds to support it. 1/ From a base of 67, 147 and 188. -25- Chapter 3: DEVELOPMENT STRATEGY AND PLANNING A. EXPERIENCE WITH PRIOR FIVE-YEAR PLANS 3.01 Bhutan' s series of five-year development plans started in 1961 mostly as frameworks for allocating India's large economic aid flows. The size of the plans increased dramatically with each new plan as the plan composition shifted from transport infrastructure towards social sectors and directly productive activities (Table III.1). During the First Plan, about two-thirds of development expenditures (both capital and recurrent) went towards transport infrastructure. The Second Plan showed an 89 percent increase in expenditures. While transport infrastructure's share fell to 41 percent, the decline mainly reflected the fact that several main road projects were being undertaken by the Indian Border Roads Organization and were thus outside the Plan. The share of education and health increased from 12 percent in the First Plan to 26 percenlt in the Second Plan while agriculture's share rose to 14 percent from five per- cent. Expenditures under the Third Plan increased by 135 percent, with the share of transport infrastructure falling to 20 percent although, again, most investments in roads took place outside the Plan. Education and health continued to be priority sectors while agriculture's share was further increased to 17 percent. Expenditures on the Chhukha power project were outside the Plan. Had they been included, they would have accounted for ten percent of total outlays. Whereas the first two plans had been financed totally by Indian Government grants, the Third Plan was also financed by internal resources (seven percent) and grants from the UN system (three percent). During the Fourth Plan, total outlays increased by 133 percent with agriculture, industry and forestry account- ing for 55 percent of the total. While the shares of education, health and transportation-related expenditures fell sharply, there was at last a 50 percent nominal increase in each of the sectors. The Indian Governmient share of financing fell to 77 percent, with UN system finance increasing to 18 percent and the internal resources share falling to five percent. If Chhukha were included, the Plan size would increase by 52 percent, the share of power would increase from five to 37 percent, and the Indian Government share of financing would increase to 85 percent. Table III.1: DEVELOPMENT OUTLAYS AND FINANCIND OF THE FIRST FOUR PLANS (1961/62-1980/81) First Plan Second Plan Third Plan Fourth Plan (1961/62-1965/66) (1966/67-1970/71) (1971/72-1975/76) (1976/77-1980/81) Nu Nu Nu Nu Mi-llion Percent Million Percent Million Percent Million Percent Agriculture 1.9 1.8 21.6 10.7 58.3 12.3 259.0 23.5 Animal Husbandry 1.5 1.4 5.8 2.9 24.2 5.1 61.5 5.6 Forestry 3.2 3.0 6.9 3.4 28.4 6.0 110.3 10.0 Power 1.5 1.4 9.1 4.5 30.1 6.4 50.5 4.6 Industry and Mines 1.1 1.0 1.0 0.5 25.2 5.3 175.0 15.8 Public Works Department 62.9 58.7 70.5 34.9 84.6 17.8 128.3 11.6 Road Transport 7.5 7.0 12.0 5.9 9.5 2.0 - - Post & Telegraphs 0.5 0.5 5.9 2.9 11.4 2.4 16.9 1.5 Telecommunications - - - - 14.8 3.1 37.3 3.3 Tourism - - - - 14.1 3.0 12.5 1.1 Education 9.4 8.8 35.7 17.7 90.0 19.0 134.6 12.1 Health 3.2 2.9 16e7 8.3 38.1 8.0 54.6 4.9 Information & Publicity 0.1 0.1 1.4 0.7 4.0 0.8 11.0 1.0 Development Headquarters 3.5 3.3 8.8 4.4 16.3 3.4 34.3 3.1 Other 10.9 10.1 6.8 3.2 26.2 5.4 20.4 1.9 Total outlays 107.2 100.0 202.2 100.0 475.2 100.0 1,106.2 100.0 Financed by Government of India Grants 107.2 100.0 200.0 98.9 426.6 89.9 853.0 77.1 Assistance from UN and other International Agencies - - - - 15.8 3.3 193.7 17.5 Internal Resource Mobili- zation - - 2.2 1.1 32.8 6.9 59.5 5.4 Total Financing 107.2 100.0 202.2 100.0 475.2 100.0 1,106.2 100.0 Note: Development outlays include only those activities financed from domestic resources, overseas aid, and Government of India development grants. They, therefore, exclude development- related expenditure fi.nanced directly by Government of India departments and agencies. This comprises mainly expenditure by the Border Roads Organization on transport and communications infrastructure. Outlays also exclude expenditure on the Chukha hydro-electric project. Source: Planning Commission. -27- 3.02 The first four plans succeeded in linking the main regions of the country through a well-conceived road network constructed under difficult conditions. Over this period, literacy rose from close to zero to 10 percent and as a result of the emphasis on education and higher level training, Bhutan built up a small but well-motivated trained cadre of administrators. While shortages of skilled persconnel remained, the Government, through concerted efforts to keep the! administration lean and by recruiting selectively from outside, was able to develop a fairly efficient administration more or less in line with needs. In sharp con- trast to the early sixties, by the beginning of t:he Fifth Plan, virtually every important position in Government was staffead by a national, while the pool of these primarily young, competent, motivated, civil servants continued to increase. 3.03 As development administration and planning capacity increased, so did the sophistication of the plans. The Fifth Plan marked a shift towards self-reliance and decentralization of planning and implementation. With the shift in emphasis away from road and power infrastructure towards the productive sectors, it became more important to involve the people in the planning process rather than to conduct the process solely from the top. Since the Fifth Plan relied heavily on unpaid district labor to implement the projects, it was even more crucial to make sure that the projects had the support of district residents. This objective was imple- mented primarily by decentralizing the developmient administration. Whereas there were some transitional and structural problems in decentralization, it largely succeeded in its objective. A description of the planning process and a critique of the decentralization efforts are provided below (paras 3.06-3.09 and paras 4.17-4.22 respectively). 3.04 Mainly as a result of the detailed and time consuming planning process undertaken, it was decided that the Fifth Plan would cover six rather than five years. Even after adjusting for the longer period and excluding non-development expenditures, the original Fifth Plan is almost three times as large as the Fourth Plan (Table III.2). The amount of financing from domestic sources (domestic revenue plus domestic borrowing) was proposed to cover current expenditures during the Plan which is in keeping with the Government's objective of increased economic self-reliance. While domestic revenue did in fact grow beyond the plan- ners' expectations, reaching Nu 1332 million for the period instead of the originally foreseen Nu 942 million, current expenditures grew even faster and despite domestic borrowing of Nu 129 million the goal of covering current expenditures with domestically generated funds was not fully met. -28- Table III.2: TOTAL FIFTH PLAN OUILAYS (1981/82-1986/87) /a Original Actual Amount Percent of Amount Percent of (m Nu.) Total (m. Nu) Total Agriculture 494.8 11.4 431.0 9.1 Animal Husbandry 122.1 2.8 105.6 2.2 Forestry 282.7 6.5 200.2 4.2 Power 715.0 16.5 345.4 7.3 Industry and Mines 756.8 17.4 303.5 6.4 Public works and Urban Development 536.9 12.4 719.2 15.3 Aviation and Road Transport 100.0 2.3 60.5 1.3 Communications and Tourism /b 141.9 3.3 194.3 4.1 Education 340.0 7.8 410.0 8.7 Health 185.3 4.3 205.6 4.4 Headquarters, Dzonkhags and Miscellaneous 662.6 15.3 1,735.8 36.8 Total 4,338.1 100.0 4,711.1 100.0 Of which: Current 1,162.0 26.8 1,612.0 34.2 Capital 3,176.1 73.2 3,099.0 65.8 Development 3,806.0 87.7 Non-development /c 532.0 12.3 Financed by: Domestic Revenues 942.0 21.7 1,331.6 28.3 Domestic Borrowing 200.0 4.6 129.0 2.7 Government of India Grants 1,340.0 30.9 2,017.5 42.8 Other External Grants 521.0 12.0 978.0 20.8 Financing Gap/External Loans 1,335.0 30.0 255.0 5.4 /a Excludes Chukha expenditures of Nu. 1,800 million. lb Includes posts and telegraphs, information and broadcasting, telecommunications, and tourism. /c Comprises expenditures of the Royal Secretariat and the Ministries of Finance, Home Affairs and Foreign Affairs. Source: Planning Commission -29- 3.05 While the sectoral shares between Tables III.1 and III.2 are not strictly comparable because of the inclusion of non-development expendi- tures in Table III.2, they give some indication of relative priorities. The shares of agriculture, forestry, and education fell significantly between the Fourth and Fifth Plans, while the shares of power and industry increased. In absolute terms, however, educational expenditures more than doubled even after adjusting for the extra year in the Fifth Plan. The amount allocated to headquarters increased from Nu 34 million during the Fourth Plan to Nu 624 million. However, this is mainly for non-development expenditure of the Royal Secretariat, Ministries of Finance, Home and Foreign Affairs, which had been outside the Fourth Plan and as a result of the decentralization which increased civil servant staff by necessity. It is more instructive to compare the original proposed allocation with the preliminary estimates for the actual expendi- tures through 1986/87. The revised plan size increased by 8.6 percent with the largest absolute increases concentrated in headquarters, public works, and education (Table III.2). The increase in the head- quarters/dzongkhags/miscellaneous category is disturbing, since it com- prises about one-third of total Plan expenditures, much more than originally estimated. While this was partly due to justifiable or unavoidable expenditures that could not have been foreseen, the deviations are large enough to warrant further study in order to more accurately plan future expenditures. The other significant comparison is the absolute decreases in the revised amounts for industry and power. This is mainly dupene to delays in implementing feasibility studies and arranging project financing. B. THE SIXTH FIVE YEAR PLAN (1987/88-1991/92) 1. The Planning Process 3.06 An important objective initiated during the Fifth Plan and refined during the Sixth Plan preparation is the involvement of the general population directly in the planning and execution of development programs. A singular aspect of the decentralization movement that embodies this objective is its insistence upon involving dzongkhag administrations and rural communities in development planning. The prime vehicle for engaging community participation in planning is the district council (the dzongkhag yargye tshokchung or DYT) a body chaired by the dzongdag (district officer) which includes government administrative and technical staff, government-appointed village headmen, elected representatives and eminent local individuals. The planning process, which relies heavily on the DYT, is carefully directed by His Majesty and by the Planning Commission, and is iterative in its nature. 3.07 Sixth Plan deliberations began in 1984, when all ministries and departments conducted a review of progress towards implementing the Fifth Plan; these findings were used by the Planning Commission to establish the -30- policy framework for the Sixth Plan, and to agree with the development agencies on the Plan's overall physical and financial parameters. During Plan preparation, His Majesty the King visited each of the 18 dzongkhags, and chaired meetings of officials and local citizens to explain the prin- ciples vested in the Plan and engage local commitment to them. Operating within specific central guidelines for their dzongkhag, the dzongdags and their staff then worked through the DYTs and village level fora, elaborat- ing the Government's program and soliciting requests for local development projects. These requests were next reviewed for their feasibility and, most importantly, for the willingness of local communities to provide the voluntary manual labor inputs required for their execution; competing demands were ultimately reconciled by the dzongdag before the DYT assembly. The Planning Commission and the central staff of the line agencies also provided active assistance to the dzongkhags throughout the process. After further rounds of discussion between the dzongdag and the central authorities, a five-year plan for each dzongkhag was finalized. These plans detail the programs to be financed through and executed by the dzongkhag administrations, as well as those centrally executed programs located in the dzongkhags (e.g. trunk road construction and maintenance, forestry activities). Each dzongkhag plan was then formally reviewed and approved by the National Assembly. Following this, the dzongkhag plans were repackaged along sectoral lines and the remaining centrally executed projects (e.g. large-scale public industry projects) added. The resulting main Plan document was ratified by the National Assembly in July 1987. A detailed elaboration of projects proposed for donor financing is under preparation for the Fall 1988 Round Table Meeting. 3.08 Although the process described above is driven primarily by centrally-determined priorities, local bodies do play a consultative role. Community aspirations help to steer resource allocation at the micro-level, but do not directly fashion overall investment decisions. At the country's present stage of development, the degree of local participa- tion in decision-making fostered by such an approach is appropriate and realistic; it is also characterized by widespread popular support. Clearly, limited popular literacy and the shortage of trained planners in the civil service will restrict the sophistication of local planning for some time to come; the process, indeed, has been simplified somewhat since the earlier years of the Fifth Plan - fewer sectors are included in the exercise with forestry, power and industry planning now handled largely from Thimphu. 3.09 An important benefit from involving local communities in the manner described is that Government, and in particular dzongkhag administrations, have been brought in closer touch with problems and perceptions of rural people - and have been seen to respond to them. In turn, the rural people have a better understanding of Government!s role and constraints in providing services. Another is that linking government activities to the provision of local labor has made it possible to check -31- the growth of random demands for government services, and to oblige vil- lagers themselves to identify their priorities. Problems have arisen, however, due to the abovementioned lack of planning expertise in the country and to the embryonic state of development administration at the dzongkhag level. In many cases, Fifth Plan physical goals were unrealis- tic in the light of actual labor availability and the level of local skills, and could only be achieved at the expense of quality. Sixth Plan dzongkhag documents are still descriptive and target-oriented rather then analytical, and could only be produced with heavy assistance from Thimphu; they have a uniform character and display little in the way of indigenous local strategy. By the same token, the preparation process has exerted a heavy toll on the scarce technical manpower available for actually implementing development programs. As a result of these shortcomings, the Government has been actively reviewing how it might improve the planning process. At one point it was proposed that development planning should focus on the gewogs, but the constraints to a further devolution of this type have since become obvious. More attention is now being given to a converse proposal--removing the planning function from the dzongkhag level and concentrating it at four regional centers; under this arrangement, the dzongkhag would focus on Plan implementation alone. This, it is sug- gested, would permit planning on a watershed basis rather than along strictly administrative lines, and would make better use of scarce man- power. As argued later (para 4.22), regionalizing planning in this manner would have high costs and would reverse the hitherto successful involve- ment of local communities in decision making. An alternative solution would be to create regional technical pools to give strong support to continued dzongkhag-level planning. 2. Objectives, Financial Dimensions and Overall Strategy 3.10 The objectives of the Sixth Plan are: (i) strengthening of the Government administration, (ii) preservation and promotion of national identity, (iii) mobilization of internal resources, (iv) enhancement of rural incomes, (v) improvement of rural housing and resettlement, (vi) consolidation and improvement of development services, (vii) development of human resources, (viii) promotion of people's par- ticipation, and (ix) promotion of self-reliance. Moreover, sectoral ministries have additional objectives which complement and supplement the national objectives, thus leading to a wide range of objectives. Many of these objectives are carry-overs from the Fifth Plan whose objectives were dzongkhag self reliance, decentralization of development administration, control of maintenance expenditures, mobilization of internal resources and people's participation. 3.11 Objectives equal or very similar to these are found in many development Plans. The Sixth Plan, however, is notable for the effort that has been made to provide operational significance to the Plan's objectives in the sectoral allocation of expenditures. Thus, the emphasis -32- on self-reliance results in a large share for manufacturing, mining, and power to carry out resource-based industrial and power projects to exploit markets in neighboring countries, especially India, in order that Bhutan's large fiscal and current account deficits be reduced. The stress on human "-resources and development services led to education having a significantly higher share. The strengthening of Government administration was begun during the Fifth Plan by a major reorganization of the bureaucracy, timely auditing of accounts, and enforcement of strict standards for the actions of Government employees. During the Sixth Plan, these measures are to be consolidated and extended through a system of rewards and punishment. Rural conditions are expected to be improved by increasing agricultural productivity through increased agricultural expenditures, promotion of construction of subsidized rural housing that emphasize aspects of sanita- tion and insulation, and through resettlement of people in scattered remote poverty stricken areas to more fertile areas near an existing or proposed development service center. The promotion of people's participa- tion is a consolidation and refinement of the decentralization efforts begun during the Fifth Plan. The effort to improve the mobilization of internal resources was also initiated during the Fifth Plan and is an integral part of the objective of self-reliance. The Sixth Plan goal is for internal resources to finance all current expenditures as compared to 86 percent during the Fifth Plan, which itself was a strong improvement over earlier Plans. 3.12 The Sixth Plan envisages total expenditures of Nu 9500 million ($730 million) of which 59 percent is for capital expenditures. After adjusting for a shorter time period of 63 months 1/ covered by the Sixth Plan, total spending over the Plan period is projected to be about 66 percent higher if account is taken of expenses in the Chhukha project during the Fifth Plan period. In real terms, the increase is about 25 percent. The Plan indicates that 27.5 percent of the financing is to come from India, another 27.5 percent from other external sources, and 34.7 percent from internal sources leaving 10.3 percent as the resource gap (Table III.3). Much of the financing of the resource gap could come from India since there are a number of projects at an advanced stage of nego- tiation. However, other projects for which financing is assumed are in fact only at preliminary stages of discussion between the Government and potential external donors. The fiscal revenue projections are fairly conservative. While increasing at about 15 percent per year, the revenue projections are quite reasonable given the large receipts of the Chhukha project. About 56 percent of revenues are projected to come from non-tax sources of which Chhukha accounts for 58 percent. 1/ Because Bhutan's fiscal year is to begin on July 1 instead of April 1 from 1988/89, the Sixth Five Year Plan covers 63 months (April 1, 1987 to June 30, 1992) as compared to the Fifth Plan's 72 months. -33- TABLE III.3 : PROPOSED OUTLAY FOR THE SIXTH PLAN (1987/88-1991/92) (In Nu. million) Sector Current Capital Total Percent Agriculture 355.3 573.3 928.6 9.8 Livestock 183.0 148.0 331.0 3.5 Forestry 139.3 178.9 418.2 4.4 Education 532.5 246.3 778.8 8.2 Health 336.2 62.9 399.1 4.2 Public Works 119.6 767.6 887.2 9.3 Trade & Industries 35.3 1240.8 1276.1 13.4 Geological Survey 17.4 17.9 35.3 0.4 Power 33.3 1214.6 1247.9 13.2 Telecommunication 28.8 105.0 133.8 1.4 P&T and Civil Wireless 65.1 3.0 68.1 0.7 Information & Broadcasting 35.7 60.2 95.9 1.0 Civil Aviation 8.6 40.2 48.8 0.5 Druk Air 14.0 377.0 391.0 4.1 Urban Development 58.7 190.0 248.7 2.6 Dzongkhags 192.2 46.4 238.5 2.5 General Government 1694.0 279.8 1973.8 20.8 Grand Total : 3849.0 5551.9 9500.9 100.0 Domestic Financing 34.7 Internal Revenue 2800.4 Internal Borrowing 500.0 Government of India 27.5 Budgetary grant 1610.0 Project tied assistance 1002.7 International Assistance 27.5 Bilateral grants 777.6 Multilateral grants 995.1 Multilateral loans 836.6 Resource Gap 978.5 10.3 Source: Planning Commission -34- 3.13 The overall strategy of the Plan is to emphasize the development of industry, mining and power; 27 percent of total expenditures and 45 percent of capital expenditures are to be allocated to these sectors. Despite the apparent contradiction of devoting so much to sectors that initially will account for a small share of employment, the strategy on which this allocation is based is rational given the potential for high return of projects in these sectors and the realization that in the long-run, Bhutan's development should rely heavily on resource-based, industrial activities and power generation, aimed primarily at markets in the neighboring countries. This is because of Bhutan's relative abundance of natural resources. Development of the traditional sectors on the other hand cannot be accelerated significantly at this stage, because of con- straints in institution and the knowledge base (adaptive research). Over- coming these constraints takes time. Merely allocating more funds will not lead to more rapid development of these complex sectors and the Government is wisely refraining from doi4g so. To some extent, the same implementation constraints are also experienced in education, health, and rural amenities. 