Bhutan: Strengthening Economic Management Program

Transcription

1 Completion Report Project Number: Loan/Grant Numbers: 2994/0338 July 2015 Bhutan: Strengthening Economic Management Program This document is being disclosed to the public in accordance with ADB s Public Communications Policy 2011.

2 CURRENCY EQUIVALENTS Currency Unit ngultrum (Nu) a At Appraisal At Project Completion (21 March 2013) (23 July 2014) Nu1.00 = $ $ $1.00 = Nu54.13 Nu60.30 a The ngultrum is pegged to the Indian rupee at par ABBREVIATIONS ADB Asian Development Bank ARMS audit resource management system DPA Department of Public Accounts DRC Department of Revenue and Customs GDP gross domestic product MOF Ministry of Finance MOWHS Ministry of Works and Human Settlement MTEF medium-term expenditure framework PVM property valuation methodology RAA Royal Audit Authority RAMIS revenue administration management information system RMA Royal Monetary Authority SDR special drawing right SEMP Strengthening Economic Management Program TA technical assistance NOTE (i) The fiscal year (FY) of the Government of Bhutan and its agencies ends on 30 June. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2015 ends on 30 June (ii) In this report, "$" refers to US dollars. Vice-President W. Zhang, Operations 1 Director General H. Kim, South Asia Department (SARD) Director B. Carrasco, Public Management, Financial Sector and Trade Division, SARD Team leader Team member M. Jensen, Senior Portfolio Management Specialist, SARD R. Galvez-Argente, Associate Project Analyst, SARD M. Panis, Senior Operations Assistant, SARD In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

3 BASIC DATA CONTENTS Page I. PROGRAM DESCRIPTION 1 II. EVALUATION OF DESIGN AND IMPLEMENTATION 1 A. Relevance of Design and Formulation 1 B. Program Outputs 3 C. Program Costs 4 D. Disbursements 4 E. Program Schedule 4 F. Implementation Arrangements 4 G. Conditions and Covenants 5 H. Related Technical Assistance 5 I. Recruitment and Performance of Consultants, Contractors, and Suppliers 6 J. Performance of the Borrower and the Executing Agency 6 K. Performance of the Asian Development Bank 6 III. EVALUATION OF PERFORMANCE 7 A. Relevance 7 B. Effectiveness in Achieving Outcome 7 C. Efficiency in Achieving Outcome and Outputs 9 D. Preliminary Assessment of Sustainability 10 E. Institutional Development 11 F. Impact 11 IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 12 A. Overall Assessment 12 B. Lessons 13 C. Recommendations 14 i APPENDIXES 1. Design and Monitoring Framework Policy Matrix Program Assurances and Conditions 23

4 BASIC DATA A. Loan Identification 1. Country 2. Loan/Grant Numbers 3. Program Title 4. Borrower 5. Executing Agency 6. Amount of Loan 7. Amount of Grant 8. Program Completion Report Number Bhutan 2994/0338 Strengthening Economic Management Program Kingdom of Bhutan Ministry of Finance SDR9,224, $20,810, B. Loan Data 1. Appraisal Date Started Date Completed 2. Loan and Grant Negotiations Date Started Date Completed 3. Date of Board Approval 4. Date of Financing Agreement 5. Date of Loan and Grant Effectiveness In Financing Agreement Actual Number of Extensions 6. Closing Date In Financing Agreement Actual Number of Extensions 7. Terms of Loan Interest Rate Maturity (number of years) Grace Period (number of years) 8. Disbursements a. Dates Initial Disbursement G0038: 21 March 2013 L2994: 23 July 2014 Effective Date 21 March 2013 Consultation Mission held on 8 15 October 2012; upgraded to a Fact-finding Mission, as approved by the South Asia Department director general. 7 February February March March March March 2013 None 30 September July 2014 None Fixed 24 years 8 years Final Disbursement Not applicable Not applicable Original Closing Date G0038: 21 March 2013 L2994: 23 July 2014 Time Interval 0 months 0 months Time Interval 0 months 16 months

5 ii b. Amount ($) Tranche Amount Date March a July 2014 Total 35.0 a Disbursement of SDR 9,224,000 is equivalent to $14,215,475 due to fluctuation in the SDR dollar exchange rate. Source: Asian Development Bank loan financial information. 9. Local costs financed None C. Program Data 1. Program Cost ($ million) Cost Appraisal Estimate Actual Foreign Exchange Cost Local Currency Cost 0 0 Total Source: Asian Development Bank loan financial information. 2. Financing Plan ($ million) Cost Appraisal Estimate Actual Implementation Costs Borrower Financed None None ADB Financed Other External Financing None None Total IDC Costs N/A N/A Total - - ADB = Asian Development Bank, IDC = interest during construction, N/A = not applicable. Source: ADB loan financial information. 3. Cost Breakdown by Program Component ($ million) Component Appraisal Estimate Actual A. Program Loan B. Program Grant Total Source: Asian Development Bank loan financial information. 4. Program schedule Item Appraisal Estimate Actual First tranche release February 2013 March 2013 Second tranche release September 2014 July 2014 Source: Asian Development Bank 5. Program Performance Report Ratings Not required

6 iii D. Data on Asian Development Bank Missions Name of Mission Date No. of Persons No. of Person-Days Specialization of Members a Consultation June a, b Consultation August c Appraisal 8 15 October c, d Consultation February c Midterm Review Nov c, d, e Review February d, b, b Midterm Review April d, b Midterm Review May d, b Completion review May f a a = sector director, b = financial sector specialist, c = project officer, d = public management specialist, e = project analyst, f = portfolio management specialist. Source: Asian Development Bank loan financial information.

