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CHAPTER 1. COUNTRY, PEOPLE AND INSTITUTIONS

Physical Characteristics

The Kingdom of Bhutan covers an approximate area of 46,500 square kilometers: roughly 150 km north to south and 300 km east to west. 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 location map of Bhutan).

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 100 metres above sea level in the south to more than 7,550 metres above the 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 the 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 ..Rainfall map of Bhutan). Rough estimates of rainfall are:

southern border areas                        3000 - 5000 mm p.a.

southern foothills                                            1200 - 2000 mm p.a.

inner central valleys                             500 - 1000 mm p.a.

above 4000 m elevation                    less than 500 mm p.a.

Natural Resources

Flora

The flora of Bhutan are exceptionally diverse as a result of a great range of altitudinal zones and varied climatic conditions, and 72% of the country is covered by forests of fir, mixed coniferous, temperate and broadleaf species. In addition, there are many species which are unique to Bhutan. Moreover, much of Bhutan's flora have remained undisturbed so that Bhutan probably has the richest flora in the Himalayan region. The flora wealth of Bhutan is highly appreciated by both Bhutanese and the outside world.

The government is determined to conserve this wealth and has set a national policy to maintain at least 60% of land under forest cover for all times to come.

Fauna

A number of rare animals can still be found since Bhutan's flora have remained undisturbed. The exact number of species is unknown, but over 165 have been reported. Rare animals including the golden langur, takin and blue sheep are found distributed quite widely. Tigers, leopards, snow leopards, red panda, gaur, serow, Himalayan black bears, brown bears, wild pigs, musk deer and other types of deer are commonly found in     many parts of Bhutan. The Phobjikha valley in Wangdue dzongkhag and Bomdiling in Tashiyangtse are two of the three wintering grounds for the rare Black-necked crane.

26% of the country has been declared as nature parks and reserves, (see Map .Protected system map.) which form havens for a number of the world's rare and endangered species.

Agriculture

While 72% of the country is covered by forest, the area suitable for agricultural production is limited, mainly by the very steep terrain and by altitude. The river valleys and the flatland in the southern foothills account for most of the fertile cultivable land whereas the northern alpine belt below the snowline is suitable only for pasture. The most recent estimates suggest that 7.8% 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

With the high precipitation and an altitudinal variation of up to 7,550 metres, water resources are abundant in Bhutan. While the altitudinal difference provides many possibilities for hydro-power generation, the main rivers are generally deeply incised and irrigated agriculture is limited to areas served by gravity from small perennial streams. The four major rivers are Ammochu, Wangchu, Punatsangchu and Manas, all of which flow in a north-south direction and discharge into the Brahmaputra in the plains of India. The Power Master Plan estimates that these rivers could provide 20,000 MW of electricity. As local requirements are still quite modest, the major share of the energy produced will be exported representing a large part of Bhutan's total export revenue.

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 the 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 25.1 Geological map of Bhutan). Mining is strictly regulated for environmental reasons, but limited coal, limestone, dolomite, gypsum and quartzite are mined for domestic use and export.

People

History

Stone implements indicate that the country was inhabited as early as 2000-1500 B.C Although Bhutan's history since the 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 Ngawang Namgyal (1594 - 1652) unified the country into one nation in the early 17th century. He established a theocracy in 1652 and gave Bhutan an administrative system, and a code of law. The theocracy established by Shabdrung ended in 1907 when Ugyen Wangchuck (1862 - 1926) was              elected as the first king of Bhutan by popular consensus. Since the establishment of the monarchy in 1907, there have been four hereditary kings:

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 have been colonized. Bhutan was fairly isolated from the outside world until the 1960s when the third King Jigme Dorji Wangchuck (1952 - 1972) opened links with other countries and initiated the development of a modern economy. His Majesty the late King also introduced many social, legal and constitutional reforms, which have far- reaching effects.

Religion

Buddhism was introduced in Bhutan in the 7th century by Guru Padma Sambhava. In the centuries that followed, Bhutan was home to many sages and saints including the great saints-scholars like Longchen Ramjam, also known as Kuenkhen Longchen Ramjam, (1308-1363).  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 religion, practised particularly in Southern Bhutan. The Hindu religion as practised by Southern Bhutanese has many 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 adapting itself in the face of development.

The importance of religious institutions continues in present day Bhutan, as signified by the strength of the monk body who number about 5000 in Dratshangs or Rabdeys supported by the state. This figure takes into account only those monks who are part of the formal monastic structure supported by the state and excludes those who are not part of the state sponsored Dratshangs. The Rabdeys are based mainly in dzongs.  Each Rabdey is headed by a Lam Neten who is appointed by His Holiness the Je Khenpo (Head Abbot), the elected Head of the Central Monk Body. The present Je Khempo is the 70th incumbent. His Holiness the Je Khenpo is the chairman of the nine-member Dratshang Lhentshog. Monks continue to play an important role in the daily lives of the people in performing religious ceremonies, and in promoting and preserving traditional scholarship. They are also actively involved in the process of development while constantly renewing their relevance to society in times of change.

Population

The population of Bhutan is estimated at 600,000. As in most developing countries, the proportion of the population under 15 is as high as 43%. As this age group enters the reproductive period, the population growth rate is likely to rise above the current 3.1%, unless family planning is more widely practised. With this in view, various family planning options with the latest techniques are made freely available, accompanied by a family planning information campaign.

Settlements

Bhutan is one of the least populated countries in South Asia. Most of the population is concentrated in the valleys, while large areas at higher altitudes in the north of the country are virtually empty except for nomadic herders.

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 6.5. 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 30,000 - 40,000 people. The other main urban settlements are Gaylegphug, Phuntsholing and Samdrup Jongkhar, all of them in the south. Towns are developing in all the 20 dzongkhag (districts) headquarters.

Employment and Incomes

Although significant economic progress has taken place since the 1960s, the majority of the population remains dependent on agriculture for incomes and employment. The national per capita income stands at US$ 470 (1995). 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 roads in the once inaccessible areas. The type of crops produced varies considerably, depending on  climate and access to markets. Staple crops include rice, maize, potatoes, buckwheat, barley and wheat. Livestock, an extremely important part of the farming system, are kept for draught power, milk and meat. Production of horticultural crops is increasing  as their export potential has been realised. By 1994, Bhutan achieved 77% self sufficiency in cereals and 38% in edible oils. While self-sufficient in maize, barley, millet and buckwheat, Bhutan is only 64% self-sufficient in rice and 65% in wheat.

85% of the population derive a living from agriculture and other traditional activities in the rural sector. Employment in the modern sectors of the economy is limited, apart from public services of various kinds, and small-scale trade in the urban areas.

Industrial development is as yet limited and does not provide significant employment. The Government has been responsible for the establishment of several productive enterprises, but the private sector is being encouraged to take over these activities.

Unlike many other developing countries, unemployment is not yet a major problem.

Transportand Communications

Bhutan's total road network measures about 3,200 km and the main routes consist of an east-west highway and four north-south highways. The road network connects all dzongkhags and 16 dungkhags. Major towns and villages are also connected by motor roads. However, some areas can only be reached by mule tracks, foot trails, and cantilever and suspension bridges. Although horses are the main beast of burden, yaks and oxen are used for transportation in some parts of Bhutan. The only airport, at Paro,  is in regular use. The national airline, Druk Air provides services to Dhaka, Kathmandu, Delhi, Calcutta and Bangkok.

Telecommunication services consisting of telephone, telegraph, telex, facsimile and email, including the international telephone links (see Map 16.1 Telecommunication services), are available to the dzongkhag headquarters throughout the country except a few dzonkhags in western Bhutan. However, civil wireless facilities are available in all the dzongkhags.

Institutionaland Legal Framework

Monarchy

His Majesty King Jigme Singye Wangchuck (born 11 Nov. 1955), fourth in Wangchuck Dynasty, is the head of the Government and of the State. His Majesty formally ascended the Golden Throne on 2 June 1974. Since then, under his leadership, great improvements have been achieved in the living standards and quality of life of the people.

Until the beginning of the twentieth century, Bhutan was ruled by the dual system of administration known as "chhosi" which was initiated by Shabdrung Ngawang Namgyal in 1651. Shabdrung Ngawang Namgyal created the office of the Druk Desid to look after the temporal administration of the country and the Je Khenpo to look after religious matters. Although the successors of Shabdrung lacked his stature and vision, this remarkable system provided a very workable form of government for over two  centuries. However, by the second half of the 19th century, frequent disputes over the issue of succession to the office of the Shabdrung brought internal strife and instability in the country. The desire of the clergy, officials and the people for political stability and internal peace, therefore, led to the establishment of hereditary monarchy.

The year 1907 marked the beginning of a new era in the history of Bhutan. On December 17 of that year, the clergy, the State Councillors, the Chillahs of all the districts, and the representatives of the people met at Punakha and unanimously elected the Trongsa Penlop Ugyen Wangchuck as the first hereditary King of Bhutan. After becoming Trongsa Penlop in 1883, Ugyen Wangchuck displayed extraordinary qualities as a leader and statesman. He was a deeply devout and religious man and imbued with a genuine desire to improve the conditions of his people. By uniting the country and establishing a central authority, he brought peace and stability to the country and laid the foundation for the emergence of modern Bhutan.

Organizationsof Government

The National Assembly, the Royal Advisory Council, the Judiciary, the Council of Ministers and the Central Secretariat are the organizations that play a crucial role in the governance of the Kingdom of Bhutan (see figure 1.1). However, at the district, block and village levels there are established mechanisms that ensure people’s people's participation in the decision making process. On the personal innitiative of the present King, the decentralization of administration was implemented in 1981 through the establishment of the Dzongkhag Yargye Tshogchungs (DYTs or District Development Committees) followed by further decentralization to the Gewog (block) level in 1991 with the introduction of the Gewog Yargye Tshogchungs (GYTs or Block Development Committees) has enhanced the capacity of traditional local institutions. Under the present King's leadership and guidance, the strengthening of these local institutions and devolution of power from the centre have led to people's active participation, and the crucial role of decision-making has been given to the people themselves at the Dzongkhag and Gewog level.

The Tshogdu (National Assembly) has 150 members of which 105 are chimmis (representative of the people) elected for a term of three years. The monk bodies elect 10 monastic representatives, while the remaining 35 members are representatives of the Government and nominated by the King. The Tshogdu sits twice a year, in addition to emergency sessions. The Royal Advisory Council consisting of 9 Councillors was established in 1965 to advise the King and the Ministers. Six Councillors are elected from the representatives of the people; two from the representatives of Monk Bodies (for one year term) and one nominated by the King acts as Chairman of the Council.

The central government consist of eight Ministries and their respective Divisions, 5 Commissions, the Royal Bhutan Army, Royal Bhutan Police, Royal Body Guards and several autonomous bodies. The Ministries include Foreign Affairs, Planning, Communications, Trade and Industry, Finance, Health and Education, Agriculture and Home Affairs (see Figure 1.1). The five Commissions are the Planning Commission, the Royal Civil Service Commission, the Special Commission for Cultural Affairs, Dzongkha Development Commission and National Environment 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 country is divided into 20 Dzongkhags (see Political Map). Larger Dzongkhags are sub-divided into Dungkhags(sub-districts). The Dzongkhags and, where they exist, Dungkhags, are further sub-divided into 196 gewogs (blocks). Dzongkhags are governed by Dzongdags who also function as the chairman of the DYTS, and Dungkhags by Dungpas. The Gewogs are administered by Gups who are elected by the community and who also function as the chairmen of the GYTs. The Gups assist the Dzongdags and Dungpas in collection of taxes, mobilization of work force for community services and public construction, settlement of disputes and many other local activities including implementation of development programmes.

Bhutan's legal system is based on codes laid down by Shabdrung, the spiritual ruler of the 17th century. The present laws as they exist in Thrimshung Chenmo (Supreme Laws) were enacted by the Tshogdu (National Assembly) in 1957 under the aegis of His Late Majesty Jigme Dorji Wangchuck (1928-1972), 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 Dzongkhag has a court headed by a Thrimpon. A Dzongkhag court has both original and appellate jurisdictions. The next level of jurisdiction is the High Court in Thimphu.

Constraintsto Development

Right from the inception of its first development plan in 1961, the RGoB has recognised that Bhutan's economic future is linked to its neighbours and to the world economy.

Having abandoned a strategy of self-imposed isolation, Bhutan has looked to increased economic interaction with other countries as an avenue for development. The development of Bhutanese economy is, however, constrained by several factors:

-                Bhutan, as a landlocked country, is geographically isolated from other countries in the region and is as far as 800 Kms from the nearest sea port in Calcutta, India. This isolation substantially increases the costs of transport of goods into and from Bhutan.

-                Because of the extremely mountainous terrain, the area of land suitable for agricultural production is very limited. This restricts the potential for increasing output from the agricultural sector and increases the risks of environmental degradation.

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

-                The above factors have made the provision of roads and communication networks difficult, and the delivery of health and education services costly.

-                Unlike most developing countries, Bhutan has a relatively small population and the supply of manpower is a major constraint. The fairly recent introduction of modern education has not been able to make good the shortage of manpower with the necessary skills for a developing economy;

-                As most of the population have been subsistence farmers until recently, the level of monetization 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.

Since the 1960s, Bhutan has made considerable progress in overcoming many of these constraints, particularly in terms of infrastructure. In the 8FYP, it will continue its efforts to off-set the limitations imposed by these constraints.