3.14 As power, industry, mining and ancillary activities grow they should start providing more employment opportunities for the excess labor that over time is bound to develop in the traditional sectors. Meanwhile, increased export revenues should allow Bhutan to lessen gradually its dependence on aid and to muster increased domestic resources for the growing needs of the social sectors and for maintenance of recent substan- tial investments in infrastructure. By and large, therefore, the Plan's overall strategy appears to be sound. Whether it will also be successful depends largely on whether sufficient efforts are made to carry out relevant studies in the power, industry, and mining sectors and whether the required technical assistance is being obtained. This question of project preparation and of underlying improvement in institutions and sector knowledge appears to be the main concern with regard to the feasibility of the Plan. Whether the Plan's overall level of investment will be reached depends on investment opportunities, not, or at least not in the first place, on the availability of resources. C. AGRICULTURE AND FORESTRY 3.15 Agriculture and forestry have been allocated Nu 1,678 million or 17.7 percent of Sixth Plan outlays as compared to 17.0 percent originally allocated in the Fifth Plan. Less than half the proposed expenditures are allocated to capital expenditures as compared to 76 percent in the Fifth Plan. Some additional activities are under discussion utilizing counter- part funds and staff already allowed (e.g. for completed projects or under normal dzongkag programs). Even if additional aid funds could be rela- tively easily absorbed, care is needed to ensure that such additional activities are consistent with proposed strategies and with available staff and resources. -35- 3.16 Given agriculture's importance in employment and output, and the priority attached to improving rural welfare, the allocation at first sight appears low and the proportion for current expenditures high. However, agriculture's proposed share has remained the same as the real- ized outcome in the Fifth Plan and proposed expenditures are more than doubled. Given the sector's implementation constraints, the allocation is reasonable, although the rapid increase in recurrent expenditures is of concern. The Government is well aware of this problem and is seeking ways of ensuring that beneficiaries (e.g. of irrigation schemes and feeder roads) maintain facilities at their own expense. 3.17 Agricultural Objectives and Strategies. The Sixth Plan objectives are similar to those of the Fifth, emphasizing environment conservation, increasing self-sufficiency in staple foods, and improved productivity through scientific management and new technologies. To achieve these objectives, a three-fold development strategy is proposed: (i) area-based programs which focus effort in regions of good potential; (ii) services and incentives to support and sustain agricultural development through both national projects and the general dzongkhag programs; arid (iii) improved planning, manpower development and implementation capabilities. 3.18 As in the previous plan, the emphasis is on intensification and higher productivity rather than extension of agriculture and livestock into new areas. Although scarcity of suitable land for settlement may seem at first sight surprising, it has proved difficult to identify such land in the past and, if it did exist, there would probably be more evidence of spontaneous encroachment. A more rapid alienation of both Government and monastery land could be envisaged as well as the allocation of grazing land to individual farmers (para. 3.25). Land reform would probably be of less significance, although revision to tenancy legislation and adjustment of the ceiling on land holding size to reflect productivity more adequately could be considered. 3.19 A key constraint to the development of both irrigated and rainfed farming is the lack of appropriate high yielding technologies that are adapted to the variability and complexity of Bhutan' s environment. Despite the dangers of fragmentation (para 3.23), the integrated area approach supported by applied agricultural research programs with expert assistance (IRRI, ICAR, CIMMYT, CIAT) appears an appropriate strategy that has a chance of dealing with the country's complexities. It must, however, be combined with a much strengthened central policy and land use planning capability to guard against excessive fragmentation (para 4.14). 3.20 A further pervasive constraint is accessibility and the costs of serving small isolated communities, which affects the provision of serv- ices, input supply, marketing and the whole range of related activities. -36- In general, the Plan resists the temptation to propose major new interven- tions and subsidies. The private sector is to be encouraged within the framework of competitive market forces and this is realistic given the open border with India and the dangers of promoting uneconomic activities and of involving Government agencies in risky market ventures. Neverthe- less, some continued Government role in input supply and related services is inevitable given the dispersed rural population and the wish to integrate them within the modern economy. 3.21 Unlike the Fifth Plan, no production targets are set and the objective of "self-sufficiency in foodgrain" is restated as "increasing self-sufficiency". This is realistic since self-sufficiency in rice is neither a viable, nor necessarily a desirable objective over the next five years. Rice may be the preferred food, and self-sufficiency an under- standable objective, but its production costs are high, it makes heavy demands on irrigation water, and irrigated cash crops have potentially much higher returns. Despite consumer preference, it would seem sensible to promote consumption of other basic foods, notably maize and potatoes,l/ and envisage some diversification of irrigated agriculture in the long-term. Initially, this would result from intensification of rice-based cropping systems, but ultimately rice itself--though remaining the dominant irrigated crop--could in part be replaced. Even if rice imports continue, this appears consistent with Bhutan's comparative advantage and, if combined with export of high value food crops, could still enable the Govetnment to aim for overall balance in food production. 3.22 Area-based Development Program (ADPs). Six ADPs have been included in the Plan, covering about 25 percent of all arable land, 2/ and a seventh (for Lhuntsi-Mongar) has been proposed. Except for the High Altitude ADP (which focuses on animal husbandry), all give emphasis to 1/ Already potatoes are entering the local diet to a surprising extent and inclusion of locally-procured maize in the World Food Program ration for school children--in partial replacement of imported bulgar wheat--is being planned. The latter should help develop consumer demand for maize and provide a short term marketing outlet for maize producers. It should therefore be strongly supported and perhaps extended (e.g. to potatoes) with the aim of reducing the share of rice in the diet. 2/ Two are on-going (Tashigang/Mongar supported by IFAD and Chirang by ADB) and four are expected to receive donor approval once preparation activities are complete (Punakha/Wangdi by IFAD, Paro Valley by Japan, Gaylegphug by India and High Altitude--35 blocks (gewogs) in Bhumthang, Tongsa and Wangdiphodrang--by Switzerland). -37- irrigation and land of relatively high potential. Each includes com- ponents on land use planning, construction/rehabilitation of irrigation and feeder roads, development of relevant technologies, extension and animal health services, input supply, mechanization, marketing and processing, and project management and monitoring. Support from central programs will emphasize these areas in coordination with the ADPs. 3.23 Perhaps the main concerns relate to: Ci) the dangers of a frag- mented approach, and (ii) limited focus on rainfed agriculture. Area programs during the Fourth Plan suffered from staffing and implementation problems, and from a plethora of individualistic approaches. Some diver- sity in area development is called for, but Government needs to strengthen the central planning role to avoid the duplication and inconsistencies that can arise if each donor agency pursues its own separate way. In respect of rainfed agriculture, allocations are provided for innovative components such as catchment management and evaluation of perennials and other crops under high rainfall conditions. Nevertheless, irrigated agriculture gets most attention. In part this reflects a deliberate focus on areas of high potential, in part a lack of defined technologies for rainfed farming. While work by the Centre for Agricultural Research and Development (CARD) on rice-based cropping will be closely integrated into various ADPs (in particular Punakha/Wangdi), and a solid base has been established for introducing potato, there is no comparable base for maize-based systems. Discussions have begun with CIMMYT on maize and wheat and the Indian Council for Agricultural Research is to support research at Bhur under the Gaylegphug ADP, which would give direct access to the wealth of Indian knowledge and experience. Technical backing for an adaptive research program in rainfed farming--closely allied to suitable ADP(s)--should receive strong support, and be integrated with programs to stabilize rainfed farming (e.g., vegetative soil conservation measures and contour farming - para 4.11). The Tashigang-Mongar ADP appears to be most appropriate for a significant maize-based program though it may require some adaptation. 3.24 The pace at which new technologies can be introduced is also of concern, even on high potential land, since intensification is proving a slower process than expected. Imaginative suggestions for intensive cropping have been made for different agro-climatic conditions 1/ and initial work by CARD and others indicates potential for double cropping of 1/ See the Report by Acres International Limited op cit. -38- paddy,l/ fertilizer use combined with farmyard manure, line sowing for weed control and the use of selected weedicides, and intensive paddy/winter crop rotations (wheat, pulse, oilseed), possibly also with an early summer green mature.2/ Potato-based rotations also show promise. However, conditions vary widely even in the same valley, and labor and cash constraints remain. Preparation for the Punakha/Wangdi ADP emphasizes a gradual approach taking account of the complexities of the traditional economy. The Paro Valley ADP is more ambitious, with emphasis on infrastructure, mechanization and a pilot land consolidation program (including realignment of canals, etc.). Paro is an advanced valley where progess has been achieved in mechanizing simple operations (rotary weeders, pedal threshers, etc.). However, more complex equipment has been sold more slowly and there is a danger of attempting too much too fast. 3.25 The High Altitude ADP focuses on livestock (promotion of cross breeding of cattle, sterilization of unproductive cattle, yak, sheep and horse breeding programs, animal health care, and pasture and fodder development), but also provides for crop development, in particular the introduction of potato (also supported by Helvetas 3/). The ADP will test the proposed new pasture policy to establish individual land ownership so as to provide individual incentives for improving management, as well as promoting fodder trees and the introduction of fodder crops into irrigated and non-irrigated crop rotations. While these programs are important, they do not fully answer long-term fodder needs and consideration needs to be given to improving pastures in more extensive ways. Furthermore, there is no real alternative to direct culling of unproductive animals if num- bers are to be contained and productivity increased (Chapter IV). The Highland Livestock Development Project concentrates on areas of high potential, in particular dairy and processing development in 11 western gewogs and broad-based general livestock promotion and services in 14 eastern gewogs. Emphasis is placed, as in other ADPs, on evolving appropriate technologies and management procedures to provide the base for more effective general programs. Finally, the Integrated Fish Production Program, which has shown promising results in the southern dzongkhags, 1/ Through wet nurseries, improved timing of operations and shorter season varieties; CARD also has some highly promising ratoon crop trials. Though yields of the second crop are lower, ratooning short- ens the turn around time, avoids the high labor needed for land preparation and transplanting, and requires no land for nurseries. 2/ Center for Agricultural Research and Development: Annual Reports for 1984/85 and 1985/86. 3/ Finance for some of the proposed infrastructural components of the proposed project--notably feeder roads--has yet to be arranged. -39- uses effective technologies and is to be continued and expanded during the Sixth Plan period. 3.26 Services and Incentives. The general dzongkhag programs have distributed services widely and more equitably than before decentraliza- tion. Nevertheless they continue to suffer from weaknesses in quality and delivery performance, and targets can sometimes become an end in themsel- ves rather than a means to improving farmer welfare. The area-based programs are in part a recognition of this and aim to identify the par- ticular requirements of varied agro-economic regions of the country. Two other complementary steps are being considered to strengthen the delivery of general dzongkhag programs. First, up to ten development service centers are to be set up providing a range of agricultural and social services at one convenient location at the gewog level. Secondly, con- sideration is being given to divide the country into four administrative regions to provide direction and control over all development activities including such areas as irrigation, mechanization and pest control. 3.27 Development service centers have been implemented in many countries with mixed results. The concept has obvious attractions for Bhutan given the rugged terrain, low population density, great distances and limited private sector development. Nevertheless, these centers are capital intensive and there is a danger that their functions and respon- sibilities will overlap with those of the dzongkhag offices. Similarly, administrative regions have an obvious rationale. Effective supervision is not always possible from Thimphu: for instance, as the number of qualified irrigation engineers increases, there is an obvious argument for locating them in the field to supervise local works. Similar arguments apply to seed and input supply, mechanization, and pest control. Never- theless, such regional centers may affect the authority of the Dzongda and could be a mechanism for reducing popular participation in decision-making at the local level. These issues which clearly go well beyond the techni- cal needs of the agricultural sector are further discussed in the final chapter (paras 4.21-4.22). For the agricultural sector it may be preferable to test development service centers and technical devolution at the regional level initially within the area-based programs and only if successful to extend such approaches to the country as a whole. 3.28 The extension service has suffered from lack of expertise and ability to provide acceptable advice, and from a preoccupation with input supply. The clear shift in emphasis towards applied research is a neces- sary step towards evolving packages that are replicable and profitable to the farmer. CARD and BNPP have made an excellent start and will provide knowledge of increasing value. In the long-term CARD is to develop into an umbrella organization for all research, but in the short-to-medium term staff and other constraints will mean that activities by other agencies -40- (such as those by ICAR at Bhur farm, the BNPP and the proposed CIM- MYT-supported maize-based research program) will have to retain con- siderable autonomy. Similarly, involvement of the extension service in input supply can only be gradually reduced as private agents are estab- lished and the basis for an effective advisory service develops. 3.29 Other programs (e.g. the National Seed Program, fertilizer supply, mechanization based at Bondey Farm in Paro, the EEC-supported pest control program etc.) are all to a large extent dependent for success on the evolution of profitable packages since otherwise farmers will be unable to accept the risks associated with modern inputs. Subsidies can play a part in stimulating demand but the crucial element is profitability of the basic technologies. In some cases (e.g. subsidies for contour bunding, the high subsidies on expensive farm equipment) the rationale for the sub- sidies should be reassessed since they may reduce interest in alternative, potentially much cheaper and effective, approaches and may distort the decisions farmers take.1/ 3.30 In contrast to many such programs, the agricultural credit scheme managed by the Royal Monetary Authority has a relatively good record of recovery and has been successful in opening up opportunities for commer- cialization in the predominantly subsistence agriculture. An important element in this performance has been the close involvement of the dzong- khag administration. Coverage, however, is variable perhaps due to the differential effects of area based programs and the interest of the Dzongda. The proposal for a separate Development Bank should help con- solidate achievements to date but, as with other programs, the objective of meeting targets should not push the program beyond the capacity of farmers to adopt profitable practices. Provided it is expanded with adequate caution, agricultural credit should have an important role in the evolution of a commercial agriculture. 3.31 Planning and Manpower Development. Data inadequacies and trained manpower constraints are not unique to the agricultural sector. Neverthe- less they affect every facet of implementation, and their improvement forms a crucial part of the Sixth Plan strategy. Priorities include improving the data on basic resources and land use planning, regular production and trade statistics, data on agricultural technologies and markets, and information feedback on the impact of development activities. Meteorological and hydrological data are collected by a variety of organizations but are often incomplete or inadequate. Only very limited soils data are available and a soils laboratory is to be established at 1/ The subject is comprehensively reviewed in the ADB-financed report entitled, "Study of Incentives and Subsidies in Agricultural Sector in Bhutan" 1986. -41- Wangdiphodrong during the plan period. Regular production data are simply not available despite a Fifth Plan program to develop the Ministry of Agriculture's capacity in this field. Similarly, although trade statis- tics are collected by the Customs and Revenue Service, the open border results in incomplete coverage and a number of serious inconsistencies.l/ CARD and other agricultural research activities will go some way towards improving knowledge on agricultural technologies. Despite the priority being given to improving the data base, the Sixth Plan is not clear how the relevant activities of different departments are to be coordinated and there is a danger that ineffective partial solutions will be adopted. Consideration should therefore be given to establishing a fully fledged Statistical Organisation at the national level, with sufficient authority in relation to other departments, and full responsibility for developing a national data base. 3.32 Manpower development will inevitably be a long-term process. During the Sixth Plan, a Natural Resource Training Institute is to be established at Lobeysa and this should go some way towards rectifying the serious deficiencies that have affected basic in-country training programs for extension and other staff. Inevitably, however, programs will con- tinue to depend heavily on expatriate personnel. Greater care is needed to ensure that such personnel truly contribute to the Government's objec- tives. There is some evidence of too many short-term consultants with differing views and a lack of a full understanding of the context in which they are intervening. If greater emphasis is to be given to longer term consultants, the Government must also be more willing to terminate con- tracts of those who are unable to adapt to the local environment or to transfer their expertise to those with whom they work. Forestry 3.33 As in earlier plans, the strategy for the forestry sector in the Sixth Plan emphasizes the conservation of the environment, management and utilization of forests as a renewable rather than a straightforward revenue resource, development of the infrastructure and manpower required to manage and utilize forest resources efficiently, and increasing the participation of local people in protection of forests so as to avoid wasteful and damaging practices. The strategy is supported by the ongoing survey and demarcation of forests, the preparation of management plans for 1/ For instance preliminary trade information indicates that potato exports amounted to 12,400 tons in 1986 though other evidence suggests they were probably about 20,000 tons (UNCDF FAO Horticulture Produce Processing and Storage Project Final Report, June 1987). The inac- curacies in the case of oranges, grown mainLy along the border, are even greater - 1,030 tons compared to 15,500 tons. -42- identified areas, afforestation (including social and community forestry), construction of forest roads and buildings, initiation of forestry research and the establishment of a new Forest Training Institute. 3.34 The Sixth Plan provides a mixture of area-based programs and national programs designed to strengthen the Forestry Department. Since 1975, FAO and UNDP have been involved in a number of technical assistance programs related to varied activities in forest management, afforestation, logging and road construction, wood processing and marketing, and training and manpower development. A recently approved Forest Management and Conservation Project will continue this broad-based effort, with emphasis on the development of management techniques and procedures adapted to the varied conditions prevailing in different parts of the country. 3.35 A more intensive area-based program has been supported by the first IDA-assisted Forestry Project which has helped develop the Forestry Department's capacity for systematic planning, logging and reafforestation in a hardwood area. A second project is expected to be approved shortly which, building on the experience of the first project, will bring inten- sive development to softwood areas in Western Bhutan. The areas selected are those that have been affected by the bark beetle infestation and the project would address pest management, forest management, logging and reafforestation on a wider scale and at an accelerated pace. The rescue operations associated with the pest attack have forced the Government into a more rapid program than might otherwise have been adopted. This will be achieved by a higher degree of mechanization and commercialization of activities ranging from extraction to transportation and marketing. 3.36 These programs represent a reasonable step towards increased exploitation of the forest resource. Nevertheless, the Plan remains fairly cautious and gives insufficient emphasis to the need for a com- prehensive resource assessment to establish the pace at which exploitation could, or should, proceed in the longer-term. Greater urgency also needs to be given to complementary updating of legislation dictating access to the forests since there is evidence that this is over-restrictive and, for instance, has been a major contributing factor to the problems of some manufacturing units. D. MANUFACTURING AND MINING 3.37 Government strategy in manufacturing and mining is to base the development of the sector on Bhutan' s natural resources, particularly minerals, forests and agro-based products and on the large availability of power at low opportunity cost. The main mineral is limestone but Bhutan also has deposits of gypsum, marble, coal, and graphite. Given the limited entrepreneurial capacity in the country, the Government foresees all medium and large-scale projects being undertaken by itself with minority private sector participation wherever possible. The Sixth Plan, -43- unlike earlier plans, does make a strong pitch for assistance and incen- tives for private sector ownership and operation. It would, however, like these benefits to go to the largest possible number of nationals rather than to foreigners or to a few large entrepreneurs. To facilitate benefits of large projects accruing to large numbers of nationals, the Government favors the public issue of shares. Foreign investment is to be permitted only in selected agro-industry projects or projects that gener- ate foreign exchange and result in .a transfer of technology. Even under these cases, permission is to be granted on a case-by-case basis, foreign participation limited to 49 percent and phased out completely within ten years after commencing operations. 