7 I. PROGRAM DESCRIPTION 1. On 21 March 2013, the Asian Development Bank (ADB) approved the Strengthening Economic Management Program (SEMP), a $35 million equivalent policy-based grant and loan to the Kingdom of Bhutan. 1 The program was financed by a grant in the amount of $20.81 million (tranche 1), and a loan in various currencies equivalent to SDR9.224 million (tranche 2). 2. The program was designed to promote macroeconomic policy reforms through budget support to the Royal Government of Bhutan. The principal objectives were to strengthen macrofinancial management of the economy and improve its resistance to shocks. To meet these objectives, the program supported improvements in four core areas: (i) fiscal management, (ii) debt management, (iii) monetary and liquidity management, and (iv) internal and external audit operations. Five separate ADB-sponsored technical assistance (TA) grants supported program implementation. The program policy matrix is in Appendix The first tranche, which was the grant, was fully disbursed on 21 March 2013, the day the program was approved by ADB s Board and became effective, reflecting full compliance by the government with 10 required policy actions; the second and final tranche, which was the loan, was fully disbursed on 23 July 2014, reflecting full compliance by the government with the 15 remaining policy actions. The program closed on 23 July 2014, 2 months ahead of schedule. II. EVALUATION OF DESIGN AND IMPLEMENTATION A. Relevance of Design and Formulation 4. During , Bhutan achieved an average annual gross domestic product (GDP) growth rate of 8.0% making it one of the fastest-growing economies in the world. However, growth was driven largely by hydroelectricity exports to India, which constituted around 25% of Bhutan s GDP. 2 By December 2011, Bhutan s current account deficit had further deteriorated, leading to an acute shortage of Indian rupees, and resulting in a severe liquidity crunch that exposed structural weaknesses in the Bhutanese economy. 3 As an immediate response to the liquidity crunch, the government and the Royal Monetary Authority (RMA) introduced various temporary measures to curb rupee outflows and slow the economy, 4 and initiated discussions with ADB requesting budgetary support Recognizing the critical need for structural reforms, the program was designed by ADB in close cooperation with the government and the RMA to strengthen macroeconomic policies and fiscal management in order to help stabilize the overheated economy, put in place the foundations for sustainable economic growth, and reduce vulnerabilities in the economy. The 1 ADB Report and Recommendation of the President to the Board of Directors: Proposed Policy-Based Loan and Grant to the Kingdom of Bhutan for the Strengthening Economic Management Program. Manila. 2 Ongoing hydropower plant construction contributed another 25% of GDP. ADB Country Partnership Strategy: Bhutan, Manila. 3 The liquidity crunch was predominantly the result of (i) a narrow economic base (mainly hydroelectricity); (ii) mismatches in revenue inflows (heavy seasonality in hydropower revenues) and debt repayments; (iii) rapid growth in credit and import-driven consumption, with the latter leading to rapid depletion of Indian rupee reserves; and (iv) policy distortions associated with weaknesses in macroeconomic management and financial intermediation. 4 Emergency measures included restrictions on personal, housing and transport sector credit; a ban on vehicle imports; and restrictions on foreign currency conversions. 5 ADB, the International Monetary Fund and the World Bank were asked to submit their assessments of the liquidity crisis and provide for corrective measures. Findings were then submitted to the Ministry of Finance as part of a parliamentary task force to seek remedial action.