CHAPTER 2. REVIEW OF ECONOMIC PERFORMANCE (1985-1995)

Overview

By the end of 1985, Bhutan had completed 24 years of planned development. Nonetheless the Bhutanese economy was still dominated by agriculture and vast majority of Bhutanese depended on agriculture for their livelihood. In 1985, agriculture contributed 54.9% of GDP as shown in Table 2.1 Construction sector with 11.1% was the next major contributor to GDP. Other sectors that contributed a significant share to GDP were government services and trade and allied activities, each contributing more than 8% of GDP. Financial services contributed 7.2% to GDP. Transport, communication and manufacturing sectors which were still in their nascent stages contributed only 5.2% and 4.9% respectively. Prior to 1986/87, before the commissioning of Chhukha Power project, Power sector’s contribution to GDP was negligible.

During the decade, the Bhutanese economy experienced growth rate of 6.8% p.a, doubling the real GDP to Nu. 2946 m from Nu. 1,519.8. This was largely due to the commissioning of Chhukha Power Project in 1987/88 and its forward linkages to other sectors, particularly manufacturing. During the period, the composition of GDP had also changed substantially with Agriculture sector's share declining from 55% to 38%. The contribution of modern sectors like manufacturing, electricity, transport & communication increased significantly (see Table 2.1).

The total real investment (Gross Domestic Capital Formation) increased on an average by about 8.6% with investment on machinery and equipment remaining on the higher side. The large investment made by the Government during the early 1990s was due to the construction of sewerage system, renovation of Punakha dzong, Telecommunications boosted the growth. As development programmes accelerated and the associated increase in the flow of funds from external donors, the Government investment formed 52% of the total in 1994. On the other hand, with the Government's policy to encourage private sector and privatization, the volume of private investment is also steadily increasing.

The savings have shown an encouraging trend as it rose from Nu. (-)4.9 m in 1985 to Nu. 2523.8 m by 1994. This growth is attributable mainly to the private sectors’ saving. The government saving on the other hand, has remained mostly negative, as a proportion of GDP it was negligible.

The consumption expenditure as percent of GDP had gradually declined from 86% in 1985 to 63% in 1994 with private consumption declining from 68% to 39%. Private consumption was concentrated more on basic necessities, with only a small segment of the population indulging in luxury items. On the other hand, government consumption expenditure remained around 25% of GDP. This is commendable, especially in view of the increased recurrent expenditure government had to incur on social sectors during the period.

The Consumer Price Index during the decade increased on an average by 9.5 %.

While exports have continued to pick up in absolute terms both with India and Third countries, the indication is high growth of imports has continued and will continue to grow. Thus, the trade balance was always negative. Nontheless, due to generous foreign grants and aids, Bhutan enjoyed a surplus overall Balance of Payments entailing the built up in reserve which was over 12 months of import cover by the end of the decade.

Aggregate growth in the various sectors

Agriculture and allied activities

The agriculture sector showed a modest growth of 3% p.a.. While the share of agriculture proper increased due to higher productivity, the share of forest and livestock sector declined in the 1990s. This was due to the restriction on mass scale logging activities and the number of cattle reared to prevent unsustainable use of forest resources by the people to prevent environment from hazards like deforestation, soil erosion, etc.

Mining

Due to lack of adequate geological information, lack of expertise and government's policy of sustainable use of resources and environmental conservation, mining and quarrying sector's contribution to GDP was negligible.

Manufacturing

The commissioning of Chhukha Power Project enabled the Royal Government and the private sector to develop medium to large power-intensive industries. Consequently, the manufacturing sector received a boost to its growth after 1987/88. The sector witnessed a growth rate of 13.5% p.a. which is attributable largely to the increased output       from Penden Cement Authority Limited (PCAL), Bhutan Chemicals and Carbide Limited (BCCL), Bhutan Board Products Limited (BBPL) and recently from Bhutan Ferro Alloys Limited (BFAL). The share of the manufacturing sector to GDP in 1980 prices increased by more than three times during the period from Nu. 75.4 m in 1985 to 268.3 m in 1995.

Electricity

Contribution of electricity, which was Nu. 6.0 m in 1985, increased to Nu. 244.9 m in 1995. Its contribution to GDP peaked in 1988 with Nu. 225.1 m. Thereafter, there was no substantial increase in its contribution until 1993, when Power tariff was raised from Nu.0.27 per unit to Nu.0.37 per unit. The tariff was further raised from Nu. 0.37 to Nu.

1.50  in 1995. This sector grew at the rate of 48.2% p.a. during the decade under review.

Construction

The share of construction sector to GDP was high during the period 1983-84 as numerous major construction works were undertaken such as Chhukha Power Project. After the completion of Chhukha Power Project, no major projects were undertaken and it contribution to GDP declined and remained low until the early 1990s. The contribution of this sector increased since1992 with the starting of major projects such as Kurichu power, Basochu power, expansion of Penden cement plant, Punakha dzong renovation, Telecommunications, Flood protection works at Punakha, Thimphu and Phuntsholing Sewerage project, etc. The share of this sector is expected to increase in the remaining years of 7FYP and the 8 FYP with the start of the major projects such as Dungsum cement plant, Tala hydro power project, etc. Despite its fluctuating trend, the Construction sector grew at an average of 6.5% p.a.

Trade and Commerce

Although the share of Trade and its allied activities to GDP increased over the years, this sector experienced one of the slowest growth rates between 1985 and 1995, growing at an average rate of 3% p.a. This low growth was due to slow growth of service industries. Further, for avoiding unwanted side-effects of the excess influx of the tourist in the country, the government adopted a policy of high value low volume tourism, restricting the number of tourist by charging a high tariff. However, with government's continued emphasis on the involvement of private sector in all spheres of socio-economic development, it is anticipated that trade and commerce will experience a higher growth in the 8 FYP.

Transportand Communications

Transport, storage and communication sector experienced one of the most rapid growth rates during the decade, 1985-95. The achievement of this sector was the outcome of the Government's act of privatizing the bus services in the 1980s for efficient management and better return on capital employed. With the purchase of an additional aircraft and with setting up of satellite communication system, the overall contribution of transport and communication sector further increased with a growth of 11.8 during the period.

Services

The share of government and financial services experienced a growth rate of more than 9% p.a. during the period as a result of growing population and the Government’s commitment to provide free education and other social services. The increase in the share of Government services was also due to the grant of the Special Government Allowance (SGA) to the civil servants in 1994. The share of financial services, on the other hand, increased because of better performance of the financial institutions like the RMA and Bank of Bhutan. The increased contribution of the financial institutions to GDP was also credited to the creation of two other financial institutions during the period; BDFC, in 1988 and the separation of UTB from RICB, as an independent financial institution in 1992.

Table 2.1 Sector-wise shares of GDP in 1985 & 1995 (in 1980 prices)

 (see PDF)

 Table 2.1 Gross Domestic Product at factor cost by kind of activity in 1980 Prices

Human Development

Economic growth however is not the goal of development; human development is. Income expansion and increased commodity production are only means that have the potential for enhancing human capabilities. They are useful only to the extent that they can contribute to “Gross National Happiness”. What matters is how secure people feel, the peace and comfort they enjoy, the richness of human lives. Recognizing that there is no automatic link between economic growth and human development, planning in Bhutan has put in place several policies that have enabled the translation of economic growth into human development.

Growth-mediatedSecurity

Bhutan has given the top-most priority to investment in people. Every effort has been made to channel economic growth for ensuring universal access to basic health, education and essential social services. Today, every family in Bhutan has shelter and access to land holdings; every child is entitled to free education; and every individual is offered free medical treatment. An effective health care system is in place that provides access to 90% of the population. An extensive outreach system has been designed that ensures that help is made available as soon as possible even in remote villages. 58% of the rural population has access to piped drinking water; and 70% of rural households have access to latrines.

During the First Plan, 59% of the expenditures were incurred on public works for the creation of infrastructural facilities. There has been a steady decline in the allocations for public works since then, and during the Seventh Plan, only 8% of the development outlay was earmarked for the purpose. Allocations to social sector like health, education, water and sanitation went up from 12% during the First Plan to 27% during the Second Plan. They varied between 16-17% during the subsequent plans. During the Seventh Plan, the allocation increased to 22.6%.

JudiciousFinancing of Development

In keeping with Buddhist values, need rather than greed has been the guiding principle in revenue mobilization. Bhutan has used a mix of local revenue mobilization, foreign aid and international loans to finance its development.

Options for domestic tax resource mobilization have been limited in Bhutan. Until 1987 Bhutan relied primarily on foreign aid for its development. The domestic resource mobilization prospects changed in 1987 with the commissioning of the Chhukha hydropower project. In 1993, about 90% of the electricity generated by Chhukha was exported to India; and RGOB’s revenues doubled between 1985/86 and 1987/88. By 1994, Chhukha accounted for 11% of total resources generated by the government.

Government revenues account for about 20% of the GDP. With little scope to increase domestic taxes, recurrent budget requirements, especially for the social sectors, are under considerable strain.

The reliance on foreign grants may seem large, but it is spent on development projects effectively and judiciously. Donors recognize and respect the constraints under which Bhutan has to operate, especially in terms of conserving natural resources, not only for Bhutan's sake but for the security of the global environment. There is also additional potential for revenue mobilization from the further expansion of hydropower projects which the Government has not yet tapped.

Preventing rather than Correcting Market Failures

The country has always attempted to prevent market failures from occurring so that the question of correcting them does not arise. For example, recognizing the global responsibility placed upon Bhutan as one of the world's ten ecological "hotspots", every effort has been made to prevent excessive logging. The Government has set the minimum forest coverage at 60% of Bhutan’s area, and monitors deforestation and reforestation activities very closely.

Despite the potential that exists, the country has not made tourism a major source of revenue. The Royal Government is fully aware not only of the negative impact that a large number of visitors is likely to have on the domestic environment; it is even more concerned about the negative externalities of tourism. Similarly, the efforts to build and develop growth centres in rural areas is a conscious strategy intended to prevent unnecessary migration to the cities with all its accompanying problems of congestion, pollution, homelessness, etc.

Impact on Human Development

CHAPTER 3. LONG-TERM DEVELOPMENT OUTLOOK

Approachtodevelopment

The Royal Government's past development efforts, and those of the people themselves, have consistently been directed to improving living standards, including spiritual well- being, preservation of cultural values and the physical environment. Since Bhutan opened its doors to the outside world in the 1960s, the Royal Government has  welcomed external assistance on a selective basis to support its successive development

plans, while seeking to ensure that such aid promotes self-reliance on a sustainable basis, rather than dependence. As with all countries, the preservation of national security is seen as a prerequisite for a meaningful development.

These broad goals are reflected in the 8FYP objectives, and development programmes outlined in this document, but the time-scale for realizing the benefits of such socio- economic development extends far beyond the life span of a single five year plan. For the 8FYP, therefore, an attempt is made for the first time to include a longer 20 year perspective and a macro-economic outlook for the five years of the Plan itself.

A Perspective to 2017

It is important that there should be a longer-term assessment of the macro-economic variables that are expected to influence the realization of the country's vision of the future. However, a period ending fifteen years beyond the 8FYP is too far away to take more than a tentative look at the economic growth prospects. Hence only the GDP and the population parameters are considered. The following provides a summary with these variables in view, starting with Table 3.1, a forecast of the national income and population from the beginning of 9FYP to 11FYP.

The population growth is projected to decline from 2.59% in 2001/02 to 1.63% in 2011/12 and to 1.31% in 20016/17. On the basis of these figures, the population is expected to reach 931,711 in 2016/17 from 600,000 in 1996 (see Chapter 14). During this period, the proportion of the population below the age of 15 years (42% in 1996) is likely to increase and stay close to 50%, which will induce a correspondingly higher expenditure on health and education.

The estimate of national income by 2016/17 is based on the accumulated performance of the economy from the current plan until the end of the 11FYP. The assumed performance during each five-year period of the overall growth rate and of the contributing sectors is examined below.

The growth in GDP for the 7 FYP is estimated to be around 5.9%. The sectors which make significant contributions in terms of growth are: mining and quarrying (14.1 %), manufacturing (9.1 %), electricity (3.9%), construction (20.3%), transport and communications (5.9%), finance, insurance and real estate (7.7%), and community and social services (6.7%).

The preparation of detailed forecasts for the 9, 10 and 11 FYPs, is more difficult because of the unpredictable behaviour of the financial variables over the longer period. The method used here to forecast GDP is based on the assumption that the economy  will have an underlying average growth rate of about 5% per annum until year 2005/06, and about 4.5% thereafter. This underlying growth rate is then boosted upwards by larger projects coming on stream, especially in the power sector. The underlying growth rate assumes a steadily growing private, financial and horticultural sector, the latter growing in accordance with its master plan projections.

Table 3.1 Forecast of national income and population, 2002-2017

(see PDF) 

In 2006/07 (9 FYP) underlying 5% p.a. growth rate is boosted by about 13% from the additional power generation and distribution from Tala. During the 9 FYP, therefore, an average annual growth rate of about 7.5% is projected. In 10 FYP

( 2007/08-2011/13) and 11FYP (2012/13-2016/17), the

underlying growth rate of 4.4% is expected to be boosted further by two major hydropower projects with over 2000 MW. The annual average growth rates for the 10 and 11 FYP's are 7.2% and 4.9% respectively. The growth rate during 11 FYP shows a decline from the previous growth rates estimated for the 9 FYP and 10 FYP. However, the annual average rate of 4.9% can be further boosted upwards if new projects, unforeseen at the present time, come on stream (see figure 3.1). In addition, the economy at that level of income will have a higher multiplier effect on the

economy, which has not been taken into consideration in estimating the GDP projections. Moreover, in absolute terms, a growth of 4.9% on a bigger economy is in itself a substantial achievement.

It must be stressed that the high growth rates projected in 9 FYP and 10 FYP depend heavily on the implementation and completion of the big power sector projects. The assumed decline in the population growth rate from 2.59% in 2001/02 to 1.31% in 2016/17 from its current rate of 3.1%, to produce a population of 931,711 in 20016/17, will in turn depend primarily upon the successful implementation of family planning programmes.