3.38 While encouraging private sector development, the Government intends to watch its development closely, partly through restrictions on foreign investment. The Government is to have a say in the location of the enterprise, in health and safety standards, in import licensing, technology choice and ecological considerations, and in product choice to ensure that firms do not produce products solely to take advantage of differences in the fiscal or trade protection regime vis-a-vis India. While regulations regarding matters such as these are not unusual, the effect which they will have on private sector initiative will depend on how they are implemented in practice. On the incentive side, the Govern- ment intends to set up industrial zones, give import protection on infant industry grounds "as a last resort", set up patent licensing, allow hard currency imports on a case-by-case basis, continue with its ban on trade unions, and hold subsidized courses for potential entrepreneurs. Again, the effectiveness of these measures depends on how they are implemented. 3.39 The increase in the share of Plan financing to the Department of Industries and Mines is very large. During the Fifth Plan, outlays on industries and mines accounted for 7.0 percent of the total, whereas in the Sixth Plan they account for 13.8 percent; their share of capital expenditures is even higher at 22.7 percent. If, as expected, some projects that are currently being studied for their feasibility are added, the shares will rise even more. However, most of the increase is due to just one large project, the Dungsum Cement Plant. Value added of industry and mining is projected to grow at 14.5 percent as compared to overall GDP growth of 7 percent. Of total revenue forecasts of Nu 2000 million during the Sixth Plan, the share from existing and new industrial enterprises is projected to be 35 percent. 3.40 The industry and mining sections of the Sixth Plan proposes a number of projects in varying states of preparation. Given the success in implementing the calcium carbide project and the accions taken to overcome problems in other projects (such as the existing cement plant, the Gedu wood processing plant and a plastic pipe processing plant) there is a clear promise that industry can make a substantial contribution to -44- the country's development. Likely areas of development in the Sixth Plan include: (a) the Dungsum cement plant; (b) mining based industries such as coal, graphite and gypsum; (c) product diversification of calcium carbide into other industrial products (acetylene black and steel desulfurization compounds); (d) forest industries such as plywood, particle board and furniture components; and (e) agro-industries such as food processing (potato, chilly, maize, soya milk) strawboard, distilling. 3.41 Over 70 percent of total Plan expenditure in this sector is for the Dungsum cement project. Located in eastern Bhutan, the plant would use readily available limestone and cheap power that would come from either a proposed new power plant (Kurichu) or through "wheeling" Chhukha power through the Indian national grid. The capacity of the plant is to be 1,500 tons/day; the plant would cost about $120 million of which about $3 million had been disbursed by late 1987. The cement would mainly be sold in India at a price that is still being negotiated 1/ but is likely to be substantially above the world price. The plant's production costs, however, are expected to be competitive at world prices and the Government is exploring the possibility of export to Nepal and Bangladesh, both net importers of cement, on hard currency terms. Even though a start has been made with the implementation of the project, financing is not yet fully finalized; the funds are likely to come mainly from the Government of India. 3.42 With the exception of the calcium carbide project and an addition to Bhutan Board Products, expenditures on individual projects proposed in the Sixth Plan are under Nu 25 million, in many cases because the projects still need study and will not be implemented or not implement,ad completely during the Sixth Plan Period (Table III.4). Some of these projects are likely to be begun during the Sixth Plan period if sufficient progress is made with the pre-feasibility and feasibility studies and with financing arrangements; if so, the amount of resources devoted to industry and mining would need to be increased. It is essential that the feasibility studies for industrial projects carefully assess all aspects of the 1/ The outcome depends on t., proportion of the output that will be sold at the so-called levy price and the proportion that will be sold on the Indian free market. -45- proposed operation - the site and the size of the project, the choice of technology, the availability of inputs, of ancillary infrastructure and of manpower, the market prospects, the financing requirements. Inadequate preparation carries the blame for some of the difficulties of the Gedu wood project, which, despite the abundance of forestry resources, suffered from insufficient supplies of logs. A more recent example is the other- wise successful calcium carbide project. Insufficient provisions were made to ensure adequate supplies of charcoal, one of the key inputs for carbide production, although again there should be no shortage of wood to be used for charcoal. As a result, charcoal or anthracite will initially have to be imported at relatively high cost and this will reduce the profitability of the operation. E. POWER 3.43 With the completion of Chhukha and related transmission lines, the western part of Bhutan is well served with power. The Government's objec- tive is to establish reliable sources of power for the rest of Bhutan. The Sixth Plan therefore aims at (i) constructing a medium-sized (60 MW) power plant in eastern Bhutan (Kurichu) which would supply commercial and residential power to that region as well as export power to India (about one-third of its power would be consumed by the Dungsum Cement plant); athough turning out more expensive than initially estimated, this project is expected to have a favorable rate of return; (ii) carrying out studies for another medium-sized power plant in central Bhutan to supply power for mineral based activites (copper mining, tungsten benefication), lift irrigation, and exports of power to India; (iii) extending transmission lines; and (iv) building mini hydropower plants in remote rural areas where it would be uneconomical to extend transmission lines from the grids. 3.44 Because of Bhutan's rugged terrain, the proposed power transmis- sion network is to follow the road system. This implies an east-west link followed by north-south links leading to India in each of the three regions. The western part of the transmission network is largely complete along the Thimphu-Phuntsholing corridor. A similar link in the eastern region would accompany the construction of the Kurichu project. The main reason for building additional power plants in the central and eastern regions rather than importing the power from India 1/ where energy is aready in short supply. Given the low cost of producing power in Bhutan rather than India, and as long ,as India stands ready to buy the power at a price that more than covers long-run marginal cost and donors are willing 1/ Since India is connected by a national grid, '-an could hook onto the grid and obtain power at the same price as paid by India for Chhukha power plus a "wheeling" charge. -46- to finance the projects on subsidized terms, it is in Bhutan's interest to build these power plants. Of course, the environmental aspects of these projects will have to be carefully evaluated before final approval of the projects. 3.45 Rural electrification has proceeded slowly. By the end of the Fifth Plan, some one hundred villages had been electrified. The Sixth Plan foresees supplying power to 10,000 rural consumers. In view of past slow progress in rural electrification this is an ambitious target. It is also a very expensive undertaking, since the estimated cost per household would be equivalent to about $1,700. The Government is also seriously considering the building of: solar-powered units which would have an average cost of about $800 per household. 1/ It is difficult to justify these levels of expenditure and Government subsidies especially since there would not be savings on fuelwood consumption for heating without additional expenditures on appliances. The Government may want to proceed cautiously and explore to what extent its goal of improving conditions in the rural areas can be attained through less costly alternatives. 3.46 In addition to hydroelectric power, Bhutan has a capacity of 10.5 MW in diesel power plants. The marginal costs of producing power from these plants is several multiples that of producing it from hydropower. However, in certain remote areas this is the cheapest way of providing power. The average price charged to consumers ranged between Nu .70 and Nu .90 KW; however, the Government reduced it to Nu .40 KW following the coming on-stream of Chhukha power. Further, the price was made uniform across reaions implying cross-subsidies. The lower price should also discourage the use of wood for energy and this would help soil conservation. Given cross-subsidization and the high costs of transmis- sion lines, however, lowering the price much below Nu .40 KW could jeop- ardize plans to expand the network. 3.47 As before, Sixth Plan allocations exclude expenditures on Chhukha which is expected to be completed in early 1988. Revenues from Chhukha alone are projected to increase government revenues by half and foreign exchange earnings from the project would reduce the huge trade deficit with India by about Nu 250 million or about 40 percent. Encouraged by the success of Chhukha in generating these revenues, the Government is seriously considering another similar project. If the project is accept- able from an environmental point of view and provided funding is available at concessional terms and India stands ready to buy the power at a rate that ensures an attractive financial return, the project is rational. Once completed, Bhutan could come close to balancing its current account with India, This project would be the next major hydro project in Bhutan and because of the nature of the terrain and river flow it is likely to 1/ Expenditures for these proposed solar plants are not presently in the Plan. -47- have an attractive rate of return. There are other larger and also attractive possibilities on other rivers. Projects exploiting these possibilities are likely to have a dominlant impact on economic and finan- cial development in the beginning of the next century. The Government will need to find suitable long-term donor assistance to help analyze the hydrology and geography of these project possibilities to arrive at a definite site selection and to lay the basis for detailed project studiy for the first of these major projects. F. PUBLIC WORKS, TELECOMMUNICATIONS AND TOURISM 3.48 Roads and Bridges. During the Sixth Plan, the Government envisages extension of the road network through each of the five major river valleys and establish road connections to major project sites such as the Dungsam cement project. The target is to carry out formation cutting on 268 km of road, base course formation on 395 km and blacktop- ping on 323 km. These distances include spillover from work started before the beginning of the Sixth Plan. The Plan furthermore envisages the establishment within PWD of a bridge construction unit capable of constructing permanent bridges and eventually replacing the existing semi-permanent bailey bridges. Three permanent bridges for motor traffic are to be completed during the Plan. In addition, 18 modular timber bridges are to be built for local traffic and 80 suspension bridges for foot and mule traffic. 3.49 To increase the scope for mechanization and achieve greater accountability, PWD intends to regroup its road construction activities in ten separate construction units with clearly defined responsibilities and a central workshop, which will contract with the construction units for the repair and maintenance of their road equipment. PWD will continue to build up its engineering and supervising staff and also intends to reduce its reliance on community labor and imported contract labor by estab- lishing a permanent indigenous work force. Private contractors, while welcomed in principle by the Government are as yet regarded financially and technically unable to carry out major road work on their own strength; PWD intends to help them by making its equipment available to them on a leasing basis. 3.50 These measvres are meant to enable PWD to gradually take respon- sibility for an increased part of the road building and maintenance program. At present, BRO is still responsible for the maintenance of 60 percent of the road network, but during the Plan period maintenance responsibility for roads in the central part of the country is to be transferred to the Bhutan Government, reducing BRO's maintenance respon- sibility to 25 percent of the road network. It is not fully clear, however, that the Government has fully prepared itself to take up an increased maintenance task. The emphasis in the Plan appears to be on -48- construction, not maintenance and while the budgetary allowance for main- tenance might be just adequate (an amount of Nu 20,000 per km per year seems to be implied) there may be underspending, as there has been in the past. Since climate and terrain in Bhutan are conducive to quick deterioration of inadequately maintained roads, this subject needs serious consideration. 3.51 Rural Water Supply, Sanitation and Housing. In line with the Plan's objective of improving living conditions in the rural areas, the Government intends to continue its push for the improvement of water supplies. Some 500 new schemes are to be constructed, while 300 schemes that show serious shortcomings are to be rehabilitated. At the end of the Plan 40 percent of the villages should have safe water supplies. In addition, the Government wants to introduce improved sanitation in 30 percent of rural residences; a start is being made with upgrading sanitary facilities in schools, basic health units, and other public facilities. Smokeless stoves are to be introduced in all villages at the end of the Plan. To achieve these targets, PWD is building up its administrative and technical staff, involving local administration in water supply construc- tion and maintenance and enlisting volunteer organizations to help (e.g. in the introduction of the smokeless stoves). 3.52 Still in the prototype stage, but potentially important, is a Government program to improve rural housing. Prototype houses exhibiting certain specific improvements in roofing, heating, insulation, sanitation, etc., are to be built in each district. Technical advice and subsidies would be made available to villagers desiring to build a house according to the new specifications or who would want to introduce some or all of the improvements in an existing house. The program is obviously demanding in terms of logistics, technical staff and financial costs. Although improvement of housing must rate high in terms of social priorities, a realistic approach will be needed. 3.53 Telecommunications. Effectiveness of Government administration requires substantial improvements in Bhutan's telecommunications sector. The strategic importance of developing this sector is even greater than in many other countries because of the difficulties of access to many parts of the country and the dispersion of the population. Existing facilities being antiquated and deficient in coverage, the Plan wants to make a significant start with modernizing the sector. Electronic telephone exchanges are to be installed in Thimphu, Phuntsholing and six other urban centers. Systems are to link the eastern, central and western regions and a beginning will be made with linking dzongkhag headquarters with gewogs. An international satellite earth station is to improve Thimphu's link with the outside world as is the doubling of Thimphu's telex connections from 20 to 40 lines. Broadcasting is to be improved by a 50 KW radio station in Thimphu replacing the present much weaker (5 KW) broadcasting capacity. -49- High priority is recommended fot' all these projects which should materially improve internal and external communications. 3.54 Tourism. Concerned about possible harm to the ecology and to the country's social fabric and cultural heritage, the Government intends to stay with its policy of slow development of tourism. The Plan has no provision for expansion of tourist facilities. Two or three small hotels are under consideration by the private sector and some overnight shelters are to be built along trekking routes. A new trekking route will be opened in the western region. Inauguration of the newly purchased jet plane should facilitate travel to Bhutan and would help reach the target of 5,000 tourists per year by the end of the Plan. 3.55 The trade-off of the present conservationist approach in terms of exchange earnings and employment creation foregone is heavy. Bhutan's natural setting and cultural heritage could undoubtedly attract a multiple of the present trickle of visitors. The main question is whether it is possible to construe a fresh approach to the sector which would allow more rapid development while avoiding the feared environmental and social and cultural damage. Further study of this matter appears to be a high priority. C. EDUCATION 3.56 Development of the education system is a fundamental requirement for overcoming Bhutan's pervasive trained manpower shortages. Pursuit of this goal itself is however hampered by administrative implementation capacity and staffing shortages of all kinds. Despite the crucial role of education in overall development, it is therefore not possible to recom- mend higher spending levels than those proposed in the Plan; in fact it will be difficult to implement the education sector of the Plan as proposed. In primary education the Sixth Plan aims at increasing enroll- ment by six percent annually (as compared to over ten percent annually during the Fifth Plan) while simultaneously improving the quality of primary education facilities, improving equity in the provision of serv- ices, and promoting a sense of community sharing of responsibilities between parents and Government. The aim is to establish some 25 new schools and to introduce the concept of extended classrooms in villages for the lower grades (pre-primary to grade III). These extended class- rooms will be provided by the community while teachers will be recruited and paid by the Government. These lower primary schools, which will have up to 150 pupils, will be clustered around deveLopment center schools, which will assume responsibility for the services provided by them and provide both boarding and places for grade III graduates. 3.57 Because of severe manpower shortages, particularly in the scien- tific and mathematics related professions, the Sixth Plan aims to increase secondary school enrollment to bring it more in keeping with manpower -50- demand projections. In the past, the Government, fearing the phenomenon of educated but unemployable youth, limited access to secondary education through the mechanism of the primary examination system. Trying to solve its manpower shortages, Government now aims to expand access and make it more equitable within the constraints of its manpower plan. To provide additional space for secondary enrollment, all primary grades will be phased out of high schools; also under consideration is the possibility of introducing grades XI and XII into some senior high schools. The teaching of mathematics and science are to be improved through the supply of better equipment, improvements in school buildings, and improved teacher train- ing. 3.58 In the case of higher education, the Plan aims at increasing enrollment at the degree level, introducing honors courses and diversify- ing academic programs, upgrading a traditional Buddhist education at the Rigney school to a degree college, and strengthening the basis for the establishment in the Seventh Plan of a university by sending potential faculty members for overseas study. Technical education is to be expanded by improving the training content at the existing technical institutes at Kharbandi, introducing a mechanical engineering diploma course, consider- ing the establishment of trade schools catering for rural crafts, and providing greater support for training programs run by various Government departments. This would make it more attractive for people to enroll in technical schools. 3.59 The distribution of expenditures between various categories seems largely rational. The heavy emphasis on improving access to quality primary education and significantly increasing the number of secondary school graduates is appropriate. The methods of achieving these objec- tives are generally efficient and reasonable. Earlier versions of the program were very ambitious. With the recent cutback in capital expendi- tures, the size of the program is probably appropriate given the administrative implementation capacity and the shortage of trained man- power. After adjusting for the shorter timne period, Sixth Plan expendi- tures on education are over twice their level in the Fifth Plan in nominal terms. While the Plan is implementable, since the bulk of the program is to be financed from external sources, an allowance must be made for the time needed to negotiate the various grants and soft loans. 3.61 Until recently, a weak aspect of the program has been the lack of attention given to increasing the supply of trained teachers. To overcome this deficiency, the Government recently upgraded the teacher stream within the civil service structure, raising salaries by much more than the sizeable increases given other civil servants. Early indications are that the supply response is better that expected. In addition, at the primary school level, the Government has negotiated an education project financed by IDA, the Swiss Government and UNICEF which will introduce an accelerated training program, maintain tight control over student-teacher -51- ratios, and properly deploy teachers. At the secondary school level, while the output of graduates is projected to increase rapidly, the problem of scarcity of adequately trained science and mathematics teachers has not been explicitly addressed in the Plan. Similarly, the issue of the means by which adult education is to be raised is not discussed in concrete terms. 