Bhutan and LDC Graduation Implications and Challenges Formulating National Policies and Strategies in Preparation for Graduation from the LDC Category Regional Capacity Building Workshop 14-16 November 2016
Outline Bhutan Overview Current Situation Graduation Criteria GNI Per Capita Human Assets Index Economic Vulnerability Index Financial Implications Trade Implications Policy Priorities
Bhutan Overview Population: 768,577 GDP: $2.2 billion (2016) Major economic sectors: hydropower, energy intensive industries, construction and tourism Agriculture, livestock & forestry share of GDP: 16.52%
Bhutan Overview LDC graduation is in sync with national policy goals 11 th Five Year Plan (2013-2018) goal of self reliance ability to finance 80% of capital expenditure without relying on ODA Effective window for graduation (2018-2021) falls within 12 th Five Year Plan period (2018-2023): opportunity to enhance policy priorities related to LDC graduation
140000 120000 100000 80000 60000 40000 20000 0 Current Situation 30.00 25.00 20.00 15.00 10.00 5.00 0.00 1980/81 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 GDP growth Agriculture, livestock, and forestry Industry minus elec. Services Electricity and water Nominal GDP Growth rate Real GDP growth rate
Current Situation Debt Burden 180000 90 160000 80 140000 70 120000 60 100000 50 80000 40 60000 30 40000 20 20000 10 0 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 Hydro Power Debt Non Hydro Power Debt Hydro Power Debt % of GDP Non Hydro Power Debt % of GDP Debt service to exports 0
Current Situation Balance of Payments 50 40 30 20 10 0 10 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 20 30 40 CURRENT ACCOUNT CAPITAL ACCOUNT FINANCIAL ACCOUNT
Current Situation Major challenges: Small economic base: hydropower-dependent, lack of value addition Low factor productivity: 1.6 total factor productivity (ADB 2014) Debt: 70% is self-liquidating hydropower loans, projected to reach 25% of export revenue Balance of payments: high levels of import during hydropower construction stage, need to manage reserves
Parameter 1: GNI per Capita Requirement: $1,242 (3 year average) or double for incomeonly criterion Bhutan: $2,242 Growth has slowed in recent years: 15.33% in 2007, 7.72% in 2011 and 2.08% in 2015 Growth driven by capital formation in infrastructure and hydropower sectors Need to strengthen contribution of other sectors for post-hydro period
Parameter 2: Human Assets Index LDC criteria: Human Assets Index 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Adult literacy under 5 mortality Gross secdondary enrolment % undernourished
Parameter 2: Human Assets Index Bhutan s HAI score improved from 45 in 2000 to 73.8 in 2015 Improvement driven mainly by increase in gross secondary education enrollment Challenges in funding and management of education and health infrastructure
Parameter 3: Economic Vulnerability Index LDC criteria Economic Vulnerability Index 50.00 45.00 40.00 35.00 30.00 25.00 20.00 15.00 10.00 5.00 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Population Remoteness Export concentration Share of agri. Forestry and fishing Coastal population Export instability Victims of natural disasters Agr. Instability
Parameter 3: Economic Vulnerability Index Bhutan s EVI improved from 43.04 in 2000 to 37.46 in 2015 No country has fulfilled the EVI criteria to date Major bottlenecks: landlocked, mountainous terrain, small domestic market Commercialization of agriculture is crucial The Bhutan govt. has provided farm machinery to all 205 gewogs (blocks) in the country Must emphasize productivity improvements over diversification alone
Implications of Graduation: Financial ODA currently comprises 10% of GDP The Constitution requires all recurring expenses be met by domestic revenue, ensuring fiscal prudence India-Bhutan relationship would be unaffected by LDC status (India provided 81% of grant inflow in 2015/16) Withdrawal of bilateral grants has implications for currency reserves; estimated to be about 10% 12 th Five Year Plan projects 20.5% drop in ODA grants
Implications of Graduation: Financial Concessional Loans: likely unaffected since multilateral FIs base lending rates on per capita income status (WB already treats Bhutan as middle income) or criteria that include GNI per capita and credit worthiness (ADB)
Implications of Graduation: Trade 40000 Exports 35000 30000 25000 20000 15000 10000 5000 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 India Hydro India Non Hydro Other Countries
Implications of Graduation: Trade Countries fear loss of trade preferences due to graduation Bhutan s trade scenario would be largely unaffected Trade with India comprises 85% of exports and 80% of imports Exports to EU and US would suffer slight competitive disadvantage (investment in energy intensive industries such as Fe-Si would be stalled) WTO membership: framework allows for an adjustment period of up to 6 years; irrelevant if Bhutan does not join Rules of origin requirements would have implications for manufacturing sector
Policy Priorities Diversification: Support growth of energy intensive industries through friendlier domestic energy tariffs Strengthen agricultural productivity through commercialization and technology Strengthen reserve management in short and medium term Long term policy must focus on improving productivity as diminishing returns from hydropower sector set in
Policy Priorities [G]raduation does not represent a solution to all the graduating country s development challenges; neither does a new set of challenges emerge out of nothing at this point. Rather, the challenges of the post-graduation period are a continuation of those that characterized the pre-graduation period. (UNCTAD) Avoid policy compartmentalization Shift policy focus from quantity to quality Build a transition strategy into the 12 th Five Year Plan