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2.1 Poverty Profile.

Bhutan’s development philosophy is based on the concept of Gross National Happiness focusing on sustainable and equitable socio-economic development, conservation of the environment, preservation and promotion of culture and promotion of Good Governance as the four main pillars of growth. This basic needs model has emphasised the welfare of the poor and disadvantaged parts of the population.

Bhutan has established an official national poverty line of Nu. 1,096.94 per person per month (approximately Nu. 37 or USD 0.9 per person per day). The poverty line is a combination of a daily calorie intake and an allowance for basic non-food goods. The proportion of the population in Bhutan living under the poverty line decreased from 31.7% in 2004 to 23.2% in 2007.

Poverty has been found to be more severe in rural Bhutan with as many as 30.9% of the rural population living in poverty compared to just 1.7% in the urban areas. Poverty is also found to vary by districts with high poverty rates in the five districts of Samtse, Samdrup Jongkha, Monggar, Zhemgang and Lhuentse. 52.9% of the population in Zhemgang are living under the poverty line. Bhutan has a relatively high level of inequality with the richest 20% of the population consuming almost seven times more than the poorest 20%. The Gini-coefficient is 0.352.

While basic education is free in Bhutan, the affordability issue remains an important reason for not attending school. Enrolment rates are far higher in urban than in rural areas. Although huge investments have been made in health facilities, the rugged and difficult terrain, remoteness, sparse population and lack of reliable communication facilities is still hindering the delivery of health care services. The main challenges are staffing and quality of services.

There are no visible differences in poverty incidence, depth and severity between male and female-headed households. The share of the poor and non-poor households headed by men and women are about the same, with men heading close to two-thirds of both groups of households. Women’s rights and interests are safeguarded by a number of provisions of different legal acts, including the draft Constitution. Further, Bhutan works in line with international conventions, such as the Convention on the Elimination of Discrimination Against Women (CEDAW), the Vienna Declaration and Programme of Action, 1993, the UN General Assembly declaration on the Elimination of Violence against Women and the Beijing Platform of Action of 1995.

Several efforts are aimed at protecting and empowering women in Bhutan. The civil society organisation RENEW (Respect, Educate, Nurture and Empower Women) is specifically focusing on empowering women; the media has wider coverage on gender issues; and the Government has taken an initiative to establish a Women and Child Protection Unit (WCPU) under the Royal Bhutan Police.

Nevertheless, areas remain where gender gaps are apparent. There are certain dominant socio-cultural perceptions, which perpetuate male superiority. Balancing work with family life is still considered a women’s issue. The impact of this may well be the low representation of women in decision-making, especially at the higher levels of governance. Although the legal framework is in place, firmer actions from the government are needed to improve equality. However, the strong emphasis by the government on providing equal education opportunities is an important means of enhancing women’s participation more fully and actively in the long run. Further, the National Action Plan for Gender 2006 and the 10th FYP emphasize the need for mainstreaming gender and outline policies and strategies for women in development. These include good governance, education and training, economic development with focus on employment, health, violence against women, prejudices and stereotypes, ageing and mental health and disabilities.

2.2 Economic Development

Real GDP grew at an average of over 9% over the Ninth Plan period between 2002 and 2006, taking into consideration an estimated growth of 18.9% in the last year of the plan 2006/07 boosted by the earnings from the newly commissioned Tala Hydro power plant. According to data from the Royal Government of Bhutan, GDP per capita has during risen from USD 835 in 2002 to USD 1200 in 2006. According toWorld Bank statistics Bhutan has a GNI per capita of USD 1,410 (2006). The UN has classified Bhutan as a Least Developed Country and ranked Bhutan 133 out of 177 on UNDP’s Human Development Index in 2005. Inflation has been between 3-5% per year over the last years.

India is Bhutan’s largest trading partner by far, accounting for 77.2% of exports and 68.7% of imports in 2006. Hydro power exports to India were still the most important export, accounting for 26.5% of total exports in 2006. This was largely because of additional sales from the Tala plant, although exports from the Chukha plant also increased. Exports of recorded media took a 16.8% share of exports in 2006, compared with just 1,7 % in the previous year.