3.62 The attention given to technical education in the Sixth Plan is to be welcomed but the amount is still inadequate. The two institutes at Deothang and Kharbandi are not working efficiently to capacity and the curriculum could be improved. Their high cost training facilities need to be more fully utilized before expansion into mechanical engineering is undertaken and before any new institutes are built. If run more effi- ciently both institutes could more nearly meet national needs. In general, the comparative cost of overseas versus in-country training should be evaluated carefully based on demand projections. There is a danger that the proposed university idea, which would require the teaching of several disciplines, would not be economically justifiable by the end of the Sixth Plan period. H. HEALTH 3.63 The Sixth Plan reflects the Primary Health Care (PHC) approach espoused in 1979, which seems appropriate for Bhutan. Provided staffing constraints are addressed more forcefully--by stepping up training efforts and improving incentives and career structures for health profession- als--considerable progress can be foreseen in areas that presently do have access to health facilities. The key issue then becomes the provision of infrastructure to underserved areas. In this respect, progress during the Plan is likely to be fairly slow. 3.64 The overall proportion of Plan expenditures (4.2 percent) devoted to health is about the same as in the Fifth Plan, implying a doubling of expenditures in nominal terms. While this allocation is probably adequate (with per capita health allocations quadrupling to $5 per annum in the first half of the 1980s), only a small part of it will be devoted to expansion of the health system since recurrent health expenditures are to increase from Nu 117 million or 57 percent of total health expenditures in the Fifth Plan, to Nu 338 million or 81 percent in the Sixth. The largest single component of the recurrent costs will be those associated with the hospital system (Nu 170 million, or 50 percent of Sixth Plan racurrent expenditures). This increase in recurrent expenditure relative to capital expenditure is to be expected in light of the expansion of health infrastructure under earlier Plans. Capital expenditures on health, however, are to decrease from Nu 89 million (which is likely to exceed Nu 100 million in actual expenditure) to Nu 80 million. Approximately ha,- of the reduced capital component of the Sixth Plan will be allocated to further expanding the hospital system, leaving only 9 percent of total -52- health allocations for the extension of the basic health network. Apart from the unresolved problems of staffing, operating and maintaining exist- ing hospitals, morbidity patterns and equity concerns are not best addressed by locking up such a considerable proportion of available capi- tal resourc*es in future hospital expansion. While the Government cor- rectly perceives the hospital program as part of its basic health network, it may still be advisable to concentrate on extending the basic health unit (BHU) network. 3.65 Another issue of much more than just sectoral concern is the limited attention in the Plan to population planning. Although Bhutan's rate of population growth is not yet very high (with estimates ranging between 2 percent and 2.3 percent nationally), the ongoing reduction in child mortality is bound to have an increasing impact on population growth unless counterbalanced by corresponding reductions in fertility. While Bhutan does not yet share the severe problems of landlessness of its neighbors, agricultural holdings are modest in size and even with success- ful intensification the land has little capacity to hold more people. The capacity of other sectors to create employment will for some time remain small relative to the large numbers employed in agriculture. If Bhutan is to mitigate future problems of landlessness and unemployment, it must plan ahead while there is still time. The logical approach to fertility control is to focus efforts on a carefully targeted mother-and-child health program which places ample stress on birth-spacing. The logical way to deliver such a program is through the BHU network. -53- Chapter 4: LONGER-TERM DEVELOPMENT ISSUES AND AID REQUIREMENTS A. CONSERVATION AND RESOURCE MANAGEMENT 1. Introduction 4.01 Through successive development plans, the Government has been conscious of the potential for ecological damage from exploitation of the nation's natural resources, in particular of its forests. Emphasis has, therefore, consistently been given to conservation and careful natural resources management. As a result, and in view of the stability of the traditional subsistence economy, Bhutan has so far avoided serious problems of land degradation, retaining its natural environment largely intact. Nevertheless, growing human (para 3.65) and animal populations 1/ and the process of development will inevitably place increasing long term pressure on the stability of the natural environment; this pressure already has adverse effects in accessible areas. 4.02 Increases in population cannot be easily absorbed in rural com- munities. Despite large uninhabited areas, Bhutan does not have extensive areas suitable for new settlement and past experience suggests that formal settlement is a difficult and expensive process. it is also clear that some Fifth Plan expectations were over-optimistic and that intensification l/ Cattle numbers have been rising by at least 4-5 percent per annum as a result of improved health care, and rising population and incomes. More than 90 percent of all families are estimated to own cattle and a major part of medium term finance under the agricultural credit scheme has been devoted to their purchase. Besides being an integral part of the agrarian economy, cattle are a symbol of wealth, one of the few investment opportunities available in the traditional subsistence economy and--when held in greater numbers--an insurance against loss. -54- of agriculture is a more complex problem than many initially thought.l/ In the short term, rising population may relieve labor constraints and increase output, but all too soon will be accompanied by land fragmenta- tion, spontaneous encroachment onto increasingly marginal lands and ultimately landlessness. It will also lead to increased pressure on neighboring forests as a source of firewood, timber and animal feed Already there is evidence that cattle must forage at ever increasing distances, leading to forest degradation and incipient erosion in the neighborhood of settlement. 4.03 It is no doubt possible to overstate these problems. They are long-term and can be moderated by a judicious mix of controls, incentives, and development programs. Nevertheless, long-term problems require long-term solutions. The Government is fully aware of the potential dangers and has clear objectives. What is important is that appropriate technologies are developed and applied in time to achieve these objectives and to enable Bhutan to avoid the more acute problems that affect some of her neighbors. 2. The Traditional Base 4.04 The stability of the traditional agricultural system arises from a complex inter-action between forest, livestock and agriculture. In essence, the forest mobilizes nutrients over extensive areas which are made available to the subsistence farmer as mulch, cattle feed, firewood and related products. The cattle accelerate the formation of mulch, provide nutrients for crops, are the principle source of draught power and supplement the diet through milk and other products. Without nutrient transfer from off-farm, soil fertility cannot be maintained and the inten- sity of subsistence cropping is at least in part a response to the rate at which this transfer takes place. 4.05 It is only recently that this integrated system 2/ has been recog- nized and much remains to be explained. The rate at which nutrients are 1/ This over-optimism was shared by an earlier Bank report: "Bhutan Development in a Himalayan Kingdom", Report No. 4307-BHU, April 1982, para 3.29. 2/ Among others, by the International Centre for Integrated Mountain Development (ICIMOD) based in Kathmandu, see T.B.S Mahat "Forestry-Farming Linkages in the Mountains", ICIMOD Occasional Paper No. 7, which argues that 3-6 ha of forest land is required to support each ha of crop land. The short description given here is very lar- gely based on preparatory work for the proposed IFAD III Area Develop- ment Project including informal discussions with the appraisal team. -55- transferred varies considerably depending on soils, climate and other factors but, by definition, most subsistence products remain on farm so that incremental nutrient requirements are probably not high. So long as the ratios between crop land, forest land and livestock populations remain in balance at the local level, and nutrients are retained on farm, this stability can be maintained. Once the balance is upset, through commer- cialization and the export of produce from the land or by increasing ratios of crop land and livestock to forest land, degradation sets in, eventually leading--if offsetting measures are not adopted--to falling crop yields and to the destruction of forest and farm land through erosion caused by changing run-off patterns, wind damage in de-forested areas, excessive cattle tracks and related effects. 3. Policies and Programs 4X06 Direct controls are clearly an important element in any long term solution. The nationalization of logging in 1979 pre-empted an unplanned acceleration of commercial forest exploitation which could have done major damage (for instance, the bark beetle infestation at least in part reflects previous poor management by private loggers, para 2.13). While safe extraction rates may in principle be much higher than present levels, the Government was undoubtedly right to slow the process down until forests were clearly demarcated and appropriate management practices could be evolved. Encroachment by the increasing population and their animals will no doubt continue, but the cautious policies adopted towards forest exploitation are a major safeguard against excessive pressures on the natural environment. 4.07 Policies to limit population growth are also of high importance. Acceleration in the rate of growth of population could be moderated through concerted family planning and related mother-and-child health programs and these need to be given higher priority. Government also needs to face up to the problem of the rising number of livestock. While imaginative approaches are being followed to encourage farmers to dispose of surplus animals, these are unlikely in themselves to be effective in stabilizing numbers given the factors that are leading to continued increase. Despite understandable reluctance, the Government will have to institute a program of direct destocking of unproductive animals if policies and programs designed to improve feed supplies. control animal diseases and increase productivity through cross-breeding etc., are not to be overwhelmed by rising numbers. 4.08 Direct controls to moderate the emergence of these problems are, however, only part of the solution. Where forest degradation has occurred, reafforestation is necessary but not usually sufficient to restore balance. Not only must it be combined with technologies which control erosion (see below) but where degradation arises out of imbalances in the local crop and livestock economy, measures must be taken to offset -56- the initial causes if the same pressures are not to reemerge. Either the ratio of crop land/livestock to forest land needs to be reduced (extremely difficult in the context of rising populations) or additional nutrients must be provided to support crops and livestock. This can be done by importing fertilizers, modifying crop rotations, introducing fast-growing fodder and mulch species, improving pasture lands, etc. Additional nutrient transfer can also occur if the efficiency of manure collection and mulch composting can be increased through stall feeding supported by new sources of animal feed. More efficient stoves and alternative build- ing materials can reduce direct demand for forest products. 4.09 Corrective measures will often involve changes in farming prac- tices and many of the benefits will be long term and common to communities rather than to individual farmers. It is important therefore to provide appropriate incentives to individual farmers to carry out their role. These need not necessarily be financial incentives (although these have a place) since they can distort economic decisions and are seldom sus- tainable over the long term or on a large scale. Redistribution of graz- ing land (to be tested in northern areas during the Sixth Plan) and allocation of individual rights to communal or forest land (e.g. once fodder trees are established as proposed under the IFAD III project) are worth considering. Commercialization of crop and livestock operations should encourage import of fertilizers and feeds reducing pressure on the neighboring forest. Stall feeding, besides facilitating collection of manure, may promote reluctance to journey ever-increasing distances into the forest. Increased availability of piped water is also important for reducing daily movements of cattle. Marketing outlets (auction yards, processing facilities) should encourage concentration of effort on high productivity enterprises on-farm and promote the disposal of surplus unproductive animals. 4.10 To complete corrective action, it will also be necessary to halt erosion directly, both on degraded land and on arable land susceptible to erosion. Pilot reafforestation work has been an important component of on-going forest programs (e.g. the IDA-supported Forestry I and proposed Forestry II projects) but remains small scale. Furthermore, trees alone do not necessarily control erosion once ground cover has been lost: innovative programs combining replanting with new methods of land forma- tion and vegetative control of soil erosion need to be explored.l/ They will need to be combined with limited (because of cost) but high priority investments, e.g. to stabilize drainage ways and miniiwize the adverse effects of road and other construction. i/ See the booklet: "Wasteland Reafforestation", the Wastelands Develop- ment Board/World Bank, New Delhi, August 1987. -57- 4.11 On arable land, traditional methods of terracing are an effective means of controlling erosion but they are expensive and labor intensive (both in construction and maintenance) and development over centuries cannot be replicated in a few years in response--in historic terms--to a sudden spu-t in population. Few farmers are willing to construct such terraces for rainfed farming which therefore creates the major hazards. Contour bunding has often proved ineffective,l/ and could be supplemented, or replaced, by vegetative techniques (a continuous hedge of an appropriate bush or grass planted along the contour 2/) which conserve soil and water in situ, reduce run-off and concentration of flow, and require little long-term maintenance. Combined with contour farming, pilot programs in India are having an encouraging impact on rainfed crop yields while at the same time stabilizing the local environment. Shifting cultivation ('tsheri') can also do damage auid Government policy aims to see it abolished. However, there has been little progress and many con- sider that permanent rainfed farming--unless protected--causes more acute problems than tsheri which seldom exposes soil more than one year in five and does so in ways which are less vulnerable to erosion than in con- tinuously cropped areas. 4.12 Given the complexity of the inter-actions involved and the limited knowledge available, interventions will need to be carefully monitored and assessed. There are many examples from elsewhere of hasty solutions applied on a large scale with results very different from those expected. This undoubtedly argues for caution and careful phasing. However, there 1/ An interesting innovation is being implemented in the context of the ADB-supported Chirang Hill Irrigation Project (CHIP) which combines rehabilitation of irrigation schemes with catchment management includ- ing steep backslope terracing under which fill from a ditch is thrown up slope rather than down slope as in most traditional approaches. While more expensive than vegetative systems of control, this has the similar objective of building up terraces naturally over the long term in contrast to traditional works which tend to erode if they are not (expensively) maintained. 2/ Vetiver Grass (Vetiveria zizanioides) is one such grass. It has a deep, strong, fibrous root system which quickly binds the soil along the contour, is practically sterile and therefore does not become a weed once established, is generally unpalatable to livestock, is perennial lasting for years without maintenance, can withstand droughts, fires, inundations, etc and grows under widely differing conditions and whose roots and leaves have resistance to most pests and diseases making the leaves a useful mulch e.g. for fruit trees. See the booklet "Vetiver Grass: A Method of Vegetative Soil and Mois- ture Conservation" World Bank, New Delhi Office, February 1987. -58- is also the danger that the inexorable rise in human and animal popula- tions, together with an acceleration in the process of development, will overwhelm the pace at which counter-measures can be introduced. Controls on forest exploitation, family planning, destocking etc. can all help to buy time, but it is important that the solutions evolved prove widely applicable both in terms of management and cost. This requires openness to innovative ideas. For instance, a major attraction of vegetative soil conservation is that, provided planting material is available, it is much cheaper than traditional methods and requires little long-term main- tenance. Another example could be new approaches to low cost, broad acre pasture development, given the slow pace to date of pasture improvememt programs that treat pasture as another crop. 4. Planning and Institutions 4.13 The above has briefly discussed the various sub-sectors together to illustrate how they inter-relate. In detail there is little new. Individual agencies are well aware of the inadequacies of the data base and of the need for careful planning if Government's objectives are to be achieved. There is a clear shift of emphasis in the Sixth Plan towards seeking an understanding of the systems involved and to evolving manage- ment policies and procedures.l/ Nonetheless, there is a danger that efforts will be dissipated, that some inter-actions will be missed and that big issues (e.g. too many animals) will go by default as detailed studies on significant but lesser problems are undertaken. There is a further danger of uncoordinated and sometimes inconsistent programs and policies. In part this is a problem of insufficient coordination between donors and the Government, 2/ in part it is due to the inevitable inde- pendence--even in a small country like Bhutan--of individual agencies with particular mandates. 4.14 There is no alternative to clear policies and direction by the Government, complemented by a greater involvement of villagers in managing and protecting forests in their neighborhood. Central direction would be best served through strengthening the role of the Ministry of Agriculture, supported by a comprehensive and practical land use planning exercise. i/ Examples include area-based agricultural development programs, the ADB-assisted Highland Livestock Development Project and the FAO-assisted Forest Management and Conservation Project. 2/ The fact that a problem is important does not mean that every program should seek a solution nor that every donor should be involved 'Integrated Rural Development' has a long history of conflicting signals and confused effects by well meaning agencies who fail to take account of the experience of others. -59- The present weak links between the Ministry and its constituent depart- ments and other agencies are a matter for concern 11 but the establishment of a separate land use agency, as has been proposed, might simply add to the plethora of different agencies and activities. At the local level, farmers must be made more fully aware of the need for preservation. One approach being tested in India is to give village "conservation" coopera- tives a direct stake in preservation through a share in Government revenues from forest land. Another approach is the Nepal community forestry model, in which communities are given legal entitlement to Government forests in return for agreement to adopt certain management practices. Whether these approaches are practical in Bhutan, and how these should be combined with individual incentives on the one hand and direct controls on the other, needs to be assessed in the light of pilot programs. 4.15 Whatever institutional measures are adopted, attention clearly needs to be given to unifying data collection and planning activities. Without an adequate data base, planning is impossible. First priority must be given to this. Access to aerial photography at an appropriate scale and to modern remote sensing technologies is a necessary first step for land use planning. Weaknesses in soils, hydrology, agricultural production and other data all need rectification. Once a coherent program of data collection and interpretation is established, systematic physical and resource-based planning is necessary to evolve a consistent policy framework and identify areas for particular purposes (new settlement, forest reservation, grazing lands, etc.). Technologies will evolve from the detailed programs and experience of individual agencies; however, each needs to be aware of the activities of others and where there is overlap, consistency or the reasons for inconsistency must be established. 4.16 Too much direction from above itself involves dangers and the enormous variability in conditions in Bhutan argues against standardized solutions. The programs suggested for the Sixth Plan, however, provide a reasonable basis for analyzing this variability. What is also required is a planning framework to ensure that these programs lead to consistent, replicable and effective technical solutions, evolved in time, so that the Government's clearly stated objectives can in practice be achieved. 1/ One proposal that could make a significant impact would be to bring the Ministry of Agriculture and its constituent departments (Agricul- ture and Irrigation, Animal Husbandry and Forestry) together in one building in Thimphu. -60- B. INSTITUTIONAL ISSUES 1. Decentralization 4.17 The decentralization process characterizing the Fifth Plan period was initiated in 1979/80. The reasons for His Majesty's decision to devolve considerable planning and implementation responsibility to the dzongkhags are set out in a 1979 Planning Commission Paper 1/ and bear repeating. As a result of the growth in centrally-planned, govern- ment-executed development activities over the first four Plans, tradi- tional community self-sufficiency was in decline; the rural population had become "alarmingly dependent on the Government," with the two parties interrelating as "complacent recipient" and "gratuitous donor." Develop- ment was taking place by central fiat; local initiative and local resour- ces were not being tapped, while at the same time unfocused and ultimately unsustainable local aspirations were being encouraged. At the same time, the traditional unit of Government in the countryside, the dzonkhag administration, had been bypassed in the development process and was dealing only with civil matters such as tax collection and the maintenance of law and order. Underutilization of the dzonkhag apparatus had led to excessive pressure on central Government agencies and to an inevitable lack of attention to the particular requirements of areas remote from the capital. Decentralization was designed to address these issues; fully 40 percent of Fifth Plan outlays (if one excludes the large commercial and industrial projects in the Plan) were to be managed by the Dzonkhags and to be channeled into schemes planned cooperatively by the Dzonkhag administration and its populace, and executed by means of voluntary labor contributions from local beneficiaries. In many respects decentralization represented a risky strategy; the capacity of the Government machinery to adjust to a massive administrative shift in staff resources and to a new development orientation was unpredictable, as was the extent to which the public would respond to the new planning process and to the requirements for voluntary labor it embodied. 