The per capita income, in real terms (at 1980 prices) is envisaged to reach Nu. 11,800 by 2016/17. This means that the per capita income of Nu. 5181 (at 1980 prices) at the end of 7 FYP, is expected to more than double by the end of the 11 FYP.

CHAPTER4. EIGHTH PLAN OBJECTIVES, STRATEGIES AND OUTLOOK

Objectives and Strategies

Self-reliance

The central theme of the 8 FYP development programmes will be mustering of efforts towards achieving self-reliance as expressed by His Majesty the King:

 "National self-reliance in the Bhutanese context means ultimately to be able to stand on one's own feet, have the power of decision in one's own hands, and not be dependent on others."

The achievement of the goal of national self-reliance will largely depend on continued progress being made in human resource development and the application of technology appropriate to Bhutan's development needs. The expansion and improvement of education and technical training, and of HRD in all economic sectors, are therefore reflected throughout the 8 FYP, and geared to both public and private sector needs. While vocational training, particularly in technical fields claims high priority, improved management will also be addressed. Both as an essential tool for self-reliance and as an end in itself, the focus on HRD includes education and health as key elements. The 8 FYP, therefore, includes further investment in preventive medicines and improved health services, with continued efforts to maximize cost-effectiveness.

Investment in essential social services is balanced by investment in the economic sectors to increase GDP, personal incomes and government revenue. Economic sector growth will come through increased production and productivity, creation of employment opportunities, expansion of trade in terms of scale and diversified markets, and through hydropower development, for which there is immense potential. Investment in essential infrastructure, particularly the development and improvement of surface transport and telecommunications, will also receive high priority. In all these aspects of development, care will be taken to avoid over-exploiting the country's natural resources. Self-reliance will also be promoted through continued encouragement of local community participation, and of selective privatization and decentralization.

Sustainability

Sustainability is one of the main criteria in the 8 FYP for the selection of social and economic programmes and projects. It requires that all development is consistent with environmental conservation and cultural values, and that it enhances the capacity of the country to increasingly provide, from its own resources, the financial and other services required to support self-sufficiency. At least for the next ten years or so, social and economic development is likely to require continued external assistance, but towards the end of that period with sound policies and management, Bhutan will become increasingly self-sufficient in terms of skilled manpower and both capital and recurrent resources.

During the 8 FYP itself, the enhancement of national revenue to support development goals from both tax and non-tax sources will be an important objective. The tax base, 7% of GDP, is relatively low as compared to other developing countries.With regard to non-tax revenues, effective and prompt revision of electricity tariff rates, higher surpluses from public enterprises and gradual introduction of user charges are expected to yield a significant increase in revenues. These necessary reforms will be implemented with due consideration for equity, and without reducing the incentive to work or produce the goods and services that the country needs. For budgeting purposes a more conservative base-line scenario has been prepared. In the event that revenues exceed this base-line scenario, additional funds will be available for activities not currently budgetted for, or they will be used to reduce the budget deficit.

Preservation and promotion of cultural and traditional values

The preservation and promotion of Bhutan's unique cultural and traditional values will continue to be pursued in the 8 FYP.  These elements, highly valued in themselves by all the people, are also essential embodiments of the nation's identity. For a small country with neither military might nor economic strength to safeguard its security, this distinct identity  is seen as an important means to safeguard and strengthen the country's status as a sovereign and independent nation. A number of programmes are therefore included in the 8 FYP to foster Bhutan's rich spiritual and cultural heritage, which has given it strength and resilience over many centuries, and to ensure that it is not eroded in the process of modern development.

Nationalsecurity

Security for the country, its people and its governing body, to lead a life and a path of development of their own choice without unnecessary external interference, is an over-riding objective which will be strengthened as the economy grows. Bhutan's national security is also envisaged to benefit from continued membership of the United Nations and regional bodies, and from continued collaboration with its friendly neighbours and with donors. These valued relationships will continue to be fostered during the 8 FYP.

Balanceddevelopment

His Majesty the King has consistently stressed the need to secure balanced development throughout the Kingdom. Balanced development involves, as far as possible, providing equal access to basic services and facilities of comparable quality to all Bhutanese wherever they

reside in the kingdom. In the case of industrial and related income-generating activities, however, the location of enterprises will take account of geographical and other factors which influence comparative advantage. In the long term, it is to be expected that several of the existing larger growth centres will gradually develop, where sufficient land for urban and industrial

development is available, while smaller growth centres will develop in the Dzongkhags as communications improve and electrification expands.

Improvingthequalityoflife

Measures to improve the quality of life in Bhutan will be directed not only to raising the income- earning capacity of the majority of the population, but also to improving access to basic services such as education, health and facilities such as clean drinking water, sanitation and communications. During the 8 FYP, efforts directed towards this goal will also address issues that will further consolidate and improve equitable income distribution. For the rural sector, integrated rural development will be pursued wherever practicable.

Institutionalstrengtheningandhumanresourcedevelopment 

The strengthening of government institutions concerned with all stages of development from planning to implementation will be addressed during 8 FYP.  In both public and private sectors, there is a need to improve management as well as to supply the skilled manpower, currently in short supply, and to ensure its effectiveness and efficient utilization. The latter also applies to technical assistance which, unless used selectively, and matched by an appropriate HRD programme, may retard efforts towards increasing self-reliance.

The national HRD programme, for which further donor assistance is a very high priority, is a reflection of the needs of government agencies and of individual programmes and projects derived through the development of manpower planning during 7 FYP. During 8 FYP, further efforts will be made to improve the present,  arrangements and procedures for manpower planning in the public sector, as well as paying more attention to the needs of the private sector. In addition to the specific needs identified for training in the national HRD programme by sub- sector and field of training, arrangements in 8FYP for the public sector include training in agriculture, as well as trade and industry, construction and services, and for participatory involvement in health and education.

Decentralizationandcommunity  participation

Community participation has long been customary in a range of local activities from house- building to the construction and maintenance of religious and cultural buildings. In recent years, communities have become further involved in development work such as constructing feeder and farm roads, schools and health clinics, and without their support the costs of these services would be beyond government's limited budgetary resources. While it is the Government's objective to mobilize continued community participation for these essential services, and since 5 FYP to further  decentralise the functions on a selective basis, a corresponding effort has been made to enable local communities to determine the priorities for developments which affect them,  whether these are part of national programmes or of a limited local nature, and to have more control over their implementation.

The necessary institutional mechanisms for public participation such as DYTs and GYTs and the rules of procedure - Chathrims for DYT and GYT are already in place and the task now is to strengthen these institutions to make public participation more effective and satisfactory to those involved. Since 5 FYP, considerable progress has been made in decentralization to Dzongkag level, and during 8 FYP further efforts will be made to strengthen planning and implementation capacity at Gewog level (see Chapter 8). In-country training programmes will play an important part in this.

Privatisationandprivatesectordevelopment

The privatisation efforts made during 7 FYP will be continued during 8FYP (see Chapter 11). The privatization of some services such as agricultural input supply and produce marketing, or the provision of a rural water supply, provides opportunities for local participants or beneficiaries     to undertake these services on a cooperative basis. In other cases, privatisation provides new opportunities for individual entrepreneurs to undertake commercial activities initiated in the first place by the Government, or to develop new businesses in areas such as surface transport, in which private sector investment is encouraged by government investment in improving the infrastructure.

The Government's general role in 8 FYP vis-a-vis private sector development will continue to be that of promoting an `enabling environment', but in some respects more direct support will be needed. From experience during the 7 FYP, for example with the hotel industry, it is clear that the government will need to provide increased training for entrepreneurs, as well as for personnel in the financial institutions, and to offer guidance on business management, if the viability of private sector enterprises as well as the loan recoveries of the lending institutions is to be improved.

Macroeconomic Outlook for 8 FYP

NationalIncome,SavingsandPrices

The GDP for the 8 FYP is forecasted based on the past performance, future capacity utilization and investment, market expansion and new policy considerations..  Overall, GDP growth at market prices is expected to average 6.7% (see Table 4.2).  The specific assumptions for each sector are as follows:

Agriculture

Reviewing past trends, a growth rate of 2.5% per annum is projected for the sector. The positive factors which contribute to this growth rate are productivity gains and horticultural development. In livestock a decreasing trend in numbers is more than compensated for by increased productivity in terms of output and weights of animals. An increase of 3% per annum is projected. For forestry and logging, a growth rate of 2% per annum is projected using past trends and continuing emphasis on environmental sustainability.

Mining and Quarrying

After analyzing past trends, and considering additional requirements of limestone (due to expansion of PCAL (Penden Cement Authority Limited)) and commissioning of Dungsum Cement Project(DCP), a growth rate of almost 20% is estimated.

Manufacturing

Since 1980, the manufacturing sector was growing at an average by about 15% per annum, although the base was small. However, during the 7 FYP manufacturing growth slowed down to 9.1%.   Growth is projected at 12% per annum in  8 FYP after taking into consideration the expansion of PCAL and production from DCP.

Transport & Communications

Based on past trends and new expansion in communications, this sector is expected to grow by about 10% per annum.

Table 4.1 GDP estimates for the 7 FYP and projection for the 8 FYP by sectors at factor cost in 1980 prices (Fiscal Year)

8 Five Year Plan

(see PDF) 

Electricity

Based on expected new micro and mini-hydels, an underlying growth of 1.5% per annum is assumed. This would be boosted up by the anticipated tariff revision early  in  the 8FYP.  Further, with the expected  additional power generation in 2000/01 (Basochu) and 2001/02 (Kurichu), the overall growth rate of the sector could increase to 7% per annum.

Construction

From 1993 to 1995, this sector's contribution to GDP was substantial with a growth rate of 24% per annum. This was mainly due to the sewerage project and private construction activities.

Based on past trends and future investment on power sector projects and DCP, a growth rate of about 7% per annum is assumed.

Service sectors

Trade and commerce is projected to grow by about 4% p.a during the 8FYP. This is accounted for by general business activity and tourism.  Based on past trends, implementation of reforms in the financial sector and rise in the value of real estate, the finance, insurance & real estate sector is projected to  grow by about 10% p.a.

Based on past trends, the Government services sector is expected to grow by about 6% per annum.

The saving ratio measured as a percentage of gross domestic savings to GDP has been steadily increasing from 15% in 1992/93 to 31.5% in 1994/95. This trend is expected to continue in the 8 FYP stabilizing at about 33%. Private sector savings, mainly corporate savings, also show a marked increase and as a percentage of GDP, it  currently stands at around 32%.

Table 4.2        Estimates of GDP and other aggregates for the 7 FYP and projection for the 8 FYP

7 FYP ESTED.

Projection for the 8 FYP (1997-2002)

1_/ The CPI Index used here is different from the CPI Index of the CSO's Bulletin. The CPI  Index used here is  the average of three periods. e.g., the 1993/94 index is estimated by taking the geometric average.

Population size is estimated by population growth rates applied to the initial size at the start of the 8 FYP. The growth rate is expected to decline gradually from 3.04% in 1997/98 to 2.59% in 2001/02.

Inflation is targetted to decline to 7.2% by the end of 8 FYP. The rate is expected to track Indian inflation closely and growth in money supply is expected to be within tolerable limits. The growth in money supply is to be contained within 30%.

Balance of Payments

In order to forecast the Balance of Payments for the 8 FYP, the following assumptions were used (see Table 4.2)

ExportsofMerchandise

Exports to India and Third countries are projected to increase by 15 and 10 percent per annum, from 1996/97 to 2001/2002, respectively. The assumptions are based on past trends and future prospects. The increases resulting from the latter are due to enhanced production and exports of power, cement, ferro alloys, calcium carbide and horticultural products.

ImportsofMerchandise

Imports from India and Third countries are expected to increase by 15 and 10% per annum respectively during the same period. Based on past trends, it is estimated that there would a small increase in  per capita income and growth in aid-imports.

Servicesand Private Transfers - Receipts

The income from services and transfers is assumed to increase by 3% per annum with India and 12 percent per annum with Third countries. The main income earning sources with India are excise refund and travel. The growth from Third countries is largely accounted for interest received from  foreign reserves and Trust Fund investments from overseas, tourism, travel and inflows of Non-Governmental Organisations.

Servicesand Private Transfers - Payments 

The payments due for services and transfers are assumed to increase by 10% per annum to India and 12% per annum to Third countries. The payments to India are largely accounted for interest payments on loans, remittances by Indian workers, medical expenses, travel etc. The payments to Third countries are accounted for interest payment on loans, aid-imports, technical assistance remittances, official travel, diplomatic expenses etc.

Official Transfers

It is assumed that official unrequited transfers, in the form of grants, are expected to increase by 10 percent per annum from both India and Third countries. These grants are received for budgetary support, financing capital projects and technical assistance.

CapitalFlows

The capital flows are mainly divided into official and private flows. The official flows are expressed in terms of net flows i.e. inflows of loans minus repayment of principal.

The Current Account balance, excluding official transfers, will continue to be in deficit during  the 8 FYP. However, this deficit as a percentage of GDP, shows a declining trend during the Plan period from about 20.7% in 1997/98 to about 19.3% in 2001/02. When forecast of official transfers are added, the Current Account position is in surplus throughout the Plan period. The overall balance, after taking both current and capital accounts transactions into consideration, shows a healthy  surplus during the plan period. Gross foreign reserves increase at an average  rate of 11.9% p.a. during the 8 FYP. This is lower than the average growth rate of about 15% accumulated during the 7 FYP. Import cover, measured as a ratio of gross reserves to imports, remains at a satisfactory level, averaging about 13.6 months.