The sectoral composition of Bhutan’s economy is changing. The past five years’ trends indicate that while the share of the secondary sector (including manufacturing, electricity and construction) has remained more or less the same, accounting for 34% of total GDP, the share of the tertiary sector (including wholesale and retail trade, restaurants and hotels, transport, finance, real estate, private and government social services etc.) in the overall GDP has increased to 42%. On the other hand, the share of the primary sector (including agriculture, forestry, and mining) shows a decreasing trend accounting for 24% of GDP in 2006.

Revenue from hydro power has been the driving force for economic growth since the commissioning in 1988 of the first hydro power project in Chhukha (336 MW). Two other projects have been constructed (Kurichu 40 MW and Basochu 64 MW), and the Tala Hydro power Project, downstream of Chhukha of 1,020 MW was commissioned in 2007. In total, 1,472 MW or about 5% of the potential of estimated 30,000 MW has been realised. In 2006/07 the electricity sector was the main source of Government revenue contributing 45.4% of the total revenue of Nu. 9,960.320 million. 2006/07 recorded a growth in both tax and non-tax revenue which is the major source of funds for the Government of Bhutan. The revenue growth for 2006/07 was 46% with the tax revenue increasing by 3.5% and non-tax revenue by 109.3%. Trade and services, respectively are the second and third highest contributors to the Government’s revenues, including excise and import duties, sales tax and other tax revenues. Direct royalty from tourism represents 3.6% of the total Government revenue. More than 21,000 tourists visited Bhutan in 2007, an increase from 17,342 in 2006. Similarly, the foreign currency earnings from tourism increased by 25% from USD 23.9 million in 2006 to USD
29.9 million in 2007.

With the aim of improving the revenue base and increasing the social responsibility, Bhutan introduced a personal income based tax system in 2002. The personal income based tax system was well received by the population in Bhutan. The Personal Income Tax rate, which was earlier adjusted downwards to 15%, has been adjusted back to the original rate of 25% as proposed during the launching of Personal Income Tax. The adjusted rates came into effect from January 2007. In 2006/07 Personal Income Tax made up 4% of the total tax revenue and 1.7% of the total revenue

In spite of these positive economic developments, Bhutan’s economy still remains vulnerable.

First of all, Bhutan’s economy is one-sided with a decisive economic dependency on revenue from hydro power based electricity exports to India. Despite Bhutan’s very large hydro power potential, environmental experts warn that due to climatic changes, this potential could diminish drastically over the next 30-50 years. With almost 32% in 2006, rising to 45% in 2007 of the Government’s revenue originating from export of hydro power, the economy is very vulnerable to changes in the power production. A diversification of the structure of the economy in Bhutan and a real development in the private sector economy is therefore of high priority.

Secondly, poverty continues to be widespread, and the gap between rich and poor is substantial, although it is being slightly reduced. Hydro power is creating economic growth but very few jobs, and an increasing number of young people leaving the education system find themselves unemployed. The public sector used to be the main employer, but as Bhutan has committed itself to a small and efficient civil service, the growth in public employment is foreseen to be minimal. Furthermore, Bhutan is employing approximately 75,000 foreign contract workers (including day workers), mostly for manual work. Until now, there has not been sufficient incentive or relevant educational background for the people of Bhutan to seek skilled or unskilled jobs in the private sector. Private sector growth and vocational training are therefore important not only to diversify the economy but also to secure jobs for the many young and well-educated people entering the job market every year.

Thirdly, Bhutan has a high debt/GDP ratio, mainly due to large loans obtained to finance hydro power projects, which makes Bhutan vulnerable. The World Bank now categorizes Bhutan among the group of highly indebted countries with debt/GDP ratio above 93%. However, most of these loans are sustainable as they are self-servicing and are related to hydro power.