8 2 program design drew on lessons from ADB experience implementing public resource management programs and policy-based loans in South Asia and in small economies, such as those of the Maldives and Bhutan. 6 Taking into consideration the terms of reference of five ongoing ADB-supported TA projects (para. 15), which were to contribute to achieving the required policy actions under the program, ADB and the government identified the need to improve (i) fiscal management to help the government allocate scarce resources more effectively and efficiently, (ii) debt management to strengthen cash management and smooth the flow of funds related to government debt repayments, (iii) monetary and liquidity management to better match the demand and supply of loanable funds, and (iv) internal audit manuals and external audit systems to enhance monitoring of public resources and accountability. 7 This resulted in the formulation of 25 policy actions, 10 of which were to be satisfied by loan signing, with the remaining 15 to be accomplished over the subsequent 16 months. During program preparation, consultations with ADB s key development partners in Bhutan for public management reforms (the World Bank and the International Monetary Fund) were undertaken to ensure project activities were complementary and did not overlap (para. 28). 6. The program was consistent with ADB s interim country partnership strategy, which acknowledged that improved fiscal and monetary measures, including better management of foreign currency reserves, were priorities for creation of an environment conducive to sustainable economic growth The program remains highly relevant. It is consistent with ADB s country partnership strategy, which calls for ADB to continue enhancing macrofinancial stability by strengthening the government s capacity in macroeconomic and fiscal management and the capacity of the RMA to regulate and supervise the financial sector. 9 On 2 June 2015, ADB approved a $36.2 million equivalent follow-up program (SEMP II), designed to deepen and consolidate the reforms undertaken under the program. 10 SEMP II was designed in coordination with the World Bank s 2014 development policy credit of $20 million for Fiscal Sustainability and Investment Climate, ensuring continued development coordination and complementarity. The current government is fully supportive of the program s reforms, which reinforce its efforts to 6 During , ADB approved two major programs in Bhutan ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan and Technical Assistance Grant to the Kingdom of Bhutan for Financial Sector Development Program. Manila (Loan 2279-BHU); and ADB Report and Recommendation of the President to the Board of Directors for Proposed Technical Assistance Grant to the Kingdom of Bhutan for Micro, Small, and Medium Sized Enterprise Sector Development Program. Manila (Grant: 0088/0089-BHU) as well as 16 TA projects in public sector management and financial and private sector development. Through these programs, ADB gained a thorough understanding of the needs and capacity of Bhutanese institutions to effectively manage reforms. Other sources of experience included ADB Special Evaluation Study: ADB Support to Public Resource Management in India. Manila, and M. Attinasi and B. Carrasco Public Resource Management Reform Programs: Do They Work? Manila; and ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan, Technical Assistance Loan, and Technical Assistance Grant, Republic of the Maldives: Economic Recovery Program. Manila (Loan 2597-MLD). Two lessons from ADB experience that were taken into consideration in the program design were that (i) government commitment is most important for a successful program; and (ii) sustained engagement with government officials, including capacity development, is required to support timely program implementation. 7 Program preparation included a governance risk assessment conducted according to the implementation guidelines of ADB Second Governance and Anticorruption Action Plan. Manila, complemented by a review of areas of possible risk and vulnerability in state financial management. Rectification was required to address inadequate cash management, weak debt management capacity, and weak audit systems and procedures, all of which were addressed in the program. 8 ADB Interim Country Partnership Strategy: Bhutan, Manila. 9 ADB Country Partnership Strategy: Bhutan, Manila. 10 ADB Report and Recommendation of the President to the Board of Directors: Proposed Policy-Based Loan and Grant to the Kingdom of Bhutan for the Strengthening Economic Management Program II. Manila.

9 3 promote sustainable and broad-based economic growth. 11 Under the Eleventh Five-Year Program ( ), the government is undertaking major reforms to (i) broaden the tax base, (ii) lower budgetary dependence on external grants and loans, (iii) finance a larger share of development outlays from domestic resources, and (iv) curtail nonessential recurrent expenditures to ensure that the fiscal deficits are sustainable. 12 B. Program Outputs 8. The program planned to achieve its targeted outcomes through strengthening of economic management in four broad areas (outputs) set out in Table 1. The design and monitoring framework is in Appendix 1. The program required completion of 25 policy actions; 10 for tranche 1 release and 15 for tranche 2 release. Policy actions required for tranche 1 release were generally prerequisites, and laid the foundation for satisfying the policy actions for tranche 2 release. 13 All policy actions were achieved as scheduled. Output Output 1: Objective Table 1: Strengthening Economic Management Program Outputs Overall objectives and achievements Improve and implement budget and debt management systems Implementing agencies: MOF and RMA Improve effectiveness of public spending; strengthen debt, reserves and cash management; and match revenue flows with debt repayment Achieved (i) Medium-term debt management strategy approved by MOF, and debt market development strategy prepared and implemented by MOF and RMA; (ii) MTEF developed by four major municipalities to facilitate annual budget preparation; (iii) staff appointed to strengthen MOF s debt management division; and (iv) close working relationships and information sharing established between MOF treasury and debt management divisions. Output 2: Improve and implement revenue effort and revenue management system Implementing agencies: DRC and MOWHS Objective Broaden tax base to reduce dependence on external grants and loans, and enhance tax administration to increase the revenue base Achieved (i) Web-based RAMIS installed in DRC with training provided and pilot implementation tested; and (ii) new rules and regulations for PVM developed by MOWHS, approved by MOF, and piloted in Phuentsholing municipality. Output 3: Improve and implement macroprudential management framework Implementing Agency: RMA Objective Strengthen financial system and develop domestic capital markets Achieved (i) Financial policy committee established, and macroprudential policy paper with corresponding rules and regulations approved by RMA; (ii) capital market master plan for approved by MOF and RMA; and (iii) regulatory and supervisory framework for a credit rating agency prepared and approved by RMA. Output 4: Improve and implement external and internal audit operations Implementing agency: RAA 11 In May and July 2013, Bhutan held National Assembly elections resulting in a victory for the opposition People s Democratic Party. The elections were the second general elections since 2008 when Bhutan successfully completed its political transformation from absolute monarchy to constitutional monarchy. 12 Gross National Happiness Commission, Royal Government of Bhutan Eleventh Five Year Plan. Thimphu. 13 As an example, in order to improve tax administration, the Department of Revenue and Customs was required to prepare a blueprint for a web-based revenue administration system as a tranche 1 condition; pilot implementation of the system was required as a tranche 2 condition.