Table 4.3 Balance of payments estimates for the 7 FYP and projection for the 8 FYP

                                                                                                                    (Nu. in million)

7FYP

8 FYP projection

Other                                  2041      641      702       770      843       924            3880

Capital accounts                   1111       345      439       543      612      687            2626

Official loans (Net)            1269      429      483       543      612       687            2755

India                               1171      464       511      563       736      808            3081

Other                                100    -34.7    -27.8    -19.4    -123.    -120.       -326.20

Commercial loans          -157.80    -84.6    -44.2          0           0          0        -128.80

Foreign Direct                         0                                                                                0

Capital flow                             0                                                                                0

Errors and omissions              383                                                                                0

Overall balance                     2797       739      804       867      882      887            4179

Gross Reserves                   3979.9    6085    6888     7756    8638     9524      7778.09

Months Import Cover              13         14        14        14         13        13                13

Cur A/C (% GDP                               -20.6    -20.5    -20.1    -19.5    -19.3

Cur A/C (% GDP Incl

3          3           2          1          1

  Grants) Grantsd. Off.                                                                                                       

Public Finance

The Government's policy will be to enhance revenues and manage expenditures prudently and effectively. Its overall revenues from tax and non-tax sources are forecast to increase by about 8% p.a. during the 8 FYP.   The total revenue generated from tax and non-tax sources is forecast to reach Nu. 13000 m during the plan period.

The increase in total expenditures during the plan period will be kept in line with revenue generating potential and aid flows.  Overall during the Eighth Plan a fiscal defict of 1% of GDP is forecast.

Table 4.4 Summary of Public Finance estimates for the 7 FYP and projection for the 8FYP

(Nu. in million)

Memorandum items

Deficit (-)/Surplus (+)           -1.7     -3.3                  2.2      0.4       -0.2     -1.0     -3.6

Money, Credit and Prices

The Monetary Survey consolidates the balance sheets of the monetary authority and the financial system. It comprises three main items, namely, net foreign assets, net domestic assets and money supply (see Table 4.4).

The Money Supply is forecast to grow by an average rate of about 23% p.a. during the 8 FYP. The ratio of GDP to Money supply, also shows a marked increase from 27.8% in 1996 to about 39.6% in 2001. Saving deposits is assumed to increase by about 22 percent per annum. Longer term deposits or Quasi money, as a percentage of total money supply shows averages around

55.4 percent. This is slightly higher than the average of 54 percent recorded during the 7 FYP. This ratio, together with the ratio of GDP/Money supply are key indicators which are widely used to measure a country's efforts to promote the process of `Financial Deepening'. The latter is considered to be one of the important conditions required to stimulate private sector investment.

On the lending side, a large proportion of it is accounted for the accumulation of Net Foreign Assets, resulting from Bhutan's healthy gross reserves position. On Net Domestic Assets, it is also envisaged that joint enterprises and the private sector will continue to borrow prudently and judiciously to expand their activities. The changes in Other Items (net) is mainly accounted for by depreciation of the Ngultrum.

Table 4.5 Money and Credit - Estimates for the 7 FYP and Projection for the 8FYP

                                                                                                                               (Nu. in million)

7 FYP                                           8 FYP

  supply                                                                                                                                          

CHAPTER 5. FISCAL AND MONETARY POLICIES

Overview

It is widely acknowledged that sound and sustainable management of an economy relies significantly on its demand management policies which essentially consist of fiscal and monetary policies.

In broad terms, fiscal policy encompasses the Government's  revenue enhancement policy, efficient and effective expenditure policy both in terms of quantity and composition, policies that minimise transfers to inefficient public enterprises and non-priority agencies, and sound  financing policies that would support a sustainable level of deficits. The fiscal deficit as a percentage of the GDP is a parameter that will be closely monitored  to ensure that it remains within sustainable levels.

To complement sound fiscal management policies, the RGOB will also continue to put in place efficient and appropriate monetary policies during the 8 FYP. The Royal Monetary Authority(RMA) will play a key role in ensuring that monetary policies which are related to determining the allowable quantum of monetary growth, the level of foreign reserves, the level of credit and interest rates are in accordance with the sound management and long-term development of the economy.

Fiscal policies

Revenuepolicies

The latest statistics for 1994/95 show that the total revenue as a percentage of GDP stands at 22%. The current apparent bias in favour of non-tax revenues will be corrected at the beginning of the 8 FYP when a reclassification of revenues will yield a more realistic picture in which tax revenues constitute the majority of Government domestic revenues. During the 8 FYP, efforts will be made to enhance overall revenues, with special emphasis on raising the tax revenues from both direct and indirect sources.The following measures and strategies will be adopted:

-                General tax administration will be strengthened to increase compliance and provide greater efficiency in collection.

-                Broaden the tax base to ensure wider coverage.

-                Rationalise the import duty structure by replacing the current system of quantitative restrictions by a comprehensive but simplified tariff system. This will ensure transparency and liberalise international trading activities.

-                Introduce an income tax assessment system which will not only enhance revenues but also provide a more equitable payment of taxes.

-                Review and strengthen the existing tax structure with a view to improve it.

-                Introduce tax incentives to improve productivity and earning potential.

-                Review the current non-tax revenues such as user charges, licensing fees etc.

-                Promote institutional strengthening, through capacity building and provision of appropriate training programmes in the Division of Revenue and Customs.

In general, all revenue enhancing measures will be based on equity and fairness as well as efficiency. The combination of the above mentioned revenue measures is expected to yield an overall revenue package for the 8 FYP of about Nu 13000 m based on a low  revenue scenario (see Chapter 4 & 13). This gives an annual average increase in revenue of about 7.8% during the 8 FYP. When added to the foreign grants in the form of budgetary support of Nu. 800 m per annum, the total revenue for the 8 FYP is estimated to be Nu. 18103 m.

Expenditure policies

As mentioned earlier, the Government will exercise a prudent public expenditure policy. The main measures to be pursued during the 8 FYP are as follows:

-                Maintain a reasonable balance between domestic revenue and recurrent expenditure.

-                Improve sustainability of public services and  gradually reduce dependence on budgetary support.

-                In accordance with the above, wherever possible, the Government will privatise its activities and introduce user charges.

-                Salary increases for public employees will attempt to restore their remuneration to 1988 levels in real terms, subject to budgetary constraints.

-                Debt service payments both external and internal will be made on time and without any accumulation of arrears.

-                An adequate provision for supplies and materials will be made.

-                Transfers to public enterprises will be minimised and subventions to other agencies will be strictly monitored.

-                Adequate provisions will be made for operations and maintenance thus ensuring that completed capital projects are well maintained.

-                Capital projects will be selected on the basis of their impact on the national development goals set out in the plan, on sound socio-economic criteria and sustainability.

The total recurrent expenditure, including the counterpart financing of the development expenditure (10%) and an allowable deficit of 1% per annum, is estimated to be around Nu. 14777m.

DeficitFinancing

The overriding feature of RGOB's approach to public finances will be to limit the budget deficit to prudent and sustainable levels. This will guarantee macroeconomic stability and longer term development prospects. In order to maintain macro economic stability, the Government will resort to borrowing, if necessary, from the financial institutions and the general public through the issuance of government bonds. Direct borrowing from the RMA will be discontinued. During the Plan period, the average deficit to GDP ratio will not be allowed to exceed 1%.

The Government will continue to seek external assistance from its development partners. It's first priority would be to obtain the maximum amount of this external assistance in the form of grants. It will seek concessional terms for the remainder. The percentage of the total external assistance, in the form of grants and concessional loans, to overall expenditure is expected to average around 55 percent.

Monetary policies during 8 FYP

The responsibility of conducting the most appropriate monetary policies lies with the RMA. Its objectives of maintaining price stability will be carried out by maintaining an established exchange rate link with the Indian Rupee and by effectively controlling the money supply. It will stringently observe the real sector and monetary sector, and if it discovers a significant discrepancy between the two to cause macroeconomic instability, then it will take necessary and timely action to absorb any unwanted excess liquidity from the system.

In addition, its other roles of reserves management, bank supervision and banking and financial sector reforms will be carried out with improved efficiency and effectiveness.

In the present context, the money supply is anticipated to grow by about 25% over the next few years, which is higher than the projected growth of nominal GDP.  In the past, the monetization of the economy absorbed much of the impact of any increase. However, in the future, the accelerated growth in money supply(M2), measured in terms of currencies, demand and savings deposits, will translate into major macroeconomic imbalances (see figure 5.1).The responsibility for ensuring a stable growth of money supply in relation to GDP growth during the next Five Year Plan lies with the RMA. The RMA has already laid the groundwork for proper monetary management in the 7FYP  by introducing monetary policy instruments such as the RMA Discount Bills and Treasury Bonds, strengthening prudential norms and supervision, and increasing competition in the financial system.

Excess liquidity

-                Introduction of government securities as a means to finance the Government away from the RMA. This will prevent further build up in the liquidity overhang and contribute to its sterilization, as well as developing the financial market.

-                Consideration of deregulating the Foreign Exchange Regulation. The RMA is working towards removing the exchange restriction on current international transactions with third countries, which will ameliorate the monetary effects of the build- up in reserves.  Furthermore, the RMA will continue to use the hard currency reserves to finance Indian rupee deficits.

-                Actively use the RMA Discount Bills to sterilize liquidity and implement monetary programme.

Credit policy

Interest rate policy

Maintaining a real rate of interest is an essential policy for ensuring the viability of financial intermediation and the soundness of the financial institutions. The present system  of administratively determining interest rates does not reflect the actual cost of financial intermediation and results in the misallocation of resources.  It has also been partly responsible for the growth of excess liquidity in the financial system. Therefore, to deepen financial markets

The RMA has taken steps to develop a system of open market operations based on RMA and Government securities. The interest rates which attach to the RMA Discount Bills and Government Bonds will serve as the “benchmarks” for short and long term interest rates, respectively.

Prudent norms and supervision

In order to improve mobilisation of resources and quality of credit allocation, or in broader terms, financial intermediation of the financial institutions, the RMA has also initiated the process of strengthening prudent norms and supervision. The implementation of the provisions of the Financial Institutions Act (1992) will be completed in the 8FYP. In addition to strengthening the portfolio of financial institutions, the RMA will seek to increase autonomy and competition in

the financial system by limiting its intervention and by creating a more even playing field among the four financial institutions namely Bank of Bhutan, Royal Insurance of Bhutan, Unit Trust of Bhutan and the Bhutan Development Finance Corporation.

Enhancingcompetitioninthe banking system

The past decade has witnessed substantial financial deepening and rapid expansion of the Bhutanese financial system. The growing monetization of the economy has created a need for greater competition and increased efficiency in financial intermediation. At present, the banking transactions involve a considerable loss of time and productivity. As a result, a significant amount of currency lies outside the financial system. Therefore, a second commercial bank is inevitable to foster greater competition and efficiency in financial intermediation. The most viable alternative found was to convert the Unit Trust of Bhutan into a commercial bank.

Conversion process is underway and it is expected to be completed before the commencement of the 8FYP.

A favourable financial system will help to achieve one of the central objectives of the Plan - increase the private sector's contribution to growth and development, combined with withdrawal of  the Government from most of the commercial activities.

Exchange system

Since its introduction in 1974, the Ngultrum has been pegged at par to the Indian rupee, which circulates freely within Bhutan. Cross rates vis-a-vis other currencies are based on the rates prevailing for the Indian rupee. The existing system will continue as trade with India still accounts for over 80 percent of total external  trade. Although large capital transactions with India must be approved by the Ministry of Finance, there are no restrictions on payments for current transactions between Bhutan and India.

In support of other monetary and fiscal policies, the RMA in the 8FYP, will gradually relax the controls on hard currency transactions in view of the high level of hard currency reserves and good balance of payments prospects. The deregulation will help in diversification of foreign trade, thereby reducing the pressure on Indian rupee reserves and also ameliorate the monetary effects of the build- up in hard currency reserves.

CHAPTER 6. EXTERNAL ASSISTANCE

Overview

During the last thirty-six years,  impressive achievements have been made in  the living standards of the Bhutanese people. Such noteworthy developments have been possible largely through the support of Bhutan's

development partners. Over the years, there has been a marked increase in development support to Bhutan in terms of both magnitude and sources of aid (see Figure 6.1 and Table 6.1). Though the composition of aid has been changing, the aid received has been on favorable terms with an increasing degree of concessionality.

In the early 1980s, aid amounted to around 50% of GDP but with the rapid economic development that has taken

place over the years, the aid/GDP ratio fell to below 20% in 1989-92. However, during  the first three years of 7 FYP, the aid/GDP ratio registered a rise as a result of a few large infrastructure projects, namely, Domestic Telecommunication Network, Support to Urban Infrastructure Programme, Kurichu Hydropower Project and Paro Airport Development. Further, capital requirements are expected to accelerate in the forthcoming years as significant investment flows are anticipated in support of large power and cement projects.

Historically, India has been Bhutan's main development partner. The first two Five-Year plans were wholly implemented with financial and technical assistance from the Government of India. From the third plan onwards, aid from the Government of India has been increasingly augmented by assistance from other bilateral and multi-lateral sources. At present, Bhutan receives external assistance from as many as 15 multilateral organizations, 19 individual donor countries (bilateral assistance), 4 Financial Institutions (ADB, World Bank, IFAD and KFAED) and some non- governmental organizations( NGOs).

Assistance during 7 FYP

In the first three years of 7 FYP, Official Development Assistance flows to Bhutan  amounted to US $262.3 m. Of this, multilateral donors' contribution amounted to US $70 m. Bilateral donors' contribution amounted to US $173.7 m, and the contribution of NGOs was US $18.6 m. A breakdown of external assistance from 1992 to 1994 is shown in the Table 6.1 below.