Fourthly, it continues to be difficult to establish and do business in Bhutan. The World Bank ranks Bhutan 138th out of 175 on the World Bank Doing Business Index. However, several strategies have been implemented and more will be implemented in the near future to streamline licensing procedures and ease conditions for businesses. The strategies include the de-licensing of the Micro Trade Category (turnover of less than Nu. 1 million, about 25,000 USD) of the trade sector whereby micro traders can operate their businesses with a simple registration of the enterprise. The Labour and Employment Act aims at balancing the needs of workers with the objective of promoting private sector growth. Bhutan’s geography implies high transaction costs, which also makes the country relatively less attractive to foreign investors.

2.3 Democratisation, Good Governance, Popular Participation and Respect for Human Rights

The draft Constitution to be enacted in 2008 will usher Bhutan into a constitutional monarchy with parliamentary democracy and free elections for Bhutanese citizens above the age of 18 to the Parliament’s two chambers. The draft Constitution guarantees basic human rights, including civil and political rights. It also guarantees the freedom of the press, radio and television and right to freedom of speech, opinion and expression. The draft Constitution provides for accountability of the government, independence of the Constitutional bodies, responsible and accountable management of public resources, rule of law and legal protection of individual rights. The draft Constitution also ensures direct involvement of communities and community organisations in the local governments, including the planning and implementation of development activities. Public consultations on the draft Constitution in all twenty districts have been conducted.

In preparation of the above significant political changes, constitutional bodies i.e. Election Commission and Anti-Corruption Commission have been established. A number of laws have been enacted to promote the rule of law, anti-corruption measures, and to ensure the independence of the free media. These include the Judicial Services Act, the Information Communication Media Act, the Anti-Corruption Act, the Office of the Attorney General’s Act, the Audit Act, the Local Governments’ Act, the Public Finance Act and the Civil Society Organisations Act. The Election Bill of Bhutan is expected to be enacted by the new parliament. Furthermore, Bhutan has introduced the Position Classification System to enhance a culture of professional excellence in the public civil service. Meritocracy will be the norm in recruiting public servants and an objective performance management system will guide promotion and training.

The Election Commission of Bhutan has successfully completed the preparation and implementation of the historical first national elections to the Parliament. The country was delimitated into 20 districts as constituencies for the National Council or Upper House and 47 constituencies for the National Assembly or Lower House of the Parliament. On 31 December 2007 and 29 January 2008 The Election Commission successfully conducted the elections to the 20 National Council seats. The election to the National Assembly was conducted free and fair on 24 March 2008 as observed by international observers, including an EU Observation Mission,. The results had a high degree of legitimacy due to a very high voter turn-out (nearly 80% of the registered voters).

Bhutan is undergoing many momentous changes in its transition towards parliamentary democracy as envisaged by His Majesty the 4th King. However, Bhutan still faces the challenge of translating constitutional rights and intentions into reality. Equal access and opportunities for all Bhutanese will continue to be of importance. Bhutan will continue to need the support of the international community up to, during and after the transition to parliamentary democracy.

There is an urgent need to resolve the issue of people living in camps in Nepal. In 2003 an agreement was reached between the Governments of Bhutan and Nepal to start repatriation of eligible persons from the first camp. The Core Working Group of countries on the people in the camps in Nepal has expressed commitment to a solution involving repatriation of eligible persons to Bhutan, ressetlement in third countries and local integration in Nepal. The Royal Government is committed to finding a durable solution through a bilateral process and in accordance with the agreements that have been reached with the Government of Nepal.

Bhutan is yet to ratify the UN conventions on Civil and Political Rights, Economic, Social and Cultural Rights, Racial Discrimination and Torture. It is recognized that the enactment of the draft Constitution will guarantee fundamental rights.

2.4 Bhutan’s Five-Year Plans 2002-2008 and 2008-2013

The long-term vision for Bhutan’s development over the next two decades is based on the Gross National Happiness philosophy and laid down in the document “Bhutan 2020: A Vision for Peace, Prosperity and Happiness”. These long-term visions are translated into concrete sector policies, strategies and programmes in the five-year development plans taking into consideration the Millennium Development Goals, the SAARC Development Goals and the commitments under the Brussels Programme of Action for the Least Developed Countries.