10 4 Output Overall objectives and achievements Objective Improve accountability and use of public resources Achieved (i) ARMS established and piloted by RAA; and (ii) internal audit manuals and report on training of internal auditors approved by MOF. ARMS = audit resource management system, DRC = Department of Revenue and Customs, MOWHS = Ministry of Works and Human Settlement, MTEF = medium-term expenditure framework, MOF = Ministry of Finance, PVM = property valuation methodology, RAA = Royal Audit Authority, RAMIS = revenue administration management information system, RMA = Royal Monetary Authority. Source: Asian Development Bank. C. Program Costs 9. Program costs are summarized in Table 2: Table 2: Program Costs Financed by ADB Item Amount Allocated Amount Disbursed at Approval at Closure Grant (dollars) $20,810, $20,810, Loan (SDR) SDR9,224, SDR9,224, Total dollar equivalent $35,000, $35,025, ADB = Asian Development Bank, SDR = special drawing rights. Note: Disbursement of SDR9,224,000 ($14,215,475 equivalent at disbursement) because of SDR dollar fluctuation. Source: Asian Development Bank. D. Disbursements 10. Disbursements were conducted in accordance with ADB s simplification of disbursement procedures and related requirements for policy-based loans and grants. 14 The program was provided in two tranches and disbursed upon satisfaction of loan and grant effectiveness conditions. The first tranche, which was the grant of $20.81 million, was disbursed on 21 March 2013 upon loan effectiveness. The second tranche, which was the loan of SDR9,224,000 ($14,215,475 equivalent), was disbursed on 23 July E. Program Schedule 11. The reforms under the program were to be implemented over 18 months, from March 2013 to September The original closing date for the program was 30 September The actual closing date was 23 July 2014, 2 months ahead of schedule. There were no program extensions. F. Implementation Arrangements 12. As the executing agency, the Department of Public Accounts (DPA) in the Ministry of Finance (MOF) was responsible for overseeing, coordinating and reporting on implementation of the program s required policy actions. The program required the support of five implementing agencies: DPA, RMA, the Department of Revenue and Customs (DRC), the Ministry of Works and Human Settlement (MOWHS), and the Royal Audit Authority (RAA). Each implementing agency was responsible for undertaking policy actions or program activities pertaining to 14 ADB Simplification of Disbursement Procedures and Related Requirements for Program Loans. Manila. 15 Policy actions for tranche 2 release are described in detail in ADB Progress Report on Tranche Release: Bhutan: Strengthening Economic Management Program (Second Tranche). Manila.

11 5 responsibilities described in the policy matrix in Appendix 2. A program steering committee with representatives of all government departments and authorities concerned, including all implementing agencies, was set up and chaired by the MOF joint secretary. The steering committee met quarterly to assess progress on meeting the required policy actions. 13. Implementation arrangements determined during program preparation were adequate to achieve the program objectives. The implementation arrangements were carefully designed to ensure representation by a broad range of stakeholders and facilitated consensus building as well as strong, high-level government ownership. Implementation was further supported by five ongoing TA projects provided and managed by ADB (para. 15). G. Conditions and Covenants 14. There were no delays in meeting the conditions for effectiveness. Loan covenants were relevant and in line with program requirements. Details on compliance with program assurances and conditions are in Appendix 3. Loan terms and conditions were prescribed by the standard Asian Development Fund loan terms of ADB. H. Related Technical Assistance 15. The program incorporated no preparatory or attached TA. However, program implementation was strongly supported by five directly related ongoing ADB-supported TA grants, which had elements that were integrated into the program and therefore substantially contributed to meeting the required policy actions. The TA projects were: (i) Strengthening Public Management in Bhutan. 16 Preparation of (i) medium-term expenditure framework (MTEF) reports; (ii) development of a revenue administration management information system (RAMIS); and (iii) development of property valuation methodology (PVM) (supported tranche 2 policy actions 1, 6 and 7); (ii) Developing a Revenue Administration Management Information System. 17 Pilot (iii) implementation of RAMIS (supported tranche 2 policy action 6); Capital Market Development. 18 Development of government securities market, banking sector deposit mobilization, capital markets master plan, and formulation of a regulatory framework for credit rating agencies (supported tranche 2 policy actions 3, 4, 11, 12 and 13); (iv) Supporting Financial Stability in Bhutan and the Maldives. 19 Preparation of macroprudential rules and regulations (supported tranche 2 policy actions 9 and 10); and (v) Strengthening Audit Resource Management. 20 Implementation of an audit resource management system (ARMS) (supported tranche 2 policy action 14). 16 ADB Technical Assistance to Bhutan for Strengthening Public Management in Bhutan. Manila (TA BHU). ADB provided $850,000 from the Technical Assistance Special Fund (TASF-IV) on 15 December ADB Technical Assistance to Bhutan for Developing a Revenue Administration Management Information System. Manila (TA 7881-BHU). ADB provided $500,000 from a grant by the Republic of Korea e-asia and Knowledge Partnership Fund on 7 October ADB Technical Assistance to Bhutan for Capital Market Development. Manila (TA 8280-BHU). ADB provided $1,250,000 from TASF-IV resources on 15 December ADB Technical Assistance for Supporting Financial Stability in Bhutan and the Maldives. Manila (TA REG). ADB provided $500,000 from the Financial Sector Development Partnership Fund for development of macroprudential regulations and liquidity management on 19 December ADB Technical Assistance to Bhutan for Strengthening Audit Resource Management. Manila (TA7723-BHU). ADB provided $450,000 for ARMS from TASF-IV resources on 13 December 2010.

