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CHAPTER 1 

COUNTRY BACKGROUND

I. Physical Characteristics

   The Kingdom of Bhutan covers an approximate area of 46,500 square kilometres: roughly 150 km north to south and 300 km east to west. However, because of the mountainous terrain, the actual distance on the ground is more than twice as long. The Kingdom is bordered by the Tibetan region of China and the Indian States of Sikkim, West Bengal, Assam and Arunachal Pradesh (see Map 1.I Bhutan and neighbouring countries and Map 1.II on Physical Features). 

 The terrain is among the most rugged and mountainous in the world, as most of the country includes part of the Himalayan ranges.  The land rises from an elevation of about 160 metres above sea level in the south to more than 7,550 metres above sea level in the north.  The variations in climate are correspondingly extreme.  Southern Bhutan is generally hot and humid, while the high Himalayan mountains in northern borders of Bhutan are under perpetual snow.  Climate can vary considerably between valleys and within valleys depending on levels of altitude. Rainfall, in particular, can differ within relatively short distances due to rain shadow effects.  Annual rainfall is concentrated in the monsoon season - mid June to September (see Map 1.II for Annual Rainfall in Bhutan). Rough estimates of rainfall are : 

II.  Natural Resources

Flora

 The flora of Bhutan is exceptionally diverse as a result of a great range of altitudinal zones and varied climatic conditions.  An estimated 56% of the country is covered by forests of alpine scrub, fir, mixed coniferous species, temperate scrub, and broadleaf species.  In addition to a wide range of species, there are many species unique to Bhutan: about 47 species have been listed (Grierson and Long, 1984), and it is thought that there are many more which have not been identified. Moreover, much of Bhutan's flora has remained undisturbed so that Bhutan probably has the richest flora in the Himalayan region. The floral wealth of Bhutan is highly appreciated by both Bhutanese and the outside world. Many tree species are of high timber quality, while others are tapped for resin. Over 300 species largely of alpine plants are used in Bhutanese traditional medicine. Horticulturalists all over the world also prize Bhutanese flora: Grierson and Long (1984) list 168 species introduced to Europe from Bhutan, including many wild relatives of cultivar species strawberries, cherry, and apple. These plants have significant value as a genetic resource for crop improvement.   

Fauna

 Because Bhutan's flora has remained undisturbed, a number of rare animals can still be found in Bhutan. The exact number of species is unknown, but over 160 species have been reported.  Rare animals include the langur, takin and blue sheep and are distributed quite widely. Tigers, leopards, snow leopards, red panda, gaur, serow, Himalayan black bears, brown bears, wild pigs, musk deer and various kinds of deer are common in many parts of Bhutan. The Phobjikha valley in Western Bhutan is one of the three wintering grounds for the rare Black-necked crane. One quarter of the country has been declared as 12 protected reserves/sanctuaries/nature parks (see Map 4.I on Protected Areas in Bhutan).  These areas form havens for a number of the world's rare and endangered species, which are not only of national but global importance. 

Agriculture

 While a large proportion of the country is covered by forest, the area suitable for agricultural production is limited by the topography and low soil fertility in some areas. The river valleys and the flatlands in the southern foothills account for most of the fertile cultivatable land whereas the northern alpine belt below the snowline is suitable only for pasture. The most recent estimates suggest that 16% of total land is used for agricultural production, including dryland and irrigated crop production and orchards. Most rural households also own livestock, which are grazed in the forest areas and pastures. 

Water

 Another important natural resource is water. The four major rivers are Ammochu, Wongchu, Sankosh and Manas, all of which flow in a north-south direction and discharge into the Brahmaputra River in the plains of India. These rivers provide significant hydropower potential, with an estimated theoretical potential of 20,000 MW.   

Minerals

 The exact magnitude of Bhutan's mineral resources is unknown, as only 30% of the country has been mapped geologically.  Mineral prospecting has been undertaken mainly in southern foothills and inner Himalayas as prospecting in the other areas is constrained by lack of transport infrastructure.  Geological mapping has indicated the occurrence of coal, limestone, dolomite, talc, marble, gypsum, slate, zinc, lead, copper, tungsten and quartzite deposits (see Map 19.I on Minerals Deposits of Bhutan).  Out of these, coal, limestone, dolomite, gypsum and quartzite are mined for domestic use and export. 

III. People

History

 Stone implements indicate the country was inhabited as early as 2000-1500 B.C (Aris, 1979).  Although Bhutan's history since 7th century is becoming increasingly known, its more ancient history remains to be brought to light.  The country consisted of small but independent principalities until Shabdrung Ngagwang Namgyel (1594-1652) unified the country into one nation in the early 17th century.  He established a theocracy and gave Bhutan an administrative system, and a code of law. During the period of theocracy from 1652 to 1907, there were approximately fifty-five Desids (monk-rulers). The theocracy Shabdrung built ended in 1907 when Ugyen Wangchuck (1862-1926) was elected as the first King of Bhutan by popular consensus. Since the establishment of monarchy in 1907, there has been four hereditary kings whose reigns spanned the following years :   

            .1 King Ugyen Wangchuck 1907-1926         .2 King Jigme Wangchuck 1926-1952 

            .3 King Jigme Dorji Wangchuck     1952-1972 

            .4 King Jigme Singye Wangchuck   1972- 

 Throughout its history, Bhutan has remained independent, being one of the few countries in Asia never to become a colony.  Bhutan was fairly isolated from the outside world until the 1960s when the third King Jigme Dorji Wangchuck (1928-1972) opened links with other countries and initiated the development of a modern economy. His Late Majesty also introduced many social, legal and constitutional reforms, which had far reaching effects. 

Religion

 Buddhism was introduced in Bhutan in 7th century by Guru Padma Sambhawa. In the centuries that followed, Bhutan was home to many sages and saints including the great saints-scholars such as Longchen Jamjam, also known as Kuenkhen Longchen Ramjam, (1308-1363) and Pema Lingpa (1450-1521). Various schools of Buddhism in Bhutan assimilated other earlier practices and beliefs. The aspirations towards enlightenment and the belief in the innate goodness of human beings are widely shared among Buddhists and majority of the Bhutanese are Buddhists. Hinduism is another important religion, particularly in Southern Bhutan. The Hindu religion as practised by Southern Bhutanese hasmany common saints and divinities with Vajrayana, the school of Buddhism prevalent in Bhutan.  

 Buddhism has a significant influence on the values of the Bhutanese and has shaped the institutions, organizations, arts, drama, architecture, literature and social structure. Bhutan's culture, as in other societies, is continually transforming itself in the face of development.  

 The importance of religious institutions continue in present day Bhutan,  as signified by the strength of the monk body who number over 4000 in Dratshangs or Rabdeys (monasteries) supported by the state. This figure takes count of monks who  are part of the formal monastic structure supported by the state and excludes monks who are not part of the state sponsored Dratshangs. The Rabdeys are based mainly in dzongs(fort-monasteries). Each Rabdey is headed by a Lam Neten who is appointed by His Holiness the Je Khenpo(Head Abbot), the Head of the Central Monk Body, who is also elected. The present Je Khenpo is the 69th incumbent.  His Holiness the Je Khenpois the Chairman of 9 member Dratshang Lhentshog. Monks continue to play an important role in the daily lives of the population in performing religious ceremonies, and in promoting and preserving scholarship. They are also actively involved in the process of development while constantly renewing their relevance to society in times of change.  

Population

 The 1990 population has been estimated at 600,000. A census is being conducted and its exact results will be known in 1992/93. Depending on the fertility and mortality assumptions adopted, population is projected to rise to between 713,211 and 768,050 by 1997. As in most developing countries, the proportion of the population under 15 is high: at 40%. As these age groups enter the reproductive period, the growth rate of population is likely to rise above the current 2.5%, unless the population can be encouraged to practice family planning. 

Settlements

            Bhutan is the least populated country in South Asia. However most of the population is concentrated in the valleys and large areas in the north of the country are virtually empty except for nomadic herders. The population is distributed in the following areas: a)            The virtually empty northern region; 

b)             The relatively well settled area in the inner Himalayan valleys; 

c)             The more thinly populated area south of the Black Mountain Range and associated highlands; 

d)             The densely populated southern area. 

 Most Bhutanese still live in villages in an extended family system or maintain strong links with their rural families. The average size of the household or family is estimated to be 8.5. The number of houses per village varies from 2 to 100 with an average of 43. Thimphu in Western Bhutan is the capital with an estimated population of 40,000-50,000 people. The other main urban settlements are Geylegphug, Phuntsholing and Samdrup Jongkhar. All of these three cities are at the border between India and Bhutan. Towns are developing in all the 18 dzongkhags (district) headquarters. 

Employment and Incomes

 Although significant economic progress has taken place since the 1960s, the majority of the population remain dependent on agriculture for incomes and employment. There is no landlessness in Bhutan, although the rapidly growing population could lead to the emergence of marginal farmers.  As most rural settlements are far from markets there has been little potential for the sale of surplus production of crops and livestock, although this is beginning to change with the opening of the more inaccessible areas through the construction of roads. The types of crops produced varies considerably, depending on climate and access to markets. Staple crops include rice, maize, potatoes, buckwheat, barley and wheat.  Livestock are an extremely important part of the farming system, and kept for draught purposes, milk products and meat. Production of horticultural crops is increasing as their export potential has been realised. Bhutan had achieved 66% self sufficiency in cereals and 20% in edible oils in 1988.  Employment in the other sectors of the economy continues to be insignificant, as industrial development has been limited.  The Government has been responsible for the establishment of several productive enterprises, however the private sector is being encouraged to take over these activities. Unlike many other developing countries, unemployment is not yet a concern. 

Transport and Communications

 Bhutan's total road network measures 2,674 km and the main motor routes consist of an east-west highway and three north-south highways. The road network connects all 18 dzongkhag (district) headquarters and 12 dungkhags.  Major towns and villages are also connected by motor roads. However the majority of settlements can only be reached by mule tracks and foot trails, as well as cantilever and suspension bridges.  Although horses are the main beast of burden, yaks and oxen are used for transportation in some parts of Bhutan.  Only one airport, at Paro, is in regular use.  The national airline, Druk Air provides services to Dhaka, Kathmandu, Delhi, Calcutta and Bangkok.  

 Telecommunication services consist of telephone, telegraph, telex and civil wireless.  However only the civil wireless service connects all dzongkhag headquarters in the country.  International telephone links are available by satellite from Thimphu.  

V. Institutional and Legal Framework  

 An enlightened monarch rules Bhutan through Lhengyel Shungtshog (Cabinet), Tshogdu (National Assembly) and the civil service. His Majesty King Jigme Singye Wangchuck (born 11 November 1955), IVth in Wangchuck Dynasty, is the Head of the Government as well as the State.   

 The Tshogdu (National Assembly) has 150 members of which 105 are Chimis (representatives of the people) elected for a term of three years. The monk bodies elect 12 monastic representatives,while the remaining 33 members are representatives of the Government and are nominated by the King.  The Tshogdu sits twice a year, in addition to emergency sessions.  A Royal Advisory Council also exists to advise the King and the Ministers, consisting of 9 Councillors. Four Councillors are elected as representatives of the people, 2 Councillors are elected as representatives of Monk Bodies and one Councillor is nominated by the King. 

 The organizations of central government consist of seven Ministries, their related Departments, 4 Commissions, the Royal Bhutan Army, Royal Bhutan Police, Royal Body Guards and several autonomous bodies. The Ministries include Foreign Affairs, Communications, Trade and Industry, Finance, Social Services, Agriculture and Home Affairs (see Figure 1.I on Government Structure).  The four commissions are the Planning Commission, the Royal Civil Service Commission, the Special Commission for Cultural Affairs and the Dzongkha Development Commission. 

 Bhutan has resident diplomatic representations in India, Bangladesh, Kuwait, New York and Geneva. The Bhutanese Ambassadors in these places are accredited to several other countries. Apart from representatives of international agencies, only India and Bangladesh have resident diplomatic representatives in Thimphu, the capital of Bhutan.(see Chapter 21) 

            The Royal Civil Service Commission is responsible for formulating and ensuring implementation of personnel policies in the civil service. The civil service strength was 11,228 as of late 1991 (see Chapter 12).  

 The country is divided into 18 Dzongkhags (see Map 1.V : Bhutan Administrative Map ) During the 7th Plan, Tashigang dzongkhag may be split into two Dzongkhags namely Tashigang and Tashi Yangtsi.  

Larger Dzongkhags are sub-divided into Dungkhags (sub-districts).  The Dzongkhags, and where they exist Dungkhags, are further sub-divided into 191 gewogs (blocks).  Dzongkhags are governed by Dzongdags and Dungkhags by Dungpas. Gewogs are administered by Gups who are elected by the community.  The Gups assist the Dzongdags and Dungpas in collection of taxes, mobilization of labour for community services and public construction, settlement of disputes and many other local activities including implementation of some development programmes. 

 Five dzongkhags in Eastern Bhutan, namely Tashigang, Samdrup Jongkhar, Mongar, Pema Gatshel and Lhuntsi are grouped under Zone IV which is headed by the Zonal Administrator, based in Yongphula. The Zonal Administration has sectoral officers who co-ordinate, plan, and monitor the activities in the zone. The Zonal Administration was established to enhance the process of decentralisation, begun in 1981. 

 Bhutan's legal system was previously based on codes laid down by spiritual rulers in the 17th century.  The present laws as they exist in Thrimshung Chenmo (Supreme Laws) were legislated by the Tshogdu (National Assembly) in 1957 under the aegis of His Late Majesty Jigme Dorji Wangchuck (1928-1971), the Third King.  Disputes are usually settled by Gups.  Disputes which fail to be resolved out of the court by the Gups go to the District Courts.  Each Dzongkhaghas a court head by a Thrimpon.  A Dzongkhagcourt has both original and appellate jurisdictions.  The next level of jurisdiction is the High Court in Thimphu. (see Chapter 21) 

VI. Constraints to Development

 Since the 1960s, the Royal Government has recognised that Bhutan's economic future is linked to its neighbours and to the world economy.  Having abandoned a strategy of self-isolation, Bhutan now looks to increasing economic interaction with other countries as an avenue for development.  The development of Bhutanese economy is however constrained by several factors:  

a)             Bhutan is geographically isolated from other countries in the region being a landlocked country, and is distant from the nearest sea port in Calcutta, India.  This isolation makes the transport of goods into and from Bhutan costly. 

b)             Because of the extremely mountainous terrain, the area of land which is suitable for agricultural production is relatively small.  This limits the potential for increasing output from the agricultural sector and increases the risks of environmental degradation. 

c)             The population is distributed in remote scattered settlements, to take advantage of the limited land suitable for agricultural production. 

d)             The above factors have made the provision of roads and communication networks difficult,  and the delivery of health and education services costly; 

e)             Unlike most other developing countries, Bhutan has a relatively small population and the supply of manpower is a major constraint. The fairly recent introduction of western education means that there is a shortage of manpower with the necessary skills for a developing economy; 

f)              As most of the population have been subsistence farmers until recently, the level of monetisation has remained low.  This has restricted the Government's ability to raise domestic revenues, and Bhutan has relied on external assistance for the funding of development programmes.  

 While the Royal Government is unable to change the physical constraints indicated above, considerable progress has been made since the 1960s in addressing some of these constraints, particularly in terms of infrastructure.  The Seventh Five Year Plan will seek to continue the efforts to overcome the limitations these constraints impose.  

                                                                  CHAPTER 2

ECONOMIC PERFORMANCEECONOMIC 

PERFORMANCE

I. IntroductionI.  Introduction

2.1  This Chapter describes the early development of the Bhutanese economy and provides a more detailed analysis of the economy during the 1980s.  Government expenditures and revenues are summarised, as well as Bhutan's trade performance during the period.  Economic developments during 1989-91 are also discussed to highlight the circumstances under which the Seventh Five Year Plan was prepared.  In view of the Government's emphasis on improving not only economic growth and equitable incomes, but also the quality of life, the final section reviews the Human Development Indicators for Bhutan.  

II. Economic Development before 1980II. Economic Development before 1980

The Traditional EconomyThe Traditional Economy

2.2  The shape of Bhutan's traditional economy was determined by the constraints identified in Chapter 1: its isolation from the external world and poor internal communications.  There were well-established trading links across the Himalayas, but with their reliance on porterage and pack animals, trade was mainly in low volume, high value articles.  It was a practical requirement for valley communities to be self-sufficient in basic necessities, especially foodstuffs, and most production was for subsistence. 

2.3  Over the centuries, the Bhutanese people developed farming systems which met their subsistence needs and used available resources in a sustainable way.  Considerable capital investments were embodied in terracing, irrigation, housing and religious/administrative buildings.  Because the economy was largely unmonetised, taxation — to support the administrative and religious establishment and to maintain community infrastructure — was in kind, in the form of labour contributions or grain taxes. 

2.4  Within its constraints, the traditional economy was very successful.  It afforded a comparatively high material standard of life (reflected in the absence of a large class of landless labourers and significantly higher wage rates than in India), but health standards were very poor, and the economy's potential was limited in the absence of greater specialisation and trade. Thus until fairly recently, the majority of the population were dependent on agricultural production as there was no industrial production of any significance.  

Early DevelopmentEarly Development

2.5  Bhutan remained closed to the outside world until the 1960s when efforts to increase links with other countries were initiated by King Jigme Dorji Wangchuck. During this time the first Development Plan was prepared and implemented in the period 1961/66. The emphasis of the first Development Plans was on establishing basic infrastructure to reduce Bhutan's physical isolation and improve internal communications, while also building up the institutions of a modern economy and state, especially through education and training.  Economic and social statistics for the period from 1960—80 are very sparse, but it is clear that the improvement in communications began a transformation of the economy which is still going on.  Better communications made trade more feasible, and this in turn prompted increased monetisation and opened the way for more specialisation in production.  A striking example of such specialisation has been the trend towards production of horticultural crops for export, complemented by imports of rice.  Taking advantage both of better communications and the availability of low-cost Indian labour, most industrial development took place near the Indian border, and the pace of modern sector development was generally faster in Southern and Western Bhutan than in the East. 

III. Economic Development during the 1980sIII.  Economic Development during the 1980s

Availability of DataAvailability of Data

2.6  The availability of economic data in Bhutan is variable. Consistent GDP series begin only in 1980, and the most recent year for which GDP estimates were available when the Plan was prepared, was 1989.  This means that broad economic data were available only for the first half of 6FYP, although figures relating to public finance and foreign exchange were available for the whole period. Other areas where statistics are especially weak include employment and labour force data, trade, and production in the traditional sector (which accounts for almost half of all production).   

Table 2.1  GDP Sector Shares and Growth Rates 1980-1989 

Source:  Central Statistical Office. 

Structure of GDP in 1980Structure of GDP in 1980

2.7  Although economic development had taken place since the 1960s, at the beginning of the 1980s, agriculture remained the most important sector in terms of GDP and employment: contributing 56% of GDP as shown in Table 2.1. Other significant sectors were trade and the activities of the Royal Government in the economy, each accounting for 11% in 1980.  Development of the industrial sector was constrained by lack of investment due to the emphasis of Government expenditure on infrastructure and the lack of entrepreneurial skills and thus accounted for less than 4% of GDP, with about half the contribution from the construction industry.  The lack of geological information and necessary technical expertise limited the development of the mineral sector, which accounted for only 0.6% of GDP in 1980. The power sector accounted for only 0.2% of GDP in 1980. 

Growth of GDP in the 1980sGrowth of GDP in the 1980s

2.8  During the 1980s, GDP grew at an average of 7.5% — a very rapid rate of growth compared with most developing countries during the same period. (These growth rates are assuming constant prices, i.e. the effects of inflation have been eliminated.)  By 1989, GDP was 90% above — almost double — its 1980 level.  Assuming a population growth rate of 2.5%, per capita GDP growth was 5% per annum, with per capita GDP estimated at $370 by 1991.  Unlike previous Plan periods, the major impetus for GDP growth was not from increases in aid, but was largely based on the expansion of the electricity and mining/manufacturing sectors. Starting from a negligible base, electricity sector growth averaged 65% p.a ( see page 4). This was largely due 

Figure 2.1

1

1

                                               Source:  Central Statistical Office. 

the commissioning of the Chhukha Hydel Plan, with an output of 336 MW, increasing electricity production from 3.5 MW in 1981/82 to 341.6 MW in 1987/88.  During the 1980s the manufacturing, mining, transport and communications all showed average growth rates of well over 10% p.a., due to the combined effects of starting from a very low base and increased investment. In the manufacturing sector, the establishment of large cement and calcium carbide plants accounted for a large proportion of the increase in output. 

2.9  Agriculture at 5% p.a. was one of the slower growing sectors. Even a 5% growth rate is rapid by most standards, and would allow a considerable improvement in average agricultural incomes despite the growth of the rural population. While these estimates are based on limited data, it has been assumed that the growth in the agricultural sector was the result of both increases in area planted and in productivity. The relatively slow growth of the forestry sector, was the consequence of RGOB policy restricting the level of logging to prevent unsustainable utilisation of the forest resource. This policy resulted in a decline in commercial logging in the early 1980s, when responsibility for logging was handed over to the Bhutan Logging Corporation ( a public sector enterprise). Output increased from this sector increased in the mid 1980s, but mainly because of the need to fell trees infested with bark beetle disease.  

Structure of GDP in 1989Structure of GDP in 1989

2.10  The difference in the growth rates of the various sectors resulted in a change in the contribution of each sector to GDP over the decade, see  Table 2.1. The share of agriculture and forestry shrank by about 10% to 45% of GDP, almost exactly offset by the growth in electricity from a negligible share to about 11%.  The share of manufacturing, from a very small base, almost doubled, to 6%. The share of government services was steady at around 10%. While the power and manufacturing sectors expanded during the 1980s the majority of the population remained dependent on the agricultural sector for incomes and employment at the end of the 6FYP:  seven out of eight adults were engaged in agriculture according to a 1984 survey. Despite the growth of the industrial sector, its overall contribution to GDP and employment remained small.  Food processing, cement, wood products and alcoholic beverages accounted for most industrial production and due to limited domestic demand, much of the production was exported to India.  One of the most important events in the industrial sector was the privatisation programme, initiated by the Royal Government in recognition of the fact that resources are likely to be used more efficiently when competitive markets operate than under the direction of bureaucrats.  Thus a vigorous programme of privatisation was begun in the 6FYP, as explained in Chapter 6.  