4.18 By 1985, Government staff coming under direct administrative control of the dzongkhag numbered 3270, or 25 percent of the estab- lishment, as opposed to 360 in 1981. Expenditure targets in the first three years of decentralization were largely met at the dzonkhag level, and the Government's 1984 mid-term review of the Fifth Plan rightly con- cluded at that point that a satisfactory start had been made. This judge- ment is still valid. The last seven years have witnessed significant labor mobilization under the shabtogwola (beneficiary self help) system. With the costs of constructing a primary school or basic health unit cut 1/ "Decentralization for Effective Dzongkhag Administration and Develop- ment," Planning Commission, 1979. -61- by up to 50 percent thereby, government budgetary funds can be used to accomplish more, and the pace of local development has accelerated in consequence. Villagers have now become better aware of how the Government can or cannot assist them, and have become more moderate and more dis- criminating in their demands. 4.19 On the other hand, the first seven years of decentralization have been marked by numerous teething problems, and an atmosphere of crisis management has often prevailed. Many dzongkhag staff have still not received the orientation or technical training originally seen to be vital for them. Dzonkhag administrators have functioned in the absence of clear directions and procedures, and the division of responsibility between them and the line agencies has often been unclear; only in the past two years has a concerted attempt been made to deal with these issues. To this lack of preparedness was added the sheer scarcity of skilled manpower, and the fact that the best staff tend to congregate in Thimphu; critical shortages in planning, engineering and accounting skills quickly emerged. As a result of these factors, there have been many examples of deficient plan- ning and poor program execution. An overemphasis on the attainment of physical targets, coupled with inadequate technical supervision, has resulted in unjustifiable activities and in poor quality work--such that during 1984 dzongkhag budgets were cut back by seven percent and a con- siderable number of construction projects curtailed; the ambitious feeder road program was largely abandoned at that point. Financial flows from Thimphu to the Dzongkhags have been erratic, and have often not taken account of the seasonal availability of labor. Financial management at the dzongkhag level has on occasion been marked by laxity and even by unauthorized diversions of funds, a phenomenon which the Government has had to deal with by transferring or even imprisoning senior staff. Monitoring of project impact at field level has been poor, with dzongkhag staff paradoxically overburdened by reporting requirements from Thimphu. Predictably perhaps, the quantities of village labor required have fre- quently exceeded what villagers are willing to supply. While the provi- sion of voluntary labor for local schemes, shabtogwola, has generally been satisfactory, chunidom inputs (labor for national projects) have suffered in consequence. In 1983, for instance, 13 of the 18 Dzongkhags provided less than 50 percent of the chunidom that was foreseen, with several providing none at all - a situation that persisted throughout the Plan period. This may have as much to do with an inability to utilize the labor as with the ability to mobilize it. 4.20 The Bhutanese are their own harshest critics; the Sixth Plan documents contain the following statement: "most of the problems (of decentralization) are traceable to serious shortcomings of the Government system. Thus far we have implemented five development Plans and have played the game of planning and implementation for a quarter of a century. We should by now be rich in experience and possess the necessary skills and tools to fine-tune planning and implementation... as we stand today we -62- are not anywhere near to that... we do not research and learn, and conse- quently continue repeating the same mistakes." A number of important steps have, however, been taken to address the problems described. Cer- tain programs have been recentralized, in-field scrutiny of potential projects has been intensified, fiscal control by Thimphu has been tightened and the chunidom system has been replaced by a less onerous arrangement. The overriding constraint remains the shortage of skilled manpower at all levels of Government and society at large. Apart from launching a comprehensive (Nu 365m, or US$28m) human resources development program, the Government has taken care to tailor the new dzongkhag plans to proven implementation capacity. Some 960 of 1160 Fifth Plan rural water supply schemes were completed; the Sixth Plan provides for 905. One hundred and twenty-five of 165 planned suspension bridges and 22 of 40 planned basic health units were constructed under the Fifth Plan; the Sixth provides for a more realistic 80 suspension bridges and 21 basic health units. 4.21 Considerable thought has also gone into deciding how to develop the decentralization process further. The Sixth Plan has ae one of its nine goals the "consolidation and improvement of development services." One of the approaches under consideration to achieve this would be the construction of multi-purpose development service centers (DSCs) which would cluster schools, basic health units, and agricultural services in one strategic location in each gewog. A 1986 consultants' report envisages a construction-cum-equipment program of some Nu 800m (US$61m) during the Sixth and Seventh Plan periods. This would have represented a very costly approach (at about $340,000 per center) partly due to the high costs attributable to staff housing - Nu 360 million (US$28 million) for 2230 houses, excluding furnishings. With the recent Government decision to incorporate housing allowances in the salary structure, the program is slightly more manageable. However, as pointed out earlier (para 3.24), experiernce with such centers elsewhere has been mixed, and there is a real danger that their contribution to rural development will be disappointing. The Sixth Plan acknowledges the "huge cost" of establishing DSCs and proposes to proceed cautiously; only ten DSCs would be established during the Plain period. This is a prudent approach, and should allow for a thorough evaluation of the DSC concept before committing too much to it. 4.22 Another concept under discussion is to create in the near future four administrative regions, or zones. In one proposal, these regions would take or, the decentralized planning function, leaving the dzongkhags under their jurisdiction to focus on project implementation; regional development councils would be formed, and technicians would be pooled at the regional center. It is argued that regionalization would permit a more efficient use of scarce skills and a better integration of develop- ment activities on the basis of natural watersheds. Also the Center's capacity to service the dzongkhag is limited. One cannot but caution against such a reorganization, however, coming so soon on the heels of the -63- original decentralization initiative. The high-level administrative attention needed to make the implementation of dzongkhag-level programs truly effective would be diverted for an indeterminate period, incremental construction and staffing requirements would almost certainly be sig- nificant, and the role of Thimphu would probably not be diminished appreciably--thus creating an additional and doubtless confusing administrative tier. Furthermore, "he involvement of local people in decision-making would decrease, and the decentralization process in an important sense would be reversed; nor is it clear that villages in many dzongkhags would experience better access to their regional capital than they now do to Thimphu. A seemingly preferable alternative would be to locate cells of departmental planners, financial and accounting staff and scarce technical experts (e.g. soil surveyors, and specialized engineers) at regional locations, and to create in those locations pools of equipment and equipment-servicing facilities, while keeping the current divisionl of responsibilities between Thimphu and the dzongkhags intact. It should also be remembered that the priority given in the Plan to telecommunica- tion and transport development should lead to greatly improved contacts between Thimphu and the dzongkhags. This would greatly reduce the rationale for regionalization. Realizing the potential problems with the scheme, the Government has recently decided to implemeht the zonal scheme in only one zone on an experimental basis. 2. Public Administration and the Civil Service 4.23 The philosophy underlying the development of Bhutan's civil serv- ice policies is coherent, and well focused. The first of the Sixth Plan's nine objectives is to strengthen government administration; the Plan states unambiguously that "the security and sovereignty of the country depend on a strong and efficient Government." Senior officials believe that popular attention in a country blessed by an absence of internal crises will tend to focus on the economic development process, and on the Government's capacity to deliver a credible program. If civil servants are consistently perceived to be inadequate to their tasks, it is argued, a rift will gradually open up between growing popular aspirations and belief in the Government's capacity to satisfy them--the longer-term political consequences of which could be serious in a country where geopolitical realities require the maintenance of a high level of internal stability. For this reason, the shortcomings of the civil service during the early years of decentralization, although predictable, have been viewed with great concern and handled in some instances with severe penal- ties. Equally, Bhutan's decision-makers perceive that the persistence of trained manpower shortages and recurrent budgetary constraints should dictate that growth in the size of the civil service be carefully control- led for the foreseeable future. All of these perceptions have coalesced into the ideal of a highly-motivated, relatively small and skill-intensive bureaucracy, one that is adequately compensated and is subject to meaning- ful rewards and punishment. In reality, however, the manpower demands -64- exacted by an increasingly ambitious development program have led to the growth of the civil service at a rate exceeding the supply of adequately trained personnel, and this has precipitated skill-mix and personnel management problems of the type described below. 4.24 As seen earlier (Chapter III), the Sixth Plan represents a sixfold nominal increase in planned expenditures over the Fourth Plan, while the decentralization process has simultaneously intensified the demand for technical and administrative skills. Between 1977 and 1987 the civil service establishment doubled, from 6,550 to 13,250--and yet Government manpower shortages of all types still represent the key factor constrain- ing the speed of development. In tandem with this growth, the Government has committed itself to the use of retrenchment programs in pursuit of a more favorable skill-mix. While several such programs have been connected to the privatization or commercialization of public enterprises (such as the national trucking and bus transport concerns), others in the past ten years have been aimed at the core of the civil service and have been designed to enhance its skill mix and to reduce both proportions and numbers of non-technical and support staff. The current round in this process had by November 1987 resulted in an establishment reduction of over 2,500 staff; the stated objective is to retrench a gross total of about 3,200, or almost 25 percent of establishment as of January 1, 1987. It is intended that recruitment of new staff during the Plan largely to limited to bonafide technical staff: experience from previous rounds, however, suggests that a significant proportion of those now leaving the service will in fact be re-employed. The Royal Civil Service Commission estimates that the establishment will need to number some 16,000 by the end of the Plan period (up from a post-retrenchment target of 10,000). Many of the new staff are expected to fill positions vacated by non-nationals, including staff in public enterprises. 4.25 The Government's willingness to use retrenchment is commendable, and demonstrates its political self-confidence. Nevertheless, retrench- ments on this scale and of this frequency are less of a solution to struc- tural problems in the civil service than they are a symptom of a demand for skills which constantly outraces the capacity of the existing manpower pool to provide them. The establishment target for the Sixth Plan are such that the cycles of pro-tem recruitment and retrenchment will need to continue. The danger of this approach to civil service development is that it is highiy disruptive, and that the climate of prolonged profes- sional uncertainty thus created could well erode the morale of the serv- ice. Indeed, implementation of the 1987 retrenchment program has been perceived in a number of quarters as having a somewhat random character, and this has led to some dissatisfaction. An additional source of uncer- tainty is the considerable amount of internal redeployment which is resulting from attempts to match scarce existing skills to specific evolv- ing program needs. -65- 4.26 It is clear that the civil service faces a considerable challenge during the Plan period. It is being asked to deliver a larger Drogram of improved quality while in the midst of an open-ended process of reor- ganization and expansion. Nonetheless, the service has evident strengths--clear overall manpower objectives, an effective decentralized administrative structure, evident professional commitment and solid popular support. The basic ministerial and departmental structure created during the last Plan (with the reorganization of the former Ministry of Development into four line development ministries) is also sound. In addition, serious attention is currently being paid to critical incentive and career structure issues. 4.27 Most important in this regard, the major retrenchment of 1987 has been carried out in conjunction with the deliberations of a Pay Revision Committee. By early 1988, pay comparability with the Indian Government declined considerably since the present pay structure was established in 1974, as did the local purchasing power of public sector salaries. In keeping with the belief that civil servants must be properly renumerated if high professional standards are to be demanded, the Government has recently granted a wage increase that increases pay and allowances by an average of about 50%, with enhancements in the middle grades of the civil service somewhat higher than this.l/ The total impact on the budget is expected to be about Rs 500 million over the Sixth Plan period in constant 87/88 rupees. Given the Government surplus in its account with the RMA following increases in Chhukha revenues, this is financiable. The Govern- ment's expressed intention is to continue linking increases in staff numbers, or in benefits, to a rigorous appreciation of their budgetary implications. This will need to be borne carefully in mind as the Plan proceeds, given current civil service expansion plans. 4.28 The Government is also in the process of developing the underpin- nings necessary to a performance-oriented civil service--position descrip- tions, clear selection and evaluation procedures, a formalized system of rewards arid punishments and coherent career structures. Since its crea- tion in 1982, the Royal Civil Service Commission has been working on a program which will, over time, attelnpt to deal with such issues. The results of a comprehensive cadrization (career streaming) exercise, for instance, are currently under discussion. It will be important, when finalizing this exercise, to ensure that adequate emphasis is given to the establishment of meaningful technical and administrative careers at the dzong-( ag level, and to the career aspirations of technical staff in general (who should, given the current emphasis on technical skills, be 1/ The exact amourt is difficult to calculate since the wage increase was accompanied by the elimination of allowances for housing, furnishings and transportation. -66- permitted to operate as technicians at a senior level; nor should they be disbarred from holding the most senior administrative positions in Govern- ment). In addition, it will be necessary for the Government to address the question of promotion prospects in a bureaucracy characterized 'by the young age (and hence, presumably, expected long tenure) of many of its senior officials. C. ECONOMIC PROSPECTS AND THE NEED FOR EXTERNAL ASSISTANCE 4.29 As this report indicates, Bhutan has favorable long-teem develop- ment potential and moderately good medium-term growth prospects. During 1986 and 1987, growth of GDP has been unusually high, 9 and 14 percent respectively, because of the upsurge in electricity generation and a sizeable increase in forestry output. In 1988, growth may still be high for the same reasons, but more moderate growth rates of perhaps 4-5 per- cent appear indicated for the years to follow--mainly because agriculture, the mainstay of the productive sectors, is yet to develop momentum, while several promising industrial and mining ventures will still be under construction. 4.30 A crucial factor in the implementation of the Sixth Plan is the role of external assistance. Despite the expectation of continued favorable domestic revenue growth, domestic savings, if any, are likely to be negligible. In fact domestic revenues have constantly fallen short of total current expenditures, (see Table I.2) and in view of Bhutan's early stage of development the Government may continue to find it dif- ficult to reach its goal of closing the current expenditure gap. Invest- ments in the Sixth Plan will therefore have to be covered fully by the proceeds of foreign aid. 4.31 Judging from past experience, the prospects for Bhutan receiving such a level of foreign assistance are favorable. Bhutan's development has consistently benefited from large capital inflows consisting of project-related funds and budgetary support. Most of the funds have come as grants and the remainder have been loans provided at highly conces- sional terms. The bulk of the funds have come from the Government of India, which has been the main supporter of Bhutan's development from earlier days. As a result of this relationship with India, Bhutan has been able to run large current account deficits with India as well as large public sector deficits without facing the usual negative consequen- ces of doing so. On the contrary, Bhutan has enjoyed price and exchange rate stability similar to that in India while its holdings of rupee reser- ves have continued to grow to comfortable levels (eight months of imports from India). In addition to successfully exploiting a mutually beneficial relationship with India, Bhutan has been receiving an increasing volume of bilateral and multilateral hard currency assistance since 1980, mainly in the form of grants. Disbursements of aid during the Fifth Plan are sum- marized in the following table (Table IV.1). -67- Table IV.1: Aid Disbursements During the Fifth Plan (million of dollars) 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 Total India 61 71 83 69 62 78 424 Loans - - 41 26 18 15 100 Grants 61 71 42 43 44 63 324 Multilateral & Other Bilateral Donors 12 11 22 14 22 30 111 Loans - 1 1 1 8 12 23 Grants 12 10 21 13 14 17 87 Total Aid 73 82 105 83 84 108 535 Aid as % of GDP 49.0 49.8 58.8 46.8 45.2 50.8 50.1 Source: Stat. App. Table 3.1. 4.32 The above table shows aid inflows during the Fifth Plan averaging $89 million per year equivalent to about 50 percent of GDP. Variations in the annual disbursement level were strongly influenced by progress of the Chhukha project, which by itself accounted for some 30 percent of the aggregate inflow. The table also shows the preponderance of aid from India which accounted for 80 percent of the total, three quarters of it on a grant basis. Aid from other donors (hard-currency aid) has been rising in importance; in the last two years of the Plan it amounted to 27 percent of the total aid inflow. Some 80 percent of this hard-currency aid has come in grant form and the remainder as highly concessional loans. 4.33 Hard-currency loans started with the Fifth Plan. The amount outstanding at the end of the Plan amounted to $95.5 million, contributed by IFAD ($12.7 million), Kuwait Fund ($27.8 million), ADB ($32.5 million) and IDA ($22.5 million) (Statistical Appendix Table 4.3). Of this total amount $73.0 million still remained undisbursed at the end of the Fifth Plan. -68- +.34 In order to finance of the Sixth Plan the Government expects a sizeable increase in the mobilization of domestic resources--from 22.5 percent to 34.7 percent of the Plan. In view of the revenue to be con- tributed by the Chhukha plant, which will boost domestic revenue by some 50 percent, and an otherwise favorable revenue performance, such a shift in the financing pattern should be feasible. As far as the origin of foreign aid is concerned, the Government also expects a sizeable shift, with a relatively much more important role for aid from non-Indian sour- ces. The following figures summarize the expected changes in the financ- ing pattern. Much of tne financing gap comprises projects being nego- tiated with the Indian Government and could be filled by Indian capital inflows. Table IV.2: Financing Patterns of the Fifth and Sixth Plans Fifth Plan Sixth Plan Domestic Revenue/Borrowing 22.5% 34.7% Government of India 58.6% 27.5% Other Aid 18.9% 27.5% Financing Gap 0.0% 10.3% Total Plan Expenditure 100.0% 100.0% 4.35 The total volume of aid disbursements required for the financing of the Sixth Plan (covering 63 months) amounts to $477 million, about 91 million a year, as compared to $89 million a year during the Fifth Plan. The Indian Government has agreed to finance Rs 2613 millicon ($201 mil- lion). Because Bhutan has utilized Indian assistance well and because of the good relations between the countries, there is no reasoni to question the expectation that capital inflows and budgetary support from India will be possible at this level. Of the Rs 2613 million of agreed financing, Rs 1,610 million ($124 million) would be a budgetary grant, Rs 830 million ($64 million) a (concessional) loan for the Dungsum Cement Project and the balance would be towards project grants and soft loans. The financing gap of $75 million includes the Kurichu Project ($54 million) for which nego- tiations for Indian financing are at an advanced stage. Additional amounts are being negotiated for telecommunications, a tungsten project and miscellaneous infrastructure projects. -69- 4.36 For the remainder of its aid requirements, Bhutan is looking for hard-currency grant aid of $137 million, about $26 million per year, of which over half would come from UNDP and various United Nations Agencies, with the remainder from several bilateral donors (In the past these have included Japan, Switzerland/Helvetas, Norway, Denmark, Italy, Canada, Korea, and the EEC). Aid disbursement requirements during the Sixth Plan are summarized in the table below. Table IV.3: Disbursements Rc-niired in the Sixth Plan by Donor (million dollars) Government of India 201 of which: Budgetary Grant 124 Project Loan (Dungsum Cement Project) 64 Other Loans and Grants 13 Other (Hard-Currency) Aid 201 Grants from UNDP and UN agencies (incl. WFP) 77 Grants from Other Donors 60 Hard-Currency Loans 64 Financing Gap 75 of which: Kurichu Power Project 54 Total 477 Source: Planning Commission. 