Bhutan is at the threshold of a major economic transformation, aiming to achieve a high income country status with a per capita GDP of USD 12000 by 2034. To achieve this target, the required average annual growth rate will be about 11%. Achieving and sustaining this high growth rate for a decade will not be easy. To achieve this, not only new engines of growth are required, but also, there is an immediate need to overcome binding growth constraints. While the GMC SAR project provides the framework of a new growth engine-representing a fusion of cutting edge technology, green energy and mindfulness, the immediate challenge is to address institutional and systemic issues that have severely constrained economic growth, especially in the last one and half decade. Long term average annual growth rate has sharply declined from 8.4% in 2000- 2010 to 4.1% in 2010-2013. The World Bank country partnership framework (CPF) broadly aims to accelerate the growth process by addressing institutional and systemic issues that have rusted the existing growth engine as well as to consolidate the new growth engine.
Figure 1: Average annual growth rate (in %)
Based on a country diagnostic study, the World Bank has identified three major growth constraints- subdued private investment, climate change induced vulnerabilities, and infrastructural bottlenecks. During the 13th five year plan, the bank will prioritise its support in these areas to address identified constraints. Choice of the three outcome areas in the CPF reflects the focus of support – increased private investment, enhanced climate resilience and resilient infrastructure for improved connectivity. All these outcome areas together will contribute to the WBG’s overarching objective of more and better jobs.
The Bank has tried to align its development assistance with the needs of the 13th five year plan, while it does not rule out direct support to GMC SAR project. The Bank’s support would range from a minimum of $175 million to a maximum of $1 billion subject to fulfilment of certain conditions related to the direction and the pace of market and institutional reforms and the ability of the government to maintain macroeconomic stability through prudent fiscal management and sound financial system. The Bank’s support beyond $175 million will be subject to meeting the ‘conditionality’, which the CPF calls ‘if and then’ approach. The Bank has identified followings as the priority areas of structural reforms-extension of external commercial borrowing to the financial sector, domestic treatment of the foreign lenders, review of FDI policy and legal framework, SOE reforms and legal framework for venture capital. These are definitely path breaking reforms necessary for a higher growth trajectory. These reforms will certainly improve the business enabling environment and provide the first order condition for accelerated private investment. Progress on these structural reforms will determine the Bank’s choice of the support instrument and the level of its engagement during the 13th plan. Besides, the Bank will also support the government to maintain macro, fiscal, and financial stability that is necessary to maintain debt sustainability at a moderate level. In this context, the CPF resembles the Bank’s structural adjustment programme (SAP). We need to remember that the SAP has a mixed track record and it does not automatically ensure desired transformation. Several factors determine the impact of SAP, but the major factor has been the level of commitment of the concerned governments to carry out required reforms. The onus is now on the Royal Government of Bhutan to speed up the desired reforms that support private sector driven investment and growth process.
Two of the leading growth sectors in the 13th plan- hydroelectricity and agriculture are highly climate sensitive. The bank will also focus its support to strengthen the government’s capacity to manage climate change risk and strengthen resilience, create an adaptive social protection system, and enhance the potential of a wood based economy. The Bank will provide technical assistance to develop carbon market infrastructure and mobilise innovative climate finance mechanisms to monetise the country’s carbon negative status. This would be critical to mobilise vast financial resources needed for climate change adaptation and mitigation measures. An unconfirmed estimate suggests that Bhutan climate change adaptation and mitigation measures would require $14 billion, which is far beyond the capacity of existing instruments and institutions to mobilise resources of this magnitude. Bhutan’s ability to monetise its carbon negative status will be a decisive factor.
Other highlights of the CPF are- Bank support to develop 1.12 GW Dorjilung hydroelectric power project through a combination of WBG resources and public private partnership, improve digital connectivity and data infrastructure, promote development of improved and low carbon urban infrastructure.
Although CPF has also cautioned against five substantial risks, my pick is only three of them. Heightened macroeconomic volatility contributed by external (destabilising global events) and internal (large SOEs, rising NPL and project delays) factors is listed as a substantial risk to the CPF and 13th plan. The CPF will place much greater demand on the institutional capacity and resources much beyond their current levels, a source of major institutional risk. The Bank has identified foreign exchange control environment as a potential risk to the resilient financial management. Although the Bank and the government will work to minimise these risks through appropriate interventions, deviations from the goalpost cannot be ruled out. Measures for better coordination among donor agencies for a coordinated effort to optimize resource use efficiency is a noteworthy aspect of CPF. The CPF is also a reflection of the global community’s trust and willingness to support Bhutan economic transformation strategy, a crucial factor for the success of 13th five year plan.
Contributed By:
Sanjeev Mehta
Senior Professor, Royal Thimphu College