2.11   Rapid economic growth was based on high levels of capital formation, averaging between one third and two fifths of GDP throughout the decade.  The construction peak in 1983-85 was influenced by the construction of the Chhukha Hydel Project. Largely because of the commissioning of this project, the growth of GDP increased dramatically in 1987/88 and while GDP continued to increase in 1988/89 the increase from the previous year was not as dramatic. (see 2 ). Without the impetus of high growth in the energy sector, overall economic growth in 1990 and 1991 probably did not exceed 3.5% p.a. 

Figure 2.2

IV. Government Expenditure and Revenues during the 6FYPIV.  Government Expenditure and Revenues during the 6FYP

Allocation of ExpendituresAllocation of Expenditures

2.12  The sectoral allocation of expenditure reflected the priority accorded to the productive sectors, in comparison to the social service sector.  

(a)Agriculture received the largest share of the budget at 18%. 

(b)Power and Trade and Industries received the second and third largest shares at 13.1% and 13.3% respectively. 

(c)The Social Services sectors received considerably smaller shares, with education allocated 8.1% and health 4.2%.  However the funds allocated to the Industrial and Power sectors include major investments in the completion of the Chhukha Hydel Project and a large cement plant. 

2.13   Table 2.3 compares 6FYP planned allocation of expenditures with what actually happened during the Plan's first three years and was budgeted for 1990/91 and 1991/92.  (The table combines capital and current expenditures.)  In general, the sectoral allocation of expenditures corresponded quite well to what was envisaged in 6FYP.  The shares of education and health were somewhat higher than anticipated (15.2% vs. 12.6%) and expenditure on other community services accounted for another 4% of the total. The higher share of social services was offset by smaller than anticipated shares for most economic services, especially the power and business/industrial sectors. 

Table 2.3  Planned and Actual 6FYP Expenditure 

Sources: 6FYP planned allocation from Table 2.2 of 6FYP.  Actual expenditures from Annual Statements of Account, DNBA.     Budgeted, not actual, expenditures are used for 1990/91 and 1991/92. Notes:  6FYP figures exclude 2.5% allocated for dzongkhags, as sectoral breakdown of this figure is not available. 

The Balance Between Capital and Recurrent Expenditure The Balance Between Capital and Recurrent Expenditure  

2.14  As well as rapid increases in the overall budget, the proportion of capital to recurrent expenditure had been rising in the Plan period, as shown in Table 2.4. This has been particularly the case in the Social Services sector, as shown below, where additional capital expenditure is likely to have the highest recurrent cost implications in future.  The capital:recurrent ratio as a whole tended to remain within the range of 50:50. 

Year          Capital Expenditure as % of Total Expenditure

                 Year                                Social Services                                  

2.15  This has meant that there was insufficient recurrent provision for the additional capital investments and this, combined with severe reductions in recurrent costs on existing programmes in the 1990/91 and 1991/92 budgets, generated pressure on the Government to make substantial increases in the recurrent budget in the first year of the 7FYP.  

Table 2.4  Government Expenditures 1987/88-1991/92 

9

9

5

8

4

1

0

0

4

7

6

4

0

0

Source:  Department of National Budget and Accounts. 

Note:    1987/88 was a 15 month fiscal year, which the table adjusts to 12 months' equivalent. 

Financing of ExpenditureFinancing of Expenditure

2.16  The main features of public sector finance during the 1980s were: 

(a)With the emphasis on investment in the necessary infrastructure for the development of productive sectors, the ratio of public expenditure relative to GDP was high at 41%; 

(b)Although the Government was able to increase domestic resource mobilisation from the Fifth Plan onwards this was largely the result of increases in public enterprise profits. Taxation contributed only 28% to domestic revenue in 1989/90. The majority of the population remained in the traditional subsistence economy, limiting the potential for collection of taxes in cash. Labour taxes and community labour contributions to construction of schools etc have meant that the rural population has made some contribution to the cost of infrastructure provision. Taxation is discussed further in Chapter 8 on Fiscal and Monetary Policy. 

(c)A large gap continued between domestic revenues and RGOB expenditures, but as electricity exports from Chhukha began, domestic revenues grew faster than expenditures. It was therefore necessary to depend on external financing for a large proportion of the budget, as shown in Figure 2.3.  

Aid FlowsAid Flows

2.17  While the First and Second Five Year Plans were financed almost entirely by the Government of India, from the Third Plan onwards other donors began to provide aid to Bhutan. Further details of aid flows and RGOB policy are described in Chapter 9.  Until 1987/88 grants from India exceeded domestic revenues, but by 1989/90 domestic revenues amounted to more than the total of grants from all sources, as shown in Figure 2.3. 

2.4.  At the same time, Government expenditure continued to expand at such a rate as to result in large overall budget deficits which became increasingly difficult to finance without creating macroeconomic instability. The financing of expenditure is summarised in Table 2.5. 

Figure 2.3

Domestic RevenuesDomestic Revenues

2.18     The main features of domestic revenues in the 6FYP were:  

(a)A relatively small contribution from tax revenues; since 1986/87 the share of tax revenues in total domestic revenues has fallen from about 50% to just over 25%. only around half of total revenues prior to Chhukha).  Direct tax revenues amount to only 5-6% of GDP, which is low by international standards. 

(b)Two thirds of tax revenues are from indirect taxes. 

(c)So-called "non-tax revenues", which mainly comprise surpluses/profits of public enterprises plus royalties and dividends, are very important.  In 1989/90 non-tax revenues accounted for almost three quarters of the total, and revenues from the Chhukha Hydel Project alone accounted for one-third of revenues. 

2.19        Domestic revenue has always fallen far short of total expenditure and only after Chhukha came on stream (1987/88) did domestic revenues first cover current expenditure. In 1987/88 there was a small overall budget surplus (comparing total expenditure against domestic revenues plusexternal grants), but in 1988/89 and  

1989/90 there were large overall deficits, mainly financed by external borrowing in 1988/89 and by running down cash balances in 1989/90.  In 1990/91 and 1991/92 the Government was forced to cut back sharply on expenditure in order to avoid an excessive overall budget deficit. 

Table 2.5  Summary of RGOB Budgetary Operations 

Source: RMA, Selected Economic Indicators, March 1991 (years to 

1989/90); Ministry of Finance Budget Summary for 1990/91 and 1991/92. For 1990/91 and 1991/92 it is assumed that the resource gap is covered by domestic borrowing. 

2.20        It should be noted, however, that the tax burden on the economy is somewhat understated by the financial figures presented, because these figures do not include labour taxes. A typical household with a family size of 8.5 may be liable to a minimum about 40 person-days a year of various forms of labour tax, which represents a substantial in-kind contribution to public revenues. If the value of labour is assumed at Nu 40 per day and the number of households liable to pay labour tax is about 54,000, the value of labour tax would exceed Nu 86 m a year.  

TradeTrade

2.21  Bhutan has a very open economy:  in 1989 exports amounted to about 27% of GDP, while imports were 38% of GDP.  Consistent with the high level of capital formation, Bhutan's imports have continually exceeded exports, although exports rose substantially from the mid-1980s. India is by far the dominant trading partner for Bhutan: it has been the destination for more than 90% of Bhutan's exports. New export markets were opened during the latter part of the 1980s, including Bangladesh. Bhutan's main exports are now electricity, wood products, agricultural products, including horticultural crops, and cement.  Figure 2.4^*indicates that the surge in exports was mainly due to the commencement of electricity sales from Chhukha, although there was also an increase in exports of wood and wood products during the same period. While the importance of India as a source of imports declined somewhat in the second half of the 1980s, 60—80% of Bhutan's imports continued to come from India by the end of the 6FYP.    

Figure 2.4

Balance of PaymentsBalance of Payments

2.22  The trade balance continued to be in deficit throughout the period under review, ranging from Nu 769.6 m in 1985/84 to Nu 412.3 m in 1987/88 and an average of about Nu 625.7 m. Imports and exports grew at 12.5% and 36% per annum respectively. Export value showed a significant rise in 1987 due to the export of electricity. In general the values of exports for most commodities have increased over the years. The value of imports have shown substantial rise in recent years for petroleum products, rice and electrical equipments. In invisible trade (services and transfers), receipts were consistently lower than payments. The main items in receipts are: income from tourism and interest from Royal Monetary Authority deposits in India. 

*   Detailed statistics on trade with countries other than India have not been published.

Figure 2.5

2.23  Bhutan's trade deficit has been covered by inflows of foreign aid.  Foreign aid ranged from Nu 989 m in 1984/84 to Nu 1086.3 m in 1988/89.  Aid from India always exceeded the aid from other sources, underscoring the importance of India as the major donor. The overall balance remained in surplus throughout the period as shown in Figure 2.5, signifying an increase in the Ngultrum value of foreign exchange reserves.  Only in 1988/89 did nonconcessionary borrowing make a significant contribution to the financing of the current account. 

2.24  Bhutan's foreign exchange position is strengthened not only by the volume of foreign aid received, but also by the fact that aid from donors other than India is denominated in convertible currencies, while much of the expenditure that it finances is denominated in rupees.  As a result, Bhutan was able during the 1980s to build up substantial reserves of convertible currency.  However, rupee reserves declined steeply in the later years of 6FYP.  

2.25  The Ngultrum has remained pegged to the Indian rupee at par since its introduction.  Consequently its value against convertible currencies has followed that of the rupee. Likewise, given the open border and common currency area between India and Bhutan, inflation in Bhutan closely mirrors India's, and has averaged around 10% p.a. during most of the 1980s. The value of rupee reserves tends to be exaggerated by the official exchange rate between the rupee and the US dollar; equally, the large decline in the dollar value of rupee reserves in 1991 reflected the devaluation of the rupee. 

V. Economic Developments during 1989—91V. Economic Developments during 1989—91

2.26  Comprehensive economic statistics are not yet available for years later than 1989.  This is unfortunate, since the second half of the 6FYP period saw a distinct deterioration in the economic and budgetary situation and significantly changed the outlook for the Seventh Five Year Plan.

2.27  Several factors contributed to the problems RGOB was facing as 7FYP was being prepared:

(a)Economic growth tapered off after the spurt provided by the Chhukha project. 

(b)There was a decline in aid receipts from India, which tended to offset the boost to domestic revenues from electricity sales. 

(c)The momentum of Government expenditure growth continued, leading towards budget deficits. 

(d)The financing of the government deficit by borrowing from the RMA led to an increase in domestic demand, which quickly leaked into imports and started a rapid decline in Bhutan's reserves of rupees, as explained above.  

2.28  Recognising the problem, and the need for macroeconomic stabilisation, the Government adopted a very restrictive budget for 1991/92. In planning for RGOB expenditures in the 7FYP, it has been necessary to take into account the factors described above. These are discussed in more detail in Chapter 7, Economic Outlook. 

VI.  Human Development IndicatorsVI.  Human Development Indicators

Table 2.6  Human Development Indicators 

2.29  While Bhutan was able to achieve impressive rates of GDP growth during the 1980s, with per capita GDP at about $370 in 1991, the Government recognises that Gross Domestic Product is too narrow a measure  of development.  Improvements in the population's social welfare as measured by access to education, health and other social services are considered equally with increases in GDP.  These key basic indicators of welfare ("Human Development Indicators" in UN terminology) are easily measured through comparison of health and education statistics, although the lack of data makes the interpretation of health and education data difficult.  Other considerations also affect the quality of people's lives such as the preservation of social structures, including family life and religious institutions.  However these considerations are less easy to quantify.  The  

fact that incomes are equitably distributed amongst the population, means that economic growth has achieved a wider spread of benefits.  

2.30  Since the implementation of the First Five Year Development Plan, there have been substantial improvements in health and education services provided by the Royal Government. This has meant that 90% of the population had access to basic health facilities and the gross primary school enrolment rate reached nearly 70% by 1991.  However, some of the HDI indicators remain particularly poor, as shown in Table 2.6 above.   

2.31       These indicators show the low levels of safe water and sanitation facilities which account for the high levels of Infant Mortality, while the constraints highlighted in Chapter 1: mountainous terrain, scattered settlements and lack of trained personnel, make the provision of social services to the whole population difficult.  

2.32  Improving the quality of life for the whole population is one of the central objectives of the Royal Government's development approach as explained in Chapter 3.  The Royal Government will set specific targets for some Human Development Indicators for the Seventh Five Year Plan period. Efforts will also be made to obtain reliable baseline data and establish monitoring systems in the relevant sectors. Sectoral chapters (especially those on Health, Education and Human Settlements) contain specific goals for improving Human Development Indicators, while the Chapter on Culture and Religion describes the strategy for preserving Bhutan's cultural and religious heritage. 

                                                                  CHAPTER 3

THE APPROACH TO DEVELOPMENT 

I. Introduction

3.1  This Chapter outlines the role of the Royal Government in the development of the economy during the Seventh Five Year Plan and the overall aims and objectives to be pursued. The preparation of the 7FYP is also described, indicating the high degree of involvement of the population and all levels of Government in the planning process. The final section summarises the procedures for implementation and monitoring of the Plan. 

II. Development Goals and Role of the Royal Government

3.2  Apart from the obvious objective of development: to increase GDP at the national level and incomes at the household level, development in Bhutan includes the achievement of less quantifiable objectives.  These include ensuring the spiritual and emotional wellbeing of the population, the preservation of Bhutan's cultural heritage and its rich and varied natural resources. Although it is difficult to achieve progress for everybody at the same time, the Royal Government's development strategy is based on giving equal opportunities and equitable services to all members of society throughout the country.  

3.3  Although the privatisation programme described in Chapter 2, will reduce the role of the Royal Government in productive activities during the 7FYP, the Royal Government will continue to play a substantial role in through the following activities: 

          ·     providing a framework of law and order which fosters economic activity; 

          ·     macroeconomic management, including regulation of the currency; 

          ·     management of Bhutan's international economic relations, including aid and trade; 

          ·     providing and maintaining basic economic infrastructure; 

·     providing and maintaining basic social infrastructure (education and health services), and developing the country's human resources; 

· direct involvement in major enterprises (notably hydropower) where the Government is the custodian of the natural resources involved and/or the proposed development is on too large a scale to be accommodated by the indigenous private sector; 

· generally, seeking a national consensus on development objectives and strategy and acting as the custodian of national interests. 

3.4  The Government is able to take both a broader and a longer term view than individuals and firms normally can.  The necessary measures and legislation will continue to be enforced to ensure that individuals' and firms' short term decisions do not have long term consequences that are nationally unacceptable (e.g. in environmental terms). At the same time, the Government will continue to invest in those activities necessary for the long term development of the economy which the private sector is unlikely to undertake. This may be due to the high risks involved, long pay-off period or because it is difficult to charge the beneficiaries: such activities include, for instance, agricultural and environmental research.  

3.5  The Five Year Plan is largely focused on RGOB activities, not because these are ultimately more important than private sector activities but because these are the activities that come under the Government's direct control.  The Plan also focuses on public sector revenues and expenditures — firstly, because public resources are limited and their allocation needs to be based on a consistent strategy, and, secondly, because the expenditures it undertakes and the revenues it raises are one of the chief links between the Government and the economy in general. 

III. The Development Approach  

3.6  As stated in paragraph 3.2, the overall aim of development is to raise the living standards of all the population, with due emphasis given to the quality of life as well as increasing incomes.  While this is the usual objective of development as pursued by all developing countries, there are many means of achieving this goal. The Government, in consultation with the people and all levels of Government, has developed an overall approach based on six principles:  

          ·     self reliance  

      1 Approach to Development

          ·     sustainability  

          ·     efficiency and development of the private sector 

          ·     people's participation and decentralisation 

          ·     human resource development 

          ·     regionally balanced development.  

While being part of the overall development strategy, these principles are also reflected in the detailed policies and programmes of the sectoral chapters of this Plan. These are discussed in the paragraphs below. 

Self-reliance  

3.7  Although Bhutan's development has been greatly assisted by development cooperation with the Government of India and with other aid donors, the Royal Government is determined not to perpetuate dependence on external assistance. Efforts are thus being made and will continue during the 7FYP to increase Bhutan's own technical capacity, through human resource development and through effective technology transfer. In addition, the ability to finance RGOB activities continues to remain a priority, particularly self-sufficiency in the recurrent and the Royal Government recognises the need to increase domestic revenues.  Chapter 8 indicates the taxation and cost-recovery measures that RGOB will pursue. Reducing dependence on aid will also require increased domestic savings and investment: Chapter 8 also outlines proposals for the further development of  Bhutan's financial institutions.  Where capital requirements exceed the resources available locally, Bhutan will welcome foreign investment, although collaboration with foreign investors will be decided on a case by case basis.  

3.8  Self-reliance does not mean that Bhutan will aim to produce all its requirements but that the Government will encourage the production of those goods and services that can compete in export markets. The revenue earned will provide for the import of goods and services that cannot be efficiently produced in Bhutan.  The same principle applies to food security: whereby every household should be able to produce its food requirements or obtain income from other sources to purchase sufficient food to ensure that every household member is always adequately nourished.  Chapter 17 (RNR) spells out Bhutan's strategy for achieving national and household food security during 7FYP. 

3.9  The concept of self-reliance also applies at the household and community level. The RGOB approach to development means that individuals and communities are involved in identifying their needs and priorities, with the role of central government being to assist in meeting these needs. This relates to the fourth principle: people's participation.  

Sustainability  

3.10   Increasing incomes in the long run is dependent on the ensuring the sustainability of production: i.e. that short run growth does not jeopardise the country's ability to expand production in the future. The sustainable utilisation of natural resources is of major importance in a country where the majority of the population remain dependent on agriculture for incomes and employment and where a wide range of valuable species remains largely intact. Environmental considerations affect every sector, and the policies related to environmental sustainability are spelt out in Chapter 4. 

3.11  The sustainability of raising living standards is also dependent on the population growth rate, as increases in GDP can be offset by high rates of population growth thus reducing per capita GDP. Increasing population is also one of the main determinants of pressure on natural resources.  The Royal Government therefore regards reducing the rate of growth of Bhutan's population as an important aspect of the strategy for sustainable development. The Royal Government through the National Assembly will consider adopting a family planning policy which will aim to curb the population growth below 2% by the year 2000. Efficiency and Development of the Private Sector  

3.12  Limited financial and human resources are the major constraint to raising living standards. One of the ways of addressing this constraint is to make more effective utilisation of existing resources through improving the efficiency of both the private and Government sectors. The Government will therefore encourage increased efficiency in the utilisation of resources through the implementation of the following measures in the economy as a whole:  

  · the continuing privatisation programme and minimising RGOB intervention in private sector decision making; 

·     when intervention is necessary, avoiding arbitrary administrative controls, making clear the rules that will be applied, and relying more on tax and price incentives than on quantitative restrictions; 

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                                                                                                                  Approach to Development

· promotion of appropriate technological innovations (in the country's internal and external telecommunications, for example); and 

·     human resources development programmes which take account of private as well as public sector skill requirements. 

3.13    For Government itself, measures to maintain and increase efficiency will include: 

· concentration on well-defined priorities, and adopting standards (of services and facilities) that correspond to what Bhutan can presently afford in the short and medium term; 

          ·     limiting the size of the public service, while ensuring high standards of productivity; 

· improving the coordination within Departments and between Ministries, to ensure that related activities are implemented in an integrated manner and avoid duplication of effort and resources; 

          ·     setting and monitoring performance targets; 

· establishing appropriate management structures for enterprises which remain in the public sector, so that they can operate on quasi-commercial lines; and, 

· appropriate assignment of responsibilities and resources between the different levels of government (see next paragraphs). 

People's Participation and Decentralisation

3.14  As noted above, the Royal Government is determined that all regions and groups in the country should benefit from development.  Popular participation in the planning and implementation of development is a way of ensuring that plans take account of popular concerns, draw on local knowledge and mobilise local resources for development. The consultative process in preparing the 7FYP is outlined in Section IV. 

3.15  The RGOB has also made considerable efforts to decentralise administration and planning since the beginning of 5th Five Year Plan in 1981. Dzongkhag Yargay Tshogchung were created in all the 18 dzongkhags which consist of elected members of the dzongkhags including gups, chimis and community leaders as well as dzongkhag authorities.  In the 6th Plan, the process of decentralisation was  taken further with the operation of Zone IV in Eastern Bhutan and the establishment of 119 Gewog Tshogpas at the command of His Majesty the King. The Gewog Tshogpas will widen the base of decision making to the grassroots level. 

Development of Human Resources

3.16  People are Bhutan's most important resource.  Human resource development is both an end in itself — since better health and education enable people to live more fulfilling lives — and a means of increasing Bhutan's development potential. The strategy for the Seventh Five Year Plan is (a) to ensure the widest possible access to basic health and education, while (b) selectively investing in the much more expensive development of higher skills and secondary level health facilities (see Chapter 11,13 and 12 on Education, Health and Human Resource Development respectively).  

3.17  Although women are accorded equal status in Bhutanese society, their circumstances often place them at a disadvantage — they are much less likely than men to complete their schooling for example.  Children's welfare strongly depends on the health and education of their mothers.  Realising Bhutan's full human potential as well as ensuring that the whole population benefit from development, requires special efforts to involve women in development,  (see Chapter 5). 

Regionally Balanced Development

3.18  As one of the objectives of the 7FYP is to provide equal benefits to the whole population, efforts will be made to ensure a uniform spread of development in all parts of the country. As it was mentioned in Section II, progress cannot be achieved for all the people at the same pace. The economic potential of each area has an important role in determining its economic development. However, the Royal Government also recognises that private investments often follow to a place where government has made initial investments in terms of communication and other infrastructural investments. The Royal Government will therefore promote a reasonable degree of balanced development through various fiscal and other instruments, including incentives to encourage the establishment of industries in less developed areas. This objective will also be pursued quite clearly in the provision of basic health and primary education services.   

IV. The Planning Process

3

Approach to Development

3.19  The formulation of the overall approach to development and strategies for achieving the objectives, and their transformation into sectoral and macro plans began almost two and half years before the plan began i.e. in January 1990.  A time table on planning process was agreed by the Planning Commission Secretariat, Ministries and Departments, Zones and other agencies. By January 1990, the Planning Commission Secretariat had circulated policy guidelines and provisional budgets to the Ministries, Departments, and other agencies of the government. The guidelines incorporated the recommendations of Mid-term Review of the 6th Plan undertaken in October 1989 and were further expanded by the sector Ministries before they were finally circulated to the zonal authorities who coordinated the dzongkhag planning process. 