CHAPTER 7. HUMAN RESOURCES MANAGEMENT AND DEVELOPMENT

Overview

CHAPTER8. DECENTRALIZATION AND PEOPLE'S PARTICIPATION

Background

The launching of the first plan in 1961 saw a modern administration system come into existence with the establishment of the Development Wing, otherwise Secretariat, and the creation of 10 sectoral departments. The post of dzongdags, responsible for administration, revenue collection and protocol functions, was formalized. For the next twenty years,  responsibility  for implementing the expanding development activities set out in the five year plans lay solely with the central administration. By the end of the 4 FYP, however, the need was felt to devolve the increasing task of development to the dzongkhag administration to increase local participation. This realization led the Royal Government to adopt the policy of decentralization as a major objective in the subsequent development plans, recognizing the benefits of enabling the people to be active participants in the planning, implementing and managing of local development programmes which have direct bearing on their lives.

With the commencement of the 5FYP in 1981, the dzongkhag administrations  were  made entirely responsible for their development programmes, besides maintaining law and order. Following the decentralization of responsibility from central agencies to the dzongkhags, the Government created the Dzongkhag Yargye Tshogchung (District Development Committee) in each dzongkhag, with elected members who are actively involved in the preparation and implementation of their own development plans.

In 1990, His Majesty the King commanded that the 7FYP programmes should be specifically gewog-based, and that future plans feature distinct sectoral strategies at gewog level. Further, in 1991, the institution of old Gewog Zomdue (meeting of households), headed by the Gup, was revitalised and formally established as the Gewog Yargye Tshogchung ( Block Development Committee) in each of the 196 gewogs with 2,589 elected members across the country.

Rationale for Decentralization

Since the end of 4FYP, the policy of decentralization, people's participation and self-reliance have been central to Bhutan's development philosophy. Underlying Bhutan's decentralization initiative is the belief that the effective involvement of communities in joint decision making, planning, implementation and management of activities which directly affect their daily lives is inherently more efficient administratively, socially and economically, than the activities being directed by central government agencies which may be remote from the aspirations and problems of the communities. It is also seen as a means of supporting and ensuring a balanced and more equitable development. While the past experience of decentralization of functions has largely reflected a devolution of central government responsibilities to local government institutions at dzongkhag level, recent policy directions in favour of privatization have been to reduce the role of the government in development, and, instead, to involve private enterprises, particularly in the commercial ventures to effect further decentralization.

The topography of the country has also lent weight to the need for decentralization. While physically   integrated   by   an   expanding   road   network   and   helped   by   an   improving telecommunication system, it still takes days to reach many parts of the country from Thimphu. And in winter and monsoon periods, many areas remain inaccessible for weeks.

Functions Decentralised

The functions to be decentralised to dzongkhags were set out by the Planning Commission in 1979. The central directorates and ministries remained accountable for the fulfillment of national goals in their respective spheres. The activities transferred to the Dzongkhag Administrations included :

Agriculture

All field and regional agricultural and irrigation services apart from research centres, training institutes and some projects which cut across more than one dzongkhag.

LivestockServices

All field and regional animal husbandry activities and services other than training institutes and research centres.

Forestry Services

Community and social forestry management.

Health

All services excluding referral hospitals and training institutions.

Education

All schools excluding college and training institutions.

Trade,Industry and Commerce

All local small scale industries, trade and commerce activities. In Power sector, maintenance and management of local electricity supply and mini-micro hydels.

RoadandTransportation

Implementation and maintenance of feeder and farm roads and transport services.

CommunityServices

Implementation and maintenance of drinking water and maintenance of suspended/suspension and traditional bridges,footpaths and mule tracks in rural areas.

Other Services

General administrative responsibilities such as collection of revenue, census and immigration, civil administration, socio-cultural activities.

It was recognized that decentralization would require a major training and capacity building programme, but the pace of the exercise left little time for this. Before decentralization began in 1981, the total dzongkhag staff strength was 361 (1981) and by 1996 there were 5,908 as per the RCSC record. There were no technical personnel in 1981, hoever by 1996 there were 3,216 out of the 5,908 district level staff. Training of the sectoral staff transferred, and of additional personnel, to strengthen the Dzongkhag Administrations, has,  therefore,  been  a  major programme during the fifteen years that have followed.

While the inventory of functions decentralized in early 80's is still valid today, the volume of activity undertaken in furtherance of many of them has greatly increased since it was drawn up. Some programmes implemented with the active participation of local communities are the construction and maintenance of community schools, feeder roads, mule tracks, water supply schemes, health service units and irrigation channels. In fact today, the only activities that are not fully decentralized are those which require coordination across dzongkhag boundaries, or which involve specialised services or economies of scale. Dzongkhag staffing levels have also increased since 1981, the total, including teachers, rising to 5,908 in 1996, or approximately 50% of the total civil service. An important recent addition was the appointment of a graduate planning officer in each dzongkhag administration.

Dzongkhag Administration

The dzongkhags continue to discharge the civil function on behalf of the Ministry of Home Affairs. This responsibility embraces the maintenance of law and order, land records, census and revenue collection. From the 5 FYP onwards, Dzongkhag staff have become increasingly involved together with the DYT's in the planning and implementation of the successive five year development plans. Their responsibilities include:

-                Preparation  of  the  annual  plans  and  programmes  and  related  budgets  of  the dzongkhags and the execution of the same;

-                Preparation  of  the  Dzongkhag  Five  Year  Plans  and  implementation  of  all approved projects and programmes; and

 -                Monitoring and review of programmes in the Dzongkhags.

With the issuance of the Guidelines for Decentralisation in 1993, coordination of the development functions was formally assigned to the Ministry of Planning, and in 1995 the Dzongkhag Planning Officers were made responsible both administratively and functionally to the Ministry of Planning.

Prior to the 5 FYP, Planning process was centralized and it was a top down exercise. However, with the initiation of the decentralization process from the 6 FYP onwards, there was a marked change, which set the pattern for preparation of the 8 FYP. The planning process involves the setting of the national objectives and guidelines for plan preparation by the Ministry of Planning in consultation with the sectoral ministries and dzongkhags with the final endorsement coming from the Planning Commission. The national objectives and guidelines are finally prepared and circulated, incorporating all the views and recommendations from the dzongkhags and central government agencies by the Ministry of Planning. With the distribution of the Guidelines, the ministries and the dzongkhags initiate their respective plans and programmes which begins virtually at the village level. Based on the local needs and experience, the various levels of government then become involved in the planning process starting from the Village Zomdu and then, in ascending order, the Gewog (GYT), Dzongkhag (DYT), sectoral Policy and Planning Divisions (PPDs), the Technical Committee and the Planning Commission. The proposals are reviewed in numerous consultations between the concerned sectors , the relevant agencies like the Ministry of Finance, Ministry of Planning and the Royal Civil Service Commission before it is finally put up for approval to the Planning Commission and to the Government.

Increased Involvement at Gewog Level

The Gewog is the level where nearly all government's development efforts ultimately converge with those of local people themselves. The decision to establish a GYT in each gewog is a recognition of this fact and of its essential role in taking the decentralization process still closer to the people. Its membership consists of the Gup as Chairman, together with Mang Aps/Tsogpas and Chipons. The Head teachers of local community/primary schoolfunctions as Secretary and other technical representatives at the Gewog level attends as as observer in accordance with the Gewog Yagye chatrim. The functions laid down in chathrim include:

-                identifying, reviewing and prioritizing development activities,

 - identifying constraints in implementation, and 

-                ensuring participation of the people through Zhapto-Lemi in timely and regular maintenance of local services and community institutions.

Despite the prevailing shortage of labour, His Majesty the King commanded abolition of Goongda Woola during 7 FYP as being inconsistent with the national ethic, emphasizing instead on the role of Zhapto Lemi, a voluntary and free labour contribution by the people for implementing development programmes in their own villages and gewogs which benefit them directly. The responsibility for mobilizing and deploying Zhapto-lemi would be fully vested in the DYT's and GYT's under a revised chathrim.

Issues to Be Addressed During 8 FYP

Enabling people to involve themselves in programmes which affect their daily lives is an end in itself. In most respects, however, decentralization itself is a means rather than an end, and government efforts to increase its  effectiveness and efficiency to contribute to development objectives will  continue  to  receive  high  priority.  In  this  regard  a  number  of  issues  will  be addressed on priority basis during 8 FYP relating to human resource and institutional development..

HumanResourceDevelopmentandCapacityBuilding

Trained staff, particularly at professional and higher technical levels, is still inadequate in many sectors in all dzongkhags. As such, further in-country and over seas training will be given high priority. Steps will also be taken to ensure that an appropriate number of returning trainees from various HRD programmes are posted to the dzongkhags, rather than being retained in the headquarters.

Improvements in management are needed and will be pursued in decentralized institutions, as well as in central government agencies, with emphasis on in-service training  by  the  Royal Institute of Management (RIM). The question of establishing a cadre and career structure for dzongkhag administrators, while often recommended, still has to be addressed. While upgrading the capabilities of Dzongkhag Planning Officers, whose enhanced abilities will also benefit the DYT's and GYT's, consideration will also be given to the creation of a professional cadre for planners incorporating economists and statisticians, which would, amongst other things, help to ensure the optimal allocation of economic planners among central agencies, sectoral ministries and the dzongkhags.

In view of the importance of the Gup as chairman of the GYT and also a member of the DYT, consideration will be given to election for office for a longer period than three years as at present, to further training in the exercise of his or her development functions, and to the provision of simple office accommodation, where this is not available.

InstitutionalStrengtheningandProcedures

One aspect of decentralized systems is the existence of organized cooperatives based mainly on commercial undertakings and activities. Such organisations are encouraged to improve the efficiency and cut down on production cost, so that the low income farmers could increase their marginal profit. The water users’ associations in the irrigation schemes and milk producers and potato growers cooperatives are some that have come up over the years. These have helped the farmers to manage their irrigation schemes effectively and marketing their produce by organising transport on a cooperative basis. With such developments, the question of whether establishing a legal framework and an institutional structure to register and guide such enterprises is necessary and pertinent needs to be addressed during 8FYP.

Greater attention will be paid to strengthening the linkage between sectoral ministries and other agencies in Thimphu and Dzongkhag professional staff to ensure optimal use of resources and, specifically to ensure that specialized services are readily available when called upon to support decentralised activities. Matters not covered in the Decentralization Guidelines issued by the Planning Commission in 1993 will be examined and their merits considered for incorporation and implementation.

In order to further enhance dzongkhag level capacity for planning, implementation and monitoring, additional efforts will be made to improve the information data base. This will include strengthening the linkage between the CSO and the Dzongkhag Planning Officer, and until such time as a qualified statistician is provided to each dzongkhag, the provision of basic statistical training to all staff involved with the collection, compilation, storage and retrieval of essential data is deemed important. This will be assisted by the computerisation of data and records and automation of dzongkhag offices together with improved telecommunication links with key central agencies.

Throughout the decentralisation experience, budgetary limitations have been a widely-felt constraint. While the establishment of an improved financial management and accounting system with appropriate links between central and dzongkhag accounts, needs to be addressed, there is also the need to  provide adequate financing of programmes at the dzongkhag level 

On the eve of 8 FYP, the main institutional mechanisms and some infrastructure are in place to provide a sound foundation for the growth of decentralisation. There is increasing consciousness of the decentralisation process as a national priority both in the public sector and among the rural leaders. It is now a question of building effectively and efficiently on these achievements. One of the expected benefits of decentralization is a reduction in bureaucracy. To fulfil this expectation, further efforts will need to be made to streamline procedures, and to identify and reduce unnecessary bureaucracy. Apart from management training, one of the important ways of promoting this will be to encourage civil servants,to participate more fully in  the  effort  to improve management at all levels.

CHAPTER 9. ENVIRONMENT AND DEVELOPMENT

Bhutan's Natural Heritage

Located in the Eastern Himalayas, Bhutan is one of the ecological wonders of the world.  The country straddles two biogeographical realms: the Palearctic realm of the temperate Euro-Asia and the Indo-Malayan realm of the Indian sub-continent.  The result is a country rich in biodiversity, with its natural forest cover largely intact. The biomes in Bhutan stretch from sub- tropical in the south (100m ASL) through temperate in the central interior, to an alpine zone in the north (7550m ASL).  Animals such as the tiger, elephant, one-horned rhinoceros, Asiatic water buffalo, pygmy hog and the rare golden langur exist in the lush tropical forests of the South.  The snow leopard, blue sheep  and takin are found in the cool forests and alpine meadows of the North.  There are over 165 species of animals (mammals), and more than 770 species of birds have been identified.

Within Bhutan's borders, one can find over 60 percent of the endemic species of the Eastern Himalayan region.  In addition, Bhutan's rich flora include over 50 species of Rhododendrons, and over 300 species of medicinal plants, mostly alpine, that are used in traditional herbal medicine.  As a result, Bhutan has been declared as one of ten global "hot-spots" for the conservation of biological diversity.  Many ecologists believe that Bhutan represents the last best chance for conservation in the Eastern Himalayas, a region considered to be of critical importance to the global efforts to conserve biological diversity.

Conservation Ethic

The preservation of the country’s rich biological diversity can be attributed to two factors, the enlightened leadership and the strong conservation ethic of the Bhutanese people.  Conservation is a central tenet of Buddhism.  Buddhism believes in preserving nature and giving back to the earth what one has taken, and also in the sanctity of life. The importance of protecting nature in all its manifestations has permeated Bhutanese consciousness and has become integral to the Bhutanese way of life.  Therefore, preservation of the environment, as well as of sacred and cultural heritage sites are an important and an integral part of the Bhutanese value system.

His Majesty the King Jigme Singye Wangchuck has stated that :

"Throughout the centuries, the Bhutanese have treasured their natural environment and have looked upon it as the source of all life.  This traditional reverence for nature has delivered us into the twentieth century with our environment still richly intact.  We wish to continue living in harmony with nature and to pass on this rich heritage to our future generations."