12 6 16. In order to facilitate early program completion, 21 implementation of certain policy actions were also supported by ADB staff consultants, 22 with additional resources mobilized under the individual TA projects TA resources were used effectively, and coordination was successful as a result of strong teamwork between the consultants and project officers at the implementing agencies and ADB. Three of the five TAs are ongoing; two (Strengthening Public Management in Bhutan and Strengthening Audit Resource Management) were successfully closed in Deliverables and performance of consultants under the separate TA to support specific actions under the program were generally satisfactory and on time. 24 Separate completion reports assessing performance will be prepared for each TA project. 25 I. Recruitment and Performance of Consultants, Contractors, and Suppliers 18. Except for the support provided by staff consultants engaged by ADB s project team and the consultants engaged under separate TA projects (paras ), the program did not make use of consultants, contractors or suppliers, and no procurement was undertaken. J. Performance of the Borrower and the Executing Agency 19. Performance of the borrower and executing agency was satisfactory. DPA, as the executing agency, was responsible for overall program administration, including (i) overseeing and coordinating timely implementation of all policy actions across the five implementing agencies, (ii) maintaining program records, (iii) complying with reporting requirements, and (iv) managing disbursements. Despite some resource and capacity constraints in both the executing agency and the implementing agencies, good progress was made in implementing a wide range of reforms under the program. High-level leadership played a critical role in keeping implementation on track. The government demonstrated strong ownership, was actively involved in program supervision, and ensured full compliance with all loan covenants. ADB staff and staff at all five implementing agencies provided useful feedback and were generally pleased with the commitment and support of the government and the DPA to successful program completion. K. Performance of the Asian Development Bank 20. ADB performance was satisfactory. The program was administered and supervised from ADB headquarters and complemented by regular visits of the program team to Bhutan. Following loan effectiveness, ADB fielded four review missions for a total of 27 person-days. 21 The government targeted tranche 2 release to be achieved within FY2013/ As an example, ADB staff consultants supported the development of MTEFs (tranche 2, policy action 1) in two municipalities that were not covered by the TA for Strengthening Public Management in Bhutan. Also, ADB staff consultants provided support in developing the debt sustainability analysis (tranche 2, policy action 5) due to MOF capacity constraints. 23 Under TA for Capital Market Development, excess funds were used to engage a consultant to analyze the status of the wholesale to retail deposit mobilization action plan. 24 Only TA for Developing a Revenue Administration Management Information System, which supported the implementation of RAMIS, was subject to some disagreement on quality and fulfilment of the terms of reference. However, this dispute did not concern the support required to satisfy the policy actions under the program, but could have led to delays in further implementation had the issues not been resolved successfully. 25 Completion reports for Strengthening Public Management in Bhutan and Strengthening Audit Resource Management are scheduled for preparation in 2015.

13 7 The review missions were effective in monitoring implementation progress and in providing technical inputs. Issues identified during review missions in relation to coordination among implementing agencies and the related TA projects were quickly and efficiently resolved by the ADB project team through effective communication of policy action requirements and timelines for implementation. Likewise, staff from the ADB Bhutan Resident Mission provided valuable assistance in facilitating policy dialogue. Throughout implementation, the ADB team responsible for the program maintained close cooperation with the DPA and the implementing agencies, and with the ADB project officers and external consultants engaged on the related TA projects. ADB responded effectively to requests for implementation assistance by providing additional support to the implementing agencies through the use of staff consultants and additional TA resources (para. 16). III. EVALUATION OF PERFORMANCE A. Relevance 21. The program was highly relevant (paras. 5 7). 26 It was provided in response to an urgent appeal from the government for budgetary support, and for critical assistance in strengthening monetary and fiscal policies to prevent a crisis, facilitate economic recovery, and ensure longterm sustainable economic growth. It was conceived in close cooperation with the government and various stakeholders in order to identify relevant and appropriate policy reforms and ensure wide commitment to accomplishing the required policy actions. The program was designed to leverage separate ongoing TA resources to ensure immediate, effective and efficient implementation. The program was consistent with ADB s interim country partnership strategy at the time, and incorporated lessons from past ADB programs. Policies and action plans were developed based on a long-term perspective such as the Capital Markets Master Plan, which charts the strategic development of the capital markets over the next 10 years. The program remained highly relevant after completion as evidenced by i) the approval of SEMP II, which builds on the achievements under the program, including support for the implementation of the capital markets master plan; and ii) the government s own efforts to institute reforms as set out in the Eleventh Five-Year Program ( ). The program design ensured rapid disbursement of the grant component (tranche 1) to provide critical budget support to the government. B. Effectiveness in Achieving Outcome 22. The program was effective. The 25 policy actions that contributed to accomplishing the program outputs successfully laid the foundation for achieving more effective use of Bhutan s own financial resources in a predictable manner. This is evidenced by the following: (i) Implementation of the debt management strategy and introduction of the medium-term expenditure framework. Ongoing implementation of the debt management strategy and action plan is strengthening MOF s organizational capacity for debt management; supporting optimization of the government debt portfolio composition; enhancing liquidity and cash management, and thereby streamlining debt service payments; and improving debt recording and reporting. Building on the debt management strategy, MOF and RMA have prepared and approved a debt market development strategy that forms the framework for 26 Ratings have been determined based on ADB Guidelines for Preparing Performance Evaluation Reports for Public Sector Operations. Manila.