3.20  To formulate the dzongkhag plans, a broad process of consultation took place with Dzongkhag Yargay Tshogchung.  People's views on the needs, opportunities and economic potential of their dzongkhag were obtained. The dialogue during the planning process was important for responding to the people's priorities but also to obtain their commitment to the success of projects and programmes through their contribution of resources such as labour for construction and maintenance of infrastructure.  

3.21  Based on the priorities identified, Dzongkhag plans were prepared and submitted to all Departments and Ministries. The proposals were integrated into sectoral plans and revised in the light of constraints such as manpower, equipment, etc. The finalised plans were then submitted to the Planning Commission Secretariat for prioritisation and integration into a national Plan, with close liaison with Ministries and Departments.  The Ministerial budget requests were aggregated by the Planning Commission and reduced to match resource projections. The Technical Committee of Planning Commission and Policy and Planning Divisions of the Ministries reviewed the draft document to arrive at broad level of consistency. Once the sectoral budgets were agreed, the dzongkhag plans were revised accordingly and reviewed by His Majesty the King with the people in each dzongkhag.  

V. Implementation and Monitoring of the Plan

3.22  Even for the functions performed directly by the Government, the Plan cannot aim to act as a rigid five-year blueprint, but rather a means of securing consensus on objectives and priorities, and of developing consistent strategies to achieve these objectives. The Plan provides a framework for the policies to be followed and for the allocation of resources during the Plan period. However it is not possible to provide for all changing circumstances in the Plan, and adjustment will have to be made where necessary during the course of the Plan.  This will be achieved largely through the annual budgets, with close liaison between the Planning Commission and the Ministry of Finance to ensure that the budget reflects Plan priorities.  The 7FYP has been prepared in a consultative manner, and similar procedures will be involved in the monitoring and updating of the Plan during its implementation. 

3.23  In addition to the annual budget exercise, other improvements are being made to the planning capabilities of the Royal Government. For example, the Planning Commission was reorganised towards the end of the 7FYP, and Policy and Planning Divisions (PPDs) were established in all Ministries.  In addition the data collection and monitoring capacity of the Royal Government and in particular, the Central Statistical Organisation (CSO), will be strengthened during the 7FYP, through absorption of Statistical Units from other Ministries and Departments, to improve the coordination of data collection and analysis.  The Computer Support Centre will be similarly strengthened through training and equipment, and will be responsible for providing technical support to user Departments and establishing computer Local Area Networks to enhance coordination and exchange of information between and within Departments.  The National Environment Secretariat will be responsible for ensuring that all Ministries pay sufficient attention to environmental issues in their programmes. (see Chapter 21) 

3.24 The outlook for the economy in the 7FYP is discussed in Chapter 7, including forecasts of growth and identification of those sectors with greatest potential. Based on these forecasts, RGOB expenditure and revenue targets are also presented.  The allocation of Government funds based on the objectives outlined in this Chapter will also be summarised. The following three Chapters provide more details of RGOB strategies on the environment, the involvement of women in development and privatisation. 

4 

                                                                  CHAPTER 4

ENVIRONMENT AND SUSTAINABLE 

DEVELOPMENTENVIRONMENT AND

SUSTAINABLE DEVELOPMENT

I. Status of the EnvironmentI. Status of the Environment

4.1  Bhutan is in a rare, possibly unique position amongst developing countries, in its preservation of a wide base of natural resources. Bhutan is also one of the countries with the greatest biological diversity, not only in terms of a large number of species, but also several species unique to Bhutan's environment. However, knowledge of the status of these species is limited as there have been few studies on Bhutanese flora and fauna. 

4.2  The preservation of natural resources has been possible because of Bhutan's recent entry into the economic development process, the cause of environmental degradation in many developing countries. The maintenance of a traditional subsistence economy enabled preservation of the environment until the 1960s and despite economic growth rates of 7.5% in the last decade, the natural resource base has remained largely intact. This has been the result of the RGOB's cautious approach to development and awareness of possible negative impacts on the environment. In addition, the fact that hydroelectric power has been the major source of economic growth has meant that development has had little impact on the environment to date. 

4.3  The Buddhist faith, which plays an important role in all aspects of Bhutanese life, also stresses respect for all forms of life and thus the preservation of natural resources. Traditional subsistence farmers have developed environmentally sustainable practices over the centuries, which have only recently come under pressure from changes resulting from economic growth and population increase. 

4.4  Because of Bhutan's fortunate position, it is still possible for the RGOB to plan for the sustainable development of the economy, with great caution and learning from the experiences of other countries.  Both developed and developing countries have become increasingly concerned about the degradation of the environment and have sought ways of achieving growth without placing further pressure on their natural resources and the global environment. In an effort to develop long term strategies on the environment, the World Commission on Environment and Development was constituted in 1987. One of the major contributions of the Commission has been the popularisation of the concept of sustainable development:  

  "to ensure that it meets the needs of the present without compromising the ability of future generations to meet their own needs. The concept does imply limits- not absolute limits but limitations imposed by the present state of technology and social organisation on environmental resources and by the ability of the biosphere to absorb the effects of human activity. But technology and social organisation can both be managed and improved to make way for a new era of economic growth."  

II. Environmental ConcernsII. Environmental Concerns

4.5  While Bhutan has been successful in maintaining its stock of natural resources, the Royal Government is concerned that development may lead to certain trends which are likely to have negative impacts on the environment: 

-       The rate of population growth will be accelerated by better health programmes resulting in lower child mortality and longer life expectancy. 

-       It has been estimated that virtually all land suitable for arable production is being utilized. As the population increases, there will be greater pressure to open new, more marginal areas for production. This may lead to 

1

Environment and Sustainable Development

degradation of less productive land, particularly as this land is likely to be on steeper slopes and more susceptible to erosion. The need to increase food production may also result in over-utilisation of existing areas and introduction of environmentally damaging practices such as excessive use of chemical fertilisers. 

-       As population and incomes increase, the demand for livestock products will rise. Although livestock numbers have not increased significantly in the past decade, further expansion of the national herd, may lead to deterioration of grazing resources and reduction in the regenerative capacity of the pastures. 

-       Although most of the country's original forest cover is still intact, increasing population will place additional demands on the resource for grazing , fodder and firewood, for non-wood forest products and building materials.  The per capita consumption of fuelwood is among the highest in the world (2.4 cu.m/pa). Until the late 1970s the commercial logging of wood by sawmills had been indiscriminate and was leading to overexploitation in some areas. To address this problem the RGOB nationalised logging activities and substantially reduced the annual cut. However the scale of the problem is insignificant as shown by recent studies of the temperate and subtropical zones which revealed that the annual loss of forest cover is between 0.30% and 0.33%. over a 10 year period (1978-88). 

-       The construction of the road network may have caused severe erosion in some areas. In such a geologically unstable environment, further road construction is likely to cause additional erosion problems. The provision of additional road infrastructure will also open new areas for development, where environmental problems may occur if not properly planned. 

-       The planned development of industrial and mining sectors may result in environmental damage and pollution. The scale of the problem is small at present, largely because these sectors are undeveloped. 

-       The rapid expansion of urban areas and human settlements has not been based on sufficient planning and development of sanitation, drainage and waste disposal infrastructure, and this is resulting in public health problems in some areas. 

4.6  While there is concern that these problems may arise, the RGOB recognises that there has been little research into these issues or even baseline data from which to determine the nature and extent of environmental problems in Bhutan. It is important to recognise that these trends may not occur as feared, or that different forms of environmental degradation may be taking place, and therefore avoid inappropriate responses to presumed environmental concerns, which may in themselves be damaging to the environment or hamper economic growth. This may be the result of, in the absence of detailed data, assuming that the environmental degradation occurring in neighbouring countries will be repeated in Bhutan, without examining the situation more closely. There is also insufficient understanding of the impact of the development process on the environment. 

III. Sustainable Development in BhutanIII. Sustainable Development in Bhutan

4.7  Bhutan's approach to sustainable development was articulated in the Paro Declaration of 1990: 

  " The key is to find a development path that will allow the country to meet the pressing needs of the people, particularly in terms of food, health care and education, without undermining the resource base of the economy. New industries, new agricultural markets, and new forestry products need to be carefully developed, with respect to their broader environmental ramifications...Sustainable development, we believe, is a concept that is in harmony with the cultural and religious traditions of Bhutan. Our nation already has a strong conservation ethic, and indeed, respect for the natural world is a central tenet of Buddhism. It is therefore essential that the traditional culture be kept strong so that its values can guide our sustainable development path." 

4.8  The RGOB recognises that it is not necessary to restrict economic growth to ensure preservation of the resource base, but that utilisation of resources in a carefully managed manner, will provide sufficient incentives to ensure that natural resources are not depleted. To achieve the sustainability of resource utilisation, it is necessary to monitor the impact of development on the environment and to provide the necessary controls, regulations and incentives to the private sector. 

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                                                                                          Environment and Sustainable Development

IV. Environmental Policies and ProgrammesIV. Environmental Policies and Programmes

4.9  Because of the lack of baseline information and detailed research data, it is not possible to draw up detailed programmes to address environmental problems. It will thus be necessary to make these types of studies a priority. 

4.10       While detailed programmes will be based on the above information, the RGOB is the process of developing the following broad measures:  

General PoliciesGeneral Policies

-       Formation of a National Environment Secretariat with responsibility for the formulation of a National Environment Strategy, coordination of all environmental activities and monitoring of the environmental impact of development. 

-       Establishment of an Environmental Trust Fund: an endowment fund from which the benefits will be used for environment related activities. Several donors have pledged funds and the Fund will become operational once the total funds pledged reach $10 million. 

-       Increasing community and non government involvement in the planning and implementation of environmental activities.  The process of decentralisation will enable greater participation of the population in developing appropriate responses to environmental problems. 

-       Improving existing and introducing new legislation and policies to ensure sustainable utilisation. Forestry legislation has been continually updated since the first Bhutan Forest Act was introduced in 1969. The proposed 1991 Forest Act will build on the reorientation of forest policy towards conservation and will include new provisions to encourage community forestry. The Act will be implemented on the completion of the cadastral survey of the country. A draft National Pasture Policy has been prepared and is under consideration by the RGOB.  A draft of the Mining Regulations will be finalised during the 7FYP and will include regulations to prevent negative environmental impacts. 

-       Preparation of Master Plans for many sectors of the economy: e.g. Forestry, Power, Roads. These plans will ensure the development of the sectors in a carefully planned manner which will minimise environmental impact and ensure utilisation of natural resources on a sustainable basis. 

-       Use of economic incentives to encourage sustainable utilisation, for example the introduction of a progressive cattle tax to reduce incentives to hold cattle.  

Policies in the Natural Resource SectorPolicies in the Natural Resource Sector

-       Developing an integrated land-use planning capability to provide the necessary information for planning of sustainable development in the agricultural sector. The activities of the Departments of Agriculture, Forestry and Animal Husbandry will be integrated in recognition of the interdependence of these sub sectors at the farm level. This will be achieved through the Renewable Natural Resource Development approach, which will be the main strategy for land based development. The benefits and constraints of traditional practices will also be examined and developed for further productivity increases, in close cooperation with farmers. Thus it will be possible to make use of the accumulated wisdom in agricultural production, rather than depending on the introduction of new farming systems. 

-       Building on existing resource management practices, rather than adoption of new control mechanisms. There are well established institutions for the management of common property in Bhutan, including forestry, irrigation water, and grazing resources. These should be relied upon and adapted to changing circumstances to ensure the development of responses which are socially acceptable and ecologically viable. The introduction of new resource management practices and controls have often been the cause of environmental degradation in themselves. 

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Environment and Sustainable Development

-       Encouraging farmers to improve livestock productivity through breed improvement and thus reduce the numbers of livestock required to produce the same benefits. This will relieve grazing pressure in addition to efforts to provide other sources of feed through fodder production and improved grazing systems. 

-       Implementing a conservation-oriented forest policy where the highest priority for forestry is conservation of soil, water regime and climate. The aim of this policy will be to maintain 60% of forest cover. The sustainable utilisation of forest resources will also be permitted once the necessary inventories and management plans have been drawn up. Bhutan was among the first countries to formulate a National Policy on Community Forestry and is in the process of developing suitable models to encourage communities to take part in the protection and management of forest resources. The Forestry Department has also been responsible for afforestation of degraded areas and had replanted over 18,000 hectares by the end of the 6FYP. This programme will continue into the 7FYP and will focus more on community participation and public awareness. 

-       Preserving Bhutan's rich endowment of biodiversity through an extensive network of 12 protected areas; 20% of the country is under formal protection, although management of these areas is constrained by lack of staff and hunting of wildlife has been banned (see Map 4.I Protected Areas). The viability of managing these areas will be examined, to determine the benefits of re-delineating some areas to establish a network of protected areas, covering 25% of Bhutan and representing a more comprehensive spectrum of species and habitats. Management Plans for protected areas will be developed, and will incorporate utilisation of the natural resources by local residents where appropriate. 

New TechnologyNew Technology

-       Ensuring that economic development is based on the growth of those sectors and productive activities with the least negative impact on the environment. Much of the recent economic development has been based on hydroelectric power generation, which is less likely to have negative impact on the environment than development of heavy industry. The priority accorded to this sector will continue during the 7FYP, while ensuring that further developments do not have a negative impact on the environment. Environmental Impact Assessments will therefore be mandatory prior to the implementation of any new hydroelectric projects, as well as all projects in other sectors of the economy. 

-       Adoption of new technologies which minimise any negative impact on the environment. As industrial development is at an early stage and has thus had limited or no negative impact on the environment, Bhutan can take advantage of new technologies being developed that are less environmentally damaging than those developed and adopted by many other developing countries in previous years.  

Social ServicesSocial Services

-       Preparing a comprehensive family planning policy,  

-       Improved urban and town planning which will ensure provision of necessary infrastructure to improve public health and the urban environment.

-       Developing a new formal education system which will enhance the understanding of the importance of sustainable development for Bhutan. The New Approach to Primary Education (NAPE) was developed for Bhutanese children of primary age and is oriented towards using practical observations of the environment as a teaching tool in all subjects. This approach will therefore greatly increase environmental awareness at an early age. Other public awareness activities will be developed by the NES. 

4

                                                                  CHAPTER 5

WOMEN'S INVOLVEMENT IN 

DEVELOPMENTWOMEN'S INVOLVEMENT IN 

DEVELOPMENT

I.  The Status of Women in BhutanI.  The Status of Women in Bhutan

5.1  Women in Bhutan constitute 48% of the population. Bhutanese women enjoy considerable freedom and are treated equal to men under the law. There is no overt discrimination on the basis of gender. Some women play as vital a role as men in the rural and urban economy.  A few women hold managerial positions in the public and private sectors. Married women who are not employed in the formal sector can often generate as much income as their husbands, in addition to being housewives. 

Access to ServicesAccess to Services

EducationEducation

5.2  There is important gender difference in enrolment of boys and girls: approximately 60% boys compared to 40% girls. This disparity is being reduced with the establishment of community schools which are located closer to communities and thus involve less time for children to reach school. The parental concerns regarding girls' safety as mentioned above can thus be addressed. Some parents also consider formal education to be irrelevant to the needs of women's lives, and education can be considered as a luxury. The dropout rate from school is also higher for girls.  While the adult literacy rate is 20%, the female literacy rate is estimated  at below 10%.  The existence of the low literacy rate for women hinders the process of communicating important issues of health, sanitation, hygiene and involving women in income generating programmes.  

Health Health  

5.3  Women face greater health risks than men, particularly as childbirth places greater stress on many women who are undernourished, anaemic and suffering from iodine and vitamin A deficiencies. Despite impressive improvements in the provision of primary health care, the maternal mortality rate remain one of the highest in the world at 7.7 per 1,000.  The majority of women still give birth at home and are not attended by a trained health worker, thus increasing the risks further. 

5.4  There are positive signs that the promotion of disease prevention, improved sanitation and hygiene are proving effective. Attendance of Mother and Child Clinics is on the increase.  However, the low ratio of female health workers: 69 women to 729 men in 1989, does restrict the use of these services by women. 

Gender Division of LabourGender Division of Labour

5.5  There is a strict division of labour at the household level with women being responsible for all household chores. Both sexes are responsible for child care. 

AgricultureAgriculture

5.6  The majority of women in Bhutan are involved in agricultural production.  There are few comparative studies of division of labour between the sexes.  However, it would appear that the participation of women in the different agricultural activities varies between different regions. Women are usually not responsible for ploughing but both men and women prepare and cultivate the land, weed, harvest, thresh, winnow, broadcast the seeds and transplant the seedlings.  

5.7  The low levels of literacy amongst women also hinders their access to credit for agricultural production. The Ministry of Agriculture provides extension services to both men and women, and have placed special emphasis on reaching women. However, as in the case of health services, the majority of extension workers are men, which 

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Women's Involvement in Development

restricts women's access to these services, for social reasons. 

Formal EmploymentFormal Employment

5.8  In addition to the agricultural sector, 0.25% of women are employed in the service sector, 0.27% in business and 0.18% in other areas of work.  Information on women's participation in the industrial sector is not available.  

5.9  Women form 14% of the Civil Service, where there is no discrimination in pay, compensation or benefits between the sexes. Although the provision of maternity benefits is not enforced by law, the rules of the Royal Civil Service Commission provide 3 months of maternity leave for the first 2 children. There is a slight difference in pay for unskilled workers where women get paid less than men.  

Self EmploymentSelf Employment

5.10  In urban areas women are active in retailing and real estate speculation. In rural areas, one of the few options for income generation outside agriculture is weaving. Weaving is the main activity for women in the central and eastern parts of the country during the winter months, when there is less agricultural work.  There are several difficulties in income generation from weaving particularly related to marketing. Many women produce woven fabrics in remote areas where the local market is limited and the transport costs to larger towns are high. The national demand for the fabric is also relatively small and the potential for export has not been assessed.  The lack of raw materials such as yarn and related facilities of dyeing and market outlets for other products such as wood, bamboo and cane crafts serve as major constraints. 

II.  InstitutionsII.  Institutions

National Women's Association of BhutanNational Women's Association of Bhutan

5.11  The National Women's Association of Bhutan (NWAB) came into being on 9th April, 1981 by the resolution passed by the 53rd session of the National Assembly. NWAB was first established as an NGO, functioned as a non-ministerial Department from 1985 to 1991, when the organisation reverted to the status of NGO.  The National Women's Association of Bhutan undertakes the promotion of improvements in the socioeconomic conditions of women throughout Bhutan through identifying the constraints that women face and appropriate solutions.  Many of the activities of the NWAB are carried out by voluntary Women's Association Members both in the capital and in the Dzongkhags, while the headquarters staff act as a link between the RGOB Ministries and the Dzongkhag Women's Associations of Bhutan. There are a total of 407 voluntary members. 

5.12  The NWAB has established several income generating programmes in selected areas.  Training has been provided to improve technical skills, in weaving, knitting and tailoring.  Short term credit has been given and market outlets provided through the Handicraft Emporium in Thimphu. Raw materials supply has been improved through the establishment of yarn depots and sub depots. These activities have provided women with an additional source of income, although the marketing constraints referred to above persist.  

Royal Government ProgrammesRoyal Government Programmes

5.13  The NWAB has worked closely with RGOB Departments to ensure that women are included in relevant programmes and projects. In addition, the Government has developed programmes directed specifically at women. For example, leadership training programmes have been initiated to promote health and hygiene, through the production of "Facts for Life" booklets and to raise women's awareness of their potential role in development. The women trained in turn train other rural women.  This programme was found to be effective in beginning to bring the women into the main stream of national development.  A smokeless stove project was launched and a total of 13,564 stoves were installed in the rural areas.  Since 1989, this project has been transferred to the Department of Works and Housing. 

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                                                                                                Women's Involvement in Development

III.  Policies to Ensure the Participation of Women III.  Policies to Ensure the Participation of Women  

5.14  During the 7FYP, the RGOB and the NWAB will continue to promote the participation of women in the development process, and ensure that they obtain equal benefits from progress, in line with the overall objectives as described in Chapter 3. 

RGOB Policies and StrategiesRGOB Policies and Strategies

5.15  While the NWAB will play a major role in promoting the interests of women, all RGOB Ministries and Departments will include the participation of women as one of their objectives. In this way, the participation of women in all sectors of the economy will be ensured. The following strategies will be implemented by Government Ministries and Departments: 

(a)    Women and girls will one of the priority target groups for the provision of health and education services, in recognition of the lower school enrolment rates of girls and the fact that women's health is more at risk. Adult education will also be targeted at women as higher literacy rates facilitate improvements in health and hygiene practices. 

(b)   Efforts will made to include women in the mainstream of development, rather than relying on traditional "women's" activities to improve their social welfare.  New income generating activities suitable for women will be identified and developed as the potential for significant income generation from weaving may be limited. The Department of Trade and Industry will encourage the involvement of women in the development of agro industries, particularly food processing and essential oil distillation which appear to hold significant potential. 

(c)    The employment of women agricultural extension agents and Village Health Workers will be increased, to encourage women to make greater use of Government services.  

National Women's Association of BhutanNational Women's Association of Bhutan

5.16  Although the NWAB has become independent of Government, the Association will continue to work closely with the relevant Departments and implement programmes with the following objectives: 

(a)       To strengthen the organization at the headquarters and the Dzongkhag levels. Institution building and manpower training will be given high priority. 

(b)       Collection and analysis of data on women through detailed surveys on their socio-economic conditions for future planning and policy making. 

(c)       Vocational training, basic skills and literacy, nutritional and health training to encourage self-reliance and to promote women's role in the mainstream of national development. 

(d)       Encourage women to make use of rural credit facilities for income generating activities. 

(e)       To promote weaving and other traditional handicrafts and to provide an additional source of income through the creation of market outlets.  Surveys will be undertaken to assess the market potential for woven products and handicrafts.   

3

                                                                  CHAPTER  6

PRIVATISATION AND PUBLIC ENTERPRISE 

MANAGEMENTPRIVATISATION AND PUBLIC 

ENTERPRISE MANAGEMENT

I. BackgroundI.  Background

6.1 The Royal Government has a played a leading role in the modern sector of Bhutan's economy.  This has extended beyond the traditional governmental roles (law and order, physical infrastructure and social services) and has included direct involvement in many commercial enterprises.  Government had to take the initiative, given the shortage of indigenous entrepreneurs and capital in the kingdom. 