 Ever since embarking on its first socio-economic development planning, RGoB's  policy has been to ensure that the process of development in all its aspects should be consistent with maintaining the environmental and cultural integrity of the country. This guiding principle is the essential basis for Bhutan's sustainable development strategy, which was  elaborated further in the 1990 Paro Resolution on Environment and Sustainable Development.

An important consequence of the enlightened leadership over the years is that over 72% of the country is still under forest cover, and in response to more recent measures, 26% of the total land area is now under protected area management (see Map...). In 1995, the 73rd session of the National Assembly ruled that the country must maintain not less than 60% of the country under forest cover for all times to come.

Environmental Challenges Ahead for Bhutan

Bhutan visualizes many challenges in the next century.  The country is small, the terrain extremely rugged, the economy is rural based and there is very limited agricultural land with overall scarcity of trained manpower and other resources required for development. At the same time, the process of modernization is creating new demands upon the country's natural resources.

As yet, Bhutan has little to sell to the outside world to pay for its numerous needs.  Foremost among these needs is the cost of financing development.  The RGoB is committed to providing increased access to essential services such as health, education, transport and so on. The cost of providing such services is very high in Bhutan as  many of the people live in scattered and remote settlements that are isolated from each other and from administrative centres.

The policies that preserve Bhutan's rich  natural beauty and biodiversity, restrict the commercial exploitation of the raw materials upon which most national development schemes are based in other countries.  In addition to tight restrictions on commercial logging aimed at preserving the forest cover, soil and water resources, exploitation of the country's mineral resources is severely regulated. The Mining Act of 1995, requires stringent environmental impact assessments to be conducted for all mining projects 

While 85% of the population earn their living from the land, only about 7.8% of the land is under cultivation and of this a high proportion is on slopes that are too steep for cultivation without severe risk of erosion. Of the total area under cultivation, nearly 30% is under Tseri or other forms of shifting cultivation which, on environmental grounds, is to be phased out. As there is no evidence of an equivalent area suitable for permanent cultivation, the phasing out of shifting cultivation is a major challenge which is going to be addressed throughout the 8FYP.

Livestock, owned by 90% of rural families are an important source of meat, milk, draught power and manure. At present, pastureland composes around 3.8% of the land area which is supplemented by forest forage and fodder as feed for the cattle. In the absence of adequate reliable data, there is some doubt about trends in livestock numbers, but during 8FYP the threat of potential damage to forest cover and to pastures through over-grazing will need to be kept under review.

During 8FYP and beyond, the pressure on land and other renewable natural resources (See Chapter 15) will inevitably grow as a result of increasing human population. In the face of limited agricultural land, and the need to extend and improve social and other services, the recent  increase in the human population growth rate, now estimated at 3.1%, is a tremendous challenge. The increase is primarily due to the dramatic success of the programmes of health sector (see chapter 28). This increase in population will present another set of equally daunting challenges in the urban areas.  Though only 15% of the population currently resides in urbanized areas, that proportion is expected to increase dramatically as a result of the combination of the "pull" of urban communities in terms of the employment and social opportunities they offer, and the "push" of the rural areas arising from limited non-farm employment, and social prospects.

Based on the plausible assumption that half of the national population increase will occur in urban areas, Bhutan's current urban population of slightly over 100,000 will approach 400,000 by the year 2020.  The next twenty-five years will thus see an unprecedented stress on the country's urban and peri-urban environments.  Such surges are common in the first phases of development and Bhutan does not have to look far for examples of the problems that ensue.  In Bhutan's case, however, the adverse potential is exacerbated by the fragility of most of the land upon which that growth is destined to occur.  Given the country's predominantly mountainous terrain, urban growth is constrained by a shortage of suitable, level ground.  Bhutan's current urban centres have sprung up where they could, mostly in major river valleys.  The narrowness of most of these valleys has severe environmental implications for most urban sector activities such as housing construction, road building, and the provision of sanitation services.

To date, Bhutan's urban settlements have sprung up with only minimal urban planning.  Town planners were simply not prepared for the dramatic increases in urban populations that have come to pass in the past two decades.  Now that they have been firmly established, Bhutan's urban areas will continue to grow and be augmented by additional centres that result from new industrial enterprises.  Within the next ten to twenty years, a dozen or more nascent population centres can be expected to be affected with the same ailments that have come to plague Thimphu and Phuntsholing.  The pressure on natural resources and pollution from urbanization will be tremendous if facilities like solid and liquid waste treatment and management are not provided. Standards have to be set for emissions of pollutants in soil, water, and air to safeguard urban population against health hazards.

To avoid slums and shanty towns from developing, there is an urgent need to provide urban housing for the low and middle income groups.  There will also be a great pressure on the government to provide educational, health, and recreational facilities, all of which will have considerable impact on the environment through polution and  pressure on natural resources. There is, therefore, a compelling need for integrated rural/urban planning, which must be addressed in 8FYP and beyond. Not only are the problems of the one interconnected with those of the other, their mutual solution depends, in large part, on the successful resolution of shared concerns.  This is especially true in the light of the fact that the government's agenda for sustainable development have both industrial and agricultural components which are interwoven.

In spite of these many challenges, and limited economic opportunities,  the RGOB has made it a policy to avoid over-exploitation of its forests and minerals. The RGoB has instead chosen to forego immediate economic gains and has placed a higher priority on the conservation of natural resources.

National Institutions in the field of Environmental Conservation

Nature Conservation Section

The primary responsibility for nature conservation activities falls on the Nature Conservation Section (NCS) of the Forestry Services Division.  The NCS maintains the protected areas and ensures that forests are protected.  The main objective of the NCS is to conserve Bhutan's rich biodiversity in line with the RGoB's policy of sustainable development and environmental protection.  The NCS is divided into three units, the Biological, the Geographical Information Systems/database management unit and the Management/Planning unit.

The biological unit conducts biodiversity surveys in protected areas.  To date, surveys have been completed for two national parks, the Royal Manas and the Jigme Dorji National Park, and work has currently been started in the third park, the Black Mountain National Park.  Critical surveys of the Phibsoo, the Kholong Chu and the Trumshingla National Parks have also been initiated.

The Nature Conservation Section faces human resources, and financial constraints in carrying out its mandates.  In addition to the large costs of maintaining protected areas and preparing management plans, there is also the need to provide protection to the endangered species from the onslaught of poachers.  Of late, many anti-poaching squads have been launched 

Until the late 1980's, the RGoB felt that as conservation activities were being carried out by the relevant Ministries such as the Forestry Services Division, there was no need for the establishment of a separate national coordinating agency. Since then, the Government has recognized that environmental related issues are cross-sectoral in nature and the need for a national agency was recognized

TheNationalEnvironmentCommission(NEC 

The National Environmental Committee was therefore set up in 1989 and later upgraded as the National Environment Commission. The composition of the NEC and its functions are outlined in Chapter 31.

To implement its mandate effectively, the NEC works in close collaboration with the line ministries and the dzongkhag administrations. The National Environment Commission Secretariat is headed by a Deputy Minister.  This Secretariat plays a key role in promoting sound environmental policies and investments and carries out the mandates given to it by the National Environment Commission. This Secretariat, however, is at an early stage of development  and requires significant institutional strengthening in order to carry out its mandate  effectively.

As outlined in the 1990 Paro Resolution, one of the ultimate objectives for the NEC is to draft a National Environmental Strategy (NES), a dynamic, long-term strategy for bringing about sustainable development through improved environmental planning, policy-making, and management. Since the state of Bhutan's future natural environment will be closely linked to the way its natural resource base is exploited, it is imperative that the National Environmental Strategy emphasizes not only the optimal utilization of the country's natural resources, but also the possibility of alternative utilization, especially in the industrial sector.  Such an approach is dictated by Bhutan's inherent smallness and its mountainous environment, both of which place severe limitations on its absorptive capacity. It is therefore critical that a concerted emphasis be placed on integrating planning activities in those sectors involved primarily in the development of Bhutan's natural resources. If done effectively, the result will be a blueprint that facilitates the adoption and evolution of sustainable natural resource management systems in line with the sustainable development approach adopted by Bhutan.

BhutanTrustFundforEnvironmentalConservation

Bhutan has received generous support from donors in the conservation and sustainable development fields.  However, the country has suffered from the lack of continuity in project funding that results from fluctuating budgets, which often lead to projects ending before their benefits have been fully realized. When adequately completed, however, income- generating projects can derive support from the revenues created. However, this is not the case with environmental conservation projects.  With a few exceptions, a national park will not be paying its way in the short term, and may not do so in financial terms even in the long-run.  The economic benefits of exploiting the forests of Manas National Park, probably one of the most important reserves in South Asia, would in the short term generate greater revenues than setting it aside as a national park.  In setting aside 26 percent of its land area to conserve the rich natural heritage of the Eastern Himalayas, Bhutan hopes that its partners in development will defray some of the costs of maintaining these protected areas.

To this end, the RGOB has established the Bhutan Trust Fund for Environmental Conservation, which can well prove to be an excellent role model of how the world community can effectively assist countries in making major commitments to the global environmental efforts.  This Trust Fund was established in March 1991 as an innovative financing mechanism which will help Bhutan continue conservation activities and ensure that the country can uphold its commitment to the environment in spite of the pressures to reduce conservation activities and focus on economic development. As of beginning 1996, six donors contributed US$ 17.4 million to the Trust Fund (see Table 9.1) 

At the 5th Round Table Meeting in Geneva, the World Wildlife Fund drew attention to the limitations of project-by-project funding and  urged support over the long term for initiatives such as the Bhutan Trust Fund for Environmental Conservation. It is also Bhutan's hope that endeavors such as its Trust Fund will be supported, as funding for such projects will ensure that the weight of global conservation does not fall on small countries like Bhutan who have much more immediate needs at hand.

CHAPTER 10. WOMEN IN DEVELOPMENT

Overview

Bhutanese women constitute 48% of the country's total population and play a major role in the development of the country. They are actively involved in all areas of economic, political and social life as farmers, entrepreneurs, decision makers, doctors, engineers and home-makers.

Bhutanese women do not suffer from gender discrimination as they have equal status with men and enjoy the same level of freedom under the laws of the country. In fact, the predominant inheritance laws are particularly favourable to women, and most households are headed by women. Their participation in the decision making fora such as Zomdus (community meetings)  at the grassroots level is as high as 70%. Participation of women in the other decision making fora like the district and block level development committees is also being actively promoted and is increasing. Positions in the higher levels of Government and decision making, in which      women are not yet adequately represented, are open to both genders, and placement of women in the higher strata of government will continue to be encouraged. In general, the level of women's involvement in the decision making processes is increasing as may be illustrated by the representation in the National Assembly and this presents a very conducive environment for enhanced integration of women in the socio-economic development of the country.

Employment

Agricultural Secto 

Currently, about 62% of women are involved in agriculture and their contribution to the production cycle is  substantial. The division of labour by gender is not rigidly fixed although ploughing is generally regarded as man's work while house-keeping is considered the woman's domain. Promotion of an efficient and productive agricultural sector can play an important role in improving the economic status of women and thus of the household as a whole. Although, at present, there are only a few female agricultural extension workers,  the scenario will soon change greatly with the National Resource Training Institute (NRTI) providing training to both the sexes. About 11 percent of the institute's enrolment today is made of female students covering all the extension services of the RNR sectors.

Public Sector

In the 1960s, there were hardly any women employed in the public sector, but the participation rate of women is now around 16% and it is rising rapidly. There is no discrimination in terms of opportunities, salaries, benefits or career development prospects. Although the sector employs 13,566 people, the number of women holding senior management positions is comparatively small, largely due to the low recruitment in the earlier years. This is due to availability of fewer educated women in the earlier years as a result of physical constraints which made educational institutions, mostly available only outside the country, almost inaccessible to Bhutanese students especially  girls.  However, the number of women at the middle and lower levels of the civil service, is increasing significantly. One of the main factors contributing to this has been the enhanced accessibility of education institutions and the increasing enrolment rates for girls, which has given rise to a higher percentage of women possessing adequate education to enter the public sector.

Private sector

In terms of distribution by economic activity, the percentage of women in the private sector has been very small in the past. However, at present, there is a visible upward trend in the number of up-coming women entrepreneurs in many spheres of production and service activities.

The initiative to increase and enhance women's representation in business has been boosted by the activities of agencies such as the National Women's Association of Bhutan (NWAB) and the Bhutan Development Finance Corporation (BDFC). NWAB plays a major role in providing vocational training, basic skills and literacy, and nutritional and health training to encourage and promote women's role in the development activities. The BDFC with its urban as well as rural credit programmes for industrial development, commercial farming and other rural activities, has a total clientele of 10,000 out of which 32% are women.

An increasing number of women both in the rural and urban areas are gainfully employing themselves in order to improve the economic well-being of their families. However, the involevement of women in the private sector is greatly hindered due to lack of entrepreneurial skills. Most entrepreneurs, both men and women, do not have the necessary experience in business management as industrial and commercial development are very recent phenomena. On the whole, women's participation in the private sector still needs to be given more impetus, and this is being provided by government programmes designed to promote entreprenurial skills both for men and women.

Access to services

Education

Education in Bhutan is free and without any discrimination. In spite of limited resources, the strong drive by the government to encourage enrolment of children in schools increased primary coverage to 72% in 1995. A review of the enrolment pattern for the technical and vocational institutions also shows interesting and encouraging results. The increased percentage of enrolment of girls in technical and vocational institutions is a direct reflection of the RGoB's recognition of the importance of promoting the involvement of women in all aspects of the country's development. This also reflects the increasing interest amongst girls themselves in technical and vocational education. Their selection of an increasingly wide choice of subjects will consequently increase their participation in the overall development of the country.