14 8 (ii) (iii) developing an efficient, liquid and deep government securities market that will enable the government to achieve cost-effective, on-demand financing. 27 Furthermore, the MTEF was successfully piloted in four municipalities and is now expected to be implemented nationwide. This will improve the allocation and effectiveness of public spending and reduce the dependence of municipalities on central government transfers and subsidies for financing current expenditures. 28 Implementation of the revenue administration management information system and a new property valuation methodology. With the introduction of RAMIS, the DRC is now increasingly using web-based integrated information technology infrastructure to facilitate tax filing, collection and administration, and thereby increasing the government s revenue base. Major functions (e.g., taxpayer registration, issuance of taxpayer numbers, and the filing and assessment of tax returns) are progressing more rapidly than anticipated (para. 28). Furthermore, the pilot implementation of a new PVM has demonstrated the need for revision of the 1992 taxation policy, which currently bases land and property taxes on the area of land and size of buildings, as opposed to real land and property values. 29 Following approval of revisions, the new PVM is expected to significantly increase local tax revenues and improve the financial selfsufficiency of municipalities. Approval of macroprudential policies, implementation of a capital markets master plan and establishment of a framework for a domestic credit rating agency. The new macroprudential policies have now become effective, strengthening banking sector regulation and the resilience of Bhutan s financial system. 30 Likewise, the Capital Markets Master Plan for is providing the foundation for an active market for equities, corporate bonds, and the fund management industry, with policy implementation to be supported by SEMP II. 31 Furthermore, the introduction of a regulatory and supervisory framework for a domestic credit rating agency (CRA) will ensure that any CRA to be established in Bhutan will comply with the principles and code of conduct established for CRAs by the International Organization of Securities Commission, in order to 27 The strategy includes policies to develop (i) an efficient primary market by improving cash management and forecasting tools; (ii) secondary markets by strengthening liquidity management tools of the RMA; (iii) a more diversified investor universe with different risk preferences (e.g. banks, institutional and retail investors); (iv) a robust and well-functioning clearing, settlement, custody, and price discovery infrastructure; and (v) robust regulation by MOF of the primary market (e.g. government debt issuance, auction rules, procedures) and by the RMA of the secondary market (e.g. intermediaries, surveillance, transparency, clearing and settlement). 28 The MTEF supports budgeting and expenditure management; revenue mobilization; tax administration; enhanced accountability across spending divisions; and the creation of fiscal deficit scenarios for objective, formula-based institutional arrangements in revenue sharing between central government and municipalities. 29 In early 2015, a task force comprising officials from MOF, the National Land Commission, MOWHS and four municipalities was set up to review the 1992 taxation policy. 30 The macroprudential policies cover (i) countercyclical capital buffers for banks, (ii) loan-to-value and loan-toincome restrictions, (iii) sectorial capital requirements, (iv) minimum ceilings on leverage ratios of banks, (v) timevarying capital provisioning and margin requirements, (vi) restrictions on distributions of profits, (vii) debt-to-equity ratios for project financing, and (viii) bank disclosure requirements. 31 The plan comprises four pillars: (i) policies to increase the supply of investment instruments by central and local governments, public and private enterprises, and financial intermediaries; (ii) policies to meet demand from retail and institutional investors for a broad range of investment opportunities; (iii) policies for market infrastructure that encompass effective, efficient, and resilient trading, clearing, settlement, and payment systems and central depositories; and (iv) the legal, regulatory, and supervisory framework; and policies governing areas such as taxation, competition, and entry of foreign participants.