6.2  Table 6.I gives an idea of the range of RGOB involvement in various enterprises.  They vary widely in size, in strategic significance, and in their formal status (some are incorporated bodies in which RGOB holds shares, while others are run less formally within government departments).  One indicator of the significance of such enterprises is that they account for more than half of RGOB's domestic revenues.  Even before revenues from electricity sales became significant, various receipts from Government enterprises accounted for almost 40% of domestic revenues. 

1

Privatisation

Table 6.1  Profile of Public and Joint Sector Enterprises 

Note: 

1      Turnover and net profit figures relate to 1990, unless otherwise indicated. 

2      U indicates that the figure is based on unaudited accounts. 

3      B and E indicate before tax and estimated figures respectively. 

4      April 1990 employment figures have been included. The employment figures for BBPL, Shumar Gypsum Mines and Penden Duuckpa Coal Company do not include casual labourers. 

5      In the joint sector or projects with major government share holdings, the term "private" only indicates management by the private sector. 

6      Year of establishment indicates the first year of commercial production. 

6.3           However, the Royal Government recognises that businesses are usually better run by businessmen than by governments.  It is committed to the development of a flourishing private sector in Bhutan, and intends, over time, to limit RGOB's direct involvement in enterprises as the capacity of the indigenous private sector increases.  Accordingly, it has begun a programme of privatisation, which will continue during the Seventh Five Year Plan.  This Chapter explains the objectives of the privatisation programme. 

6.4           Although most of the enterprises currently in the public sector will eventually be privatised, there are some which, for strategic or practical reasons, will remain under Government control, at least for a considerable period.  These enterprises will be provided with a management structure and operating framework that encourages efficiency whilst ensuring that they operate in the national interest.  There will also be efforts to encourage private sector initiatives in the provision of social services (private schools and health facilities), and government will contract out to the private sector many functions where this seems likely to be the most efficient and effective mode of provision.  Government assets, such as employee housing, will be sold off whenever appropriate.  However, the Government will take steps ensure that privatisation does not lead to the concentration of ownership and 

2 

                                                                                                                                     Privatisation

unacceptably high inequalities of income distribution. 

6.5           The Ministries chiefly involved in managing the privatisation programme are the Ministry of Finance and the Ministry of Trade and Industry, which oversees many of the commercial enterprises which are priorities for privatisation.  However, as Table 6.I indicates, a number of other Ministries and departments also have responsibilities for public enterprises within their sectors. 

Developments during FYP6Developments during FYP6

6.6 In order to promote  a suitable institutional and legal environment for privatisation, Government passed "The Companies Act of Kingdom of Bhutan, 1989". Many enterprises, including public enterprises have been already incorporated under the Companies Act. For instance, Druk-Air Corporation and Bhutan Polythene and Pipe Company have been registered under the Companies Act so that the management decisions such as recruitment and salary fixation need not follow the Royal Civil Service Rules, thus giving the management freedom to act in the interest of enterprise's efficiency.  All companies which have more than one owner have to be registered under the Companies Act. 

6.7 The privatisation of Gedu Wood Manufacturing Corporation was the most significant activity during the 6FYP. Privatisation of this corporation took place in February 1990 and its management handed over to a private entrepreneur who owns 41% of the shares in the Corporation. The Government, other private companies and employees of the Corporation own the remaining shares.  The Bhutan Tourism Corporation and Bhutan Polythene Pipe Company had also been privatised by the end of the 6FYP. In addition, the Government was in the process of selling most of its shares held in many industries including Bhutan Calcium Carbide Limited, Penden Cement Authority.   

Policy ObjectivesPolicy Objectives

6.8  The objectives of the Royal Government's strategy of privatisation include: 

(a)    ensuring the efficient management and operation of enterprises, and thereby promoting economic growth; 

(b)   limiting the role of Government, so that it can concentrate on activities where there is not an adequate private sector alternative; 

(c)    fostering indigenous entrepreneurial and management expertise; and 

(d)   providing increased opportunities for saving and investing within the Bhutanese economy. 

6.9           The Government is fully committed to the privatisation strategy.  As indicated in the previous section, a substantial number of privatisations have already taken place.  In future, RGOB will look for private sector involvement from the start of new ventures and encourage foreign investment though these will be welcomed on the basis of case by case consideration.  Measures to encourage investments and to support indigenous entrepreneurs are described in Chapter 18 on Manufacturing and Trade. 

6.10        During FYP7 the privatisation programme will be continued mostly by divesting shares held by the government in joint corporations.  However, there are limits to the speed with which full privatisation can be achieved. Factors that have to be taken into account include: 

(a)    The need for each privatisation to be properly prepared and launched.  This involves ensuring that the concern has an appropriate legal structure, that its assets are properly valued and so forth.  In several cases, there may need to be considerable restructuring of a company before it can be floated. 

(b)   The capacity of the local capital market to absorb the new shares on offer.  The primary purpose of privatisation is not to raise money for the Government, but there is a danger of realising much less than the true value of public assets if too many offers are made simultaneously.  (This is one of the reasons why RGOB has, for the time being, retained some of the shares in a number of the companies already 

3

Privatisation

 privatised.) 

(c)    Policy issues surrounding certain enterprises: for example, privatisation of logging activities will depend on first establishing adequate regulation and monitoring capacity to ensure that logging complies with environmental safeguards. 

6.11        Sale of existing public enterprises is not the only possible form of privatisation.  For example, many of the functions formerly reserved to the Food Corporation of Bhutan have been opened up to the private sector, and FCB retains only a more limited role concerned with food security and the marketing of controlled foodstuffs.  The role of the State Trading Corporation has been similarly curtailed, and the functions of the Bhutan Government Transport Service have been almost entirely superseded by private sector services.  (Both the State Trading Corporation of Bhutan and Food Corporation  are now directly involved only at the wholesale level; retail outlets are managed by agents.)  In road maintenance and construction, RGOB is fostering the development of private firms to which work previously undertaken by the Department of Roads may be contracted out. Government transport facilities have also been contracted out, so that Government officers have to now hire vehicles when required.  

6.12        In addition to the industrial activities identified above, there are other areas where the Royal Government will consider as potential operations for privatisation.  These include the Post Office, some of the operations of the Telecommunications and Power Departments, and some of the activities of the Ministry of Agriculture.  There are however, a number of public enterprises which are unlikely to be privatised during the period of FYP7, because of factors already mentioned or because of special institutional circumstances.  The most significant examples are: 

(a)    The Chhukha Corporation which is simply too large in scale to be absorbed by the domestic capital market for the foreseeable future although the distribution of power in urban areas may be privatised. 

(b)   The Bank of Bhutan, which is a joint operation between RGOB and the State Bank of India. 

(c)    Druk Air, which is unlikely to be attractive to private shareholders until its financial returns considerably improve. 

6.13        Privatisation is part of a broader strategy to generate an efficient, dynamic, commercial and industrial sector in Bhutan.  To achieve its full potential, privatisation needs to be complemented by measures to create an enabling, competitive environment in the private sector.  Such measures  are described in Chapter 18 on Manufacturing and Trade. 

6.14        During FYP7, RGOB will also take measures to put onto a sounder footing those enterprises which for the time being remain in the public sector.  For each such enterprise: 

(a)    An appropriate corporate structure and legal identity will be established, if not already in place. Such enterprises will be expected to run along commercial lines in accordance with the Companies Act of Kingdom of Bhutan, 1989. 

(b)   Relevant interests and skills will be represented on the Board of Directors. 

(c)    General objectives and strategy for the corporation will be agreed between RGOB and the Board, but RGOB will not attempt to interfere in the day-to-day running of public enterprises. 

(d)   The Board will be responsible for appointing senior management as laid down in the Companies Act of Kingdom of Bhutan, 1989. 

(e)    Government's return from the enterprise will take two forms: dividends on Government equity, and general taxation, in which publicly owned and private companies will be treated on the same footing. 

(f)    Enterprises will be expected to make a competitive return on their capital; any subsidies will be explicitly justified.  

4 

                                                                  CHAPTER 7

ECONOMIC OUTLOOKECONOMIC OUTLOOK

I. IntroductionI. Introduction

7.1  This Chapter examines Bhutan's long term economic opportunities and, based on anticipated major investments, provides a forecast of economic growth in the 7FYP. Government expenditure and revenue projections are also outlined, with the resulting deficit and financing requirements detailed for the Plan period.  

II. Long Term OpportunitiesII.  Long Term Opportunities

7.2  Economic development in Bhutan is constrained by those factors described in Chapter 1: mountainous terrain; small and scattered population; limited domestic demand and lack of skilled manpower. Considerable progress has been made in overcoming these constraints since the 1960s, as described in Chapter 2, but these factors continue to limit the potential for economic growth.  Opportunities are further shaped by Bhutan's proximity to, and special relationship with, the massive Indian economy.  This gives access to large potential markets, but also largely determines the terms of Bhutan's economic relationships with third countries.  Towards the end of 6FYP, India began to adopt a more open economic strategy, and this is likely to make Bhutan's economic relationships with third countries more straightforward without sacrificing the advantages of open access to Indian markets. 

7.3  Based on the constraints discussed above and the existence of abundant natural resources, Bhutan's long term economic opportunities seem to lie in the development of activities which are based on the sustainable exploitation of the country's natural resources.  The area with the most obvious potential is the further development of hydroelectric power for export.  Although power generation will produce additional Government revenues, the development of other sectors will be required to provide incomes for the majority of the population.  The agricultural sector will continue to provide incomes for the majority of Bhutanese and efforts will be made to encourage increases in productivity of arable, livestock and forestry output, with emphasis on the sustainability of these increases as described in Chapter 4.  

7.4  However, it is unlikely that the agricultural sector would be able to generate significant increases in output to maintain the high levels of growth achieved in the 6FYP, thus other sectors will need to be developed to provide for economic growth.  The industrial sector appears to hold potential, particularly in agro industries, such as wood and food processing, essential oil production. Mineral based industries provided the main impetus for industrial growth in the 6FYP and these will be further developed during the 7FYP, as outlined in Chapter 18 and 19.  As the industrial sector is at an early stage of development, Bhutan would find it difficult to compete with the established industries in the region, particularly those industries based on low labour costs. As labour is scarce in most of Bhutan, labour costs tend to be higher. The combination of high labour and transport costs, indicates that Bhutan would have a comparative advantage in the production of high value quality goods for export.  

III. Economic Forecasts for the 7FYPIII. Economic Forecasts for the 7FYP

7.5  Economic forecasting for the medium term is constrained by lack of data. Even if the relationships between different parts of the economy were better known, they are likely to change rapidly in a small developing economy like Bhutan's, so that it is not safe simply to extrapolate past trends.  Because the economy is so small, a few large projects can make a big difference to the outlook: not only the existence but the timing of such major investments can be crucial.  The economy may be greatly influenced by external factors; not least, by the levels of foreign aid on which much of the financing of investment depends. 

7.6  As noted in Chapter 2, economic growth during the 1980s comfortably exceeded the population growth rate.  However, a large part of the growth during the 1980s was due to the Chhukha Hydel Project.  During the 7FYP period, there will be preliminary work on more large power plants, but these will not come on stream until the late 1990s.  Consequently, while the energy sector will be the major source of growth in the long term, its contribution to increases in GDP will not be significant during the 7FYP.  Exploitation of another of Bhutan's major natural resources, its forests, will proceed cautiously, to ensure that development is not environmentally damaging.  While production is expected to increase in this sector, it is unlikely that the share of forestry in total GDP will expand significantly.  There is also scope for continued growth of the agriculture and livestock sectors, mainly through improved productivity (see Chapter 17).  

7.7  Because of the limitations described above, the sector which seems to have the greatest potential for rapid growth during 7FYP is manufacturing.  Starting from a small base, manufacturing grew at over 15% p.a. during the 1980s. Because the base is still quite small, few large-scale projects could ensure continued rapid growth of the sector.  As will be described in Chapter 18, the ferro-silicon plant and another proposed cement factory (Dungsum) are the largest investments foreseen in the sector. Growth of the smaller establishments within manufacturing will also be encouraged to increase income and employment opportunities for all the population throughout the country. Tourism is another significant potential foreign exchange earner. The Royal Government has opted for selective tourism to minimise the possible adverse impact on its culture and environment. The number of tourists has been limited to below a ceiling of 4,000 tourists a year. Recognising the potential of this sector, the Government has privatised the Bhutan Tourism Corporation and will encourage the tour companies to increase their marketing activities abroad to attract a higher number of tourists. 

Table 7.1  GDP Projections 1989-1997 

Source:  Planning Commission.

7.8  1 shows the results of an exploratory GDP projection, in which an overall growth rate of just over 5% p.a. is achieved through continued rapid growth of the manufacturing sector, despite the decline in electricity sector growth.  In this scenario, the share of manufacturing in GDP would almost double, to 13.2% by 1997, while the share of electricity would fall to 7.7% from 9.4%.  There would be a continued slow decline in the relative importance of the natural resources sectors: the combined share of agriculture and forestry would fall from about 43% to 41% of the total. 

IV. Government Expenditure IV. Government Expenditure  

7.9  This section explains RGOB expenditure patterns in the 6FYP and their implications for the 7FYP budget.  The capital and recurrent budget projections for the 7FYP are also summarised, including sectoral allocations, and compared with revenue forecasts to indicate the likely Government deficits. 

Government Expenditure During 6FYPGovernment Expenditure During 6FYP

7.10  As indicated in Chapter 2, RGOB has been heavily reliant on external assistance, from India and from other donors, to bridge the gap between its expenditure and domestic revenues.  During 6FYP, however, the degree of this dependence was substantially reduced, notably because of the additional domestic revenues from the Chhukha power plant.  Other domestic revenues were less buoyant.  The allocation of expenditures between sectors broadly followed the priorities set out in 6FYP. 

7.11  However by the end of the 6FYP, several factors compelled the Government to implement severe budget restraint: increases in economic growth tapered off after the commissioning of the Chhukha Hydel project; there was a decline in aid receipts from India; Government expenditure was increasing rapidly leading to significant budget deficits; and a decline in Bhutan's rupee reserves resulted from domestic borrowing to finance Government deficits. 

Recurrent and Capital Budget Projections for the 7FYP Recurrent and Capital Budget Projections for the 7FYP  

7.12 While the Government will be playing a less important role in productive activities, RGOB will continue to influence the development of the private sector economy as a whole, through the impact of public sector expenditures, taxation and borrowing, and through provision of services and substantial investments in infrastructure. Much of the Five Year Plan therefore focuses on the Government's own expenditure proposals.  For the 7FYP, the Royal Government has adopted expenditure and revenue targets which it considers are consistent with a 5% p.a. rate of economic growth, in the sense both that they allow sufficient public investment to support such a rate of growth, and that the domestic revenue requirements of the programme could be supported by such a growing economy. 

7.13  The aggregate expenditure projections have been based on the following considerations:

(a)Provision of sufficient recurrent funds for the existing activities of Ministries and Departments.  

(b)The capital and recurrent budget requirements for new projects as submitted by all Ministries shown in the Project Profiles, in Volume II. These requirements were analyzed by the Planning Commission and compared with forecasts of economic growth, domestic revenues and donor funds to estimate the most appropriate levels for the aggregate capital and recurrent budgets. 

(c)Once the overall budget was agreed, Ministerial and Departmental budgets were fixed based on: sectoral priorities; implementation capacity, including the availability of skilled manpower, and the capacity of the construction sector; and the appropriate ratio of capital to recurrent costs, to avoid the build up of recurrent costs.  

(d)In keeping with the Royal Government's objective of achieving recurrent budget self-sufficiency, recurrent expenditures will be kept to the minimum required to provide for existing activities and the growth of priority sectors.  

(e)In order to ensure that increases in the recurrent budget are not driven by expansion of capital expenditure, it has been necessary to restrict capital expenditure growth.  

7.14  Projections of annual recurrent and capital expenditures have been made for all Departments, to provide information on the funds required to implement all projects and programmes during the 7FYP. However, fiscal discipline will be maintained: if revenues fall short of requirements, expenditures will be curtailed in order to avoid unacceptable budget deficits.  The situation will be reviewed and the expenditure projections revised, as part of the annual budget exercise described in Chapter 3. 

Overall Financing FrameOverall Financing Frame

Table 7.2  Seventh Plan Outlay and Sectoral Allocations 

Figure 7.1

Recurrent Expenditure ProjectionsRecurrent Expenditure Projections

7.15  The capital and recurrent budgets for the 7FYP are shown by Department in Table 7.2, with the phasing over the Plan period shown in each of the sectoral Chapters.  The recurrent expenditures of the Government are targeted to grow by an average of almost 10.8% p.a. during the 7FYP.  Figure 7.1 shows that recurrent expenditures increase substantially in real terms compared with the 1991/92 budget, to ensure that Departments are able to continue the implementation of existing activities and programmes, however real total recurrent spending will not exceed the level reached in 1989/90.  Of the total recurrent budget, 21% is provided for new activities.  The average rate of growth in real terms is at the same level as the anticipated rate of growth of GDP: as described in Chapter 3, the Approach to Development, the intention is to improve the quality and efficiency of Government services and programmes, by providing for human resource development and maintenance of basic infrastructure.  The emphasis of the expenditure targets is thus on consolidation rather than a large expansion of Government services or investment in new infrastructure.  Figure 7.1 indicates how the overall recurrent budget will be phased, while Figure 7.2 shows the distribution between the social, community, economic and Government Administration sectors.  

Figure 7.2

Figure 7.3

Capital Expenditure ProjectionsCapital Expenditure Projections

7.16    Capital expenditure is considered in two distinct categories: 

(a)the majority of capital projects which generate subsequent recurrent costs to RGOB; 

(b)major investments which are themselves net revenue generators to the government (notably hydel schemes and the proposed Dungsum Cement Project during 7FYP). 

7.17       The second category have traditionally been considered as "non-plan" projects, to proceed if funding can be secured.  This approach makes sense for several reasons: 

-     the projects are so large that their inclusion within a single capital expenditure target would distort the entire programme; 

-     as long as they are genuinely self-liquidating (i.e. they can earn a commercial rate of return on investment), the recurrent budget constraint which limits the capital expenditure which RGOB should undertake does not apply to them; 

-     because of their commercial potential, such projects should be able to tap funding sources which are not accessible to mainstream capital projects: competition for funding between Plan and nonPlan projects is therefore limited. 

7.18  Accordingly, the expenditure projections for 7FYP focus mainly on the target for recurrent plus Planproject expenditure.  Anticipated expenditures on non-Plan projects (and the funding that they require) are identified separately.  However, this does not imply that these projects are less important.  The overall target for (Plan Project) capital expenditure is Nu. 6980m for the 7FYP, ( in nominal prices) with a ratio of capital to recurrent expenditure being 45:55 compared with 50:50 in the 6FYP. The distribution between capital and recurrent funds is shown in Figure 7.3. Non-Plan projects amount to Nu.9,632m and include power projects and the Dungsum Cement Plant.  As already noted, this figure is separate from the main Plan targets, in the sense that an increase/decrease in estimates for non-Plan projects need not affect the targets for Plan projects or for recurrent expenditure, although it does affect the total external financing requirement. 

Figure 7.4

Sectoral AllocationsSectoral Allocations

7.19   Figure 7.4 shows the allocation of the recurrent budget between the major sectors, while the distribution of both capital and recurrent funds between the Departments is shown in more detail in Table 7.2.  The social sector includes health and education and as indicated in Figure 7.4, social services have been allocated 19.8% of the recurrent budget.  The recurrent budget for the social services sector will be increased substantially in the first year of the Plan as shown in Figure 7. 2.  The economic services sector has a higher share, however this includes Departments such as Power and Roads, which are vital for economic development but also enable greater access to social services and improve the quality of life.  Other activities in the economic sector will be revenue generating, including Power and Telecommunications, and will therefore be largely self financing.   

7.20  In terms of total funds, the social services sector will receive 22.7%, increasing from 15% of the total budget in the 6FYP. The economic services sector will receive 42%: the Ministry of Agriculture 17.3%; Ministry of Trade and Industry 15.7% and the Ministry of Communications 9%.  As noted already, the activities funded in the economic sector will also enhance the provision of social services.  In addition, the emphasis of many programmes will be on improving the quality of service rather than on expansion of programmes. This is particularly the case for the health sector.  Some expansion will take place in education, however the Government will encourage communities to establish their own schools, with financial support and provision of materials and teaching staff by the RGOB. It is envisaged that this will reduce the need for Government financing. There are also administrative functions with important development implications that will require increased resources over the Plan period: these include financial management, revenue collection and statistics.  The recurrent budget for administration also includes Nu. 1,222m required for debt servicing, including principal and interest payments. 

V. Domestic Revenue PotentialV. Domestic Revenue Potential

Table 7.3  Recurrent Expenditures and Revenue Projections for the 7FYP 

                                                 (Figures in Brackets in 1992/93 Prices) 

  Source: Planning Commission Secretariat

7.21  The Royal Government's objective of recurrent budget self-sufficiency requires vigorous efforts to increase domestic revenue during 7FYP.  Some of the constraints in raising additional revenues and possible revenue measures are explained in Chapter 6, Fiscal and Monetary Policy. The following paragraphs consider two revenue scenarios which are then compared with recurrent expenditure projections to identify likely financing requirements, as shown in Table 7.3. 

Low revenue scenarioLow revenue scenario

7.22  The `low revenue scenario' is based on the revenue forecast made by the Department of Revenue and Customs in late 1989.  The forecast has been updated to include additional revenue anticipated from several projects. The Ferro-Silicon Project is expected to begin production in 1993/94 and a revenue of approximately Nu. 20m per year has been included in the forecast. A new power tariff was negotiated with the Government of India at the end of the 6FYP, which took effect in 1991, increasing from Nu.0.16 to Nu.0.27 per unit. The tariff will be negotiated again in 1994/5 and thus it is likely that power revenues will increase further. Revenues have been estimated to increase from Nu. 384m in the first 2 years of 7FYP to Nu 513m from 1994/95 onwards as a result of increase in tariff rate from Nu. 0.27 to Nu 0.37 per unit. The tariff rate is assumed to remain at that level until the end of 7FYP. In addition, the forecast made by the Department of Revenue and Customs was revised to include the planned commissioning of 2 minor power generating projects:  

the Chhukha Tail Race and Bunakha Reservoir Scheme. The Chhukha Tail Race is expected to be commissioned in 1994/95 bringing in additional revenue of Nu 24m per year and the Bunakha Reservoir Scheme is expected to be commissioned in 1995/96 generating an additional revenue of Nu. 50m per year. The Dungsum Cement Project is assumed to start production in 1996/97 contributing Nu 40m in that year. By taking account of these additional revenues,  total domestic revenue is projected at Nu. 5306m for the 7FYP in nominal prices.   