4.38 The amount of commitments made over the next few years will depend on the rate of progress made in project preparation. The pipeline of undisbursed aid is quite small in the case of the most important donor, India--,2,9 million according to the Plan documents. Most of India's project aid will thus have to come from new commitments and it is the state of readiness of the relevant projects which will determine how rapidly final commitments can be made. In the case of hard-currency loans, the undisbursed pipeline is relatively large, $73 million at the beginning of the Plan as compared to a total volume of disbursements required in this category of $64 million. Given the recent rise in dis- bursements in this categoDry, disbursements from the pipeline should help finance most of the expercted hard-currency loan assistance. In view of -70- the usual lag between commitments and disbursements, annual commitments of about $15 million appear indicated. Such a level should be adequate to help carry out new undertakings towards the end of the Plan and in the years beyond. 4.39 The conclusion is that project readiness rather than aid availability will dictate the pace of donor assistance and the overall investment level. It is this factor which will determine whether donors will be able to respond to the shift in the Sixth Plan in favor of the mining, industrial and social sectors. Substantive discussions with donors before, during and after the Round Table Meeting are important in assuring aid of the required volume and composition. 4.40 A related important factor in the implementation of the Plan is the availability of technical assistance. Substantial technical assis- tance is needed to introduce new technologies and to assist in strengthen- ing institutional structures and management systems. Two forms of inef- ficiency in the current management of technical assistance can be observed, however. First, as the number of longer-term experts and volun- teers has increased, the effectiveness of local counterpart arrangements has diminished. Exploiting the counterpart function is the best way of training technical staff in the practical skills they need, and systematic attention should be given to using the learning opportunities afforded by the presence of experts. As a corollary to this, the Government should be more active in terminating the assigniments of those experts who do not perform well, and donors should, in principle, be sympathetic to such actions. Second, an increasing number of experts are being engaged on short-term assignments. Apart from the heavy burden this places on Bhutan's few key decision-makers, brief visits to a country with such unique development requirements and in which travel (and thus the acquisi- tion of detailed local knowledge) is difficult will often prove marginal in their value. Donors should be judicious in promoting, and the Govern- ment in accepting, this type of technical assistance input. 4.41 With respect to Government management of donor assistance, two particular topics deserve mention--the need to clarify the communication channels between donors and the Government, and the issue of coordinating future and ongoing donor assistance programs. On the communication ques- tion, the precise delineation of responsibilities between the Planning Commission, the Ministry of Finance, the line Ministries and departments and the Ministry of Foreign Affairs in relation to dialogue with donors is still evolving, with the Ministry of Finance of late taking an increasing interest in loait appraisal. At present, and despite occasional contrary signs, the assistance program is sufficiently small to permit a somewhat ad-hoc approach, As the size of the donor project portfolio grows, however, it will be important to define respective Government agency roles more clearly, particularly in relation to the supervision of projects under implementation. On the coordination issue, the Government hopes -71- that the 1988 Round Table Meeting, will prove a more effective forum for resource mobilization than previous such meetings; it is then expected that donors will pursue cofinancing arrangements that will ensure a rational upstream coordination of their inputs. To ensure this, it is recommended that the Government discuss carefully with each donor how and in which areas of the economy it could make the most useful contribution. Insofar as ongoing activities are concerned, the teed for tighter coor- dination is already apparent in the agriculture sector, in which there are at least 20 donor-financed projects of which eight can be classified as area-based development programs. These projects contain a good deal of needless overlap, while experience obtained in them could usefully be shared--on adaptive research findings, extension methods and water manage- ment systems, for example. A tool which has proven useful elsewhere in this regard is a technical group of Government and expatriate staff meet- ing regularly to discuss specific topics and to exchange implementation experiences. With respect to project implementation and management in general, the Government may also wish to give thought to convening occa- sional meetings in Bhutan of donor representatives to review common problems and to establish common procedures. 4.42 Despite a low level of hard currency exports of goods and serv- ices, Bhutan's balance of payments with countries other than India has been in satisfactory condition. The reason has been the availability of aid. Whereas donors typically provide hard currency to cover all of project foreign exchange costs and often substantial local costs, Bhutan has obtained a large part of its project import requirements from India. This situation has permitted Bhutan to achieve a surplus in its overall hard currency balance of payments and to add to its hard currency reser- ves. According to the official balance of payments estimates, only about 40 percent of hard currency disbursements is spent on hard currency aid-related merchandise imports. Whereas a similar percentage of disbur- sements are spent on aid-related service imports, this still allows for a modest but steady rise in Bhutan's hard currency reserves. 4.43 Since the donor community at large is generally expected to main- tain its favorable attitude towards assisting Bhutan's development efforts, hard currency debt service is unlikely to present a serious problem. The total amount of outstanding and disbursed hard currency debt of $36 million (end of 1986) has been provided on lenient terms: average interest rate 1.1 percent, maturity 35.6 years, grace period 8.0 years. Because of the low level of Bhutan's hard currency export earnings, the debt service ratio is estimated to be 16% in 1987/88, relatively high considering the short period over which it has contracted any debt and given the concessional nature of the debt. With the purchase of the aircraft in 1988/89 (80% loan at 7.4% interest, 10 year maturity, 1 year grace, and a high finance charge), the debt-service ratio is projected to reach 64%. The debt service ratio, however, may not be the best measure of the weight of debt service in Bhutan. More important appears to be the -72- fact that the overall pattern of aid inflows has permitted a steady rise in reserves, and that reserves are likely to stay high. Even after payment of debt service, Bhutan's overall balance of payments is forecast to be positive (Table IV.4). A better measure of debt service ability for a country like Bhutan is the ratio of debt service to total foreign exchange receipts, and this ratio remains manageable. The high projected rate of increase of merchandise exports is quite feasible given the opening of new surface trade routes with Bangladesh and the proposed air routes to Bangkok and Kathmandu. Table IV.4 Hard Currency Balance of Payments Projections (Millions of Dollars) 1981182 1982183 1983/84 1984/85 1985186 1986187 1987188 1988/89 1989190 1990191 1991/92 1992/93 1993t94 1994/95 1995196 Exports,fob 0.61 0.25 0.34 0.54 0.16 0.21 0.66 1.05 1.31 1.64 2.05 2.56 3.20 4.00 5.00 Imports,cif -7.31 -10.38 -12.55 -8.43 -19.74 -23.02 -23.41 -54.22 -31.03 -32.95 -35.02 -37.27 -39.70 -42.33 -45.19 Aid-related -5.21 -4.83 -9.43 -6.13 -9.35 -12.56 -10.14 -13.29 -13.76 -14.26 -14.79 -15.35 -15.95 -16.58 -17.25 Aircraft-related 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -26.46 -1.50 -1.50 -1.50 -1.50 -1.50 -1.50 -1.50 Other -2.11 -S.S5 -3.12 -2.30 -10.40 -10.46 -13.27 -14.46 -15.76 -17.18 -18.73 -20.41 -22.25 -24.25 -26.44 Trade balance -7.31 -10.13 -12.21 -7.89 -19.58 -22.81 -22.74 -53.17 -29.72 -31.31 -32.98 -34.71 -36.50 -38.34 -40.19 Service receipts 1.47 2.72 2.64 3.48 3.55 4.87 6.31 7.42 8.46 9.16 9.91 10.70 11.52 12.40 13.35 Travel 1.15 1.44 1.37 1.56 1.73 3.01 3.86 4.24 4.66 5.13 5.64 6.21 6.83 7.51 8.26 .Interest on reserves 0.16 0.73 0.56 1.20 1.28 1.39 1.93 2.28 2.83 3.00 3.16 3.31 3.43 3.54 3.64 Other 0.16 0.55 0.71 0.71 0.54 0.48 0.52 0.90 0.96 1.03 1.10 1.18 1.26 1.35 1.45 Service payments -6.36 -5.40 -10.23 -7.43 -16.46 -15.16 -15.16 -19.60 -21.64 -22.72 -23.85 -25.34 -26.75 -28.20 -29.75 Interest 0.00 0.00 -0.06 -0.08 -0.12 -0.36 -0.60 -1.00 -2.95 -2.89 -2.84 -2.99 -3.06 -3.09 -3.13 Concesslonal debt 0.00 0.00 -0.06 -0.08 -0.12 -0.36 -0.60 -1.00 -1.31 -1.42 -1.64 -1.86 -2.10 -2.30 -2.50 Comnercial debt 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -1.64 -1.47 -1.20 -1.13 -0.96 -0.79 -0.63 Other -6.36 -5.40 -10.17 -7.34 -16.34 -14.80 -14.56 -18.60 -18.69 -19.83 -21.01 -22.35 -23.69 -25.11 -26.62 Private transfers 1.59 1.59 2.08 2.16 1.96 2.04 2.16 2.29 2.43 2.57 2.73 2.89 3.06 3.25 3.44 Current account balance -10.61 -11.22 -17.71 -9.68 -30.52 -31.05 -29.44 -63.07 -40.47 -42.30 -44.19 -46.47 -48.67 -50.89 -53.15 ForeLgn eapital Inflows 12.25 11.34 22.21 14.27 3O.40 34.78 33.55 72.31 43.28 44.93 46.68 48.54 50.47 52.56 54.77 Met Borrowings 0.50 0.89 0.67 1.10 8.36 11.16 10.11 46.33 15.73 15.73 15.73 15.73 15.70 15.70 15.70 Concessional (net) 0.50 0.89 0.67 1.10 7.84 11.66 15.04 18.00 18.00 18.00 18.00 18.00 18.00 18.00 18.00 Comnercial (net) 0.00 0.00 0.00 0.00 0.52 -0.50 -4.93 28.33 -2.27 -2.27 -2.27 -2.27 -2.30 -2.30 -2.30 Grants 11.75 10.45 21.54 13.17 30.04 23.13 24.51 25.98 27.54 29.19 30.95 32.80 34.77 36.86 39.07 Errors and omissions 1.21 0.82 -1.85 0.92 -1.59 4.83 5.77 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Overall balance 3.46 0.94 2.65 5.51 6.28 8.56 9.87 9.24 2.81 2.63 2.49 2.07 1.81 1.67 1.62 Wj Memorandum Items Hard Currency Reserves 8.1 8.5 10.4 14.2 20.6 28.1 38.0 47.2 50.0 52.6 55.1 57.2 59.0 60.7 62.3 (as months of Imports) 7.1 6.4 5.5 10.8 6.8 8.8 11.8 7.7 11.4 11.3 11.2 11.0 10.7 10.3 10.0 Debt Outstanding 0.3 1.2 2.0 3.2 11.5 24.5 34.6 80.9 96.7 112.4 128.1 143.9 159.6 175.3 191.0 Debt-Service 0.0 0.0 0.0 0.1 0.3 0.6 1.5 3.0 7.8 7.7 7.7 7.8 7.9 8.0 8.0 DS/(XGS+Transfers) 0.0X 0.2X 0.4X 1.12 5.12 8.0X 16.0% 28.0X 63.9X 57.92 52.4X 48.6X 44.72 40.6X 36.8X DS/Total FX receipts 0.0X 0.1X 0.1% 0.3X 0.7X 1.4X 3.4X 3.6% 14.1X 13.3X 12.5X 12.1% 11.6X 11.0X 10.5X Assumptions for Pmooections: (a) Merchandise Exports are projected to grow at 25% annually after 1988189. (b) Aid-related Imports are projected to grow at the same rate as concessional capit-l inflows. Other Imports are projected to grow at 9%. (c) Service receipts are the sum of (i) tourism earnings which Increase at 10%X year, (ii) Interest earnings of 6X on reserves, and (III) other services such as receipts from philately, royalties, and Druk Air, which grow at 7% after a jump In 1988/89 from increased Druk Air receipts as the new aircraft begins operation. (d) Other service payments increase in 1988/89 due to finance charges on the aircraft loan. (e) Private transfers and grants are assumed to grow at 6X, vhereas net disbursements from concessional loans are projected to increase to $18 million In 1988/89 and then remain constant. Source: Statistical Appendix Table 3.1 and Bank staff estimates. -74- 4.44 The balance of payments with India has also been in surplus and rupee reserves in the Bank of Bhutan and the Royal Monetary Authority have been rising. This has happened despite the use of part of the hard cur- rency aid proceeds for imports from India. The main factor has been the large amount of Indian budgetary support. By December 1987, Indian rupee reserves stood at Rs 622 million, the equivalent of six months of imports. 4.45 The downside of this scenario is that donors would reduce their aid and that investment projects would be delayed or not carried out at all. An immediate balance of payments problem would not arise in that case, since the decline in aid-related imports would automatically lead to a smaller current account deficit, while the reserve cushion would allow continued debt service payments for a substantial period of time. The more serious consequence would be that investment and GDP growth would be less and that income levels would remain low. That outcome should be avoided in view of Bhutan's development potential and the serious deter- mination of the Bhutan Government and people to develop their economy. -75- STATISTICAL APPENDIX Table No. Section/Title Page No. POPULATION . . . . . . . . . . . . . . . . . . . . . . . . . . 77 1.1 Population Estimates by Age and Sex 1.2 Population Projections with Different Fertility & Mortality Parameters NATIONAL ACCOUNTS . . . . . . . . . . . . . . . . . . . . . . 79 2.1 Gross Domestic Product at Current Prices by Kind of Activity 2.1A As Percent of GDP 2.2 Gross Domestic Product at 1983 Prices by Kind of Activity 2.2A Annual Percentage Growth BALANCE OF PAYMENTS ... ......................................83 3.1 Balance of Payments Summary 3.2 Balance of Payments with India 3.3 Balance of Payments with Countries Other Than India 3.4 Exports to India by Major Commodity 3.5 Imports from India by Major Commodity 3.6 Convertible Foreign Exchange Generated by Exports of Goods and Services 3.7 Use of Convertible Foreign Exchange 3.8 Gross International Reserves EXTERNAL DEBT . . . . . . . . . . . . . . . . . .. . . .......91 4.1 Service Payments, Commitments, Disbursements and Outstanding Amounts of External Public Debt 4.2 Structure and Terms of External Public Debt 4.3 Loan Commitments, Debt Structure, and Terms PUBLIC FINANCE . . . . . . . . . . . . . . . . . . . . . . . 94 5.1 Summary of Budgetary Operations 5.2 Central Government Current Expenditure 5.3 Government Capital Expenditure 5.4 Budgetary Receipts by Source 5.5 Outlays of Development Plans, First Plan to Fifth Plan 5.5A As Percentage of Category -76- MONETARY STATISTICS .... .................................................. 100 6.1 Royal Monetary Authority - Money and Banking Statistics 6.2 Bank of Bhutan - Money and Banking Statistics 6.3 Monetary Survey 6.4 Money Supply and its Counterparts 6.5 Royal Insurance Corporation of Bhutan - Financial Statistics 6.6 Royal Insurance Corporation of Bhutan - Investment by Sector of Economic Activity, Amounts Outstanding 6.7 Unit Trust of Bhutan - Financial Statistics PRICES . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 7.1 Consumer Price Indexes 7.2 Consumer Price Indexes, Major Components, Percentage Change on Previous Period 7.3 Exchange Rates, Ngultrum/$ US -77- TABLE 1.1 : POPULATION ESTIMATES BY AGE AND SEX, 1986 Age Group Males Females Persons 0-4 123,300 108,100 231,400 5-9 72,300 74,300 146,600 10-14 70,300 73,800 144,100 15-19 67,900 66,800 134,700 20-24 58,800 57,200 116,000 25-29 50,000 49,600 99,600 30-34 42,800 41,600 84,400 35-39 36,600 34,800 71,400 40-44 31,500 29,000 60,500 45-49 28,300 25,900 54,200 50-54 24,600 22,400 47,000 55-59 20,300 18,400 38,700 60-64 15,900 14,700 30,600 65-69 11,600 10,900 22,500 70-74 7,900 7,900 15,800 75-79 4,500 4,600 9,100 80 and over 2,900 3,200 6,100 ALL AGES 669,500 643,200 1,312,700 Source : Central Statistical Office. -78- TABLE 1.2 : POPULATION PROJECTIONS WITH DIFFERENT FERTILITY AND MORTALITY PARAMETERS Projections A B C D E F G H I POPULATION ('000) 1991 1,477 1,481 1,484 1,473 1,476 1,479 1,467 1,470 1,473 1996 1,661 1,676 1,689 1,642 1,657 1,670 1,619 1,663 1,645 2001 1,862 1,898 1,928 1,818 1,853 1,882 1,762 1,796 1,823 2006 2,090 2,159 2,216 2,006 2,072 2,125 1,900 1,963 2,012 DEMOGRAPHIC PARAMETERS TotaL fertility rate 5.8 5.8 5.8 5.0 5.0 5.0 4.0 4.0 4.0 Crude birth rate,2006 41.0 40.4 39.9 36.9 36.3 35.9 31.2 30.8 30.4 Crude death rate,2006 17.6 14.1 11.3 17.2 13.8 11.2 16.7 13.4 10.9 Life expectancy ,2006 MaLes 45.8 51.8 56.5 45.8 51.8 56.5 45.8 51.8 56.5 Females 48.7 55.0 60.0 48.7 55.0 60.0 48.7 55.0 60.0 Average annual population growth 2.4 2.5 2.7 2.1 2.3 2.4 1.9 2.0 2.2 1986 to 2006 (%) Source : 1980 PopuLation Census projected forwarded using demographic methods based on different fertiLity and mortality assumptions (Projections A to I). -79- TABLE 2.1: GROSS DOMESTIC PRODUCT AT CURRENT PRICES BY KIND OF ACTIVITY (Nu. in milLions) Activity 1981 1982 1983 1984 1985 1986 Agriculture and Livestock 555.4 647.5 769.6 884.3 989.4 1109.7 Forestry and logging 68.6 116.8 127.9 131.9 170.7 264.1 Mining 4.0 6.2 4.7 6.7 10.9 14.8 Manufacturing 48.1 52.2 69.2 79.1 94.9 96.0 Electricity 1.1 3.0 3.1 3.2 3.6 96.0 Construction 168.8 229.3 261.4 268.5 242.3 234.4 Wholesale and retail trade, 151.2 174.7 200.7 230.7 259.1 290.1 hotels and restaurants Transport 32.2 36.8 44.1 50.3 60.0 68.8 Finance, insurance and 136.7 145.3 156.7 175.5 191.2 192.6 reaL estate Government services 151.4 177.4 196.9 221.1 322.8 355.1 Less:Imputed bank service charges -26.9 -29.9 -30.2 -38.5 -44.6 -43.3 TOTAL GROSS DOMESTIC PRODUCT 1290.6 1559.3 1804.1 2012.8 2300.3 2678.3 Source: Central Statistical office. -80- TABLE 2.1A : GROSS DOMESTIC PRODUCT AT CURRENT PRICES BY KIND OF ACTIVITY (As Percent of GDP) Activity 1981 1982 1983 1984 1985 1986 Agriculture and livestock 43.0 41.5 42.7 43.9 43.0 41.4 Forestry and logging 5.3 7.5 7.1 6.6 7.4 9.9 Mining 0.3 0.4 0.3 0.3 0.5 0.6 Manufacturing 3.7 3.3 3.8 3.9 4.1 3.6 ELectricity 0.1 0.2 0.2 0.2 0.2 3.6 Construction 13.1 14.7 14.5 13.3 10.5 8.8 Wholesale and retail trade, 11.7 11.2 11.1 11.5 11.3 10.8 hotels and restaurants Transport 2.5 2.4 2.4 2.5 2.6 2.6 Finance, insurance and 10.6 9.3 8.7 8.7 8.3 7.2 real estate Government services 11.7 11.4 10.9 11.0 14.0 13.3 Less:Imputed bank service charges -2.1 -1.9 -1.7 -1.9 -1.9 -1.6 100.0 100.0 100.0 100.0 100.0 100.0 Source : Statistical Appendix TabLe 2.1. TABLE 2.2 : GROSS DOMESTIC PRODUCT AT 1983 PRICES BY KIND OF ACTIVITY (Nu. in millions) Activity 1981 1982 1983 1984 1985 1986 ----------------------------------------------------------------------------------------- Agriculture and Livestock 670.0 709.5 769.6 808.2 850.2 892.6 Forestry and logging 80.7 127.3 127.9 121.1 141.1 192.2 Mining 4.2 6.5 4.7 6.3 7.7 10.4 Manufacturing 60.5 59.6 69.2 72.5 81.0 76.3 Electricity 2.5 2.7 3.1 3.1 3.7 91.0 Construction 204.3 252.3 261.4 244.0 200.2 176.2 Wholesale and retail trade, 177.9 189.6 200.7 212.7 219.6 226.7 hotels and restaurants Transport 37.9 39.9 44.1 46.3 51.4 54.8 Finance, insurance and real estate 147.1 151.3 156.7 170.0 175.4 174.5 Government services 183.2 195.1 196.9 201.0 219.1 225.7 Less: Imputed bank service charges -32.9 -32.9 -30.2 -35.0 -38.4 -33.8 TOTAL GROSS DOMESTIC PRODUCT 1535.4 1700.9 1804.1 1850.2 1911.0 2086.6 ----------------------------------------------------------------------------------------- Source : Central StatisticaL Office. -82- TABLE 2.2A : GROSS DOMESTIC PRODUCT AT 1983 PRICES BY KIND OF ACTIVITY (Annual Percentage Growth) Activity 1982 1983 1984 1985 1986 AgricuLture and livestock 5.9 8.5 5.0 5.2 5.0 Forestry and logging 57.7 0.5 -5.3 16.5 36.2 Mining 54.8 -27.7 34.0 22.2 35.1 Manufacturing -1.5 16.1 4.8 11.7 -5.8 Electricity 8.0 14.8 0.0 19.4 2359.5 Construction 23.5 3.6 -6.7 -18.0 -12.0 Wholesale and retail trade, 6.6 5.9 6.0 3.2 3.2 hotels and restaurants Transport 5.3 10.5 5.0 11.0 6.6 Finance, insurance and real estate 2.9 3.6 8.5 3.2 -0.5 Government services 6.5 0.9 2.1 9.0 3.0 Less: Imputed bank service charges 0.0 -8.2 15.9. 9.7 -12.0 GDP 10.8 6.1 2.6 3.3 9.2 Source : Central Statistical Office. AJ -83- Table 3.1: Balance of Payments Summary, 1981/82-1987/88 (In millions of dollars) ----------------------------------------------------------------------------------------------------- 1981/82 1982183 1983/84 1984/85 1985/86 1986/87 1987/88 -------------------------------------------------------------------------------------,.1---------- Exports, f.o.b 19.20 16.55 15.58 17.36 22.23 33.40 60.81 India 18.60 16.30 15.24 16.83 22.06 33.19 60.14 Other countries 0.61 0.25 0.34 0.54 0.16 0.21 0.66 Imports, c.i.f. -65.60 -67.13 -70.79 -69.42 -85.12 -90.36 -102.83 India -58.30 -56.75 -58.25 -60.99 -65.38 -67.34 -79.42 Other countries -7.31 -10.38 -12.55 -8.43 -19.74 -23.02 -23.41 Trade balance -46.40 -50.58 -55.21 -52.06 -62.89 -56.96 -42.02 India -39.69 -40.45 -43.00 -44.17 -43.31 -34.16 -19.28 Other countries -6.70 -10.13 -12.21 -7.89 -19.58 -22.81 -22.74 Services and private transfers (net) -25.70 -27.79 -38.84 -26.15 -30.66 -21.28 -14.13 India -22.32 -26.70 -33.34 -24.37 -19.72 -13.03 -7.49 Other countries -3.30 -1.09 -5.50 -1.79 -10.94 -8.25 -6.64 Current account balance -72.00 -78.37 -94.05 -78.21 -93.56 -78.24 -56.15 India -62.00 -67.14 -76.34 -68.53 -63.03 -47.19 -26.77 Other countries -10.00 -11.22 -17.71 -9.68 -30.52 -31.05 -29.38 Official transfers (net) 72.81 81.03 63.11 56.54 74.44 70.05 58.60 India 61.06 70.58 41.57 43.38 44.40 46.92 40.10 Other countries 11.75 10.45 21.54 13.17 30.04 23.13 18.51 Official capital (net) 0.48 0.87 42.11 26.66 26.01 19.46 19.65 India -0.02 -0.02 41.44 25.56 18.17 7.80 4.61 Other countries 0.50 0.89 0.67 1.10 7.84 11.66 15.04 Receipts 0.50 0.89 0.67 1.10 7.84 11.66 15.44 Repayments 0.00 0.00 0.00 0.00 0.00 0.00 -0.40 Errors and omissions 5.51 2.69 -3.47 6.31 -1.97 3.72 10.26 India 4.30 1.87 -1.62 5.39 -0.38 -1.61 -0.38 Other countries 2.79 0.82 -1.85 0.92 -1.59 5.32 10.64 Overall balance 6.80 6.22 7.70 11.29 5.45 14.49 27.43 India 3.34 5.29 5.05 5.79 -0.84 5.93 17.55 Other countries 3.46 0.94 2.65 5.51 6.28 8.56 9.87 ----------------------------------------------------------------------------------------------------- Source: RMA and IMF estimates. 1 / Comprising official transfers and loans. -84- Table 3.2: Balance of Payments witb. India, 1982/83-1987/88 (In millions of U;S dollars) --------------------------------------------------- I ---- ------------------------- 1982/83 19b_/84 1984/85 1985/86 1986/87 1987/88 Exports, f.o.b. 1/ 16.30 15.24 16.83 22.06 33.19 60.14 Imports, c.i.f. 1/ -56.75 -58.25 -60.99 -65.38 -67.34 -79.42 Chhukha 2/ -9.35 -13.09 -7.55 -5.46 -3.13 -2.31 Other -47.40 -45.15 -53.44 -59.92 -64.21 -77.11 Trade balance -40.45 -43.00 -44.17 -43.31 -34.16 -19.28 Services and private transfers (net) -26.70 -33.34 -24.37 -19.72 -13.03 -7.49 Receipts 9.32 10.30 11.20 12.95 13.56 16.26 Travel 3.12 3.88 4.21 4.90 5.47 6.94 Interest 3.04 3.37 2.99 4.08 3.04 4.27 Diplomatic (net) 0.52 0.58 0.59 0.65 0.70 0.77 Excise duty refund and 2.65 2.47 3.41 3.31 4.34 4.28 treaty subsidy 0.00 0.00 0.00 0.00 0.00 0.00 Payments -36.02 -43.64 -35.56 -32.67 -26.59 -23.75 Travel -3.12 -3.88 -4.21 -4.90 -5.47 -6.17 Interest 0.00 0.00 0.00 0.00 0.00 0.00 Chukha -17.13 -24.00 -13.83 -10.00 -2.35 -1.54 Other 3/ -15.77 -15.76 -17.52 -17.76 -18.77 -16.04 Current account balance -67.14 -76.34 -68.53 -63.03 -47.19 -26.77 Official transfers 70.58 41.57 43.38 44.40 46.92 40.10 Chhukha grants 31.15 3.15 0.00 0.00 0.00 0.00 Other grants 4/ 39.43 38.42 43.38 44.40 46.92 40.10 Budgetary 26.97 24.84 29.92 27.71 31.28 23.13 Non Budgetary 12.46 13.58 13.46 14.71 15.64 16.96 Other 0.00 0.00 0.00 1.98 0.00 0.00 Official capital (net) -0.02 41.44 25.56 18.17 7.80 4.61 Chhukha loans 0.00 40.49 25.15 18.19 7.82 4.63 Other loans -0.02 0.95 0.40 -0.02 -0.02 -0,02 Receipts 0.00 0.97 0.42 0.00 0.00 0.00 Payments -0.02 -0.02 -0.02 -0.02 -0.02 -0.02 Errors and omissions 1.87 -1.62 5.39 -0.38 -1.61 -0.38 Overall balance 5.29 5.05 5.79 -0.84 5.93 17.55 -------------------------------------------------------------------------------------------- Source: RMA and IMF estimates. 