15 9 (iv) reduce information asymmetry and enhance capital market efficiency. 32 With the support of the program, the RMA also developed a deposit mobilization action plan in order to help align banking asset durations and liabilities. Implementation to date has been slow, but is expected to continue under SEMP II with the introduction of mobile and branchless banking, financial literacy programs, and new savings products offered by the banks. Audit resource management system under implementation, and approval of an internal audit manual. Through the successful development and piloting of an audit resource management system (ARMS), 33 and training of about 150 field and non-field auditors on the system, the RAA is strengthening its institutional infrastructure, which will help prevent waste, fraud and corruption (para. 28). Furthermore, the development of internal audit manuals and training of internal auditors will facilitate the use of best practice in internal audits, risk and fraud management and assessment, reporting, monitoring and strategic audit planning in government offices. 23. The actions listed above, which were all accomplished with the support of the program, contributed to achieving the three targeted program outcome performance indicators ahead of schedule. The outcome performance indicators are in Table 3: Table 3: Program Outcome Performance Indicators Outcome Current Status Source Debt-to-GDP ratio no higher than 35% by FY2015 (baseline: 45% in FY2012, net of hydropower loans) Fiscal deficit within the prescribed level of 3% each fiscal year during the Eleventh Five-Year Plan by FY2015 (baseline: 4.70% in FY2012) Private savings-to-gdp ratio increased by 2 percentage points by FY2015 (baseline: 32% in FY2012) FY2014: 33.0% FY2015: 25.9% (projected) FY2014: 3.8% surplus FY2015: 2.2% deficit (projected) FY2013: 34.1% (most recent estimate) MOF MOF MOF MOF ADB = Asian Development Bank, FY = fiscal year, GDP = gross domestic product, MOF = Ministry of Finance, RMA = Royal Monetary Authority. Source: Asian Development Bank; Bhutan Ministry of Finance National Budget Financial Year ; Royal Monetary Authority of Bhutan Annual Report 2013/14. National Statistics Bureau of Bhutan National Accounts Statistics C. Efficiency in Achieving Outcome and Outputs 24. The program was efficient. It fully achieved all targeted outputs and outcomes envisaged during program design. The outputs were accomplished 2 months ahead of schedule. The efficiency observed in achieving the outputs and outcomes was largely the result of thorough program preparation leading to an appropriate design, and a strong commitment by all ADB 32 The scope of CRA services include: (i) issuance of credit ratings on debt instruments, (ii) rating of creditworthiness of enterprises, (iii) rating of initial public offerings of equity securities, (iv) rating of companies listed on the Royal Securities Exchange of Bhutan as to their corporate governance practices, and (v) rating of the performance of investment funds. The International Organization of Securities Commission is an international body that develops, implements and promotes adherence to internationally recognized standards for securities regulation ( In April 2014, a high-level delegation of RMA officials participated in a credit rating agency study tour of the Philippines and Nepal. Based on this experience, the RMA is now exploring the possibility of establishment a joint-venture CRA (as opposed to approving a representative office of a foreign credit rating agency). 33 ARMS provides technology infrastructure to efficiently plan and schedule audit assignments, monitor the progress of audits in the field, and track audit observations through computerized processes.

16 10 implementing agencies involved in program formulation, which set targets that were achievable within the required timeframe. The implementation process was also efficient. ADB responded efficiently to a request for budget support from the government with a solution that provided both financial support and a structured and accelerated approach to policy reforms. Throughout implementation, the DPA served as a central administrator and facilitated coordination between government officials, ADB staff, and TA consultants. Efficient implementation was ensured through proactive support by the ADB project team and ADB staff consultants. 25. TA resources were used effectively. The program successfully leveraged five related, but separately contracted TA projects to meet the targeted policy actions. While the TA projects were prepared independently, their terms of reference, objectives and timelines were carefully considered during the program design, and select TA outputs incorporated into the program to ensure efficient and effective use of the TA, and maximize TA support to the program. D. Preliminary Assessment of Sustainability 26. The program is likely to be sustainable. While adaptation of new policies, frameworks and systems will require time to take full effect, reform actions prepared and piloted under the program are now gradually being implemented (para. 22). The implementation of reforms and new administrative measures introduced through the program have helped strengthen the government s macrofinancial management, and laid the foundation for sustainable economic growth. In particular, policy actions under the program s financial sector management component have helped strengthen the financial system. The introduction of macroprudential rules and regulations is increasing the resilience of the banking system against risks arising from procyclicality of bank lending, 34 and the RMA has now taken steps to build a stress-testing framework to assess risks, and is collecting financial data for developing macroeconomic and financial soundness indicators. The action plan related to the improvement of the wholesale retail deposit ratio is now addressing structural problems of asset liability mismatches of the banking sector. Most importantly, the introduction of the Capital Markets Master Plan facilitates positioning of the capital markets to support broad-based economic growth and socioeconomic development objectives, including poverty reduction. Capital markets development is now expected to stimulate healthy competition, resulting in lower financing costs for borrowers. Diversification away from predominantly bank-based financial intermediation will help expand alternative sources of credit, and thereby help limit the systemic impacts of economic shocks, and improve the resilience of the financial sector. 27. The successful implementation of sustainable policy actions under the SEMP was largely the result of the strong commitment by MOF and RMA officials to bring about essential reforms to ensure sustainable economic recovery, and the strong partnership, continued policy dialogue and effective coordination between ADB and the government. The government maintains a clear commitment to further reforms, as evidenced by the approval of SEMP II. While the program primarily supported the development of new policies, strategies, action plans, and initiatives, and thereby laid the critical foundation for strengthening economic management in a sustainable manner, SEMP II has been designed to build on, sustain and leverage the initiatives accomplished through the program. Policy actions under SEMP II will, for example, use the PVM to propose revised property tax rates, add and operationalize direct and sales tax modules to RAMIS, and support implementation of policies set out in the Capital Markets Master Plan. 34 Banks may underestimate risks during periods of high growth, relaxing credit standards and thereby attracting lower quality borrowers, which may lead to higher credit losses during economic downturns.