Figure 7.5

High Revenue scenarioHigh Revenue scenario

7.23  There are two main differences between the scenarios. Firstly, the high revenue scenario assumes that the revenue in 1992/93 will be higher by Nu. 162m compared to the amount for that year shown in low revenue scenario. The increase is expected to come about through greater effort in tax collection, revision of rates, introduction of new taxes, increases in user charges as well as revenue from new industrial projects. Secondly, the 1992/93 revenue of Nu 1,060 is projected to keep pace with inflation, at 10% per annum. The additional revenue arising from revision of the Chhukha power tariff and revenue generated by the Ferro-Silicon Project, Chhukha Tail Race, Bunakha Reservoir Scheme and Dungsum Cement Project are also included in this projection.  The 7FYP total revenue according to this more optimistic forecast is Nu. 6730m in nominal terms, ( Nu.5489m in real terms). The two revenue scenarios are shown in Figure 7.5, which also include a revenue forecast for 1991/92, as the actual receipt figures were not available.  The revenue forecast was made in 1989 and is the basis for the low scenario for the 7FYP.  Figure 7.5 shows that in the first scenario domestic revenues will remain at approximately the same level during the 7FYP, and will decline in real terms in the last year of the Plan.  Under the second scenario, domestic revenues will increase over the period in real terms. 

VI. Projected Government DeficitsVI. Projected Government Deficits

7.24 As indicated in Table 7.3, recurrent expenditure is estimated at Nu. 8611m, thus the low revenue forecast would mean a recurrent funding gap of Nu. 3305m and Nu. 1881m in the `high revenue scenario', in nominal prices. In the low revenue scenario, the average growth rate of revenue in nominal prices is 8.1% whereas recurrent expenditure, also in nominal prices grows at annual average of 10.8%. In this scenario, revenue will cover 62% of recurrent expenditure during the 7FYP period. The high revenue scenario would mean an average growth of 12.3%, and would increase the proportion of recurrent expenditures to be covered by domestic revenues to 78%.  

7.25   Besides these new sources of revenue, the Royal Government will explore all options for expanding the  domestic revenue base, as explained in more detail in the Fiscal and Monetary Chapter. The Government is therefore hopeful that the higher projected revenue can be attained, however in both `low revenue scenario' and `high revenue scenario' cases,  strong assumptions are made about the timely implementation of the hydro and industrial projects. Difficulties encountered in implementing the projects during the 7FYP, would lead to a stagnation of revenue in both the scenarios. Investment in other industrial and hydro-power schemes are, expected to generate additional revenues only in the 8FYP, as explained in Section II.  Thus, 7FYP domestic revenues are less certain and are likely to be at a considerably lower level than those anticipated for the 8FYP, when the power and other industrial projects being initiated will come on stream.  

Financing RequirementsFinancing Requirements

Table 7.4  Domestic Revenues and Aid Requirements for the 7FYP 

                                                                (1992/93 Prices) 

7.26  Based on the above projections, the financing requirements for the 7FYP are shown in Table 7.4.  As indicated, the low revenue forecast would result in a financing requirement of Nu.8,582m in 1992/93 prices, or 66% of the total budget.  The high revenue forecast would reduce the requirement to Nu. 7,448m or 57% of the total budget. This figure does not include the non Plan projects for which Nu. 9,632m will be required.  However the percentage of aid required to finance the budget will fall during the period from 70% to 62% under the low revenue scenario, and from 64% to 48% under the high revenue scenario.  This compares with approximately 50% of the budget met by external assistance in the early part of the 6FYP. Towards the end of the 6FYP, the proportion fell as Chhukha revenues came on stream. At the same time aid receipts fell, as described in Chapter 2.   

Recurrent Cost FinancingRecurrent Cost Financing

7.27  Table 7.3 indicates the likely recurrent financing gap during the 7FYP, Nu.3305m in the low revenue scenario or Nu. 1881m in the high revenue scenario, in nominal prices. Of the total recurrent budget, Nu.1,893m is required for recurrent costs arising from new projects, as shown in Table 7.5, while Nu.6,716m, will be required to meet the costs of existing activities.  Thus under the low revenue scenario of Nu. 5,306 (in nominal prices), external funds will be required to meet some of the recurrent costs of existing activities, in addition to the new project recurrent costs. However, if the higher revenue scenario is realised (Nu. 6,730m), the RGOB will be able to meet all of the existing recurrent costs. Financing of additional recurrent costs would therefore be required.  

7.28      Based on the above expenditure and revenue projections, it is clear that the Royal Government will need to persuade aid agencies to avoid the natural bias towards capital projects, as there will be a requirement for recurrent cost financing.  As explained in Section IV, on projections of RGOB expenditure,  the emphasis of the expenditure programme for the 7FYP will be to meet existing recurrent costs and to limit capital investments so as to prevent unsustainable increases in the recurrent budget.  Even with such a restricted capital investment programme, the Royal Government will require assistance with the recurrent budget as outlined above. The kinds of recurrent cost financing required for the 7FYP include: 

(a)    Aid funding is will be required for certain recurrent expenditures that have high foreign exchange content (examples include medical drugs and replacement of vehicles and equipment). 

(b)   Aid funding will be required for recurrent costs that relate to particularly important human development objectives (examples include essential drugs and school text books). 

(c)    In a number of cases, aid finance will be required for the initial running costs associated with capital projects.  The RNR sector is one area where this is particularly necessary. 

(d)   Technical Assistance (whether financing expatriate personnel or funding the training of Bhutanese) has a recurrent cost element, and will continue to be a very important form of aid. 

7.29        The constraints on the Royal Government's ability to finance essential recurrent expenditures apply equally to the financing of the local costs of capital projects.  (Local costs include various expenditures that do not involve procurement abroad or the use of foreign exchange, such as the costs of Bhutanese staff.)  Here too, the effectiveness of donor aid will depend on aid agencies being willing to meet the bulk of local as well as foreign exchange costs. 

7.30        The Environmental Trust Fund described in Chapter 4 represents one innovative way of ensuring long term recurrent funding for the activities to which it relates. 

7.31        In all cases where aid is sought for recurrent costs, RGOB intends to keep track of the element of implied recurrent cost subsidy; long term budgetary planning will anticipate the need for the Government in due course to take on full responsibility for recurrent cost funding.  The details of Government aid policy are discussed in Chapter 9. 

Financing GapFinancing Gap

Table 7.5  Aid Requirements and Financing Gaps by Sector

                                                                (Nominal Prices) 

7.32  The financing requirements are shown for each sector in Table 7.5, and the remaining funds required taking into account the funds already secured at the time of Plan preparation. This does not include funding requirements for the Non Plan projects, some of which have donor funding committed and others have been included in the funding programme put forward to the Government of India.   The financing gap however, is overstated as at the time of preparing the Plan, the Royal Government was finalising aid programmes with 3 of the major donors in Bhutan.  The commitments made as part of these agreements have not been included in the funds secured, as the final agreements had not been signed.  The sectors to be financed by these donors include Human Resource Development, Health, Education, Energy.  Based on these discussions and tentative commitments from other donors, aid funds of approximately $279 million had been identified by the time of Plan preparation, excluding aid from the Government of India.  It is difficult to make a direct comparison of the funds expected and the funds required, as many cost estimates were prepared prior to the devaluation of the Ngultrum. This may also lead to the underestimation of some project costs.  In addition, the Government is aware that funds in the pipeline do not always materialise and that efforts to mobilise aid resources will need to continue, during the 7FYP. These efforts will need to be directed at obtaining recurrent cost financing as explained above.  

7.33  In the past, it has been argued that Bhutan has not put forward sufficient projects for funding, and this has been a major constraint in aid mobilisation.  This is no longer the case as a sufficient number of projects have been prepared to utilise funds already in the pipeline, and additional funds may yet be required. Thus the major objective will be to ensure that aid funding is received in time to implement the projects put forward and that the flow of funds is sufficiently smooth so as to ensure the most effective implementation of the development objectives and programmes set out in this document. 

                                                                  CHAPTER 8

FISCAL AND MONETARY POLICYFISCAL AND 

MONETARY POLICY

I.  IntroductionI.   Introduction

8.1  This chapter explains the Royal Government's fiscal and monetary policies for the Seventh Five Year Plan.  Broadly speaking, fiscal policy is concerned with the level of government expenditure and how it is financed.  Monetary policy concerns the currency, interest rates, inflation, regulation of the financial sector, and domestic and foreign borrowing.  Fiscal and monetary policies are closely related, notably because of the monetary effects of any government budget deficit. 

8.2  The institutions chiefly responsible for monetary and fiscal affairs are: 

(a)The Ministry of Finance, which is responsible for long term planning of monetary and fiscal policy, the preparation of annual budgets and the control of expenditure; only the Ministry of Finance is empowered to borrow money or issue loan guarantees on the Government's behalf. 

(b)The Royal Monetary Authority, which performs the usual functions of a central bank, including issue of the currency, regulation and supervision of financial institutions, and control of foreign exchange. 

(c)The Planning Commission, which is responsible for setting national priorities and drawing up public investment programmes, to bring about economic development consistent with fiscal and monetary policies. The Planning Commission also liaises with the Ministry of Finance to ensure that annual budgets reflect the strategy and priorities of the Five Year Plan. 

8.3  This chapter has the following sections: 

(a)revenue and taxation policy and targets for 7FYP; 

(b)monetary policy and strategy for the financial sector. 

Table 8.1  Tax Revenues 1985/86-1990/91 

Source:  CSO Statistical Yearbook and DNBA. 

II. Revenue and Taxation Policy and Targets for 7FYPII. Revenue and Taxation Policy and Targets for 7FYP

Principles of Revenue and Taxation PolicyPrinciples of Revenue and Taxation Policy

8.4  During 7FYP the Government's main concerns will be: 

(a)to ensure that the volume of revenue it draws from the economy is sufficient to finance an appropriate level of public expenditure without stifling or destabilising the rest of the economy; 

(b)to raise revenues (and to distribute expenditures) in ways that are equitable in their incidence (taking income, sex, and geographical differences into account); 

(c)to ensure that the taxation system as a whole provides an appropriate set of incentives to individuals and to enterprises. 

8.5   The last of these concerns is especially relevant. The private sector oriented, growth promoting strategy of this Plan will involve less direct intervention by the Government in the economy: instead, Government will try to ensure that the prices of inputs and outputs in the economy reflect their true costs to the nation, so that the independent decisions of private sector producers make the best use of the resources available.  It is therefore important to ensure that tax measures aimed primarily at raising revenue do not at the same time distort the incentives that producers and consumers face. 

8.6   The scope for raising additional domestic revenues will continue to be limited by: 

(a)low average incomes, combined with the limited monetisation of much of the economy; and, 

(b)Bhutan's special trading arrangements and monetary links with India, which limit RGOB's freedom of action over some revenue sources, especially trade taxes. 

8.7  The main RGOB revenue agency is the Department of Revenue and Customs.  The Department will be strengthened by increases in personnel, training and computerisation of activities.  

Revenue measures for 7FYPRevenue measures for 7FYP

8.8  The Government will take steps to increase not only the level of tax revenues but also the shareof tax revenue in total domestic revenues. Three main factors will contribute to the increased share of tax revenues: 

(a)increased tax collections; 

(b)privatisation will reduce RGOB's direct revenues from public enterprises; while,         (c) revenues from power sales are expected to level off. 

8.9           Increasing tax revenues will depend more upon extending the tax basethan upon higher tax rates.  In many cases (e.g. corporate taxes), Bhutan's tax rates are already at levels similar to those in competing countries.   

8.10        Direct taxationconsists of personal and corporate taxes.  Corporate taxes presently yield three times as much as taxes on individuals and trading units.  Although RGOB will ensure that the levels of corporate taxation are not so high as to deter domestic and foreign investment, it is expected that corporate tax revenues will increase as manufacturing and other concerns in the public sector expand and the privatisation programme proceeds.  Although the number of personal income tax payers is small, the Department of Revenue and Ministry of Finance are studying the possibilities of introducing a more comprehensive personal income tax, which if introduced, would increase tax revenues. 

8.11        Labour taxesare another form of personal taxation; at present they affect most individuals much more than monetised personal taxes do.  Labour tax is particularly important in unmonetised communities, and through their labour village people make an important contribution to their own development.  However, labour taxes can be inefficient, since there is a loss of other production which is different for different people and which may exceed the value of the labour contributed.  As the economy develops, labour tax will become relatively less important. Already for some labour taxes there is an alternative of cash payment; in future it is likely that more and more people will take this option. 

8.12        Indirect Taxationaccounts for two thirds of domestic tax revenues.  However, the yield from indirect taxes is limited by the large number of exemptions to the existing tariffs and duties.  Such exemptions have two undesirable effects: as well as reducing total revenues to Government, they create distortions in the economy, since their effect is to give discriminatory privileges to some participants.  During 7FYP the number of exemptions from indirect taxes will be reviewed. 

8.13        Quantitative restrictions, such as those embodied in import and foreign exchange licences, have a similar effect to tariffs in raising costs in the economy, but without the benefit of additional government revenue.  For this reason, and because quantitative restrictions are more arbitrary and less transparent than the alternative, there will be a concerted move to replace quantitative restrictions with tariffs as the main means of regulating imports. 

8.14        Cost-recoveryis another means of reducing Government expenditures and relates to both commercial and Government service sectors:  

(a)    RGOB operates many commercial or quasi-commercial services (the Post Office for example, and several manufacturing and other enterprises).  The privatisation programme (described in Chapter 6) will help to reduce the likelihood of public subsidy to services that ought to be self-financing, while enterprises that remain in the public sector will, as far as possible, be run along commercial lines.  Fees and charges will be regularly reviewed and there will be attention to accounting and bill collection functions. 

(b)   There are also various non-commercial services, including health and education programmes, where limited cost recovery may be possible.  The present policy is that basic services should be free, but the relevant Departments will examine the possibility for private sector involvement and cost recovery for some services.  

8.15   Where miscellaneous charges are already made for Government services, these will be regularly reviewed in the light of inflation and the actual costs of providing the service. 

III. Monetary Policy and Strategy for the Financial SectorIII. Monetary Policy and Strategy for the Financial Sector

8.16  Apart from Bhutan's central bank — the Royal Monetary Authority, the country's main financial sector institutions are: 

(a)       The Bank of Bhutan, which is the only commercial bank in the country.  Apart from its main office in Phuntsholing, it has 23 branch banks in dzongkhags throughout the country. About 22,000 accounts are maintained by BOB.  In the past it has also managed Government's accounts, but this has been transferred to the RMA.  The majority of BOB's shares are held by the Royal Government, with the remainder (25%) held by the State Bank of India, with which BOB has an institutional relationship. 

(b)      The Royal Insurance Corporation of Bhutan (RICB), established in 1975, provides both life and general insurance.  It is an important institutional investor within Bhutan.  RGOB holds a majority of its shares, but there are also private sector shareholders. 

(c)       The Government Employees Provident Fund (GEPF)is managed on RGOB's behalf by the RICB, and represents a growing portfolio of investments based on matching contributions by civil servants and the Government. 

(d)      The Unit Trust of Bhutan (UTB)was set up by the GEPF and the RICB in 1980 to encourage investment by Bhutanese within the domestic economy. 

(e)       The Bhutan Development Finance Corporation (BDFC)was established in 1988 to act as the development finance institution for small and medium scale industrial and agricultural producers.  The Corporation manages the donor funded agricultural credit programmes.  As well as credit, the organisation provides technical support to entrepreneurs.  Its shareholders include the Royal Government, the RMA, RICB and the Bank of Bhutan.   

Development of the Financial Sector during 6FYPDevelopment of the Financial Sector during 6FYP

8.17  Currency and Money Supply.  As the economy has close links with the Indian economy, the Ngultrum has been held at par with the Indian rupee since its introduction in 1974. Although the rupee is freely exchangeable within Bhutan it is now used mainly for financing imports from India. During the 6FYP, from December 1986 to December 1990, the money supply grew at an average rate of 21% p.a.  The expansion of the domestic money supply is determined by the rate of growth of domestic GDP, the rate of inflation in India,^*the rate of substitution of the Ngultrum for rupees, change in net foreign assets and the increased monetisation of the economy. 

8.18  Savings, Investment and Interest Rates.  The policy of the RMA has been to maintain deposit rates comparable with those in India, but to set lending rates marginally lower than those in India, in order to encourage investment.  Real interest rates on deposits (i.e. the returns on savings when the effects of inflation are taken into account) have generally been negative.  There has been significant excess liquidity in the banking system, indicating a that a shortage of viable investment projects has been more of a constraint than the cost of borrowing.  Table 8.2 summarises the operations of bank and non-bank financial institutions during the second half of the 1980s. 

Borrowing and Debt serviceBorrowing and Debt service

8.19  A brief description of each financial institute's investments are given in what follows. The size of the loans in million US dollars are cited in parentheses. 

8.20  IFAD was the first international development financing institution that the country joined. IFAD has funded three area development projects : (1) Small Farmers Development and Irrigation Development Project (US$ 7.19 m) in four Western Districts, (1) Tashigang Mongar Area Development Project (US$ 5.87 m)  and (3) Punakha Wangdi Valley Development Project (US$ 2.64 m). During the 7FYP IFAD's investment will be in Zone IV covering five districts. It will include several sectors though its main focus will be Renewable Natural Resources sector. 

8.21        The World Bank  has financed the Bhutan Calcium Carbide Projects (US$ 12.41 m), Forestry Project -

* As long as the two currencies are at par and India remains Bhutan's major source of imports, inflation in Bhutan will tend to parallel that in India.

Phase I (US$ 7.13m) and Phase II (US$ 1.06 m), Construction of Primary Schools (US$ 4.09 m) and Technical Assistance (US$ 3.70 m).  The Asian Development Bank has provided loans for the following projects : Multiproject Phase 1 (US$ 5.28 m) and Phase 2 (US$ 9.81 m), Chirang Hill Irrigation Project (USS$ 4.42 m), Road Mechanisation (US$ 4.91 m), Urban Centres Sewerage (US$ 3.48 m), Highland Livestock Development Project (US$ 5.82 m), Industrial Estates (US$ 1.16m ), Bhutan Development Finance Corporation ( US$ 2.44 m).  

8.22       The Kuwait Fund has provided loans for the Gedu Wood Manufacturing Corporation (US$ 9.56 m), Bhutan Board Products (US$ 11.15 m) and Bhutan Calcium Carbide (US$ 7.08 m).  

8.23  Commercial loans were secured for the purchase of the BAe-146 aircraft (US$ 22.66 m) and Earth Satellite Station (US$ 1.43 m).  The total debt servicing in hard currency during the 7FYP is estimated to be US$ 33.53 m. Annual average for debt servicing is about US$ 6.7 m. 

Table 8.32  Convertible Currency Loans in $US Million: Commitments and Disbursements 1981/82-1990/91 Foreign Debt Indicators for Convertible Currency Loans 198/87-1989/90 

 Item                                                                           86/87           87/88          88/89            89/90

                                                               Commitments of          Total Disburse-    Total Repayment 

 Debt outstanding (cumulative)                  loans signed between25.04 ments as 41.55of 72.62(inte rest + principal)73.62 

 Debt service payments                             1981/92 and 1990/0.3691April 1990.87 0 4.07as of  April 1990 6.76

Financial 

Institute Debt service ratios  (Interest + principal payments 9.30 11.10 39.80 65.10 as % of convertible currency exports of goods and 

IFAD services)                                                                15.70                   7.12                            0.30

WORLD BANK Debt outstanding as % of GDP                 9.6028.39      13.90 16.01 27.00             28.300.64

 ADB                                                                             37.32                  17.78                            0.35

^{Source : Selected Economic Indicators, RMA, Vol. 5. No.2}KUWAIT FUND . June 1991         27.79                          23.42      4.94

COMMERCIAL LOAN                                                    24.09                  24.09                          10.08

TOTAL                                                                        133.29                  88.42                          16.31

Source : Selected Economic Indicators, RMA, Vol. 5. No.2. June 1991

Table 8.4  Debt Servicing Projections for the 7FYP 

Note : data from Department of National Accounts and Budget, November 1991. * Druk-Air and Satellite Earth Station. # assuming rescheduling. Exchange rate : $ 1 = Nu 26 

Rupee DebtRupee Debt

In addition to the debts servicing described above, there is Rupee debt payable to the Government of India. The debt servicing is mainly for the Chhukha Hydel Project (now known as Chhukha Hydel Corporation). Similar financing of grants and soft loans have been agreed for the Dungsum Cement Project proposed for implementation during the 7FYP. Repayment against the Rupee loans is expected to start in fiscal year 1992/93. Repayment will amount to Rs 70 m a year or Rs 350 m in total during the 7FYP. 

TABLE 8.5: BHUTAN - OPERATIONS OF BANK AND NON-BANK FINANCIAL INSTITUTIONS 

NOTE: Figures are for December, except for 1990

8 

Monetary Aims and Policies for 7FYPMonetary Aims and Policies for 7FYP

8.24  The RGOB recognises the vital role that the financial system must play in bringing about the development of the economy. The most important requirement is that people should have confidence in the currency and the financial system.  To ensure this, the Royal Government and the Royal Monetary Authority will: 

(a)       maintain the parity of the Ngultrum with the Indian rupee; 

(b)      take a cautious approach towards the expansion of the money supply, recognising that too rapid an expansion could create inflationary pressures and reduce people's willingness to hold Ngultrum; 

(c)       ensure that overseas borrowing is carefully monitored and does not exceed the comfortable debt service capacity of the economy; 

(d)      ensure that the domestically-financed budget deficit is kept within reasonable bounds (partly so as not to crowd out private sector investment), and financed in a non-inflationary manner;                         (e)  apply foreign-exchange restrictions in a transparent and liberal manner. 