1/Based on trade data for the corresponding calender years. 2/Until 1984/85, 30 percent of actual Chhukha-related disbursements had been imputed to imports, including the imports of electricity, and 55 percent to service and transfer payments. (The balance of 15 percent had been assumed to have been spent on domestic goods and services). In the later years, the estimates for imports and other payments related to Chhukha are based on special considerations, such as the lower level of use of Indian labor. 3/Estimated at 40 percent of non-Chhukha grants. 4/Include non-budgetary grants. -85- Table 3.3: Balance of Payments with Countries Other than India, 1982/83-1992/93 (In millions of US dollars) --------------------------------------------------------------,,.,,-,-------------------------- 1982/83 1983/84 1984185 1985/86 1986/87 1987/88 -------------------------------------------------------------------------------------------- Exports, f.o,b. 1/ 0.25 0.34 0.54 0.16 0.21 0.66 Imports, c.i.f. 1/ -10.38 -12.55 -8.43 -19.74 -23.02 -23.41 Aid-related 2/ -4.25 -8.33 -5,35 -14.21 -13.04 -12.73 Other -6.13 -4.22 -3.08 -5.54 -9.97 -10.68 Trade balance -10.13 -12.21 -7.89 -19.58 -22.81 -22.74 Services (net) -2.68 -7.59 -3.95 -12.91 -10.29 -8.85 Receipts 2.72 2.64 3.48 3.55 4.87 6.31 Travel 1.44 1.37 1.56 1.73 3.01 3.86 Interest 0.73 0.56 1.20 1.28 1.39 1.93 Diplomatic 0.12 0.12 0.10 0.10 0.11 0.12 Stamps 0.43 0.44 0.42 0.15 0.05 0.03 Other 3/ 0.01 0.16 0.19 0.29 0.33 0.37 Payments -5.40 -10.23 -7.43 -16.46 -15.16 -15.16 Official travel, medical -0.31 -0.77 -0.90 -0.80 -0.39 -0.35 treatment, etc. 0.00 0.00 0.00 0.00 0.00 0.00 Interest 0.00 -0.06 -0.08 -0.12 -0.36 -0.60 Concessional debt 0.00 -0.06 -0.08 -0.12 -0.36 -0.60 Commercial debt 0.00 0.00 0.00 0.00 0.00 0.00 Diplomatic -0.84 -0.93 -0.91 -1.16 -1.24 -1.37 Aid-related 2/ -4.25 -8.33 -5.35 -14.21 -13.04 -12.73 Other 4/ 0.00 0.00 0.00 0,00 0.00 0.00 Private transfers 1.59 2.08 2.16 1.96 2.04 2.22 Helvetas 1.10 1.32 l.io0 0.99 1.08 1.19 Leprosy fund 0.16 0.31 0.60 0.56 0.56 0.59 Other 0.33 0.46 0.40 0.42 0.40 0.44 Current account balance -11.22 -17.71 -9.68 -30.52 -31.05 -29.38 Foreign aid(net) 11.34 22.21 14.27 37.88 34.78 33.55 Official transfers 10.45 21.54 13.17 30.04 23.13 18.51 Official capital (net) 0.89 0.67 1.10 7.84 11.66 15.04 Receipts 0.89 0.67 1.10 7.84 11.66 15.44 Repayments 0.00 0.00 0.00 0.00 0.00 -0.40 Commercial loans 0,00 0.00 0.00 0.52 -0.50 -4.93 Errors and omissions 0.82 -1.85 0.92 -1.59 5.32 10.64 Overall balance 0.94 2.65 5.51 6.28 8.56 9,87 Source: RMA and IMF estimates. 1/ Based on trade data for the corresponding calender years. 2/ Estimated to be 42.5 percent of gross aid receipts (official transfers and loans before repayments. /3 Comprises Druk Air receipts and visa fees, 4/ Other interest and insurance premium payments by Druk Air. -86- Table 3.4: Exports to India by Major Commodity, 1981-85 (In millions of US dollars) ------------------------------------------------------------------------------------- 1981 1982 1983 1984 1985 ------------------------------------------------------------------------------------- Cement 4.12 3.63 3.49 3.68 4.45 Timber 1.85 1.07 0.81 1.23 3.78 Cardamom 1.25 1.02 0.79 1.37 3.07 Fruit products 0.52 0.93 1.09 1.81 1.71 Potatoes 1.80 0.89 0.51 1.05 1.30 Apples 0.01 0.31 0.05 0.31 0.49 Oranges 1.99 2.28 0.36 1.27 1.08 Rosin 0.83 0.82 0.80 0.99 0.87 Alcoholic beverages 0,12 0.06 0.44 0.58 0.63 Veneers 0.03 0.11 0.30 0.52 0.56 Menthol 0.57 0.15 0.03 0.15 0.26 Block boards 0.00 0.00 0.01 0.55 1.20 Other 6.11 5.34 6.41 4.08 2.43 Total 19.19 16.60 15.07 17.60 21.83 Memorandum item: Exchange rate (period average) Ngultrum per 8.66 9.46 10.10 11.36 12.37 US dollar Source: Dept. of Trade and Industry. -87- Table 3.5: Imports from India by Major Commodity, 1981-85 (In millions of US dollars) 1981 1982 1983 1984 1985 ----------------------------------------------------------------------------------- Diesel -3.23 3.&£ 4.00 4.69 4.32 Rice 1.80 1.57 1.70 1.88 2.70 Tyres and Tubes 0.55 1.21 0.10 1.36 2.71 Electricity 0.55 1.07 1.56 1.75 1.89 Truck chasis 2.30 0.72 0.44 2.89 3.35 Petrol 1.35 1.34 1,33 1.26 1.31 Iron rods 3.33 1.36 0.58 0.94 1.75 Structure and parts 5.12 0.92 0.33 0.69 0.70 Machinery parts 1.69 0.22 0.61 2.17 4.01 Hardwares 0.23 0.33 0.13 2.04 1.71 Passenger cars 0.23 0.49 0.25 0.43 0.33 Bitumen 1.31 0.21 0.51 0.29 1.08 Fabrics 1.39 0.86 0.13 0.46 1.37 Other 37.05 43.66 47.80 .2.95 37.45 Total 60.12 57.80 59.47 63.80 64.68 Memorandum item: Exchange rate (period average) Ngultrum per 8.66 9.46 10.10 11.36 12.37 US dollar Source: Dept. of Trade and Industry. -88- TABLE 3.6 : CONVERTIBLE FOREIGN EXCHANGE GENERATED BY EXPORTS OF GOODS AND SERVICES(*) ----------------------------------------------------------------------------- Period Item 1981/82 11982/83 11983/84 11984/85 11985/86 11986/87(Pe) A. Million of Dollars Exports,fob 0.61 0.25 0.34 0.54 0.16 0.21 Services 1.47 2.72 2.64 3.48 3.55 4.87 Tourism 1.15 1.44 1.37 1.56 1.73 3.01 Interest 0,16 0.73 0.56 1.20 1.28 1.39 Others(l) 0.16 0.55 0.71 0.72 0.54 0.47 Total 2.08 2.97 3.08 4.02 3.71 5.08 B. Percentage of Total Exports, fob 29 8 11 13 4 4 Services 71 92 89 87 96 96 Tourism 55 48 46 41 47 59 Interest 8 24 19 29 34 27 Others (1) 8 19 24 17 15 9 Total 100 100 100 100 100 100 (*) Revised estimates.Totals may not add up because of rounding.-(l) Inclu- ding revenue from stamps,foreign embassies,Druk Air,and visa fees.-(Pe) Pre- liminary estimates. Source: Royal Monetary Authority. -89- TABLE 3.7 : USE OF CONVERTIBLE FOREIGN EXCHANGE (*) ----------------------------------------------- ------------------------------------------------------------------------------------- Period Item 1981/82 11982/83 11983/84 11984185 11985/86 |1986187(Pe) ----------------------*----.----------------------------------------------------------- A. Millions of Dollars Imports, cif 7.31 10.39 12.55 8.43 19.74 23.02 Services 6.36 5.98 10.23 7.43 16.46 15.16 Official travel, medical expenses, and international organisations 0.60 0.31 0.77 0.90 0.80 0.39 Diplomatic expenses 0.55 0.84 0.93 0.91 1.16 1.24 Interest 0.00 0.00 0.06 0.08 0.12 0.36 Aid-related 5.21 4.83 8.33 5.35 14.21 13.04 Total 13.67 16.37 23.78 15.86 36.20 38.18 B. Percent of Total Imports, cif 53 64 55 54 55 61 Services 47 37 45 46 45 40 Official travel, medical expenses, and international organisations 4 2 3 6 2 1 Diplomatic expenses 4 5 4 6 3 3 Interest - - 0 1 1 1 Aid-related 38 30 37 34 40 34 Others (1) - - 1 1 1 0 Total 100 100 100 100 100 100 Source: Royal Monetary Authority. -90- Table 3.8: Gross International Reserves, 1980/81-1987/88 (In millions of rupees) 1980/81 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88 Rupee reserves 179.7 209.5 260.4 312.5 381.3 371.1 446.9 644.7 Royal Monetary Authority 0.0 0.0 0.0 6.2 12.0 8.1 10.7 13.8 Bank of Bhutan 179.7 209.5 260.4 306.3 369.3 362.9 436.2 630.9 (In millions of dollars) Convertible currency reserves 5.5 8.1 8.5 10.4 14.2 20.6 28.1 41.0 Royal Monetary Authority 0.0 0.0 0.0 4.4 7.9 19.8 26.9 39.4 Royal Government 3.2 3.3 2.8 Bank of Bhutan 2.3 4.1 4.5 4.7 6.3 0.8 1.1 1.7 Royal Insurance Corporation of Bhutan 0.0 0.6 1.2 1.3 0.0 0.0 0.0 0.0 Total reserves 27.4 30.5 34.6 39.6 44.9 50.8 62.7 90.8 Sources: Information provided by the Bhutanese authorities; and IMF staff estimates. 1/ Includes reserve tranche position in the Fund. 2/ The large change betweeen 1985/86 and 1986/87 is predominantly a result of the takeover of the Bank of Bhutan's convertible foreign exchange by the Royal Monetary Authority. TABLE: 4.1 SERVICE PAYMENTS, COMMITMENTS, DISBURSEMENTS AND OUTSTANDING AMOUNTS OF EXTERNAL PUBLIC DEBT PROJECTIONS BASED ON DEBT OUTSTANDING INCLUDING UNDISBURSED AS OF DEC 31, 1987 INCLUDES ONLY DEBT COMMITTED 000000 - DEC 31, 1987 DEBT REPAVABLE IN FOREIGN CURRENCY AND GOODS (IN THOUSANDS OF U.S. DOLLARS) * * * TABLE TOTAL * * * DATE DEBT OUTSTANDING AT T R A N S A C T T 0 N S D U R I N G P E R I 0 D OTHER CHANGES : END OF PERIOD ----------- --------------------------<- ------------------- ---------------------------------------- ----------------------- DISBURSED INCLUDING COMMIT- DISBURSE- S E R V I C E P A Y M E N T S CANCEL- ADJUST- : ONLY UNDISBURSED MENTS MENTS -----------:-----------:----------- LATIONS * MENT * : : : : : PRINCIPAL INTEREST TOTAL : (1) (2) (3) (4) (5) (6) (7) (8) (9) 198212 1,144 6,012 - 836 - 3 3 - - 198312 1,764 19,894 14,327 693 - 6 6 - -445 198412 2,733 33,460 15,164 1,124 - 33 33 - -1,598 198512 8,832 65,543 27,160 5,474 - 28 28 - 4,923 198612 20,952 79,466 9,163 11,416 - 153 153 - 4,760 198712 42,110 103,518 12,790 18,095 603 580 1,183 - 11,865 * * * THE FOLLOWING FIGURES ARE PROJECTED * * * 198812 58,188 102,895 - 16,700 622 797 1,419 - -1 198912 70,138 101,026 - 13,819 1,867 905 2,772 - -2 199012 78,677 99,158 - 10,407 1,867 958 2,825 - -1 199112 84,381 97,097 - 7,765 2,060 990 3,050 - -1 199212 88,227 95,038 - 5,906 2,060 1,000 3,060 - 1 199312 89,780 92.881 - 3,711 2.156 994 3,150 - -1 199412 89,751 90,550 - 2,305 2.332 971 3,303 - I 199512 87,638 87,742 - 693 2,810 934 3,744 - 2 199612 84,539 84,553 - 89 3,187 905 4,092 - -2 199712 81,017 81,031 - - 3,523 855 4,378 - 1 199812 77,488 77,502 - - 3,528 808 4,336 - -1 199912 73,941 73,955 - - 3,545 757 4,302 - -2 200012 70,393 70,407 - - 3,551 718 4,269 - 3 200112 66,828 66,842 - - 3.566 672 4,238 - 1 200212 63,215 63,229 - - 3,614 625 4,239 - 1 200312 60,251 60,265 - - 2,964 582 3,546 - - 200412 58,079 58,093 - - 2,171 542 2,713 - -1 200512 56,107 56,117 - - 1,973 520 2,493 - -3 200612 53,854 53,864 - - 2,251 503 2,754 - -2 200712 51,590 51,600 - - 2,262 480 2,742 - -2 Projected amounts in this column are amounts excluded from projections because of unknown terms. * This column shows the amount of arithmetic imbalance in the amount outstanding including undisbursed from one period to the next. The most common causes of imbalances are changes in exchange rates and transfers of debts from one category to another in the table. Table 4.2 STRUCTURE AND TERMS OF EXTERNAL PUBLIC DEBT AS OF DEC 31, 1986 INCLUDES ONLY DEBT COMMITTED 000000 - DEC 31, 1986* DEBT REPAYABLE IN FOREIGN CURRENCY AND GOODS (IN THOUSANDS OF U.S. DOLLARS) AVERAGE TERMS --------------------------------------------------------------------------------------------------------------- INTEREST MATURITY GRACE GRANT GRANT TOTALO*t AMOUNT* (%) (YRS) (YRS) ELEMENT(%) EQUIVALENT AMOUNT ---------------------------- ----------------------------------------------------------------------------------- 198312 14,327 1.323 26.5 5.4 61.0 8,745 14,327 198412 15,164 1.084 36.2 7.9 71.0 10.760 15,164 198512 27,160 1-157 38.3 8.7 73.3 19,897 27,160 198612 17,665 1.112 38.2 9.1 74.1 13.089 17,665 ------------------------------------------------------------------------------------------------------------- TOTAL EXTERNAL DEBT 74,316 1.163 35.6 8.0 70.6 52,492 74,316 * Includes increases during this period to debts with original commitment dates from Jan 1, 1900 to DEC 31. 1986. * Total loans have interest, grace period, and maturity intormation available, used to compute average terms. l Total of all loans in this breakdown regardless of availaDility of interest, grace period, and maturity information. -93- Table 4.3: Loan Commitments, Debt Structure, and Terms, 1980-87 Amount Interest 1/ Loan Disbursed as Final Grace Rate Commitment of 3131/87 Date of Date of Period Maturity (percent Lender/Project (mn. US$) (mn. US$) Negotiation Disburs-nen4 (in years) (in years) per annum) AsDB 32.51 6.67 Multi-Project I 6.06 10/06/83 6/30187 10 30 1 Multi-Project II 9.51 5/01/85 12/31/89 10 30 1 Agriculture 4.29 11(04/85 12/31/91 10 30 1 Roads 2/ 4.76 3117/86 9/30/92 10 30 1 Animal husbandry 2/ 4.51 3(17/86 9/30/92 10 30 1 Urban Centers Sewerage 3.38 Kuwait Fund 27.79 18.54 Gedu Wood 9.56 5/16/83 12/31/87 5 15 2.0 Calcium Carbide 7.08 5/22/85 6/30/88 5 15 2.5 Tala Particle Board ( 7.05 3/7/84 12/31/87 5 15 2.0 ( 4.10 3/7/84 12/31/87 5 15 2.0 IFAD 12.68 3.25 Small farm development 6.98 12/10/80 12/31/86 10 40 1 Agriculture 5.70 3/17/86 3/31/93 10 40 1 IDA 22.52 7.76 Technical assistance 3.58 2/29/84 12/31/87 10 30 1.25 3/ Forestry 6.91 6/25/84 9/30/90 10 30 1.25 3/ Calcium Carbide 12.03 5/23/84 6/30/91 10 30 1.25 3/ Total 95.5 37.93 Source: Royal Monetary Authority of Bhutan. 1/ Includes commitment and service charges but excludes charges on special commitments. 2/ Loans finalized but not yet signed. 3/ A charge of 0.5 percent per annum is levied on amount of loan not withdrawn; in addition, 0.75 percent per annum charge is assessed on amount withdrawn and outstanding. -94- Table 5.1: SUMMARY OF BUDGETARY OPERATIONS (Nu. millions) ---------------------------------------------------------------------------------------- 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88 ---------------------------------------------------------------------------------------- Revenues 123.5 137.8 197 278 264 340 654 Tax 65.3 76.5 105 139 136 174 192 Current non-tax 23.6 51.5 63 111 97 139 374 Other 34.6 9.8 29 28 31 27 88 Grants 300.2 360.3 478 512 706 782 797 From India 1/ 195.3 259.7 256 356 339 486 557 Other 104.9 100.6 222 157 367 296 240 Total Revenues and Grants 423.7 498.1 675 790 970 1122 1451 Expenditures 436.1 487.8 699 758 1218 1308 1523 Current 169.0 213.1 223 304 442 510 643 Capital 267.1 274.7 476 454 776 798 880 Overall Balance -12.4 10.3 -24 32 -248 -186 -72 Financing 12.4 -10.3 24 -32 248 186 72 External 4.5 8.9 7 15 132 170 274 Domestic and Residual 7.9 -19.2 17 -47 116 16 -202 Source: Ministry of Finance and IMF estimates. 1/ Excludes grants relating to Chhukha. -95- Table 5.2: Central Government Current Expenditure, 1983/84-1988/89 (In millions of ngultrum) Estimate 1983/84 1984/85 1985/86 1986/87 1987/88 General Public Services 123 155 223 279 356 Development headquarters 5 10 0 0 *0 Information and broadcasting 2 2 3 3 14 Nondevelopment sectors 116 143 220 276 345 Economic services 51 69 142 113 202 Agriculture and irrigation 9 9 15 25 53 Food Corporation of Bhutan 4 4 10 11 10 Animal husbandry 6 6 11 11 27 Forestry 7 10 16 14 27 Industries, mines, trade, and commerce 6 7 7 6 9 Druk Air Corporation 3 5 0 0 0 Tourism 1 2 0 0 0 Public Works Department 5 11 61 23 46 Communications 8 12 16 16 25 Power 2 3 6 7 17 Social services 49 80 77 118 174 Education 35 45 45 78 103 Health 11 23 31 32 58 Urban Development and Municipal Corporation 3 12 1 8 13 Adjustment 1/ 0 0 0 0 -89 Total current expenditure 223 304 442 510 643 Source: Ministry of Finance and IMF estimates. 1/ Adjustment factor in 1987/88 reflects the netting out of deparmental enterprise expenditure to maintain comparability of total expenditure relative to previous years. -96- Table 5.3: Government Capital Expenditure (In millions of ngultrum) Est. Annual 1983/84 1984/85 1985/86 1986/87 1987/88 General public services 110 136 120 102 101 Development headquarters 17 13 0 0 0 Information and broadcasting 6 5 3 18 46 Nondevelopment sectors 87 119 117 84 55 Economic services 290 261 565 595 644 Agruculture and irrigation 59 48 60 53 70 Food Corporation of Bhutan 10 8 14 32 3 Animal husbandry 20 13 6 22 26 Forestry 15 24 21 19 20 Industries, mines, trade, and commerce 14 18 318 247 193 Druk Air Corporation 24 5 0 0 0 Tourism 5 1 0 0 0 Public Works Department 113 122 86 84 127 Communications 21 4 8 9 22 Power 10 16 52 129 183 Social services 76 57 91 101 135 Education 49 21 44 28 28 Health 22 12 14 21 11 Urban Development and Municipal Corporation 5 24 33 52 96 Total capital expenditure 476 454 776 798 880 Source: Ministry of Finance and IMF estimates. -97- TABLE 5.4: BUDGETARY RECEIPTS BY SOURCE, 1983184-1987/88 (In millions of ngultrum) 1983/84 1984/85 1985186 1986/87 1987/88 2/ Tax revenue 105.0 138.6 135.9 173.8 206.6 Taxes on income 31.1 35.8 40.9 58.7 58.2 and profits Taxes on property 3,2 3.6 3.2 3.3 8.6 Taxes on domestic goods and services 67.3 97.6 89.4 108.3 138.8 Taxes on international trade 0.7 1.0 1.8 2.8 0.7 Other taxes 2.7 0.6 0.6 0.7 0.3 Nontax revenue 62.8 111.3 97.3 139.3 197.8 Operating surpluses of public enterprises 1.0 1.0 0.0 0.0 0.0 Profit transfers from public enterprises 39.2 74.9 50.6 84.0 146.1 Royalties, interest, 17.4 27.2 33,8 45.5 42.2 dividends, ect. Administrative fees 5.2 9.0 12.9 9.8 9.5 Other receipts 1 29.5 28.2 30.6 27.0 98.9 Total domestic revenue 197.3 278.1 263.8 340.0 503.3 (Of which: Chhukha revenue) 0.0 0.0 0.0 22.7 100.0 Source: Ministry of Finance and IMF estimates. 11 Includes estimates of revenue of departmental enterprises (Nu 87.7 million in 1987/88), which were not included in the budget presentation in earlier years. 2/ Budget estimates. -98- TABLE 5.5 : OUTLAYS OF DEVELOPMENT PLANS(a), FIRST PLAN TO FIFTH PLAN (Nu. in millions) First Second Third Fourth Fifth Plan Plan Plan Plan Plan(b) Agriculture 1.9 21.6 58.3 259.0 419.4 Food Corporation of Bhutan - - - - 135.5 Animal Husbandry 1.5 5.8 24.2 61.5 162.4 Forestry 3.2 6.9 28.4 110.3 229.9 Power 1.5 9.1 30.1 50.5 340.5 Industry and Mines (including 1.1 1.0 25.2 175.0 323.3 Trade and Commerce) Public Works Department 62.9 70.5 84.6 128.3 787.5 Road Transport/Aviation 7.5 12.0 9.5 - 26.3 Post & Telegraph 0.5 5.9 11.4 16.9 65.8 Teleconmmnications - - 14.8 37.3 33.7 Tourism - - 14.1 12.5 29.1 Education 9.4 35.7 90.0 134.6 519.1 Health 3.1 16.7 38.1 54.6 237.5 Information and PubLicity 0.1 1.4 4.0 11.0 36.1 Urban Development - - - - 187.3 General Development - - - - 1114.9 Other 14.4 15.6 42.5 54.7 - TOTAL OUTLAYS 107.2 202.2 475.2 1106.2 4648.3 (a) The data for the First to Fourth Plans refer to actual outlays. For the Fifth Plan the figures are revised allocations as presented in the Interim Review of the Fifth PLan.(b) Fifth Plan figures exclude Chukha Hydel Project. Source: Fifth Plan documents produced by Planning Commission. -99- TABLE 5.5A : OUTLAYS OF DEVELOPMENT PLANS, PERCENTAGE OF CATEGORY, FIRST PLAN TO FIFTH PLAN (per cent) First Second Third Fourth Fifth Plan Plan Plan Plan Plan Agriculture 1.8 10.7 12.3 23.4 9.0 Food Corporation of Bhutan - - - - 2.9 Animal Husbandry 1.4 2.9 5.1 5.6 3.5 Forestry 3.0 3.4 6.0 10.0 4.9 Power 1.4 4.5 6.3 4.6 7.3 Industry and Mines (incLuding 1.0 0.5 5.3 15.8 7.0 Trade and Commerce) Public Works Department 58.7 34.9 17.8 11.6 16.9 Road Transport/Aviation 7.0 5.9 2.0 - 0.6 Post & TeLegraph 0.5 2.9 2.4 1.5 1.4 Telecommunications - - 3.1 3.4 0.7 Tourism - - 3.0 1.1 0.6 Education 8.8 17.7 18.9 12.2 11.2 Health 2.9 8.3 8.0 4.9 5.1 Information and Publicity 0.1 0.7 0.8 1.0 0.8 Urban Development - - - - 4.0 General Development - - - - 24.0 Other 13.4 7.7 8.9 4.9 - TOTAL OUTLAYS 100.0 100.0 100.0 100.0 100.0 (a) See footnotes to Table 5.1. Source : Fifth Plan documents produced by Planning Commission. TABLE 6.1 : ROYAL MONETARY AUTHORITY - MONEY AND BANKING STATISTICS C*) -------------------------------------------------------------------- Millions of Ngultrum ------------------------------------------------------------------------------------------------------------------- Assets Liabilities ------------------------------------------------- ----------------------------------------------------- Foreign Assets Claims Reserve Money -------------------------------on- Deposit Of which: Other End of Money Currency Govt. Items Period Total Total Rupee Other Banks Total Total Outside Banks Deposits (Net) ---------------------------------------------------- ----------------------------------------------------- 1983 51.4 51.4 2.8 48.6 - 51.4 39.2 22.1 13.0 -0.8 1984 116.9 102.9 6.7 96.2 14.0 116.Q 85.2 46.2 23.9 7.8 1985 244.0 227.8 7.2 220.6 16.2 244.0 203.7 70.4 22.2 18.1 1986 Jan 252.5 236.8 6.8 230.0 15.7 252.5 213.5 68.7 22.4 16.6 Feb 243.7 227.5 6.6 220.9 16.2 243.7 208.4 72.9 22.2 13.1 Mar 267.2 251.4 8.1 243.3 15.8 267.2 211.9 87.0 22.2 33.2 Apr 268.3 252.5 6.3 246.2 15.7 268.3 223.5 74.6 22.2 22.6 May 262.6 247.1 5.9 241.2 15.4 262.6 224.7 74.2 22.9 15.0 l June 266.9 251.8 7.7 244.0 15.2 266.9 225.1 79.7 22.5 19.3 0 July 280.6 265.1 9.8 255.3 15.5 280.6 234.5 78.6 23.6 22.5 O Aug 272.2 256.9 6.9 250.0 15.3 272.2 230.4 78.6 23.6 18.3 I Sept 284.9 269.0 12.5 256.5 15.9 284.9 243.9 80.1 24.7 16.3 Oct 305.8 290.0 10.8 279.2 15.8 305.8 246.8 84.5 20.8 38.2 Nov 312.0 296.3 8.8 287.5 15.7 312.0 248.7 89.3 22.0 41.3 Dec 320.3 303.6 9.4 294.2 16.7 320.3 259.2 90.7 19.4 41.6 1987 Jan 331.2 313.3 9.6 303.7 17.9 331.2 267.1 83.4 25.6 38.5 Feb 347.4 329.5 10.9 318.6 17.9 347.4 273.1 87.5 34.7 39.6 Mar 376.5 358.9 10.7 348.2 17.6 376.5 288.8 100.0 34.t 53.0 Apr 391.2 373.6 11.1 362.4 17.7 391.2 318.1 84.8 35.8 37.3 May 404.1 386.4 11.7 374.7 17.7 404.1 331.8 83.2 38.2 34.1 June 421.1 400.0 13.9 386.1 21.1 421.1 379.5 90.5 9.4 32.2 July 439.4 417.5 12.6 405.0 21.9 439.4 393.6 89.5 9.4 36.4 Aug 459.1 436.8 13.1 423.7 22.3 459.1 409.9 96.6 9.4 39.8 Sept 466.8 444.3 13.0 431.2 22.6 466.8 415.0 101.2 9.4 42.4 Oct 500.4 479.7 18.0 461.7 20.7 500.4 438.7 98.1 9.4 52.2 Nov 522.7 498.0 15.6 482.4 24.7 522.7 449.3 100.6 9.4 63.9 Dec 506.5 482.7 15.7 467.0 23.8 506.5 432.6 | 103.5 9.4 64.6 ------------------------------------------------------------------------------------------------------------------- (*) Excluding Rupees in circulation. Discrepancies in the totals are due to rounding. Source: Royal Monetary Authority. TABLE 6.2. BANK OF BHUTAN-MONEY AND BANKING STATISTICS (*) - - --- ----- - ---- -- -- -- -- - ----- -- - --- -- - ---- -- - ---- --- --- - Millions of Ngultrum Assets Liabillties Foreign Assets Foreign LiabilitLes ----------------------------- ----------------------------- Claims on CiaLms on Demand Govt. Credit Other End of Reserves Claim on Govt.Cor- Private Deposit. Time Deposits from Capital Items Period Total wi.th RHA Totl1 ORpee 1ther Govt. porations Sector Total (1) Deposits Total Rupee Other (2) R1A Accounts (Net) 1983 453.5 9.2 320.9 284.3 36.6 23.0 57.3 43.1 453.5 81.7 146.9 26.6 26.6 - 73.4 2.1 121.0 1.8 1984 604.1 13.3 433.1 356.7 76.4 58.6 41.3 57.8 604.1 111.2 184.9 45.8 45.8 - 113.0 - 111.1 38.1 1985 741.7 119.3 420.8 405.0 15.8 119.6 26.6 55.4 741.7 132.5 232.3 53.3 53.3 - 105.1 - 132.6 86.0 1986 Jan 727.5 123.1 413.8 408.4 5.4 99.9 26.9 63.8 727.5 130.2 240.9 45.9 41.7 4.1 115.5 - 132.9 62.2 Feb 722.8 114.4 415.7 406.8 8.9 108.1 29.0 55.6 722.8 117.8 230.9 57.9 57.9 - 118.3 - 133.4 64.6 Mar 707.2 113.3 372.9 362.9 9.9 124.1 30.7 66.2 707.2 132.1 186.6 49.3 48.6 0.6 144.7 - 139.8 54.7 Apr 723.5 127.1 349.6 440.0 9.7 145.6 25.4 75.9 723.5 165.4 179.6 64.1 60.0 4.1 116.7 - 140.4 57.3 May 702.6 128.7 312.9 305.3 7.6 169.9 29.2 61.9 702.6 140.7 137.4 52.3 46.6 5.6 104.2 - 145.7 122.4 June 698.7 125.5 349.2 341.2 8.0 126.9 35.1 62.0 698.7 146.5 210.8 57.2 55.5 1.7 105.8 - 148.2 30.3 July 673.4 133.1 337.9 330.6 7.4 109.8 30.3 62.3 673.4 142.0 215.2 23.5 20.5 3.1 101.6 - 152.3 38.7 Aug 708.2 131.0 327.3 319.8 7.4 146.9 28.4 74.7 708.2 135.3 237.3 29.7 28.3 1.4 100.0 - 153.7 52.3 Sept 709.5 135.0 291.8 281.5 10.2 197.2 20.6 64.9 709.5 129.2 245.7 38.5 37.9 0.6 95.7 - 157.4 43.1 Oct 762.6 141.5 427.3 413.7 13.6 99.2 13.7 81.0 762.6 139.8 247.7 40.8 40.8 - 111.0 - 160.8 62.6 Nov 746.9 146.9 390.1 371.1 19.0 133.8 12.6 63.5 746.9 139.8 261.0 29.3 29.1 0.3 100.5 - 161.1 55.2 Dec 765.3 143.1 433.8 407.9 25.9 104.2 16.9 67.3 765.3 140.9 268.1 37.3 37.3 - 107.8 - 150.1 61.1 0 1987 Jan 803.5 154.1 476.9 454.3 22.6 84.4 20.0 68.1 803.5 145.0 285.4 46.0 45.9 - 109.3 - 150.1 67.8 Feb 801.1 150.2 450.8 430.0 20.8 111.6 15.7 72.7 801.1 146.3 288.5 43.3 43.3 - 107.0 - 150.1 65.9 Mar 799.1 172.1 450.7 436.2 14.5 79.8 25.3 71.1 799.1 160.2 251.8 70.1 70.1 - 119.8 - 154.3 4..8 Apr 832.5 194.6 426.2 408.0 18.2 115.5 24.6 71.6 832.5 155.5 250.3 47.5 47.5 - 118.7 - 158.2 102.2 May 856.1 209.0 436.1 414.0 22.0 114.4 24.9 71.8 856.1 203.8(3) 212.2(3) 94.9 94.9 - 126.1(3) - 160.7 58.3 June 942.4 259.6 561.4 544.4 16.9 18.7 26.7 75.9 942.4 189.3 222.1 49.2 49.2 - 259.5 - 167.0 55.4 July 958.5 268.9 569.2 549.2 20.0 18.7 26.8 74.9 958.5 189.0 219.5 47.3 47.3 - 273.5 - 168.3 61.0 Aug 998.5 284.3 603.5 581.7 21.8 14.8 21.8 74.1 998.5 211.2 220.5 52.1 52.1 - 274.8 - 175.8 64.1 Sept 941.0 284.6 546.2 526.3 19.9 15.3 21.6 73.3 941.0 201.1 215.5 62.2 62.2 - 211.3 - 177.7 73.3 Oct 1069.1 316.0 652.5 619.6 32.8 15.3 10.8 74.6 1069.1 222.4 214.8 61.3 61.3 - 319.8 - 183.3 67.4 Nov 1049.8 324.7 622.2 586.4 35.8 15.3 11.0 76.7 1049.8 211.9 220.3 60.1 60.1 | 296.5 - 187.6 73.4 Dec 1052.1 310.4 637.0 606.0 30.9 11.8 10.7 82.3 1052.1 213.3 223.4 42.7 42.7 - 307.1 - 175.9 89.8 (C) Provisional data. Discrepancies in the totals are due to roundlng.