The enrolment of girls at 43% is one of the highest in the SAARC region as well as in the developing countries. Nonetheless, RGOB is making further efforts to increase enrolment especially at secondary and college levels. While girls' enrolment in community and primary schools is as high as 43%, it is only 20% at the college level. Parental concerns regarding the well-being of girls still make it necessary for the government to locate schools closer to communities and also to provide boarding facilities.

Health

Maternal and child health have always been accorded high priority by the government and with the assiatnce from the interanational organizations, there has been a rapid expansion of health infrastructure, installation of modern equipment and training of personnel for mother and child health services. These efforts have contributed towards the impressive achievements made in the quality of life enjoyed by  the women in Bhutan today. Health programmes made particularly significant impact between the years 1984 and 1994, resulting in the reduction of many health hazards for mother and child (see for detail in Chapter 28, Table 28.1).

Further steps will need to be taken to enhance health service facilities and also improve women's awareness of issues related to basic health, nutrition and family planning. In this context the involvement of women voluntary health workers in providing health services is a priority area of intervention. At present, available statistics show that although in a few dzongkhags women health workers exceed 60% of the total, overall they only constitute around 22%.

Institutions for strengthening the mainstreaming of women in development

NationalWomen'sAssociationofBhutan(NWAB)

The NWAB was established in 1981 under a resolution passed in the 53rd  session of the National Assembly. The NWAB was established to enhance the role of women at all levels of the development process. The association, with nationwide chapters, has successfully addressed

various needs of rural women through a variety of programmes like education, family health care, skills training, employment and rural credit facilities. The NWAB became a semi-governmental organization in 1985 and a Non-Governmental Organization in 1992.

Since its inception, NWAB has carried out several programmes in close collaboration with government agencies. It has provided training programmes to enhance income generating skills in such areas as weaving, knitting and tailoring, as well as in establishing business activities and in improving women's access to credit. The association's chapters, especially in the eastern districts, have been successful in initiating group saving schemes which have served to mobilize resources for small-scale income earning activities. The NWAB members in cooperation with the district health authorities have also actively participated in disseminating information related to general health, hygiene and small family size norms to rural women. They have also been involved in the installation of safe piped drinking water, fuel efficient and smokeless stoves, in rural areas.

BhutanDevelopmentFinanceCorporation(BDFC)

The BDFC is the most important of the financial institutions in meeting the credit needs of the rural community.  With its network of branch offices in all the 20 districts, the BDFC provides credit services to both women and men. While past loans to women accounted for 27% of the total BDFC loans, women comprised 32% of the total clients in 1994. The recovery rate for loans made to women was about 49% as compared with about 40% for men.

In order to enhance credit accessibility and delivery, the BDFC decentralized its credit system with the establishment of Block Loan Committees. To further enhance the delivery system, the BDFC introduced  schemes such as Saving Mobilization and Group Guarantee Lending during the 7 FYP. These measures brought about wider participation by the rural population, especially the women.

Objectives and Strategies for the 8 FYP

While there will be no parallel projects formulated specifically for women, measures related to the promotion of women in development will be incorporated in all sectoral projects and programmes. Appropriate policies and development planning will enhance the contribution of women by reflecting their special needs, role and potential.

CHAPTER 11. PRIVATIZATION AND PRIVATE SECTOR DEVELOPMENT

The General Approach

 During the last decade, increasing attention has been focused, in Bhutan as well as worldwide, on the role of the private sector in economic development. Two aspects of private sector development will be addressed in the 8FYP. The first focuses on privatization of public sector activities - divestiture programmes, in part or in whole. The different modalities of privatization will include outright sale, partial minority ownership, management contracting, lease  management and commercialization. In principle, the private sector will be encouraged to assume activities that have hitherto been carried out by the public sector if this will result in        increased efficiency and higher profitability. However, where it is in the public interest, essential services will continue to be in the public sector, operating, wherever appropriate and possible, along commercial lines.

The second category of private sector development to be pursued involves enhancing the current level of activities and promoting new activities, hitherto undeveloped. For this the government will continue to promote an `enabling environment', appropriate to Bhutan, that will help to stimulate private sector growth. Recognizing the role of the private sector, the government adopted appropriate strategies and policies during the 6 FYP, and subsequently enhanced the process of privatization in the 7 FYP with the divestment of shares and measures to create an

`enabling environment'. For the private sector to continually grow and take a greater share in the country's economic activities, further steps will be taken during the 8 FYP. In addition to the development of the private sector itself, the divestiture programme will also further government's objective to improve public finances

through improved efficiency in privatized enterprises, thus providing greater tax revenue, and also by reducing the tax burden which occurs through transfers and subsidies to loss- making public enterprises.

Review of Past Performance

SavingsBehaviour

Two important parameters that contribute towards growth and

development are savings and investment. During the 7 FYP, gross domestic savings grew by an average of 24% p.a. Private savings performed even better with an average growth rate of 25.2% per annum, of which corporate savings accounts for the larger share of the increase. At present, gross savings to GDP stand at 20%. However, private sector investment as a percentage of GDP has remained low due to insufficient activities for private sector involvement at acceptable levels of profitability. This has consequently given rise to a situation of excess liquidity (see Figure 11.1).

NetBorrowingby Sectors

Statistical evidence from the banking sector shows that between 1992 and 1995, the overall net credit to the private sector(excluding personal loans) increased at 6.5% p.a. Analysis of the five important sectors show that borrowing by the agricultural sector was at a steady rate of 6.4% p.a., while for the manufacturing sector it had been fluctuating with an estimated average of 24% p.a. The building and construction sector's borrowing saw a moderate increase of about 3.8% p.a.

The trade and commerce sector borrowing fluctuated at a rate averaging around 8.3% p.a. and the Transport sector saw a declining rate of about 6.3%.

PrivatizationProgrammes

Privatization of public sector enterprises was given increased priority during the 7FYP, with the government continuing to transfer all commercial enterprises to the private sector, wherever possible, while limiting its role to providing essential regulation, entrepreneurial, managerial and skills training, and technical backstopping. During the 7 FYP, several public enterprises were divested. Of the 14 major industries, ten have majority private ownership at present as opposed to only two in 1990, but outright sale of some enterprises was not possible due to the lack of competitive offers. Buyers were not attracted to industries where (a) the scale of operations was seen to be beyond their managerial capacity, or (b) not seen as viable under prevailing circumstances. In some cases the government felt that privatization might lead to undue concentration of ownership in a few hands and therefore did not proceed with the sale of such enterprises.

In the Agricultural sector, the Fruit Processing Unit in Paro could not be privatized through outright sale as no buyer was found.

In the Mining/Manufacturing sector, the Calcium Carbide Plant was fully privatized together with the gypsum, slate and coal mines. The Sha Slate Mines in Wangdiphodrang and Salt Iodisation Plant in Phuntsholing were also privatized. Privatization of Bhutan Polythene Corporation was not achieved due to lack of private sector interest.

The activities and facilities related to Tourism, Hotels and Transport services were successfully privatized. The Tourism Authority of Bhutan will remain within the public sector to monitor and, where necessary, regulate private sector activities in tourism.

Three government workshops in Thimphu, Phuntsholing and Samdrup Jongkhar were also auctioned to the private sector for a period of seven years each for a fixed royalty.

Private Sector Development 

Despite a number of constraints, the private sector has continued to register  modest growth and play its role in the economic development of the country. The factors that have restrained the potential growth of the sector have been identified as;

(a)           The relatively small size of the local market,

(b)           Lack of entrepreneurial expertise and experience 

(c)           Limited access to credit facilities 

(d)           High interest charges an 

(e)           Shortages of domestic skilled and unskilled labour.

Towards the promotion of small entrepreneurs in carrying out commercial and industrial activities, a total sum of Nu.71.839 million was disbursed by the Bank of Bhutan to a total of 2631 beneficiaries between 1992 and 1994.

To develop the indigenous entrepreneurial capacity, a series of Comprehensive Entrepreneurship Development courses were held. By mid 1994 a total of 99 businessmen/women were trained under the scheme which started in 1990. A total of 81 entrepreneurs participated in the three workshops for the development of cottage industries which were held in Khaling, Bumthang and Panbang. Several business opportunity workshops were also conducted in various dzongkhags which attracted more than 20 participants.

Major reforms are underway in the Financial and Banking sector, which are detailed in  Chapter 13.

Objectives and Strategies for 8 FYP

Objectives

Public Sector Enterprises

A number of public enterprises which are unlikely to be privatized are the Chukha Hydel Power Corporation which is simply too large for private sector participation, the Bank of Bhutan, which is a joint operation with the State Bank of India, and the Druk Air Corporation which is unlikely to be attractive to the private sector until its financial position improves. But in the case of others, the Government will continue  divesting its share to the private sector.

A list of major public enterprises including divested corporations and their current status is presented in Table 11.1. A forecast of further divestment of enterprises during the 8 FYP is also shown in Table 11.1. Based on accounts submitted for years 1992, 1993 and 1994, a forecast of sales and profits for the last two years (1995 and 1996) of the 7 FYP is  presented in Table 11.2. Based on these estimates for 7 FYP and taking into consideration other factors such as capacity utilization rates and investment programmes, an attempt is made to prepare sales forecast and a minimum rate of return on capital employed for 8 FYP, for each of the Public Enterprises. These are also presented in Table 11.2. It is assumed that all the enterprises should obtain a rate of return on capital employed above 10 percent as the latter currently represents an average risk- free return i.e. yield on bonds and bills 

The government will continue to finance and implement large projects such as Dungsum Cement Project, and other major hydro-electric projects which are beyond the present capacity of the private sector. For small to medium-scale projects, the strategy will be for the government to act as a catalyst by providing the private sector with improved access to credit and markets, physical infrastructure, training and technical backstopping. During the 8FYP, strong emphasis will be placed on profitability as the major criterion of performance of all the public sector enterprises. However, until such time the private sector capacity is developed further, there may be circumstances where potentially significant enterprises, particularly in trade and industry, will be pioneered by Government, provided there are sound prospects for privatization within a short time.

Privatization of Functions and Activities of Government Agencies

Ministry of Agriculture

The RGOB intends to privatize the various farms which are currently under the Ministry of Agriculture as far as it is feasible. After privatizing NASEP(Druk Seed Corporation), the Agricultural Machinery Centre (AMC) in Paro will also be privatised. The Forestry Services Division will also contract out logging activities and other functions of the division where appropriate to reduce overhead costs and encourage the growth of the private sector.

Ministry of Trade and Industries

In the Power Division, construction of mini and micro hydel power plants, and  transmission and distribution will be contracted out to the private sector. Efforts will also be made to privatise the State Trading Corporation of Bhutan (STCB). Privatization of the agro-industries in  Wangchutaba and the Wood Craft Centre in Langjuphaka will also be actively pursued.

Ministry of Communications

Road construction and maintenance, for which private contractors have increasingly been utilized, will be further encouraged. The Ministry of Communications will formulate detailed regulations for privatized road construction and maintenance activities. While postal services have been privatized to a great extent in the dzongkhags through the agency system, efforts will be made to further privatize services right down to the gewog (block) level. The privatisation process will go through an intermediate stage in which the services will initially be corporatised.

Ministry of Health and Educatio 

To further enhance quality and reduce government overhead costs, the existing policy of encouraging private schools and health clinics will be given renewed emphasis. The private sector will be encouraged and assistance provided to establish schools beyond the primary level as and when proficiency is established.  The Printing Unit, which is currently under the Education Division will also be sold to the private sector.

Other Ministries

The National Property Division and Foreign Drinks Store under the Ministry of Finance will be considered for privatization,  These are activities that should normally be guided along competitive and profitable lines and therefore suited to be under private sector management.

The Ministries of Planning, Finance, Trade and Industry, the Royal Civil Service Commission, as well as the sectoral ministries, have a role in the promotion of the government privatization programme.

Policies and Strategies for Private Sector Development

Access to Credit

Entrepreneurs have faced difficulties in obtaining sufficient credit to expand businesses or establish new enterprises. With the financial restructuring programme which is expected to take place during 8 FYP, a number of constraints currently faced by entrepreneurs will be removed. Interest charges, though remaining high at the earlier period of the plan will be gradually decreased (For details see Chapter 13). The interest rate will be maintained at a level which will be attractive to both savers and borrowers; savers will receive a positive real rate of return while borrowers will find the rate attractive to borrow and make profitable investments.

Foreign investment

Development of the private sector is partly constrained by the shortage of domestic capital as well as by indigenous entrepreneurial capacity and technological know-how. The government will, therefore, continue with its current policy of foreign equity participation of up to a maximum of 20% in joint venture projects. The selection of foreign participation will be made on a case-by-case basis.

Labour  requirements

Bhutan is still experiencing a serious shortage of skilled and semi-skilled labour, which is expected to continue during the 8 FYP. The gap between demand and supply will therefore continue to be reduced as far as possible by the employment of expatriate labour. In order to bridge the gap satisfactorily, the RGOB will review its procedures for the employment of expatriate labour and revise them where necessary. The RGOB will also pursue the promotion of mechanization to off-set the lack of required domestic manpower.

Other policies and strategies

In general, the policies and strategies adopted in the 6FYP and 7FYP will be continued with greater emphasis placed on implementation in order to further private sector participation. A brief summary of some of the strategies to be followed is outlined below:

-                increasing assistance to entrepreneurs in identifying market prospects for- manufacturing activities;

-                developing a fair and equitable tax structure providing appropriate incentives to individuals and enterprises in the private sector;

-                improving power supply through increased efficiency and reduction in energy losses due to transmission.