8.25  In order to make the financial system more dynamic and improve efficiency, the RGOB and the RMA will: 

(a)       restructure and reform the existing institutions and establish new institutions to bring about greater competition and thus enhance efficiency in the financial sector; 

(b)      establish a greater supervisory role for the RMA in order to enable it to monitor the operations of financial institutions and their soundness.  In this regard, the RMA has already established a Supervision Division which will be responsible for monitoring the operations of financial institutions on a continuous basis; 

(c)       enact a Financial Institutions Act to establish a legal framework for the licensing, operations and regulations to be observed by financial institutions and enable the RMA to reform these institutions where necessary.  The draft of the legislation had been prepared by the end of the 6FYP with Technical Assistance from the IMF and the legislation will be enacted early in the 7FYP; 

(d)      develop a capital market to provide low cost, long term financing to the private sector. As a first step, 

the Government has approved the establishment of an "Over the Counter" (OTC) share trading facility. Technical Assistance for this project has been requested from the Asian Development Bank; 

(e)       develop a money market to deal primarily in central bank securities and treasury bills.  As a means of obtaining long term, non-inflationary resources, the Government will introduce treasury bills early in the 7FYP.  These together with RMA securities, also to be introduced, will provide the RMA with effective monetary policy instruments. 

(f)       the RMA will establish a small coin mint.  

                                                                  CHAPTER 9

AID POLICYAID POLICY

I. IntroductionI.  Introduction

9.1  Aid has underpinned Bhutan's development efforts, both by financing successive Development Plans and by improving the skills of Bhutanese through training and technical assistance. Aid will continue to be important during the Seventh Plan as explained in Chapter 7, although the Royal Government intends to reduce its dependence on aid in the future.  This Chapter: 

(a)     reviews the contribution of aid to the implementation of the 6FYP,and; 

(b)    explains the Royal Government's aid policy and measures to ensure the maximum benefit from aid. 

9.2  The Royal Government discusses its aid requirements and policies at Round Table Meetings with its aid partners, which are held every few years. The 1992 meeting was deliberately timed to coincide with the preparation of the 7FYP.  The Royal Government's submission to the 1992 RTM contains a comprehensive statement of national aid strategy and spells out the aid requirements derived from this Plan. Many of the points touched on in the present chapter are discussed more fully in the RTM document. 

II. Aid During the 6FYPII.  Aid During the 6FYP

Volume and Importance of AidVolume and Importance of Aid

9.3  Aid has been extremely important in financing Bhutan's development as measured by the ratio of aid to GDP and the proportion of public expenditure financed by aid.  In the early 1980s, aid amounted to around 50% of GDP, but rapid economic growth combined with a fairly constant level of aid has reduced the aid/GDP ratio to about 20% (see Figure 9.1).  This is still a high figure compared with many other developing countries, but the ratio is declining.   

Figure 9.1

9.4  As explained in more detail in Chapter 2, Economic Performance, Bhutan also became less dependent on aid for financing of RGOB expenditures.  Domestic finance accounted for an increasing proportion of revenues during the 6FYP, while there was also a shift in the balance between aid from the Government of India and other donors. 

Sources of AidSources of Aid

9.5  Historically, India has been Bhutan's main aid partner, but aid from third countries has become increasingly important, with the proportion of aid from third countries rising from about 17% in 1981/82 to over 30% by 1990/91. 

9.6  Non-Indian aid is provided by a variety of aid agencies. Whereas the UN system tended to dominate aid provision in the early years of external assistance, aid from bilateral agencies and from other multilaterals, such as the World Bank, IFAD and the Asian Development Bank, has become equally important, as indicated in Figure 9.2. 

Figure 9.2

Allocation of AidAllocation of Aid

9.7  Aid from India An important proportion of Indian aid is in the form of budgetary support, which is not earmarked for any particular project or programme.  In addition, India has funded a number of projects, often implementing them in a turnkey fashion.  The Chhukha Hydel Plant (for which most expenditures took place in the Fifth Development Plan) was funded by a combination of grants and soft loans from the Government of India, and was treated as additional to the basic FYP aid. India has also provided significant technical assistance, both in training of Bhutanese nationals and in providing the services of Indian experts. 

9.8  Technical Assistance and Capital Aid  The composition of third country aid has changed significantly, with an increasing proportion supporting capital projects rather than technical assistance (see Figure 9.3).  The Royal Government welcomes this trend, and hopes for a further shift towards capital assistance during the 7FYP. 

Figure 9.3

9.9  Sectoral Allocation of Third Country Aid  Aid allocations have reflected national development priorities.  The largest shares of technical assistance have tended to be provided to the following areas, in descending order: Human Resource Development, Agriculture and Forestry, Health and Population, and Development Administration.  Industry and Transport and Communications, which take only a small share of technical assistance, have received a greater proportion of capital assistance, of which Agriculture and Forestry have received the largest share. 

III. Aid Policy for the 7FYPIII.  Aid Policy for the 7FYP

Basic PrinciplesBasic Principles

9.10 The Royal Government welcomes aid from the international community.  National development objectives will not be readily achieved without external funding and technical expertise.  In Bhutan's case, the low level of monetisation of the economy and the limited tax base have made it more difficult to mobilise internal resources.  As explained in the Chapter on Approach to Development, one of the main strategies to is to increase self reliance, which will mean increasing internal resource mobilisation and reducing dependence on aid.  However, to raise adequate revenues to become completely self sufficient will not be possible within the 7FYP period and thus Bhutan will continue to seek assistance from her international partners. 

9.11  Continuing aid to Bhutan is justified by Bhutan's status as a Least Developed Country.  In addition the low levels of health and education indicators combined with the physical constraints, described in Chapter 2, provide further reason for Bhutan to seek aid.  However the Royal Government recognises that there are dangers as well as benefits associated with aid.  Aid must complement Bhutan's own efforts and must not be a substitute for them; and the responsibility for deciding national priorities and development strategy must remain with the Royal Government. 

9.12  An important aspect of the strategy set out in Chapter 3 is to reduce reliance on external sources of funding and thus the Government will take the necessary steps to increase domestic resource mobilisation, including ensuring that communities continue to contribute to the costs of development activities, through provision of labour etc.  The economic growth envisaged during the 7FYP, will also enable the RGOB to finance an increasing proportion of expenditures from domestic revenues.  At the same time, the RGOB is determined to be prudent in its development expenditures and to keep its borrowing comfortably within its capacity to service debt. 

9.13  Technical Assistance is a very important component of the aid that Bhutan has received, and further Technical Assistance will be sought during the 7FYP.  Here too, the Royal Government is determined that the use of TA should be carefully judged and will take steps to ensure that the overall level of assistance will be related to the country's absorptive capacity, that the assistance is provided to priority sectors, and that such assistance is provided in such a way as to improve the skills of Bhutanese as rapidly as possible. 

Responsibilities for Aid ManagementResponsibilities for Aid Management

9.14  Most of the projects and programmes described in this Plan will draw upon external finance or technical assistance from one or more of the aid agencies active in Bhutan.  The coordination and management of aid is therefore an important aspect of the implementation of the Plan.  Aid management responsibilities are assigned amongst several agencies: the Planning Commission, the Ministry of Finance, the Royal Civil Service Commission, the Ministry of Foreign Affairs, and the various sector Ministries, Departments and specialised agencies of the Royal Government.  In order to improve the overall management of aid and donor activities, the Royal Government will ensure that the roles and responsibilities of all those involved are more clearly defined.  These responsibilities will also be made clear to all aid agencies. 

9.15  The Planning Commissionhas the ultimate responsibility within the Royal Government for managing and coordinating aid to Bhutan; strategic and policy decisions are made by the Planning Commission itself, while dayto-day aid management is handled by the Planning Commission Secretariat.  The Planning Commission's responsibility for aid management is one aspect of its overall responsibility for long term economic planning, and the Commission is thus well placed to ensure that aid complements local resources. The Planning Commission Secretariat is the main contact point for aid agencies within Bhutan. 

9.16  The Ministry of Finance's responsibilities concerning aid include: 

(a)    Loans:MF is the only agency of the Royal Government that has the power to negotiate loans on the Government's behalf, or to provide Government guarantees for loans to third parties. In practice, there is consultation between the Planning Commission and the Ministry of Finance before any aid agreement is concluded, since even aid on grant terms has implications for the future commitments of domestic resources. 

(b)   Annual Budget: MF has overall responsibility for preparation of the annual budgets; it liaises with the Planning Commission to ensure that each annual budget properly reflects the Five Year Plan, and also reflects anticipated external aid. 

(c)    Recording Aid Flows: it is important that aid flows are recorded, whether or not the funds involved pass through the RGOB accounting system;  MF tries to ensure that the Royal Government's financial records include all aid flows, both in cash and in kind.

9.17        The Royal Civil Service Commission  has primary responsibility for the Royal Government's manpower planning, and hence for related aspects of Technical Assistance. Direct recruitment of expatriates on long-term contracts is an RCSC responsibility, although the task may be delegated to the sector ministry most concerned (as with the Department of Education in recruiting teachers).  RCSC is also the main contact point for the various volunteer agencies. Project-related consultancies, however, are approved by the Planning Commission. 

9.18        The Ministry of Foreign Affairs  is the formal contact point for missions that are diplomatically accredited to Bhutan, is responsible for matters of diplomatic protocol, and plays an important part in making Bhutan's case for assistance internationally.  It is also required to approve technical assistance proposals. 

9.19        Early in the Seventh Five Year Plan, the arrangements for coordination amongst the Planning Commission, RCSC, the Ministry of Finance and the Ministry of Foreign Affairs will be reviewed and strengthened, with particular attention to the coordination of technical assistance. 

9.20        Sector Ministries, Departments and specialised agencies of the Royal Governmentare not allowed independently to solicit aid: only the Planning Commission, which operates in close coordination with the Ministry of Finance, may do so, and, as noted earlier, the Planning Commission is the authorised contact point for aid agencies in their official dealings with the Royal Government.  However, it is recognised that, in the course of preparing aid projects which have already been included in the RGOB development programme, and in their subsequent implementation and monitoring, the external financing agency needs to have good contacts at technical level with the implementing Ministry, department or agency.  Such contacts are encouraged, but the Planning Commission, the Ministry of Finance and the Royal Civil Service Commission should be kept fully informed of all such contacts, and should be appropriately represented on aid agency/RGOB coordinating committees.  Within sector ministries, it is expected that the Policy and Planning Divisions (PPDs) which are now being strengthened will be the main contact point for aid agencies. The PPDs in turn, will have strong working links with the Planning Commission which will continue to exercise overall responsibility for aid coordination. 

Aid Management IssuesAid Management Issues

Absorptive CapacityAbsorptive Capacity

9.21  During the 6FYP, some donors were concerned that Bhutan's capacity to absorb aid was limited by  bottlenecks in project preparation and implementation. During the 7FYP, the problem of absorptive capacity will be addressed by: 

          ·    adopting realistic expenditure targets (see Chapter 7); 

  · strengthening planning and project preparation capacity, both in the Planning Commission and in sector Ministries through the Policy and Planning Divisions; 

  · addressing constraints in the construction sector, by expanding the national Labour Force and relaxing restrictions on the employment of non-nationals; 

  · emphasis on human resource development, so as to make Bhutan less dependent on external skills for preparation and implementation of development programmes; 

  · increasing the role for the private sector in productive activities to leave RGOB to concentrate on proper governmental concerns. 

9.22  In the past much aid has been provided through turnkey projects. This can sidestep implementation capacity constraints, but can fail to transfer skills that will make Bhutan less dependent in the long run. There may continue to be a limited role for turnkey assistance, but the Royal Government will seek to ensure that there is always a provision for the training of Bhutanese to undertake the operation and management of new facilities.  

Aid CoordinationAid Coordination

9.23  The allocation of responsibilities within the Royal Government for aid management and coordination was summarised in the previous section.  RGOB recognises that there is a significant coordination problem, stemming from the numbers of different agencies involved in assistance to Bhutan, and exacerbated by the fact that so few of Bhutan's aid partners are permanently represented in the country.  There is no absolute "cure" for problems of coordination, but there are a number of measures that can be taken to minimise the problem. 

          ·    strengthening RGOB's own planning and monitoring procedures; 

  · continuing consultation between the RGOB and its aid partners through the periodic Round Table meetings, and through sectoral meetings with donors to be held in Bhutan from time to time; 

          ·    encouraging donors to concentrate their aid on particular sectors and/or geographic regions; 

  · as far as possible, avoiding the involvement of several donors in a single project, since this can make the management of the project much more complicated and time consuming. 

Technical AssistanceTechnical Assistance

9.24  The Royal Government's aims in relation to Technical Assistance are (a) to limit dependence on TA, but (b) to maximise its effectiveness.  Effectiveness has to be considered both in terms of job performance by TA personnel and in terms of the passing on of skills to Bhutanese.  As these may be conflicting considerations, job descriptions or Terms of Reference will include a clear description of the counterpart training to be provided.  The requirements will vary from case to case: in some cases the basic training requirement may be met by formal training of Bhutanese, while in others, the passing on of skills to Bhutanese colleagues will be a major element of the TA role. Where this is the case, both RGOB and the sponsoring aid agency will take account of the training requirement in the selection of personnel.   

9.25  The Government believes that the balance of aid should shift further towards capital aid, and, where technical assistance is concerned, that there should be more emphasis on short term inputs and less reliance on long term resident advisors.  The danger with the latter is that they are under pressure to do things directly themselves rather than training Bhutanese counterparts.  Short term inputs, provided they fit within a coherent strategy for the sector and institution involved, are more likely to complement and encourage local skills instead of simply substituting for them.  RGOB will also encourage donors to employ local consultants whenever possible, both in their own right and jointly on teams with expatriate consultants. 

The Terms of AidThe Terms of Aid

9.26  Most of the aid that Bhutan currently receives is on grant terms, with the balance in soft loans that have a high grant element. The Royal Government expects that most aid for the 7FYP will continue to take the form of grants or soft loans. However, the Royal Government fully recognises that aid is not a free resource.  Allocation of aid (or domestic resources) to any project has costs in terms of other worthwhile projects which remain unfunded, in terms of the project's demands on scarce Bhutanese manpower and managerial capacity, and in terms of complementary inputs of domestic funds that it requires.  The projects and programmes for which aid is requested during 7FYP have been carefully selected as priorities in implementing the national economic and social development strategy. 

9.27  Although seeking to maximise the grant component of aid, RGOB recognises that there is a place for international borrowing in support of the development programme, subject to the following guidelines: 

(a)    The Planning Commission, the Ministry of Finance and the Royal Monetary Authority will carefully evaluate any proposed loan, taking account of the grant element implied by sub-commercial interest rates and favourable repayment schedules, but also having regard to any foreign-exchange risk and the costs implied by procurement tying. 

(b)   Appraisal of projects to be funded by loans will be particularly rigorous, and should establish that the economic rate of return on the project significantly exceeds the cost of the loan. 

(c)    Loan finance is most likely to be appropriate for commercial projects (such as development of industries or of hydroelectric power); as well as requiring an appropriate rate of return at appraisal, management structures will be established for such projects that ensure that loan servicing is met from the ventures' own revenues. 

(d)   The Ministry of Finance and the Royal Monetary Authority will monitor Bhutan's aggregate debt, so as to ensure that the total debt burden at no point exceeds the reasonable capacity of the economy to service it. 

9.28  The quality of aid is determined by its non-financial as well as its financial aspects.  Aid that is inflexible and accompanied by heavy administrative requirements is less valuable to the recipient.  Grant aid that is conditional on procurement from the donor country is also likely to be worth less than its face value.  The Royal Government recognises that aid agencies are constrained by their own rules and regulations, and cannot usually make exceptions in Bhutan's favour. It naturally welcomes international moves to liberalise aid terms, but also recognises that there is scope for optimising the value of aid despite the remaining restrictions that attach to it. Thus: 

(a)    The Planning Commission (in consultation with the Ministry of Finance) will try to match programmes to donors in ways that reflect each donor's comparative advantages. 

(b)   Every effort will be made to use tied aid for procurement only in areas where the donor is in any case internationally competitive (taking technology, price and other factors into account).  RGOB will guard against the proliferation of incompatible types of equipment. 

(c)    A key factor in making the best use of aid is to adopt a sufficiently long planning horizon.  This can be assisted by the adoption of a programme approach by donors, so that the donor and RGOB can jointly plan the best use of aid funds well in advance. 

(d)   RGOB will endeavour to ensure that its own administrative and accounting procedures are of a standard that makes it unnecessary for donors to set up parallel systems. 

Aid and the Private SectorAid and the Private Sector

9.29  It is important to consider how the Seventh Plan's emphasis on private sector development should affect aid.  RGOB will continue to have a vital role in creating an enabling environment, in providing and maintaining basic infrastructure and so forth. Aid will continue to be mostly government to government, but there are requirements for: 

(a)    support to development finance institutions, and for projects which directly assist the development of private entrepreneurship; and, 

(b)   private sector access to training and skilled manpower (20% of the HRD programme budget will be earmarked for private sector training). 

9.30  The details of aid requirements for the 7FYP are provided in Chapter 7, Economic Outlook.  

                                                                 CHAPTER 10

CULTURE AND RELIGIONCULTURE AND 

RELIGION

I. Importance of Culture and ReligionI. Importance of Culture and Religion

10.1  The culture of any society reflects the values and institutions of its people. High culture in Bhutan has been largely influenced and determined by religion and this is reflected in Bhutanese art, architecture and society. Religion and its related traditions play a central role in the lives of the population and thus cannot be ignored in the development process, as explained in Chapter 1. Simply imposing development models from outside which do not take religion and tradition into account will not only serve to diminish existing culture, but will also meet with limited success.  This process can lead to the creation of dualism, whereby the majority of the population continue to make use of traditional services and practices, while a minority, usually the more educated population, will benefit from government funded development programmes. 

10.2  The preservation of cultural traditions and religious institutions is one of the major objectives of the Royal Government and the need to give full recognition to these factors has been realised, particularly in health and education. This does not mean that new technologies will not have a place in the development of Bhutan, or that the Government intends Bhutan to remain static, but that the relevance and impact on society of new technologies will need to be carefully assessed. In addition, it is the intention of the Royal Government to increase opportunities for Bhutanese and the outside world to gain greater knowledge and understanding of Bhutanese culture, through improvements of existing institutions and the creation of new ones. The Government would like to not only encourage the transmission of knowledge from other parts of the world to the Bhutanese, but also encourage the older generation of Bhutanese to pass on their knowledge to the new generation. 

II. InstitutionsII. Institutions

10.3  Both culture and religion are represented by objects,for example artistic objects and by institutions; monasteries and places of exhibition. These objects and institutions are under state ownership and also under private control. While culture is based on ancient traditions in Bhutan, new cultural institutions and activities are being developed to provide continuity in a changing world and develop appropriate roles for existing institutions. 

Dratshangs or Rabdeys, Shaydras (Buddhist Colleges) and Drubdras (meditation centres) Dratshangs or Rabdeys, Shaydras (Buddhist Colleges) and Drubdras (meditation centres)  

10.4  The Sangha, the Holy Brotherhood, is organised in the form of Central Monk Body, the Dratshangs or Rabdeys (formal monasteries), the Shaydras (Buddhist Colleges) and Drubdas (meditation centres). In view of the fact that the status and powers of the Sangha has undergone severe erosion over the years, His Majesty initiated the formation of a 9 member Dratshang Lhentshog(Council of Ecclesiastical Affairs), under the chairmanship of His 

Holiness the Je Khenpo, in 1984.. The aims of the Dratshang Lhentshog are to promote the welfare of the Dratshangs and Rabdeys and to restore their traditional relevance in a period of social change. 

10.5  The number of monks supported by the state is estimated to be about 4,000. This figure excludes monks who are in private monastic organizations. The monks are normally admitted into the monasteries voluntarily at the age of 7 or 8 and remain part of the monk body through out their lives, progressing through the monastic hierarchy and education system. The Dratshangs or Rabdeys, Shaydras, Drubdras and other private institutions of similar nature are important centres of learning. Subjects taught in these institutions may include indigenous medicine, philosophy, literature, rituals, metaphysics, grammar, meditation techniques, poetry, drama, painting, embroidery etc. It has been estimated that there are at least 2,000 monasteries in the country. 

Special Commission for Cultural AffairsSpecial Commission for Cultural Affairs

10.6  The Special Commission for Cultural Affairs was established in May 23, 1986, with 29 members. The Secretariat for the Special Commission for Cultural Affairs has 34 staff, who are responsible for technical and administrative support to: the Royal Academy of Performing Arts (Dance troupe) with 77 members; the School of Traditional Arts which consists of 18 teaching staff and 60 students; the Drama Division of Royal Academy of 

Performing     Arts     which    consists     of     5     people;     the    National     Library     with     a     staf

f strength of 46 people; the Bronze Casting Unit which consists of 23 people; the National Museum with a Director, a curator and 14 other staff and the Division for Cultural Properties which employs about 16 people. Because of limited staff, the Division for Cultural Properties works in conjunction with Dzongkhag Administrations, the Royal Bhutan Police and Royal Bhutan Customs in issuing transit permits for the movements of art objects and in controlling the traffic of antiques.  

Arts and AntiquitiesArts and Antiquities

10.7  The most important objects among antiques and art objects are Chortens (stupas), wall paintings, statues (made of gold, silver, ivory, silver brass, bronze, bone, terracotta, rhino-horns, stucco, wood etc), thangkhas (scroll paintings), xylographic blocks, manuscripts, rare books, carvings, artifacts used during rituals and textiles. Such objects can be found in community temples, private collections and government monasteries. The Royal Government is concerned that the movement of art objects, which are part of Bhutan's heritage, needs to be controlled. Priceless art objects could be lost to Bhutan, and there are therefore strict restrictions on the sale of antique objects to foreigners. At the same time, copies of these objects are taken to exhibitions in other countries to provide an insight into Bhutanese artefacts to the outside world. 

National MuseumNational Museum

10.8  The National Museum at Paro was established in 1968 to display a selection of Bhutan's art objects. For the last 24 years, the Museum has acquired over several thousand objects of arts of both organic and inorganic materials. Out of its collection - about 60 percent - is on display in the seven floors of the Museum. Among the objects on display are bronze and copper utensils, arms and ammunition of Bhutan, bamboo and cane products, carpentry tools, pottery, jewellery, thangkhas, ritual objects, images, icons, philatelic etc.  

Written MaterialsWritten Materials

10.9  Important religious texts have been collected in the National Library, Thimphu, for reference purposes and to ensure the preservation of these valuable documents. Apart from some administrative archives and chronicles, there are few documents on wholly secular themes. However, such subjects as architecture, astrology, medicine etc. are found as part of religious texts.  Although the National Library has been able to build up a wide collection, most of the valuable religious texts and other documents are found in private collections, dzongs and monasteries.  The extent of original written heritage that exists in the country is thus unknown. Such texts are considered sacred in themselves and private collectors may not reveal their possession of sacred manuscripts and scriptures. Other documents such as poems, verses, land-records, writs (Kasho), permits etc which do not lend themselves to safekeeping, are at risk of being lost permanently.  