The 10th FYP (2008-2013) will serve as Bhutan’s poverty reduction strategy. The 10th FYP, using a results-based planning approach, is based on broad consultations at both national and local level. Poverty reduction is the main development priority. The 10th FYP is expected to consist of six interrelated key strategies: (i) vitalising industry (ii) national spatial planning to promote balanced regional development; (iii) synergising integrated rural-urban development for poverty alleviation (iv) infrastructure development, (v) investing in human capital and (vi) fostering an enabling environment through good governance. In addition there are considerations on the cross-cutting development themes of decentralised governance, employment, environment, women in development, information and communications technology and HIV/AIDS.

The total development outlay for the 10th FYP is Nu. 141.692 billion (USD 3,542 million), of which current expenditures account for 44% and capital expenditures account for 56%. Domestic revenue, including revenue from the Tala Hydro power plant and other receipts, will provide about 46.3 % of the financing of the 10th FYP. Development assistance is expected to finance 39.5%. After accounting for other receipts the resource gap is estimated at 9.3%. The need for assistance in the coming years continues to be critical for Bhutan. As the 10th Plan is still to be approved by the new Parliament before 1 July 2008, there may be some final adjustments.

The overall pro-poor expenditures continue to be maintained at high levels with share of the budget allocations to the social sector at 24% and 10% in the agriculture sector to help reduce rural poverty. The ratio applied to distribute the outlay between the centre and decentralised levels is planned to be 80:20.

2.5 Support Provided by other Development Partners.

The Gross National Happiness Commission is the central coordinating authority for development assistance, and aid coordination at the highest level takes place at Round Table Meetings held biannually. The 10th Round Table Meeting was held in February 2008 in Thimphu. The Round Table concluded that the coming years coincide with significant political reforms aimed at establishing parliamentary democracy The democratic process and the poverty targets of the 10th FYP need the continued support and cooperation of the development partners in this important phase for Bhutan.

Due to the strong Government ownership a good division of labour has been established between the major donors. Bhutan has chosen to work with a limited number of development partners. In 2006/07 India was the largest donor with USD 77 million (61% of the total grants) followed by the World Bank USD with USD 16.5 million (13%). The second and third largest bilateral donors during the 9th FYP have been Denmark (USD 11.4 million 2006) and Japan (figures not available). Other donors are the Netherlands (USD 3.4 million 2006), UNDP (USD 2.7 million 2006), the European Commission (USD 2.8 million annually over the period 2007 – 2013), Austria (USD 1.7 million 2006), Switzerland (USD 1.5 million 2006), Canada, Norway, Australia, The Kuwait Fund, ADB and UN organisations. Several donors including the Netherlands and ADB have indicated intentions to increase their contributions during the 10th FYP

Table 2. Donor Assistance to Bhutan – Divided in Sectors.

Sector Donors
Infrastructure India, ADB, World Bank, the Netherlands, Japan
Agriculture Japan, World Bank, EC, India
Social sectors (Health & Education) India, Denmark, World Bank, UNICEF, Switzerland, Japan, Canada, Australia
Water & Sanitation UNICEF, ADB
Natural Resources Denmark, World Bank, ADB, Switzerland, the Netherlands, Austria, EC
Good Governance (incl. Judiciary/Public Admin.) Denmark, UNDP, India, World Bank, ADB, the Netherlands, Switzerland, UNCDF, JICA, SNV, EC
Communication Japan, India
Energy India, World Bank, Austria, ADB, Japan, Norway, UNDP/ GEF
Private Sector ADB, Austria, India, Denmark
Trade Facilitation EC

This page forms part of the publication 'BHUTAN-DENMARK PARTNERSHIP' as chapter 2 of 8
Version 1.0. 08-03-2009
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