17 11 E. Institutional Development 28. The impact of the program on institutional development was significant. (i) During inception and implementation, the program played a significant role in building consensus among government officials for the need for reforms and continued policy dialogue. (ii) RAMIS has significantly improved efficiency of the DRC. Since the launch of RAMIS in January 2015, some 29,000 out of an estimated 89,000 income tax payers (companies, businesses and individuals) have registered tax returns online, exceeding the expectations of the DRC in terms of the number of taxpayers filing online. The successful introduction of RAMIS has encouraged further organizational and process reforms within the DRC. (iii) The implementation in July 2014 of ARMS, a web-based enterprise-resource planning system, has helped RAA computerize and automate work processes and expand its audit services, and thereby significantly improve the efficiency and effectiveness of all its operations. In addition to the core audit management module, 35 RAA is now targeting wider integration of other ARMS modules, including those for system administration, attendance and leave management, human resource management, inventory management, general administration, and training. During implementation, training was provided to 45 internal auditors placed in 10 ministries, 20 districts and 2 autonomous bodies. Courses ranged from certified internal auditor and certified government auditing professional qualifications to internal control and auditing techniques. The courses were funded by the World Bank, the United Nations Development Programme, and the government. (iv) The MTEF was successfully piloted in four municipalities, and is now expected to be developed by municipalities nationwide to facilitate more efficient budget preparation. During MTEF preparation, 42 local government officials were trained in municipal fiscal data collection and assessment, and in effective use of the MTEF methodology and templates. (v) Extensive training support provided by TA interventions benefited more than 300 participants, and strengthened institutional capacity and enhanced the sustainability of the program reforms. (vi) Some program policy actions specifically targeted institutional strengthening, i.e. engagement of staff in the MOF debt management division (tranche 1, policy action 2), and appointment of internal audit officials for all major spending departments and large autonomous agencies, including MOF, Thimphu Municipality, and the National Land Commission (tranche 1, policy action 10). F. Impact 29. The impact of the program was significant. Implementation of reforms under policybased loans can be a long-term process requiring both institutional and behavioral changes among stakeholders as new policies and initiatives are processed, modified and eventually adopted. Measuring the impact of policy reforms over the short to medium term can therefore be 35 ARMS consist of six major modules and forty-four sub-modules. The audit management module is the largest and includes strategic planning, audit planning (programming, scheduling and execution), field audit monitoring, reporting, follow-up, quality assurance, audit team performance evaluation, audit data bank, risk assessment, internal control assessment, e-documentation, and a data bank of audited agencies.

18 12 challenging. However, by FY2015 the targeted impact indicators had been accomplished. The program impact indicators are in Table 4. Table 4: Program Impact Indicators Impact Current Status Source Balance of payments not in deficit by FY2017 (baseline: 3.5% in FY2012) Improved gross international reserves above $900 million by FY2017 (baseline: $ million in FY2012) FY2014: 5.8% (actual) FY2015: 7.4% (projected) FY2014 $1.012 million (actual) FY2015: $1.132 million (projected) RMA MOF MOF MOF FY = fiscal year, MOF = Ministry of Finance, RMA = Royal Monetary Authority. Sources: Bhutan Ministry of Finance National Budget 2015/16. Thimphu; Royal Monetary Authority of Bhutan Annual Report 2013/14. Thimphu. 30. During FY2012 FY2013, the government successfully slowed GDP growth from 8.6% to 4.5%, well below the average growth rate of over 8.0% during (para. 4). The introduction of new macrofinancial management policies and measures also helped address the country s economic problems. As credit growth was curtailed, inflation was reversed, economic growth decelerated, and rupee shortages systematically eased. The economy has since stabilized and is now supported by reserve accumulation, as the balance of payments has turned to a surplus. 31. However, the rupee shortage is symptomatic of a deep-rooted structural weakness in the economy, because hydropower generation will remain a key driver of economic growth, with trade and current-account deficits remaining high in the medium term. In order to ensure longterm, sustainable economic growth, the short-term stabilization measures introduced by the authorities in 2012 had to be backed by structural reforms to address distortions and critical shortcomings in the economy. The program successfully introduced policy reforms to correct these shortcomings and move the economy to a more stable, higher-growth equilibrium. Through tailored intervention, the program laid the foundation for sustainable fiscal, monetary and budgetary resource management; enhanced fiscal space for social and economic development through improvements in tax administration; and a more efficient financial management system for the country. 32. All program activities were confined to policy and institutional reforms, and the program was classified at appraisal as category C for impacts on the environment, involuntary resettlement, and indigenous peoples in compliance with ADB s Safeguard Policy Statement (2009). 36 As anticipated, none of the program activities resulted in or led to involuntary resettlement or affected indigenous peoples, and no adverse environmental impacts were identified. IV. OVERALL ASSESSMENT AND RECOMMENDATIONS A. Overall Assessment 33. Overall, the program was successful. It achieved all objectives set out between the government and ADB at program inception, within the targeted time frame. The program was (i) highly relevant in addressing fiscal and macroeconomic challenges that are a continuing priority for Bhutan; (ii) effective in that it fully achieved its targeted outputs and outcomes; (iii) efficient in that it achieved a diverse set of outputs before scheduled completion by leveraging separate TA 36 ADB Safeguard Policy Statement. Manila.