Dance and DramaDance and Drama

10.10  Dance and drama have always played an important role in explaining difficult religious and social concepts to the population, mainly through the annual Tsechhus performed throughout the country.  These dances are performed by gelongs (monks), gomchens (lay priests), and lay people, and most of the dances have been recorded and are performed by the Royal Academy of Performing Arts (dance troupe division). 

Music and FolksongsMusic and Folksongs

10.11  In most parts of Bhutan, making music is a communal activity, sometimes related to work and as a means of recording and relating local history. Travelling performers: manips and reciters of loze (lengthy narrative poems) are also involved in performing and preserving traditional music and poetry. Efforts to preserve the loze have been taken through publication in Dzongkha, while traditional songs are being recorded by the Department of Information and Broadcasting (see Chapter 16). 

Film Making and Radio Film Making and Radio  

10.12  There are one or two independent film makers in Bhutan, who are under-capitalised and struggle to make their excellent films pay. The Development Support Communication Division within the Department of Information has been recording history in the making videos and other Bhutanese documentaries.   

III. Constraints to Preserving Cultural HeritageIII. Constraints to Preserving Cultural Heritage

10.13  Both the National Museum and National Library were unable to expand their collections during the 6th Plan due to financial constraints. The lack of funds has also precluded improvements in other areas of arts and culture. The National Museum was also unable to set up the fumigation chamber. The School of Traditional Arts has been particularly affected where the physical facilities are almost non-existent and the building will soon be unfit for use. 

10.14  Most art objects in the private and state dzongs, temples and monasteries as well as the National Library and National Museum are exposed to chemical and physical deterioration.  These institutions lack the financial resources to ensure the preservation of their religious objects.  One of the important functions of Division for Cultural Properties of Special Commission is recording and inspection of art objects. However, regular inspection and verification of antiques is hampered by the remote and secluded locations of the monasteries and temples where the objects are held. By their very purpose of retreat, most temples and monasteries are scattered and situated in inaccessible places. With the present staff strength of the Division for Cultural Properties, it is seldom possible for the Division to inspect the temples more than once every four to five years. 

V. Review of 6FYP ProgrammesV. Review of 6FYP Programmes

A. Objectives in the 6FYPA. Objectives in the 6FYP

10.15  The objectives in the 6th Plan were to: 

  · acquire and conserve the objects relating to history, religion, handicrafts  and culture (this objective was relevant specifically to the National Museum). 

          ·    renew the relevance of Driglam Namzha (Etiquette and Manners) in public life 

          ·    promote and preserve traditional folklore, dance, drama, music, arts and crafts 

  · encourage scholarship by consolidating existing institutions such as Dratshangs (Monastic bodies), Dubdras (Meditation centres), Shaydras, National Library. 

B.  Achievement of ObjectivesB.  Achievement of Objectives

10.16  As mentioned above, budgetary constraints prevented the National Museum  and the National Library from acquiring new objects during the 6FYP period. However, the National Museum will have established a simple conservation laboratory. The Museum has also arranged several exhibitions abroad which received positive reviews.   

10.17  With regard to renovation of temples and monasteries, 64 temples and monasteries have been renovated and work on 9 temples and monasteries are in progress. Subsidies amounting to approximately Nu.0.67 m were provided for roofing and painting of private as well as public monasteries. In addition, the restoration of wall paintings in Paro Kitchu Lhakhang and Dodedrak Lhakhang in Thimphu was completed. Antiques were recorded and documented in almost 400 temples and photographic records of antiques were made in about 200 temples during the Plan period. 

10.18  Three shaydras were established during the 6th plan. One Shaydrawas opened in Drametse in Tashigang with 100 lay priests. Nunneries were opened in Bjakchukama in Punakha and Kila Gonpa in Paro with enrolments of 25 nuns in each nunnery. 

10.19  Orientation in Driglam Namzha (Etiquette and manners) and Bhutanese culture were given in Junior schools, High schools, Sherubtse College, Kanglung as well as other institutions. However, due to shortage of instructors in Driglam Namzha, not all institutions received such instruction. 

10.20  A 13 member Dzongkha Advisory Board was instituted to take effective measures to develop Dzongkha as the national language and a Dzongkha Development Commission established to implement these activities. The immediate need in the 6FYP was to develop Dzongkha text books.  The Dzongkhag Development Commission revised the dzongkha language school textbooks from Class II to VI and reference books from Class II to VIII. Other books prepared include a book for the Khaling Muenselling School, a Moral Science, Dzongkha grammar book, a draft Dzongkha-dzongkha dictionary, and a Dzongkhag-English dictionary. The Dzongkhag Development Commission also carried out a linguistic survey, organized Dzongkha classes for about 5,000 non-dzongkha speaking people and provided training in using dzongkha typewriters and computer software. 

V.  Objectives for the 7FYPV.  Objectives for the 7FYP

10.21  The objectives of the 7th Plan are to: 

  · provide continuity in the development process through the preservation and adaptation of culture during a period of change. 

          ·    respond to the religious needs of the population whose values may be challenged. 

  · encourage greater awareness and appreciation of Bhutan's cultural heritage both by the population and the outside world. 

          ·   increase the popularity of dzongkha as a medium of mass communication and official correspondence. 

10.22  The main strategies for achieving the objectives are: 

  · to sustain and strengthen the institutions of the Dratshangs or Rabdeys and to encourage scholarship in order to expand the wealth of knowledge in Bhutan. This will be furthered by the establishment of the Domkhar Buddhist Institute in Bumthang. 

          ·    provide opportunities for the integration of monks into the development process 

  · expand the collections in the National Museum and National Library and to undertake conservation work for private and government collections in the dzongs, monasteries, temples and houses. The National Museum will set up a fumigation chamber to conserve its acquisitions. The National Museum will continue to organise international mobile exhibitions to make the collection more  accessible to those who can not visit Bhutan and thus reach a wider audience. 

  · recording and documentation of cultural heritage. Documentation and recording will be made of rituals and ceremonies; antiques and art objects; written materials on both secular and religious subjects and oral traditions.        

  · production of media materials and orientation courses for the education of all sections of society in Bhutanese tradition and culture. 

VI. Programmes for the 7FYPVI. Programmes for the 7FYP

Establishment of Domkhar Buddhist InstituteEstablishment of Domkhar Buddhist Institute  

10.23  One of the main activities in the 7th Plan will be the opening of Domkhar Buddhist Institute. The Tashichholing dzong premises in Bumthang will be turned into an Institute with an initial enrolment of 15 students and a total capacity of 50 students mostly carrying out research. It is hoped that the Institute will be founded by Royal Charter which will establish its independence, so that the Institute will attract not only monks, lay scholars (both men and women) but also international students. The long term plan is to build this Institute into an international centre for, first of all Buddhist studies, and then studies of the Himalayan region. 

Improvements to the School of Traditional Arts Improvements to the School of Traditional Arts  

10.24  The curriculum for  School of Traditional Arts includes painting, sculpture, xylography, carving, casting, gold plating, embroidery and appliques. Skills that have been actually taught are painting, carving and sculpture. Although the School of Traditional Arts in Thimphu was established long ago, its facilities for both the students and teachers have deteriorated due to lack of funds. This has led to low morale among the students and a very poor recruitment record.  The School building will be rebuilt and re-equipped and the teaching capabilities of the staff will be enhanced. A Fine Arts Diploma will be offered by the School following the improvements. 

National Museum ParoNational Museum Paro

10.25  In order to have the capability to advise and undertake conservation work and restoration of art objects, the National Museum will expand its conservation Laboratory and train staff in conservation and restoration techniques. Museum staff will also be enable to improve their skills in display and exhibition of the collection. 

Construction of a Theatre/Town Hall,Thimphu Construction of a Theatre/Town Hall,Thimphu  

10.26  Although Thimphu city has more than 40,000-50,000 people, it has neither a drama hall nor a community meeting hall. It is not possible to stage drama productions or concerts. A Theatre and Town Hall will be constructed in the 7FYP. 

Literary Survey Literary Survey   

10.27  A nationwide survey on literary sources will be carried with the aim of locating important documents. It will be an important step in ensuring the survival of such documents. The task will be coordinated by National Library. A local survey team will locate and evaluate the documents covering about 3-5 dzongkhags a year. The documents will be assessed and important ones will be computerised as far as possible. The National Library will also establish a fumigation chamber.

Documentation and Recording Documentation and Recording  

10.28  The Division for Cultural Properties will continue to undertake the recording of antiques in about 400 temples and monasteries. The Division will be equipped to make photographic records of antiques in 200 temples for the purpose of identification and recovery of the antiques should they be lost or stolen. 

Restoration and Renovation of MonasteriesRestoration and Renovation of Monasteries

10.29  The restoration of wall paintings in Tongsa dzong will be completed in the 7th Plan. Subsidies will be provided on a case by case basis for the renovation of monasteries, chortens, dzongs, temples etc of architectural and historical importance.  

Dzongkhag Development Commission ProgrammesDzongkhag Development Commission Programmes

10.30  The Dzongkhag Development Commission will continue to produce dzongkha textbooks from pre-primary to degree level, including manuals. The Commission will also produce a Dzongkhag-English Dictionary, Dzongkha-English-Nepali Dictionary and braille textbooks from pre-primary to Class X level for the blind students. A Dzongkha Linguistic Society will be established to promote Dzongkha as well as the important dialects. 

Research and training related to Dzongkha will be continued.

V. Financial and Manpower RequirementsV. Financial and Manpower Requirements

                                                                 CHAPTER 11

EDUCATIONEDUCATION

I. Basic SituationI. Basic Situation

A. Structure of the SectorA. Structure of the Sector

11.1  Education has been an important part of religious life in Bhutan for centuries and continues to be so today with approximately 4,000 monks, nuns and lay priests receiving education in religious institutions, supported by the state, throughout the country. This figure does not include those studying in private monasteries. Monastic education involves the study of religious rituals as well as other skills, including literacy, numeracy, philosophy, astrology, literature, arts and in some cases traditional medicine.   

11.2  Formal western education was started only in the 1950s. Bhutan has achieved considerable success in expanding the provision of formal education: school enrolment grew from 1,500 pupils in 59 schools in 1959 to an enrolment of over 70,000 in 195 institutions in 1990.  The gross primary enrolment ratio was estimated at 66.9% in 1990, based on an estimated population of 104,000 children between the ages 6 and 12. Despite these impressive results the Royal Government is committed to further improvements in the provision of education and following the Jomtein Conference, Bhutan has pronounced its determination to achieve access to primary education by the year 2000. While formal education of children has been expanding, the illiteracy rate amongst the adult population remains high. The Royal Government is thus also committed to increasing the basic education of the adult population, to enable the increased participation of the whole population in the development process.

11.3  The formal education system consists of one year pre-primary, six years primary, four years secondary, two years senior secondary and three years degree programme.   

Table 11.1  Educational Institutions, Pupil Enrolment and Teachers 1990 

B. Educational InstitutionsB. Educational Institutions

Department of EducationDepartment of Education

11.4  The Department of Education is responsible for the provision of education services, including construction of schools and other educational institutions, training and employment of teachers and development of curricula. 

The Department is headed by the Director General and consists of 7 Divisions: Planning and International Coordination Division; Curriculum and Textbook Development Division; Board of Examinations; Inspectorate of Schools; Technical and Vocational Education Division; Teachers's Education Division and School Planning and Building Cell which is responsible for the design and supervision of school construction. The supervision and administration of educational services at the Dzongkhag level are the responsibility of the District Education Officers of which there are 18, who are in turn supervised by 4 Regional Education Officers.  

11.5  The numbers of schools and other educational institutions are indicated in Table 11.1 (see Map 11.I Education Facilities in Bhutan). The numbers of pupils enroled and teachers employed are also shown. These figures highlight the high proportion of boys enroled in comparison to girls and the dependence on non-national teachers. As of 1990, 43% of the teaching staff were expatriates, mostly from India and a few through the voluntary service organizations of U.K., Canada, Japan, Australia, New Zealand , Netherlands and the UNV programmes. 

Community SchoolsCommunity Schools

11.6  There were 46 community schools in 1990 with an enrolment of 3,978 pupils. Community schools were formerly known as Extended Classrooms (ECRs) and following an evaluation of the ECRs, the Department has reformulated the ECR concept into that of community schools.  A community school is one that is built and maintained by the community where a minimum of 30 students is found to be within a walking distance of 1 hour. Such community schools are provided with one or two teachers by the Department of Education. The establishment of community schools within easier reach of communities has contributed to an increase in the numbers of children attending school, particularly girls. 

Primary EducationPrimary Education

11.7  There were 156 primary schools in 1990 with an enrolment of 48,051. Out of the total enrolment 29,582 were boys and 18,469 were girls (see Table 11.1). Altogether, one year of pre-primary and 6 years of primary schooling are required for a student to complete primary education. At the end of primary education in Class VI, the pupils sit for a Common Examination. This examination is taken by all Class VI pupils throughout Bhutan at the same time, with evaluation of papers being the responsibility of the Bhutan Board of Examination. Depending on the results of the candidates, those with higher results are assigned to Junior or High Schools as boarders in other parts of the country. Part of the reason for such dispersal of students around the country is to improve national integration. 

11.8  The Common Examination in Class VI will be discontinued in 1995, when students will sit for the first Common Examination in Class VIII. The Class VIII level of education will be considered as the required level for basic literacy and numeracy. The policy of the Royal Government is to achieve universal access to primary education by the year 2000.  

11.9  Until the 6FYP, the curriculum for the primary education was largely based on the Indian system.  The curricula in primary education (pre-primary to Class VI), particularly at the lower levels, have been revised to incorporate the history, values and environment of the Bhutanese people under the New Approach to Primary Education Programme. The curriculum in the higher secondary and university education levels in Bhutan is still based on the Indian system. 

Secondary EducationSecondary Education  

11.10  There were 21 junior schools and 10 high schools with enrolments of 11,517 and 4,467 students respectively in 1990. Students throughout Bhutan sit for a Common Examination in Class VIII, set by the Bhutan Board of Examination. After the Common Examination in Class VIII, students in Bhutan sit for the Indian Certificate School Examination in Class X and then for the Indian School Certificate Examination in Class XII. Only high schools have classes up to Class X. Subsequently, the students have to either go to Sherubtse College or to Yangchenphug High School in Thimphu for Classes XI-XII courses. Classes XI-XII were introduced in Yangchenphug High School in the academic year 1989. Classes XI-XII courses are also offered in Simtokha Rigney School, the Institute for traditional secular studies. Simtokha Rigney School had 676 students in 1990. Most of these students become Dzongkha language teachers after their studies. 

Higher EducationHigher Education

11.11  Higher educational institutes consist of Sherubtse College which offers general degree courses in Bachelors of Arts, Science and Commerce and the National Institute of Education in Samchi for Post Graduate Certificate in Education, B. Ed and primary teacher training courses. The enrolment in Sherubtse College and National Institute of Education in 1990 were 345 and 174 respectively in 1990.  

Teachers Training InstitutesTeachers Training Institutes  

11.12  In addition to the National Institute of Education, there is another teacher's training institute : the Teacher's Training Centre in Paro which had an enrolment of 59 in 1990. 

Technical and Vocational EducationTechnical and Vocational Education  

11.13  There are three formal technical institutes in the country: the Royal Technical Institute in Phuntsholing, the Royal Bhutan Polytechnic in Deothang and the National Trade Training Institute in Phuntsholing. The Royal Bhutan Polytechnic provides diploma courses in electrical, civil and mechanical engineering. In 1990, the Royal Bhutan Polytechnic had an enrolment of 147, the National Trade Training Institute had an enrolment of 63 and the Royal Technical Institute had an enrolment of 292. The Royal Technical Institute in Kharbandi, Phuntsholing was established in May 1965 and it is one of the oldest technical institutes in the country and had produced 298 certificate holders by 1990. The Royal Technical Institute offers certificate courses in three main trades i.e., Electrical, General Mechanics and Motor Mechanic with four allied trades : fitting, carpentry, welding and sheet metal trade. The National Trade Training Institute offers courses in masonry and plumbing.  

Royal Institute of Management (RIM)Royal Institute of Management (RIM)

11.14  The Royal Institute of Management provides in-service training for civil servants and the private sector particularly at mid and junior management levels. Its pre-service and in-service courses include personnel management; decentralised rural development; financial management and audit; communication and report writing; development policy orientation and computer training. The RIM also undertakes research connected to management, public administration and training techniques. RIM has a Library Learning and Documentation Division which caters to general readers especially civil servants. While external training is necessary in most cases as an interim measure, the Government recognises that it is the in-country training that can provide a greater training coverage at a relatively low cost and also meet the specific training requirement of the civil service and private sector. It is in recognition of this fact that the Royal Government established the Royal Institute of Management at Thimphu in the beginning of 1986, with its own Board of Directors. The RIM had a staffing strength of 47 in 1991. 

Other InstitutionsOther Institutions

11.15 There are 5 Hindu religious and linguistic education institutions -Sanskrit Pathsalas- in Southern Bhutan with a total enrolment of 458 students and a school for the blind - Zangley Muenselling School in Khaling - with an enrolment of 27 students. Other educational institutes include the Forestry Institute in Taba, the National Agriculture Training Institute in Paro, the Natural Resources Training Institute in Lobesa,  the Royal Health School in Thimphu, the National Institute of Family Health in Geylegphug, etc. They are discussed under the relevant chapters. 

C. ConstraintsC. Constraints

Lack of School Facilities and Remoteness of SchoolsLack of School Facilities and Remoteness of Schools

11.16  The lack of adequate school facilities, as a result of financial resource constraints, is the major reason for the modest enrolment figure. The remoteness of many communities and thus the long distances children have to walk to school, ranging from 30 minutes to 4 hours, is another factor contributing to poor enrolment in primary level education.  

11.17  The enrolment of girls is much lower than boys. As shown in Table 11.1 there were only 18,469 girls out of 48,051 primary schools pupils in 1990. The distance between the schools and homes is thought to be an important factor for the lower enrolment of girls in primary schools, besides social and economic reasons.  

11.18  The remoteness of many schools hinders effective supervision and monitoring of teaching methods by the Schools Inspectorate Division. 

Shortage of TeachersShortage of Teachers

11.19  In addition to the lack of school facilities, the education sector is constrained by an inadequate number of trained national primary teachers. The shortfall is made up by expatriate teachers mostly from India. In 1990, 43% of the overall teaching staff consisted of expatriate teachers. At a more disaggregated level, 40% of teachers in primary schools, 51% of teachers in high schools and 34% of teachers in other institutes were expatriates in 1990. The demand for national teachers will increase further during the 7FYP to meet existing requirements for national teachers and the additional requirements for the new schools to be constructed.  

High Dropout and Repeater RatesHigh Dropout and Repeater Rates

11.20  The number of children dropping out of primary schools is considered to be high: averaging 13% in 1990. At the end of primary level, Class VI, about 32 % children do not return to continue their education at the secondary level. Thus, there is a large number of children out of school. Once children leave school, they are unable to continue their education by other means as there is little adult  or non-formal education. It has been observed that those pupils who leave school, particularly those from the higher primary classes, are less prepared to return to rural life nor are they adequately qualified to continue training or  to find formal employment. This situation is of great concern to the Royal Government.  

Table 11.2Repeater and Dropout Rates for Academic Year 1988-1989 

11.21  On average, over 27% of primary school students repeat their classes each year.  This is thought to be due to the dependence on examinations to assess pupils' performance and a lack of appropriate curriculum until NAPE was introduced.  A large proportion of children in rural schools are also over age. 

11.22  Until the New Approach to Primary Education was introduced in 6FYP,  the use of curricula which were inappropriate to the needs of the population reduced the incentive for parents to send their children to school. The scarcity of labour in rural areas is another reason for parents being less willing to send their children to school.  

II. Review of Past PerformanceII. Review of Past Performance

A. Objectives of the 6FYPA. Objectives of the 6FYP

11.23  The objectives in the 6FYP were to:   

          ·   increase enrolment at the rate of 6% per year and increase retention of children in primary schools 

          ·    develop a curriculum relevant to an agrarian economy 

          ·    strengthen the teacher education system both before and during service 

          ·    increase adult literacy rate, especially for out of school girls and women 

          ·    promote the development of teaching and learning materials 

          ·    increase community participation in primary educational expansion 

B. Achievement of ObjectivesB. Achievement of Objectives

Primary EducationPrimary Education

11.24  In 1986, the enrolment level between pre-primary and Class VI was 49,485. By 1990, the enrolment in the primary education was 63,643. The primary school enrolment is higher than that shown in Table 11.I as some of the junior schools also have primary sections. The growth rate of enrolment thus exceeded planned increases. The increase in enrolment in the 1987-88 and 1988-89 academic years were 8% and 11% respectively. The growth rates of enrolment were highest among the educationally underserved Dzongkhags and regions which made some impact on reducing the disparity in access to education. However, the difference is still quite marked (see Table 11.3). 

11.25  In terms of physical development works, 49 community schools were planned, while  a total of 84 community schools were established. A total of 12 primary schools were planned, and the 5 primary schools to be constructed under the Royal Government's funding were completed. The 7 donor funded primary schools were still to be constructed at the end of the 6FYP. 

Secondary EducationSecondary Education

11.26  Nanglam Junior High School was opened in 1990 and Mongar Junior High School was upgraded into a High School. Many high schools had primary sections which are beginning to be transferred to Primary Schools. Class XI-XII courses were introduced in Yangchenphug High School. 

Higher EducationHigher Education

11.27  The enrolment in the degree course in Sherubtse College increased from 166 in 1986 to 200 in 1991 and Honours courses were introduced in the 1991 academic year. The enrolment at the  National Institution of Education increased from 41 in 1986 to 74 in 1991.  Class XI-XII courses have also been introduced in Simtokha Rigney School to prepare for its elevation to a degree level institution. 

Curriculum DevelopmentCurriculum Development

11.28  In the 6FYP, the New Approach to Primary Education was introduced. It is a children centred approach using nationally developed and relevant curricula. For example, the teaching of science is based on learning from the immediate environment, through tending to the school kitchen gardens, through introduction of health, hygiene and population education. The subject was renamed "Environmental Science".  