-(l) Demand Deposits of Government Corporations estimated. Saving Deposits included in Demand Deposits. -(2)Government Deposits estimated.-(3) Continuity Impaired due to changed classification TABLE 6.3 : MONETARY SURVEY (*) ---------------------------- Millions of Ngultrum ------------------------------------------------------------------------------------------------------------ End of Period ------------------------------------------------------------------------------- Item 1980 1981 | 1982 | 1983 j 1984 | 1985 | 1986 | 1987(1) ------------------------------------------------------------------------------------------------- Foreign assets (Net) 145.3 241.9 292.3 345.7 490.2 595.4 700.1 1,077.0 Rupee 103.7 176.4 205.8 260.5 317.6 358.9 380.0 579.0 Other 41.6 65.5 86.5 85.2 172.6 236.5 320.1 498.0 Domestic credit 13.1 -13.9 -65.3 37.1 20.8 74.3 61.1 -211.7 Claims on govt. (Net) -79.5 -101.4 -160.5 -63.3 -78.3 -7.7 -23.1 -304.7 Claims on govt. corps. 51.6 35.5 45.7 57.3 41.3 26.6 16.9 10.7 Claims on pvt.sector 41.0 52.0 49.5 43.1 57.8 55.4 67.3 82.3 Total liquidity - Broad money (M2) 95.0 132.1 159.5 250.7 342.3 435.2 499.7 540.2 Money supply - Narrow money (Ml) 65.3 74.3 85.7 103.8 157.4 202.9 231.6 316.8 Currency outside banks 3.1 6.1 12.2 22.1 46.2 70.4 90.7 103.5 Demand deposits 62.2 68.2 73.5 81.7 111.2 132.5 140.9 213.3 Quasi - money 29.7 57.8 73.8 146.9 184.9 232.3 268.1 223.4 Other items (Net) 63.4 95.9 67.5 132.1 168,7 234.5 261.5 325.1 ------------------------------------------------------------------------------------------------------------ (*) Excluding Rupees in circulation. Discrepancies in the totals are due to rounding. Derived from Money and Banking Statistics of the Royal Monetary Authority and the Bank of Bhutan.- (1) Continuity impaired due to changed classification. TABLE 6.4 . MONEY SUPPLY AND ITS COUNTERPARTS(*) ---------------------------------------------- End of Period ------------------------------------------------------------------------------------------------------------------------------------------------------------------- 1986 11987 Millions of Ngultrum ----------------------------------------------------------------------------------------------------------------------------- Item Dec |Jan |Feb 1Mar |Apr jMay |June |July 1Aug isept joct |Nov jDec 1. Foreign assets(net) 700.1 744.2 737.0 739.5 752.2 727.6 912.2 939.4 988.2 928.3 1070.8 1060.1 1,077.0 1.1.Rupees 380.0 418.0 397.6 376.8 371.6 330.8 509.1 514.4 542.8 477.2 576.3 541.9 579.0 1.2.Other 320.1 326.2 339.4 362.7 380.6 396.8 403.0 424.9 445.5 451.1 494.5 518.2 498.0 2. Domestic credit 61.1 37.7 58.4 21.7 57.2 46.8 -147.5 -162.5 -173.5 -110.5 -228.6 -203.0 -211.7 2.1.Claims on government(net) -23.1 -50.5 -30.0 -74.7 -39.1 (4)-49.9 -250.1 -264.2 -269.4 -205.4 -314.0 -290.7 -304.7 2.2.Claims on government corps. 16.9 20.0 15.7 25.3 24.6 24.9 26.7 26.8 21.8 21.6 10.8 11.0 10.7 2.3.Claims on private sector 67.3 68.1 72.7 71.1 71.6 71.8 75.9 74.9 74.1 73.3 74.6 76.7 82.3 3. Other factors(l) 261.5 268.1 273.1 249.3 318.9 275.2 262.8 278.9 286.4 300.0 306.9 324.3 325.1 ----------------------------------------------------------------------------------------------------------------------------------------------------------------- 4. Proad money supply 499.7 513.8 522.3 511.9 490.5 (4)499.2 501.9 498.0 528.3 517.8 535.3 532.8 540.2 (l.plus 2.less 3.) M2 4.1.Quasi-money 268.1 285.4 288.5 251.8 250.3 (4)212.2 222.1 219.5 220.5 215.5 214.8 220.3 223.4 4.1.1.Time deposits 268.1 285.4 288.5 251.8 250.3 (4)212.2 222.1 219.5 220.5 215.5 214.8 220.3 223.4 4.2.Narrow money supply (M2 less quasi-money) Ml 231.6 228.4 233.8 260.1 240.2 (4)287.0 279.8 278.5 307.8 302.3 320.5 312.5 316.8 4.2.1.Cy.outside banks(2) 90.7 83.4 87.5 100.0 84.8 83.2 90.5 89.5 96.6 101.2 98.1 100.6 103.5 4.2.2.Demand deposits(3) 140.9 145.0 146.3 160.2 155.5 (4)203.8 189.3 189.0 211.2 201.1 222.4 211.9 213.3 ------------------------------------------------------------------------------------------------------------------------------------------------------------------- (*) Discrepancies in the totals are due to rounding.-(l) Other factors comprise Capital Accounts and other unclassified balance sheet items.-(2) Excluding Rupees in circulation outside banks.-(3) Including Savings Deposits.-(4) Continuity impaired due to changed classification. TABLE 6.5 : ROYAL INSURANCE CORPORATION OF BHUTAN - FINANCIAL STATISTICS(*) ------------------------------------------------------------------------- Millions of Ngultrumr --------------------------------------------------------------------------------------------------.----------------------------------------------------------------- Assets Liabilities ------------------------------------------------------------------------------- --------------------------------------------------------------------- Investment (1) ------------------on-------------------.-.---------.----------. Claims on Claims on Nornmone - Govern - Claims on tary Insu - End ment Claims on Deposit Financial rance Other of Enter - Private Money Institu- Real Reserve Life GEPF UTB Capital Items Period Total Reserves Total prises Sector Banks tions Estate Total Funds Fund 1und Fund Accounts (Net) ------------------------------------------------------------------------------------------- --------------------------------------------------------------------- 1983 140.1 2.6 137.5 25.1 41.3 52.4 6.1 12.6 140.1 5.8 4.8 102.5 21.3 12.0 -6.2 1984 170.1 7.0 163.1 29.0 61.0 51.2 6.8 15.0 170.1 9.8 5.6 119.8 36.8 12.0 -13.9 1985 219.1 3.4 215.7 17.9 102.2 71.8 6.8 17.1 219.1 7.6 7.4 149.2 66.0 12.0 -23.1 1986 269.5 2.5 267.1 18.1 150.3 71.0 7.0 20.7 269.5 6.9 9.0 171.3 92.1 12.0 -21.8 1987 Jan 270.2 1.0 269.2 18.1 154.1 69.3 7.0 20.7 270.2 6.9 9.0 173.2 93.7 12.0 -24.5 Feb 275.3 0.6 274.7 18.2 159.5 69.3 7.0 20.7 275.3 6.9 9.0 174.8 93.1 12.0 -20.4 Mar 281.3 0.9 280.4 16.8 167.6 68.3 7.0 20.7 281.3 6.9 9.0 177.1 92.6 12.0 -16.2 Apr 288.2 1.0 287.2 16.8 174.4 68.3 7.0 20.7 288.2 6.9 9.0 179.6 96.0 12.0 -15.2 May 294.8 0.4 294.4 16.8 182.6 67.3 7.0 20.7 294.8 6.9 9.0 181.8 98.7 12.0 -13.6 June 304.5 0.5 304.0 16.9 192.2 67.3 7.0 20.7 304.5 6.9 9.0 175.0 99.8 12.0 1.8 July 317.4 1.0 316.5 16.9 203.9 68.0 7.0 20.7 317.4 6.9 9.0 175.1 103.0 12.0 11.6 Aug 307.6 0.4 307.1 16.9 205.9 56.6 7.0 20.7 307.6 6.9 9.0 173.6 109.2 12.0 -3.1 Sept 318.4 0.5 318.0 17.0 216.7 56.6 7.0 20.7 318.4 6.9 9.0 178.3 122.7 12.0 -10.4 Oct 331.9 1.8 330.2 17.0 222.5 63.0 7.0 20.7 331.9 6.9 8.7 187.9 133.5 12.0 -17.0 Nov 346.3 0.8 345.5 17.1 227.4 73.3 7.0 20.7 346.3 6.9 9.0 189.2 141.3 12.0 -12.0 Dec 354.5 0.8 353.8 14.9 233.2 75.2 7.0 23.4 354.5 6.9 9.2 210.8 145.4 12.0 -29.7 --------------------------------------------------------------------------------- ------------------------------------------------------------------(------------- Source : Royal Insurance Corporation of Bhutan.-(*) Totals may not add up due to rounding.- (1) Including UTB funds. TABLE 6.6 : ROYAL INSURANCE CORPORATION OF BHUTAN - INVESTMENT BY SECTOR OF ECONOMIC ACTIVITY, AMOUNTS ----------------------- --------------------------------------------------------------------- ----------- OUTSTANDING Millions of Ngultrum ------------------------------------------------------------------------------------------------------------ End of Period ----------------------------------------------------------------------------------------- 1987 Sector 1983 1984 1985 1986 Jan |Feb kMar |Apri |May ------------------------------------------------------------- ------------------------------------- Agriculture and forestry 5.32 9.00 9.00 9.00 9.00 9.00 9.00 9.00 9.00 Mining and O manufacturing 19.82 27.25 26.60 31.66 32.09 32.46 31.71 32.36 32.93 n Housing construction 33.55 40.17 68.21 107.06 110.27 115.36 119.30 124.74 129.47 Other construction (1) 12.60 15.00 17.07 20.68 20.68 20.68 20.68 20.68 20.68 Trade and commerce - - - 6.66 6.25 6.04 6.71 7.46 8.90 Transport 5.86 10.37 12.71 11.28 11.81 12.10 14.92 14.79 16.15 Personal loans 1.89 3.25 3.07 2.73 2.79 2.75 2.71 2.83 2.97 Bank deposits 52.42 51.20 71.78 70.98 69.34 69.34 68.34 68.34 67.34 Others (2) 6.06 6.83 7.26 7.00 7.00 7.00 7.00 7.00 7.00 TOTAL 137.52 163.07 215.70 267.05 269.23 274.73 280.37 287.20 294.44 ------------------------------------------------------------------------------------------------------------ Source : Royal Insurance Corporation of Bhutan.- (*) Totals may not add up due to rounding. Including UTB funds.- (1) The RICB's own real estate investments.- (2) UTB participations and shares. TABLE 6.7 : UNIT TRUST OF BHUTAN - FINANCIAL STATISTICS (*) -------------------------------------------------------- Millions of Ngultrum --------------------------------------------------------------------------------------------------------------------------- Assets Liabilities ------------------------------------------------- -------------------------------------------------- --------- Investments Credit from End Deposit Other of Through Call Money Capital Items Period |Total |Reserves ITotal RICB Direct Total |Deposits |Loans Banks Accounts (Net) -------------------------------------,---------------------------------------------------------------- 1980 4.0 0.5 3.5 - 3.5 4.0 1.6 - - 2.5 -0.1 1981 10.5 0.1 10.4 - 10.4 10.5 7.6 - - 2.6 0.3 l 1982 16.3 1.2 15.0 - 15.0 16.3 12.8 - - 3.1 0.3 _ 1983 25.2 0.0 25.2 21.3 3.9 25.2 20.1 - - 3.8 1.3 1984 40.9 0.1 40.8 36.8 4.0 40.9 33.8 - - 4.4 2.7 1985 70.0 0.3 69.7 65.4 4.3 70.0 57.6 - - 4.2 8.2 1986 100.3 0.0 100.3 91.4 8.9 100.3 86.8 - 0.0 5.4 8.1 1987 Jan 97.5 0.8 96.7 92.0 4.7 97.5 81.9 1.0 1.8 4.2 8.5 Feb 97.3 1.8 95.5 90.6 5.0 97.3 81.4 - 3.3 4.2 8.4 Mar 97.9 0.9 97.0 91.6 5.4 97.9 84.3 - 3.1 5.4 5.1 Apr 99.9 0.4 99.6 95.1 4.5 99.9 89.1 - 0.5 5.4 5.0 May 106.0 3.8 102.3 97.7 4.5 106.0 88.2 1.5 3.7 5.4 7.2 June 104.8 1.2 103.6 98.8 4.7 104.8 89.4 - 1.9 5.4 8.0 July 110.7 3.9 106.8 101.9 4.9 110.7 92.0 2.5 4.0 5.3 7.0 Aug 117.2 4.2 112.9 108.2 4.8 117.2 97.1 2.5 4.2 5.3 8.1 Sept 130.9 4.9 126.0 121.6 4.4 130.9 103.8 8.0 4.8 5.3 9.0 Oct 147.1 10.2 136.9 132.2 4.7 147.1 115.0 6.6 10.2 5.3 10.0 Nov 146.1 1.8 144.3 139.9 4.4 146.1 119.2 9.6 1.8 5.3 10.3 Dec 150.2 0.1 150.1 145.4 4.7 150.2 125.3 6.5 - 5.3 13.1 --------------------------------------------------------------------------------------------------------------------------- Source :Unit Trust of Bhutan.- (*) Totals may not add up due to rounding. TABLE 7.1 : CONSUMER PRICE INDEXES,JUNE 1981 TO JUNE 1987. (December 1979 = 100) Ave. change(a) Component Weight 1981 1982 1983 1984 1985 1986 1987 1987 0X) ( X ) --------------- -------------- --------------- --------------- -------------- --------------- June Dec June Dec June Dec June Dec June Dec June Dec June Dec June Dec 80-87 79-87 INDEXES Food 72.3 112.0 115.7 129.1 122.8 139.4 149.6 148.0 156.9 155.6 160.8 165.0 169.2 171.7 183.8 Non-food 27.7 119.0 117.7 130.4 125.6 176.7 147.2 187.3 171.4 171.1 178.1 204.2 215.2 217.5 229.3 Total 100.0 113.9 116.3 129.5 123.5 149.7 148.9 158.8 160.9 159.9 165.6 175.9 182.0 184.4 196.4 1 PERCENTAGE CHANGE ON THE PREVIOUS YEAR Food 72.3 11.0 14.5 15.3 6.1 7.9 21.9 6.1 4.9 5.2 2.5 6.1 5.3 4.0 8.6 7.9 7.9 Noa-food 27.7 8.4 -0.9 9.6 6.7 35.5 17.2 6.0 16.5 -8.6 3.9 19.3 20.8 6.5 6.5 10.3 10.9 Total 100.0 10.2 9.7 13.7 6.2 15.6 20.6 6.1 8.0 0.7 2.9 10.0 9.9 4.8 7.9 8.6 8.8 PERCENTAGE CHANGE. ON THE PREVIOUS PERIOD Dec 79 - Dec 87 Food 72.3 10.8 3.3 11.6 -4.9 13.6 7.3 -1.1 6.0 -0.8 3.3 2.6 2.5 1.4 7.0 3.9 - Non- food 27.7 -1.1 10.8 -3.7 40.7 -16.7 27.2 -8.5 -0.2 4.1 14.7 5.4 1.1 5.4 5.3 Total 100.0 7.5 2.1 11.4 -4.6 21.2 -0.5 6.7 1.3 -0.6 3.5 6.2 3.5 1.3 6.5 4.3 - (a) Average rate of change measured on a yearly or half-yearly basis. Source : Collection undertaken by Central Statistical Office. TABLE 7.2: CONSUMER PRICE INDEXES, MAJOR COMPONENTS, PERCENTAGE CHANGE ON PREVIOUS PERIOD, 1981 TO 1987 P E R I O D Average Weight 1981 1982 1983 1984 1985 1986 1987 change(&) (E) ---- - - ----------- Component June Dec June Dec June Dec June Dec June Dec June Dec June Dec (E) Cereals 37.77 8.9 -1.0 21.2 -1.6 17.1 10.1 -7.5 8.4 -7.5 4.2 2.9 0.1 0.9 2.9 3.2 Pulses 0.67 -19.5 11.2 8.6 -8.8 -4.0 5.6 9.6 -0.7 14.2 2.8 4.0 1.0 2.8 9.0 4.2 Vegetables 2.43 -18.1 7.2 30.1 -9.0 11.6 -2.2 16.8 8.8 3.1 8.5 0.8 5.7 -0.1 10.0 4.8 Fruits 0.04 7.3 18.4 -3.5 1.3 29.1 -23.4 33.1 -17.5 22.8 35.1 25.3 -37.2 20.5 11.8i 5.9 Edible oil and fats 2.87 8.6 13.0 0.8 -6.9 12.7 0.9 -0.4 5.8 -5.2 0.8 8.4 3.4 9.5 29.1 5.1 Spices 5.10 14.0 1.5 6.9 -10.7 11.5 1.7 13.9 -4.0 18.6 3.9 0.6 15.2 0.2 18.2 5.4 I Milk nd its products 7.07 25.0 18.9 -13.5 -3.9 32.8 4.2 4.1 -0.4 8.3 -1.1 0.7 6.5 0.5 7.4 4.5 Othar food and intoxicants 16.36 14.9 3.8 6.5 -9.7 -0.3 6.1 6.7 6.7 5.6 2.8 3.1 1.8 2.3 7.7 4.1 OD Fuel and lighting 3.65 -42.6 17.7 -10.7 2.1 -9.3 18.8 -6.2 19.3 -7.5 8.3 11.3 6.2 -0.9 7.0 2.4 1 Clothing and footvwar 21.20 7.1 -4.2 14.8 -5.7 55.1 -21.8 34.5 -12.8 0.8 3.1 17.3 5.0 1.2 4.9 5.6 Statior^ry goods and personal effects 0.62 5.7 3.1 19.9 -0.4 -7.1 8.3 5.3 7.3 4.5 3.5 3.4 1.5 0.2 18.1 4.9 Misc- goods and services 1.57 39.8 -2.6 8.1 7.3 -5.0 2.7 6.0 9.0 -2.4 8.1 0.0 9.0 2.1 6.6 6.6 Furniture and utensi1s 0.65 -0.7 23.0 -4.3 -2.5 16.2 3.6 6.6 8.2 -0.9 9.3 -2.8 7.2 3.2 3.2 5.3 Total 100.00 7.5 2.1 11.4 -4.6 21.2 -0.5 6.7 1.3 -0.6 3.5 6.2 3.5 1.3 6.5 4.3 (a) Avrage six morthly rate of chang- -asured over the period December 1979 to June 1987. Source: Collection undertaken by Central Statistical Office. -109- TABLE 7.3 EXCHANGE RATES, NGULTRUM/$ US (*) ---------------------------------------- Period Average --------------------------------------------------------------------------------------------------------- Year ---------------------------------------------------------------------------------------- Period 1980 1981 | 1982 | 1983 | 1984 1985 | 1986_ 1987 1988 Jan 7.9360 7.9420 9.1240 9.7900 10.7170 12.6160 12.2750 13.0400 13.0560 Feb 7.9300 8.1830 9.1860 9.9040 10.7560 12.9380 12.3740 13.0680 Mar 8.1140 8.2110 9.2760 9.9690 10.7490 12.9590 12.2880 12.9370 Apr 8.0510 8.2510 9.3580 9.9780 10.8330 12.4850 12.4030 12.8110 May 7.8790 8.3910 9.2760 9.9940 11.0290 12.5460 12.4840 12.6930 June 7.8320 8.5870 9.4280 10.0520 11.0540 12.4620 12.6120 12.8400 July 7.7480 8.E700 9.5370 10.0850 11.3400 12.0340 12.5130 13.0270 Aug 7.7670 8.9920 9.5540 10.1700 11.5740 11.9350 12.5770 13.1000 Sept 7.7260 9.0910 9.6190 10.1880 11.8240 12.1760 12.6870 13.0210 Oct 7.7100 9.1570 9.6660 10.2240 12.0800 12.0280 12.8540 13.0590 Nov 7.7690 9.1110 9.7550 10.3500 12.0830 12.0860 13.0920 12.9880 Dec 7.8950 9.1170 9.6840 10.4820 12.3120 12.1600 13.1710 12.9540 ------------- --------- --------- - -------- --------- --------- --------- --------- --------- --------- Calendar year average 7.8631 8.6586 9.4553 10.0988 11.3626 12.3688 12.6108 12.9615 ------------- --------- --------- ------- -- --------- --------- --------- --------- --------- --------- Fiscal year 1979/80 1980/81 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 --------- --------- --------- --------- --------- --------- --------- --------- --------- average 8.0764 7.8928 8.9294 9.6283 10.3121 11.8868 12.2374 12.7865 --------------------------------------------------------------------------------------------------------- Source : International Financial Statistics, IMF, various issues.- (*) Midpoint rates. DISTRIBUTORS OF WORLD BANK PUBLICAT!IONS ARGENTINA FINLAND KOREA, REPUBLIC OF SPAIN Carlos Hirsch, SRL Akateeminen Kirjakauppa Pan Korea Book Corporation Mundi-Prensa Libros, S.A. Galeria Guemes P.O. Box 128 P. 0. Box 101, Kwangwhamun Castello 37 Florida 165. 4th Floor-Ofc. 453/465 SF-00101 Seoul 25001 Madrid 1333 Buenos Aires Helsinki 10 KUWAIT SRI LANKA AND THE MALDIVES AUSTRALIA, PAPUA NEW GUINEA, Fiji, FRANCE MEMRB Lake House Bookshop SOLOMON ISLANDS, VANUATU, AND World Bank Publications P.0, Box 5465 P.O. Box 244 WESTERN SAMOA 66, avenue d'lena MALAYSIA 100, Sir Chittampalam A. GardinerSlawatha Info-Line 75116 Paris University of Malaya Cooperative Bookshop, Colombo 2 Overseas Document Delivery GERMANY, FEDERAL REPUBLIC OF Limitedi SWEDEN Box 506, GPO UNO-Verlag P. 0. Box 1127, Jalan Pantai Baru Fritzes Fackboksforetaget Sydney, NSW 2001 Poppelsdorfer Allee 5.5 Kuala Lumpur Regenngsgatan 12. Box 163-56 AUSTRIA D-5300) Bonn 1 MEXICO 5-103 27 Stockholm Gerold and Co, GREECE INFOTEC SWITZERLAND A-1011 Wien KEME Apartado Postal 22-860 Libraine Pavot Graben 31 24. lppodamou Street Col. PE/A Pobre 6, rue Gren'us BAHRAIN Athens-11b35 14060 Tlalpan, Mexico D,F, Case postal 381 MEMRB Information Services GUATEMALA MOROCCO CH 1211 Geneva 11 P.O. Box 2750 Librefias Piedra Santa Societe d'Etudes Marketing Marocaine TANZANIA Manama Town 317 Centro Cultural Piedra Santa 2 Rue Moliere, Bd. d'Anfa Oxford Universitv Press BANGLADESH 11 calle 6-50 zona I Casablanca P.O0. Box 5299 Micro Industries Development Assistance Guatemala City NETHERLANDS Dar es Salaam Society (MIDAS) HONG KONG, MACAO InOr-Publikaties byv. THAILAND House 56, Road 7A Asia 2000 Ltd. P.O. Box 14 Central Department Store Dhanmondi RJArea 6 Fl., 146 Prince Edward Road, W, 7240 BA Lochem 306 Silom Road Dhaka 1209 Kowloon NEW ZEALAND Bangkok BELGIUM Hong Kong Hills Library and Information Service TRINIDAD & TOBAGO, ANTIGUA, Publications des Nations Unies HUNGARI' Pri-vate Bag' BARBUDA, BARBADOS, DOMINICA, Av. do Roi 202 Kultura New Market GRENADA, GUYANA, JAMAICA, 1060 Brussels P.O. Box 139 Auckland MONTSERRAT, ST. KIMS AND NEVIS, BRAZIL 1389 Budapest 62 NIGERIA ST. LUCIA, ST. VINCENT & Publicacoes Tecnicas Intemnacionais Ltda. INDIA Universitv Press Limited GRENADINES Rua Peixoto Gomide. 209 Allied Publishers Private [I.d, Three Crowns Building Jericho Systematics Studies Unit 01409 Sao Paulo, SP 751 Mount Road Private Mail Bag 5095 55 Eastern Main Road CANADA Madras - 600 002 Ibadan Curepe Le Diffuseur Branch offices: NORWAY Trinidad, West Indies C.P. 85, 1501 Ampere Street 15 JIN. Heredia Marg Narvesen Information Center TURKEY Boucherville, Quebec Ballard Estate Bertrand Narvesens vei 2 Haset Kitapevi, A,S. J4B 5E6 Bombay - 400 038 P.O. Box 6125 Davutpasa Caddesi CHINA 13/14 Asaf All Road N-0602 Oslo 6 S-ergekale Sokak 115 China Financial & Economnic Publishing New Delhi.- 110 002 OMAN l'opka.pi House MEMRB Information Services Istanbul 8. Da Fo Si Dong Jie 17 Chittaranian Avenue P.O. Box 1613, Seeb Airport UGANDA Beijing Calcutta - 700 072 Muscat Uganda Bookshop COLOMBIA Jayadeva Hostel Building PKSA ..Bx74 Enlace Ltda. 5th Main Road Gandhinagar PfraKISTkAN gPnO. Boxp714 Careers 6 No. 51-21 Bnaoe-500965, Shahrah-e-Quaid-e-Azam UNITED ARAB EMIRATES Bogota D.E. 3-5.1129 Kachiguda Cross Road P.O. Box No, 729 MIEMRB Gulf Co. Apartado Aereo 4430 Hyderabad - 500 027 Lahore 3 P. 0. Box 6097 Cali, Valle Prarthana Flats, 2nd Floor F7RU Shatiah COSTA RICA Near Thakore Baug, Navrangpura Editorial Desarrollo SA UNITED KINGDOM Ubreria Trejos Ahmedabad - 380009 Apartado 3824 Microinfo Ltd. Calle 11-13 Patiala House LUma P. 0. Box 3 Av. Fernandez Guell 16-A Ashok Marg PHILIPPINES Alton, Hampshire GU34 2PG San Jose Lucknow - 226 001 National Book Store England COTE DIVOIRE INDONESIA 701 Rizal Avenue URUGUAY Centre d'Edition et de Diffusion Africaines Pt. Indira Limited Metro Manlla Instituto Nacior,aI del Libro (CEDA) JI. Sam Ratulangi 37 POLAND San Jose 1 16 04 B,P. 541 Jakarta Pusat ORPAN Montevideo Abidjan 04 Plateau P.O. Box 181 Palac Kultury i Nauki VENEZUELA CYPRUS IRELAND 00.001 Warszawa Libreria del Este MEMRB Information Services TDC Publishers PORTUGAL Aptdo. 60.337 P.O. Box 2D198 12 North Frederick Street Livraria Portugal Crcs16- Nicosia Dublin I Rua Do Carmo 70-74 YUGOSLAVIA DENMARK ISRAEL 1200 Lisbon Jugoslovensaka Knjiga SamfundsLitteratur The Jerusalem Post SAUDI ARABIA, QATAR YU-11000 Belgrade Teg Republike Rosenoerns Alle 11 The Jerusalem Post Bullding Jarir Book Store ZIMBABWE DK-1970 Frederiksberg C. I'.O. Box 81 P.O0. Box 31% Longman Zimbabwe DOMINICAN REPUBLIC Romema Jerusalem 91000 Riyadh 11471 P.O. Box ST 125, Southeiton Editora Taller, C. por A. ffALY SINGAPORE, TAIWAN, BURMA, BRUNEI Harare Restauracion Ucosa Commissionaria Sansoni SPA Information Publications Apdo. postal 2190 Via Lamarmora 45Prvt,Ld Santo Domingo Casella Postale 552 Pr06IvateF, Ltd. Idutra EGYPT, ARAB REPUBLIC OF 50121 Florence Bldg., 24 New Industrial Road Al Ahram JAPAN Singapore Al Galaa Street Eastern Book Service SOUT H AFRICA Cairo 37.3, H-ongo 3-Chome, Bunkyo-ku 113 Oxford University Press Southern Africa The Middle East Observer Tokyo P.O. Box 1141 8 Chawarbi StreetJODNCpTonM CairoJODNCpTon80 EL SAVADORJordan Center for Marketing Research FuaeL SAVDRP.O. B3ox 3143 Edilico La Centro Americana 6o. Piso Jabal Amman Apartado Postal 01-278 KENYA San Salvador 011 Africa Book Service (E.A.) Ltd. P. 0. Box 45245 Nairobi Prices and credit terms vary fromn country to country. Consult your local distributor before placing an order. PHYSICAL RELIEF 90 91e (meters) B H U T A N "kflMALAYA' 5000 BHUTAN FORESTRY 11 PROJECT | , ' - 3 #| |PROJECT LOCATIONS -PROJECT LOCATIONS A ELEVATION POINTS IN METERS P'ROADS:* AIRPORT 4 p,- PAVED ROADS ® NATIONAL CAPITAL 7O'~1ILLUNPAVED ROADS 0 DISTRICT CAPITALS - ROADS UNDER CONSTRUCTION ® OTHER TOWNS __ v Awww ROADS UNDER IMPROVEMENT 0 SELECTED VILLAGES KANGRI ROADS PROPOSED UNDER DISTRICT BOUNDARIES - .- 7554 FIFTH PLAN - - -INTERNATIONAL BOUNDARIES *ROAD INFORMATION AS OF 1983. 7G A S A Laya / * %%/ Lunana / o) / 28'8 U H U T SI ;LHARI / / ' 73142BUM HG' PUNAK / H A G WANGDIPHODRANG kuntsi J\ Puakha,..i~Ta hi Ya'ngtsi , - Nob ng 2 ( Drukyel zong \(ip (rWangdiphodrang T Sitokha -- H' - ^;G AN G -CHAMGANG T T N S A : I Tashigang HA Chuzom Q. gangun \mON AR D A G A NA\~-.. \ -( Chimakoth Sibsoo L- T..Chukha-..-"-\ PEgaMmAu PemI ,Gatsel ,' S A M D R U P L G AY G G ON GK HA R Zamchi PaI. hnsoigS rbhn ~NA5 DchlgO Nang!arnM eothang ~ PC] nt oingGaylegphug. KILOMETERS 0 10 20 30 40 MILES 6O 5 10 15 2`0 '25 89' 90 9 92' JANURI 18 * r .. F ;..- jr:7 The World Bank Headquarters European Office Tokyo Office 1818 H Street, N.W. b6, avenue d'lena Kokusai Building Washington, D.C. 20433, U.S.A. 75 110 Paris, France 1-1 Marunouchi 3-chome Telephone: (202) 477-1234 Telephone: (I) 40.69.30.00 Chiyoda-ku, Tokyo 100, Japan Facsimile: (202) 477-0391 Facsimile: (1) 47.20.19.66 Telephone: (3) 214-5001 Telex: WUI 64145 WORLDB3ANK 1elex: 842-620628 Facsimile: (03) 214-3657 RCA 248423 WORLDBK Telex: 781-26833 Cable Address: IN'T'BAFRAD I 02SI IING ''TC8Nl7C' *~~~~ .F . : - -. . . . . ISN05-21.3. .B 0-21 117 4 ... ,:,}. f,.- , E,.,, .,,,-- .- . > . - .^ ..... .