11.29  To nationalize the curriculum to Bhutan's needs and ethos, the Curriculum and Textbook Development Division of the Department of Education has been strengthened with recruitment of selected curriculum writers from the teaching force. The Division has re-written the English text and work books, simplified Dzongkha text books, prepared teachers' guides, science and environmental science (EVS), Bhutanese history and geography textbooks and produced teaching materials for NAPE.  District Resource Teachers have been posted in each Dzongkhag to provide support to teachers in the introduction of NAPE.  

Teacher TrainingTeacher Training

11.30  The output of primary school teachers from the 2 Teacher Training Institutions has increased from 46 in 1987 to 130 in 1991. The output of secondary teachers from National Institute of Education increased from 20 in 1987 to 27 in 1991. Nevertheless, there is a marked shortage of national teachers and many teachers have not had any training in the New Approach to Primary Education. 

Royal Institute of ManagementRoyal Institute of Management

11.31  Since the establishment of RIM, several programmes were launched to fulfil its functional goals. A Training Plan was prepared for 1986-95 . The Plan incorporates training programmes for all the five categories of civil servants: top, senior, middle level executives, supervisory and office support personnel. Of the 9 faculty members, 7 have completed long courses abroad. A Library Learning and Documentation Division has been established and links forged with institutions in the region and Europe for the exchange of information.   

Non Formal EducationNon Formal Education

11.32  There has not been any significant programme introduced for non-formal and adult education. However, educational programmes are becoming a regular feature of Bhutan Broadcasting Services.  

III. Objectives and Strategies for the 7FYPIII. Objectives and Strategies for the 7FYP

A. Objectives for the 7FYPA. Objectives for the 7FYP

11.33  The broad objectives for the Education sector are in line with national objectives of improving the quality of life, developing human resources, facilitating the meaningful participation of the population in the country's development activities, and preserving and strengthening the country's culture. 

11.34  The specific objectives for the 7FYP are to:  

  · increase the coverage of education to bring about equitable access and meet the target of universalization of primary education by the year 2000 

  · enhance the relevance and quality of education particularly at the primary level within the overall framework provided by the New Approach to Primary Education. 

          ·   expand educational opportunities for the disabled and the disadvantaged for their basic learning needs. 

                        ·           enhance the literacy rate through alternative forms of education such as non-formal and adult literacy programmes. 

  · strengthen technical and vocational education in view of the envisaged development of the industrial sector. 

B.  Strategies for Achieving ObjectivesB.  Strategies for Achieving Objectives  

11.35   The Strategies for achieving these objectives are as follows: 

                        ·           increase the numbers of schools, particularly community schools, to ensure the equitable distribution of education facilities. 

  · increase the number of national teachers as well as their expertise in order to ensure improvements in the learning and teaching processes. 

  · continue improvements in the national curriculum to increase its relevance to the needs of the population and the economy, to encourage greater enrolment levels, and to prevent the high dropout and failure rates. 

  · improve the efficiency in the delivery system with a view to make the education system more cost effective. 

  · encourage greater involvement of communities in the construction and maintenance of community schools. 

          ·    improve liaison with the industrial sector to increase the relevance of technical education. 

Increase Access to Education Increase Access to Education  

11.36  To achieve universal access to primary education by the year 2000, a target of 88% coverage would need to be met by 1997. The number of students in 1997 in primary education system should be 100,280, which will entail an annual growth rate of 6.85%. Special emphasis will to be given to educationally backward areas and girls to reduce the existing disparity. 

Table 11.3  Enrolment Targets for the 7FYP by Dzongkhag 

11.37  As the numbers of pupils attending schools increase, the physical resources in the existing schools will have to be consolidated and expanded and new schools will have to be constructed. Emphasis will be placed on encouraging communities to establish new schools to reduce the capital costs to the Department. As an incentive to communities and to ensure quality education in these schools, the Department has decided to post the best teachers to community schools. The Department is also encouraging communities to become involved in the selection of school sites, construction of the buildings and management of the schools through formation of School Management Boards. This will increase their sense of responsibility for the education of their children. 

11.38  As with enrolment in primary schools, the education system will endeavour to provide fair and equitable enrolment in higher secondary education between different dzongkhags and between boys and girls. To improve the enrolment of girls in higher secondary levels, girls boarding facilities with girls warden, will be opened. Some of the schools and institutions located adjacent to the international boundary will be relocated in more convenient places. 

Improving the Quality of EducationImproving the Quality of Education

11.39  The curricula will be developed further, particularly at the primary level within the overall framework provided by the New Approach to Primary Education.  All primary level education will be brought under the curricula of NAPE by 1997. Improvement of the text books of all subjects and teaching materials for NAPE will be continued.  In particular, text books on dzongkha, elementary agricultural economics, population education, environmental conservation and sustainable resource use, and health education will be given strong emphases. 

11.40  The curricula for the higher secondary education has not been revised. The production of relevant text books for post primary education will be the main task during the 7FYP.  Texts books will be written for the following subjects: English, History, Geography, Physics, Chemistry, Biology, Economics, Dzongkha. 

11.41  Bhutanese students currently sit for the Indian Certificate for School Examination (Class X) and Indian School Certificate (Class XII). Hence, there is limited freedom for launching an independent curriculum for secondary education and the Department of Education intends to introduce a Bhutanese secondary examination by 1995. This will necessitate the strengthening of the Bhutan Board of Examination to undertake the task.  A Board of Education consisting of senior educationists will also be formed to advise the Bhutan Board of Examination (BBE) and to develop linkages with educational institutes in the region to ensure that BBE's certificates are valid and honoured by other institutes. 

11.42  Curricula will also be developed for higher secondary level education between Class VII-X. The curriculum development will not only include re-writing textbooks but also diversifying the subjects. Arts, crafts, computer  science and basic  skills in agriculture, carpentry, electrical and mechanical objects and typing will be introduced.  The introduction of trade skills will widen the range of opportunities for those who seek employment directly from secondary education. 

11.43  In the 1988-89 academic year, an average of 10 per cent of students were dropouts and an average of 25 percent of students were repeaters.  The implementation of NAPE, which is activity centred and more interesting to the child than the one it replaced, is expected to reduce the repeater and dropout rates. The introduction of continuous classroom assessment of pupils is also  envisaged to identify reasons for high dropout and failure rates. In addition, a study into the causes of high repeater and dropout rates will be undertaken. Its results will form the basis of corrective measures. 

11.44  There are at present 5 Sanskrit Pathsalas with a total enrolment of 458  and 16 teachers.  They are located in the south to cater to special needs of communities of the south.   

11.45  The Department of Education plans to develop a physical education curriculum, including improvement of traditional and modern sports and games; and organization of regional and national sports competitions. 

Improving the Efficiency in Delivery of Educational ServicesImproving the Efficiency in Delivery of Educational Services

11.46  The Royal Government has accorded the education sector high priority in terms of RGOB expenditure, however budgetary constraints will necessitate restraint in the expansion of expenditure. The Department of Education will thus identify the most cost effective means of providing education to the population. In this context, community participation in the construction of community schools and maintenance, bussing services, private schools, and in some cases relocation of schools will be promoted to improve enrolment rather than building new schools and boarding facilities to encourage increased enrolment in remote areas.  

11.47  Most of the additional pupils to be enroled at the post primary level will be accommodated in existing schools, which will need to be improved and/or expanded.  

11.48  Private entrepreneurs will be encouraged to set up primary schools in towns.  The Department of Education will develop appropriate incentives to make this venture attractive. 

11.49  The administrative and supervisory capacities of the Department and the District Education Officers as well as the collection of data to strengthen monitoring and evaluation capabilities of the Planning Division will be improved. 

Increasing the Numbers and Skills of National TeachersIncreasing the Numbers and Skills of National Teachers  

11.50  One of the main constraints to the rapid development of primary education is the lack of trained national teachers. The overall desired teacher-pupil ratio in primary schools is 1:36 as opposed to the 1990 ratio of 1:30. But the average ratio disguises the problem of high numbers of pupils per class in the  lower classes and low numbers in higher classes of primary schools. This results in low utilisation of classroom space and teacher time in the higher classes of primary schools. To improve the utilization of teacher-time, multigrade teaching system will be introduced gradually. To improve classroom space utilization, the minimum permissible number in a classroom shall be 25. 

11.51  As the number of pupils increase, there will need for a parallel increase in the number of teachers, particularly of the national teaching force.  Moreover, the educational goals and value system implicit in NAPE require national teaching staff. It is intended to reduce the percentage of expatriate teachers from 40% of the teachers in primary schools, 51% of teachers in high schools and 34% of teachers in other institutes in 1990, to 34% in primary schools, 30% for junior schools and high schools and 30% for other institutions by the end of the 7FYP. 

11.52  In order to meet the increased demand for national teaching force, the existing capacity of all teacher training courses will be increased. The output of teachers from various courses after taking account of the wastage are given in Table 11.4. 

Table 11.4  Output of Teachers in the 7FYP 

11.53 Improving the quality of education will be improved further through intensive in-service training for untrained national teachers. Workshops and short courses at national, zonal and Dzongkhag levels on specific subject areas and pedagogy will be organised. Multi-grade teaching, school administration, pastoral care and career counselling will be part of these training programmes.  Additionally, distance education will be introduced for teachers.  This will enable teachers to be informed of education development without having to travel long distances to attend training courses at educational institutes. 

University Level EducationUniversity Level Education

11.54  Sherubtse College has been affiliated to the University of Delhi, with students taking degrees conferred by the University of Delhi. The Department of Education intends to continue the cautious steps towards improving Sherubtse College, the Simtokha Rigney Institute and the Royal Bhutan Polytechnic with the aim of establishing the Ugyen Wangchuck University. In the course of 7FYP, the basic infrastructure and academic competence of Sherubtse College will be improved to enable the upgrading of the college to an autonomous body.  Physical facilities, including laboratories, equipment and buildings will be established. The infrastructure will be improved not only to enable higher enrolment in university education, but also to accommodate the courses in B.Ed and P.G.C.E which will be transferred from NIE Samchi to Sherubtse  College in Kanglung in the course of 7FYP.  At the same time, the Class XI and Class XII courses will be transferred to 4 other high schools namely Jigme Sherubling High School, Drugyel Paro High School, Shemgang High School and Punakha High School. 

Table 11.5  Enrolment at Sherubtse College 1990 

11.55  Simtokha Rigney School offers courses up to Class XII and it is the main source of Dzongkha language teachers.  In the 7FYP, both infrastructural and curriculum development will take place to enable the School to provide degree level studies in Dzongkha. But the present site in Simtokha is unsuitable for further expansion and the Higher Institute for Rigney and Dzongkha studies will be established elsewhere. The opening of such an Institute will reduce the need for students to attend courses outside Bhutan. But where specialization is needed, scholarships for further studies will continue to be awarded. 

Technical and Vocational EducationTechnical and Vocational Education  

11.56  The existing courses will be reviewed and updated to reflect the developments in these fields and to reflect the manpower demands in these areas.  In particular, importance shall be given to the participation of the user agencies in the curriculum development. A closer relationship between the Institute and the Department of Trade and Industry will make the Royal Bhutan Polytechnic course more relevant to the needs of industry. 

11.57  The workshop in the Royal Bhutan Polytechnic will also be re-equipped with appropriate tools.  Students' residences will be constructed with priority for girls hostels in order to increase the enrolment of girls at the Polytechnic.  The infrastructure and curriculum of the Royal Technical Institute will be improved.  A girl's hostel will be built to increase the enrolment of girls at the RTI. The National Trade Training Institute, in Kharbandi will increase its enrolment capacity from 60 at present  to 100 by the end of the 7FYP.  To enable this expansion, the number of instructors as well as the physical facilities will be increased.  Due to the envisaged expansion of the industrial sector and demand for technically skilled manpower, the possibility of establishing 2 more trade schools will be studied. It is likely that one of them will be established in Eastern Bhutan. 

Royal Institute of ManagementRoyal Institute of Management

11.58  A new facility for the RIM will be constructed for the RIM in the 7FYP, as the existing Institute is housed on several sites. This will improve the functioning of the Institute, in addition to training of the RIM staff. The RIM will also improve the content of their courses through the establishment of linkages with client organizations for assessment of their training needs and evaluation of RIM training. This will enable the RIM to meet the incountry training requirements of the top, senior, middle level executive and supervisory and office support personnel. The Library Learning Resources and Documentation Division will be expanded with a view to strengthen training and research facilities. RIM will also establish linkages with reputed institutions abroad with similar objectives to obtain assistance inter-alia in the development of the RIM faculty, training materials and documentation and also to share training experiences.  

Adult and Non Formal EducationAdult and Non Formal Education

11.59  During the 7FYP, an adult literacy programme will be developed with the aim of reaching approximately 3,000 people.  The programme will meet basic educational needs of the population in terms of basic skills reading, writing and numeracy and will start on a pilot basis in 1992.  The Department of Education will carry out the programme in conjunction with National Women's Association of Bhutan, the Ministry of Agriculture and the Ministry of Communication. Non-formal education programmes will be developed for those pupils who dropped out of school.  It is envisaged that the community schools will be used for adult literacy and other non-formal education programmes and thus be made use of by all members of the communities.  

Educational Opportunities for the Disabled and DisadvantagedEducational Opportunities for the Disabled and Disadvantaged  

11.60  The Zangley Muenselling Blind School is the only school which gives education to the blind. There are no other schools which cater to the education of the  disabled. The Department of Education will conduct a survey to assess the size and characteristics of the disabled population.  Based on this survey, special programmes or facilities shall be developed to integrate  the disabled into regular schools,  wherever possible. A community rehabilitation programme for the disabled people will also be implemented by the Department of Health Services.  

Financial and Manpower Requirements for the 7FYPFinancial and Manpower Requirements for the 7FYP

                                                                 CHAPTER 12

HUMAN RESOURCE DEVELOPMENTHUMAN 

RESOURCE DEVELOPMENT

I.  Basic SituationI.  Basic Situation

12.1  Unlike many developing countries, Bhutan suffers from a shortage of labour as well as skilled manpower, and thus human resource planning needs to focus on  developing the skills of a small human resource base rather than on providing employment opportunities. Manpower shortages, both skilled and casual labour, have presented a major constraint in the development of most sectors of the economy. This has affected both the Government and private sector. In the case of unskilled labour shortages in the agricultural sector, the problem is compounded by the limited scope for mechanisation due to the mountainous terrain. 

The Royal Civil ServiceThe Royal Civil Service

12.2  The civil service of the Royal Government employs the largest number of people with formal education in Bhutan. The manpower needs of the civil service have been expanding rapidly with the increasing social and economic development activities of the Royal Government. Between 1977 and 1987, the size of the civil service doubled. However a major retrenchment exercise was carried out between 1987 and 1988 in accordance with the Royal Government's new policy directives of maintaining a small, compact and efficient civil service. In 1991, there were 11,228 people employed in the civil service (see Table 12.1). 

12.3  While it was necessary to streamline the civil service, many Departments are constrained by a lack of qualified national staff. These constraints are being alleviated with the selective absorption of qualified national manpower and a cautious approach to recruitment of expatriate staff. 

12.4  In some sectors the proportion of non-nationals are relatively high reflecting the shortage of qualified nationals to fill these positions. The sectors with the highest proportion of expatriate staff are education and in the scientific and technical fields. Conversely the proportion of expatriates is lowest in the administrative cadre of the civil service. The number of expatriates required will continue to decline as an increasing number of Bhutanese with requisite qualifications are employed both in the private and the Government sector. However, self-sufficiency in the number of Bhutanese with adequate qualifications, particularly in the scientific and technical fields, will require continuous investment in human resource development. The shortage of national manpower with specific professional qualifications will persist in many sectors while the human resource base is being built. 

Numbers of Graduates, Postgraduates and Diploma Holders in 1991Numbers of Graduates, Postgraduates and Diploma Holders in 1991

12.5  There were only 671 graduates and postgraduates and 506 diploma holders, in the civil service in 1991. Over the last 5 years an average of 90 national graduates and post graduates students graduated per year. In addition, there are approximately one thousand people graduating from the various training institutes in Bhutan: Royal Commercial Institute; Royal Institute of Management; Royal Institute of Health Science; Royal Technical Institute; Royal Polytechnic etc. 

Table 12.1Employment Trends in the Civil Service 1985-1991

Note 1.: + These agencies were privatised and their employees delinked from the civil service ** CSO stands for Central Statistical Office and CSD stands for Computer Support Division. 

++ 1991 total staff strength for Druk Air/Civil Aviation does not include Druk Air employees since Druk Air is considered to be a corporation. Note 2.: 1991 civil service does not include joint and public sector employees 

Note 3.: The staffing strength cited in the sectoral Chapters will vary from these numbers as enumerated in different months and some sectors include general supporting cadre (GSC), who are employed on short term basis.

Table 12.2  Diploma Holders, Graduates, and Post Graduates in the Civil Service 1991 

Table 12.3Annual and Cumulated Output of Graduates 1970-1990 

Joint and Public Sector IndustriesJoint and Public Sector Industries

12.6  The Royal Government has increased the pace of privatization of many industries and service sector activities during the 6FYP. As the undertakings are privatised they are incorporated under the Companies Act of Kingdom of Bhutan, 1989. Employees of such corporations are no longer considered part of the civil service. At the beginning of 1991, the total employment size in the public and joint ventures incorporated under the Companies Act of the Kingdom of Bhutan stood at 2,576, out of which 715 were non-national. This figure does not include the manpower that are employed on a daily wage system (casual labour) 

12.7  Table 12.4 indicates employment figures in 16 public and joint undertakings in the country. It can be seen that the percentage of non-nationals is 8 percent higher in public and joint undertakings than in the civil service. 

Table 12.4Employment in Public and Joint Undertakings 1991 

Private Sector EmploymentPrivate Sector Employment

12.8  There is very little reliable information on employment in private sector industries. The Ministry of Trade and Industry carried out a survey in the 18 Dzongkhags in 1990. The survey covered 157 industrial units, which were found to employ only 2,900 persons.  An analysis of the data covering those 157 units surveyed showed the following results: 61 units (or 39 per cent) employed 10 or more persons; 29 units (or 18 per cent) employed 20 or more persons; 12 units employed 200 or more persons - one unit in Phuntsholing employed 241 persons and the other in Samdrup Jongkhar employed 337 persons. The majority of the units (61 percent of the units) employed less than 10 persons and about a third employed less than 5 per cent. 

12.9  Compared to the percentage of expatriates in the civil service and public and joint sector undertakings, the percentage of expatriates in the private industrial sector is the highest at 47%.  Among skilled workers, in technical and clerical jobs, the proportion of expatriates is higher than nationals. 

Trading EstablishmentsTrading Establishments  

12.10  There is little information available on the manpower situation in the trading (retailing and hotel) sector. According to the Ministry of Trade and Industry, about 8,000 trading licenses have been issued (see Chapter 18). There would be many licences which might not have been used and many trading establishments are small employing very few skilled or educated persons and are run as family enterprises. Together these small trading establishments add to a thriving retailing and hotel service sector. However, trading establishments do not represent a significant sector for employment creation. 

Construction SectorConstruction Sector  

12.11  Approximately 450 licences have been issued in the construction sector. Many of these construction agents may not be in operation. Licenses are classified into grade A, B, C and petty contractors depending on the investment in construction equipment, existence of a permanent office, past experience and the other assets of the contractor. The majority of the construction agents are petty contractors and do not either have construction equipment of their own or a permanent labour force. However they are responsible for most of the construction work, which means that the construction sector is highly labour intensive. Both skilled and unskilled manpower in construction sector are scarce and this has been an important factor in causing delays in the implementation of RGOB programmes. 

B.  ConstraintsB. Constraints

12.12  One of the major constraints in indigenization of manpower in both the private and Government sectors is the unavailability of qualified manpower. The pool of potential trainees with the relevant qualifications is limited because of the small numbers of graduates from colleges outside Bhutan and in-country training institutes. There is also an imbalance between the output of manpower at the higher education level in certain disciplines and the manpower demand in the country. Increasingly, the need for manpower with technical and scientific qualifications is much higher than for those with Arts qualifications. 

12.13  The institutional capability for manpower planning in many organizations is weak. The Royal Civil Service Commission lacked such capabilities and thus institutional strengthening of RCSC was a priority in the 6FYP. The problem of institutional weakness in many organizations is compounded by the lack of appropriate data collection systems. There is no national database for manpower planning which covers all sectors of the economy. 

12.14  The financial resources for human resource development, mainly for training abroad, have been contributed by various donors. However the donor funds provided have been insufficient to meet the increasing HRD needs as development activities which require qualified people are on the rise and new technologies are introduced.  

C.  InstitutionsC.  Institutions

12.15  The Royal Civil Service Commission is responsible for co-ordinating the personnel management of the Civil Service, human resource development and manpower training of both the private and government sectors. The Royal Civil Service Commission also negotiates with multilateral and bilateral donors for funding of the Human Resource Development Programme in close co-operation with the Planning Commission, Ministry of Foreign Affairs and user agencies. The Royal Civil Service Commission consist of 8 members who alternate as chairman for a period of six months. The Royal Civil Service Commission Secretariat had a staffing strength of 47 in 1991. 

II. Review of Past PerformanceII. Review of Past Performance

A.  Objectives and Achievements in the 6FYPA.  Objectives and Achievements in the 6FYP

12.16  The Royal Government has introduced an integrated approach to planning, programming and implementation of manpower development or human resource development activities. In practical terms this means that the Royal Civil Service Commission is responsible for implementing all manpower training. This new approach has enabled more effective programming and re-programming of resources from UNDP and other sources for manpower development during the 6FYP and will be continued in the 7FYP. 

12.17  Institutional strengthening of the Royal Civil Service Commission was a major goal in the 6FYP.  The activities included the following human resource management aspects : 

          ·    enactment of Bhutan Civil Service Rules and Regulations 

  · establishment of a comprehensive information system in the Royal Civil Service Secretariat covering various aspects of personnel management and human resource development

          ·   establishment of methodologies for proper evaluation and choice of appropriate training facilities 

          ·    preparation of a proposal for the establishment of national planning capabilities. 

12.18  From 1954 to 1991, a total of 4,545 training courses have been funded.  This includes training both in and outside Bhutan. Training courses are of various duration ranging from one month to long term professional courses lasting 5 years. The courses indicated in Table 12.5 do not show the number of people trained, as many people have been sent for re-training to upgrade their skills. 

Table 12.5Sectoral Training Funded from 1954-1991