-                enhancing domestic saving through increased competition between the financial institutions which would be  encouraged by the phasing out of administered interest rates. Financial institutions will be encouraged to support productive investments in cottage, small and medium scale manufacturing and construction sectors;

-                adoption of special share allotment schemes to encourage participation from small investors, under which a certain percentage of shares will be offered to individuals and small investors. This will be further supported by special incentives such as introduction of discounts, borrowing at low interest rates for share purchases, and payment by instalments 

-                promotion of further divestiture of public sector enterprises wherever appropriate and feasible, after carrying out relevant studies.

-                high priority will continue be given to Human Resource Development for the private sector, to include domestic entrepreneurship, management and associated skills, and training in technical fields required by private sector enterprises.

Table 11.1 Profile of major enterprises and divestiture programme for  the 8FYP

Table 11.2 Sales of major enterprises and projection for the 8FYP

Penden Dukpa Coal Co.

Eastern Bhutan Coal Company.                                              -                                        15.80                  17.38                  19.12                   10.00                   20.00                                                                                                 4.68                                    30.00

Bhutan Ferro Alloys                                                                                                                                                                                                                                                                              10.00

CHAPTER12. MANAGEMENT OF PUBLIC FINANCE

Overview

The Royal Government of Bhutan will continue to emphasis on the prudent and efficient management of its finances. Revenues will be enhanced through increased efforts in compliance and collection of taxes, and introduction of equitable and fair user charges for non-tax revenues. It will also focus on new areas of taxation, set up an appropriate legal framework, and review the current tax structure and administrative system.

The growth in expenditure will be kept below the nominal growth of GDP and in line with revenue increases. Additional spending will only be allowed if additional collection of revenues can be made. The overall fiscal deficit as a percentage of GDP will be kept to 1 percent. The expenditure will be strictly monitored so as to bring about efficiency and effectiveness from the recurrent budget, and a higher rate of implementation and capital formation from the capital budget. The financing of the deficit from domestic borrowing will be minimised to avoid inflationary pressures and crowding out effects on the private sector.

Revenue prospects for 8 FYP

The Revenue and Customs Division of the Ministry of Finance has produced two scenarios of revenue projections. In the first scenario, termed the base line scenario, revenues are projected to increase at a rate of 7.8 percent in nominal terms during the plan period. This is based on the assumptions of sound economic performance, increase in profits, revision of power and other tariffs and improved administrative efficiency in terms of wider coverage and efficient collection of taxes. In the second scenario, termed the optimistic scenario, the revenues are projected to increase by 12.8 percent per annum during the 8 FYP. This is based on the assumptions mentioned under the base line scenario as well as the implementation of tax reforms and the introduction of new tax measures. However for the 8 FYP revenue projections the baseline scenario has been used, (see table 12.1) 

The projections of the main items of tax and non-tax revenues are discussed individually in the following section. The items which make significant contributions to tax revenues are corporate income, royalties, Bhutan sales tax and excise duty. On the non-tax revenue side, major contributions are made by dividends from corporations, revenues from government agencies and to a lesser extent, capital revenues.

Individual Revenue projections

Bhutan Sales Tax and Excise Duty 

Bhutan sales tax is projected to grow by about 5 percent per annum as a result of increases in prices and consumption demand. Though introduction of sales taxes to new sectors is under consideration, these have not been used in the projections. Excise duty, which is currently applicable to alcohol and beverages, is also projected to grow by 5 percent per annum.

Revenues from Government Agencies

The main contributions to this category are expected to come from profits made by Telecommunications and higher tariffs on domestic power. The revenues are projected to grow by about 6 percent per annum.

Corporate Income Tax, Net Transfers from Public Enterprises, Dividends

A reclassification of revenues within these three categories will be effected in 1997/98. Taken together, these three sources of revenue are projected to grow by 24% in the first year of the 8FYP, reflecting the expected increase in the Chhukha power tariff. Thereafter growth is projected at 5% p.a..

Table 12.1 Base Line National revenue estimate for 7FYP and forecast for 8FYP

Capital Revenue 

Though it is difficult to project capital revenues due to the wide variability from year to year, it is anticipated that the revenues generated under this category will be significant. It covers sale of government shares of the corporations and sale of government property.

Royalties

In contrast to the 7 FYP, royalties have been included under the category of tax revenues.

Royalties include mining and minerals extraction rents, tax on wood products but do not include Royal Bhutan lottery. The royalty on the latter is still classified under transfer of profits.

Foreign Grants

It is assumed that the Government of India will continue to provide budgetary support in grant form amounting to Nu. 800 m p.a. during the 8 FYP.

Expenditure programme for 8 FYP

Expenditure ceilings

Taking the above factors and the related assumptions into consideration, the total revenue during the 8 FYP, is projected to be about Nu. 13000 m. For the purpose of allocating and targeting expenditures, this figure will be used as the most realistic revenue forecast. With the continued growth of education and health coverage, and with new capital projects coming on stream, recurrent expenditures will need to grow in real terms by 3-4% a year.

The total government expenditure mainly consists of three items namely, recurrent, development or capital expenditures and loan repayments.

Recurrent Expenditures

Recurrent expenditure is further broken down in to 6 sub-classifications - personnel emoluments, interest payments, utilities and rent, supplies and materials, grants and transfers, and operations and maintenance.

Personal emoluments

The average salary of civil servants would be increased to a level equivalent in real terms to that of 1988 by 2001/02, which would be done in tranches subject to availability of resources. Civil service numbers are currently 13,566 (1996) inclusive of teachers and health workers.

There will be some retrenchments of under-performing staff during the next few years to maintain a slim, efficient and high quality civil service. In addition, real expenditures on Personnel Emoluments will need to rise, since the average government salary in 1995/96 was, despite a wage increase, was still about 40 % below the real level of 1988/89. This will facilitate induction of competent personnel in the civil service.

Interest payments 

Payments are based on debt service data provided by the debt management unit in the Ministry of Finance. Interest payments are expected to be stable in nominal terms.

Travel, Utilities and Rent, and Supplies and Materials

The increase in these expenses will rise by at most 11.8% a year in real terms..  Grants/subventions and Other Expenses

The RGoB will continue to pursue the policy of not offering subsidies or transfers to loss- making organisations. However, it will continue providing grants or subventions to non-profit making institutions. Overall expenses in this category will be closely monitored to ensure efficient use.

Operationsand maintenance expenditure

Although past trends show an annual average in real terms of over 10%, the projected growth rate is kept to below 11.7% a year from 1996/97 to 2001/02, with increases above this to be allocated if and when revenue availability above the base-line projection allows.

Capital expenditure

At present, based on the budget estimates of 1995/96, about 50.4% of the capital expenditures is financed by external donors. It is anticipated that Bhutan's development partners will continue to provide assistance to the capital budget in similar manner. For the 8 FYP, capital expenditure is projected to reach Nu 13429 billion. The total of these outlays is less than the total projected commitments for 8 FYP projects, as many will have outlays which extend into the 9 FYP. Donors are expected to finance over 80% of the total capital expenditure. The balance as counterpart financing will be the responsibility of RGoB, which is expressed as   net capital expenditure.

Lending/Repayments

This consists of two major items, namely loans to enterprises and repayment of external principal and repayment of domestic debt. It is anticipated that the loans to enterprises will continue to increase at about 1% per annum from about Nu. 90m in 1996/97. External principal repayments are based on the schedule provided by the National Budget and Accounts Division, Ministry of Finance.

DeficitLevel and Financing

Given the above revenue and expenditure projections the overall fiscal position during the 8 FYP shows a deficit of 1 percent of GDP. This, of course, assumes that the projections regarding revenue growth, foreign grant flows and expenditure ceilings can be realised.

Donor Financing

The scenario provided here indicates the following aggregate contributions for the 8 FYP by donors: 

- Government of India - Budgetary Support Grant      Nu. 4000 m

-                Government of India- Project-Tied Grant                     Nu. 3500 m 

-                External Multi & Bilat. Donors for Capital Budget       Nu. 11034 m

-                External Donor support for recurrent cost                     Nu. 1103 m

Total                                                                                Nu. 19637 m

Table 12.2 Government Expenditure Estimates for the 7 FYP and Projection for the 8 FYP

7 FYP Estimates                                                                      8 FYP Projection

1992/93  1993/94  1994/95  1995/9

6

1996/97  Total        1997/98  1998/99  1999/00  2000/0

1

2001/02  Total

Table 12.3 Eighth Five Year Plan Budget Outlay

Nu. in million

CHAPTER13.FINANCIAL SECTOR DEVELOPMENT

InstitutionalDevelopment

In the 1960's the Bank Of Bhutan(BOB) was the only financial institution that was operational in the country. It played an important role in meeting the limited needs of the economy. However, these needs have changed and grown, and in order to meet the new challenges, a number of other financial institutions have been established. Today, in addition to the Royal Monetary Authority (RMA), there are four major financial institutions in the country and their activities are being currently reviewed so as to further improve and strengthen the financial sector.

Royal Monetary Authority (RMA)

The RMA was established in 1982, in accordance with the Royal Monetary Authority of Bhutan Act  of 1982. Amendments were made subsequently in 1992, through the Financial Institutions Act. Today, it fulfils the role of a Reserve/Central Bank and carries out the conventional functions that are normally associated with central banks.

As of June-end 1995, its total assets stood at Nu. 3806 m, of which convertible foreign currency reserves accounted for about 98% (For details on RMA, refer to Chapter 31).

Bank Of Bhutan (BOB)

The Bank of Bhutan is the oldest financial institution, established in 1968 through a Royal Charter. At present, nearly 80% of BOB's shares is held by the Government, while the remaining 20 percent is held by the State Bank of India, with which BOB has an institutional association. The total asset recorded at the end of June

1995 was Nu. 3.147 billion, of which BOB's capital accounts for about 10% (see figure 13.1).

Over the years, BOB has established 26 branch offices throughout the country. Its total loan outstanding at the end of June 1995 was Nu. 1.343 billion of which the private sector accounted for about 39%. Until 1993, the BOB also took the responsibility of managing Bhutan's Indian Rupee reserve.

BhutanDevelopmentFinance Corporation (BDFC)

The BDFC was established through an Article of Incorporation and commenced its operation in 1988 primarily to promote the industrial, agricultural and commercial development of Bhutan. Essentially, it was expected to play the role of a multipurpose development finance institution. Its equity is shared between the RGOB, BOB, and the RICB. The main sources of funds for the BDFC are external concessional loans and grants, grants from the RGOB and a line of credit from the RMA.

Royal Insurance Corporation of Bhutan (RICB)

The RICB was established in January 1975 by a Royal Charter to provide life and general insurance. Of the total equity, 39% is held by the private sector and 61% held by the government. The RICB's total assets at the end of June 1995 stood at Nu. 968.9 m, of which only 7% was accounted for by its own capital. The bulk of the RICB's liabilities are not insurance-related but are funds obtained from the GEPF (Government Employee Provident Fund) for which an assured return of 10% per annum must be provided.  Loans and advances amounted to about Nu. 727 m at the end of the same period.

Unit Trust of Bhutan (UTB)

The UTB was established in 1980 through incorporation of its Memorandum and Articles of Association. Its main objectives are to mobilize savings through the sale of units, accept deposits through various schemes and to allocate the funds for productive investments. UTB will become a fully-fledged commercial bank by the end of the 7 FYP.

As of June 1995, UTB's total assets stood at around Nu. 656 m (see Figure 13.1). It operates five saving mobilization schemes, of which the unit share scheme is the most popular. The funds collected through unit shares amounted to Nu. 378.5 m at the end of this period accounting for 85% of the total deposit liabilities. It's loan portfolio accounts for 79% of the total liabilities.

Financial Sector Reforms to be Initiated during  8FYP

Overview

Although many reviews and reforms have been carried out since the 6 FYP, the changing and increasing needs of the economy warrant further reforms and improvements in the financial sector. The reforms under consideration at the end of 7FYP for implementation during the 8 FYP are envisaged, in general, to create a competitive environment, greater mobilization of resources and improvements in financial intermediation, to deepen and widen the capital and money markets and help the development of the private sector. In particular, the reforms are expected to address the following concerns:

-                The government budget deficits are partly financed through direct borrowing from the RMA. Deficit financing of such nature has adverse consequences of expanding money supply and thereby causing inflationary pressures in the                 economy;

-                At present, the RMA does not operate the full range of flexible policy instruments that are normally available to monetary authorities, that will check excessive credit expansion. However, at  present these additional instruments may not be effective in a situation of excess liquidity; and

-                The administered interest rate structure has contributed to some degree of market distortion.

Objectives for 8FYP

-                Strengthen prudential supervision of the financial institutions;

-                Develop effective monetary policy tools to enhance indirect monetary control;

- Sterilize the excess liquidity in the banking system;

-                Improve the viability and competitiveness of the financial institutions;

-                Promote domestic credit expansion consistent with balance of payments objectives and sustainable growth in output.

Strategies and Programmes for 8FYP

The process of liberalization of the financial sector which began during the 7 FYP will also continue during the 8 FYP.

Introduction of Government Bonds

In order to avoid direct government borrowing from the RMA, minimize the cost to the government, and support the development of indirect instruments of monetary policy, the introduction of government gilt-edged bonds,  along with the issuance of RMA Bills, which are currently in operation, will be pursued.

Preparations for the issue of government gilt-edged securities were completed towards the end of 7FYP with assistance from IMF. A high level debt management committee is envisaged to coordinate debt and monetary management policies, oversee debt management and be  responsible for the timing of auctions, the type of security (short, medium, long term securities), and the size of each auction.

At present, apart from the Cash Reserve Ratio (CRR), the RMA does not have any other policy instrument through which it can exercise control over the required liquidity in the financial system. CRR is normally imposed on commercial banks as a means of controlling their credit creation capacity by requiring them to maintain a certain percentage of their loanable funds in the form of deposits with the central bank. At present, the RMA imposes a CRR of 15% of total deposit liabilities of the Bank of Bhutan. However, in view of the large excess reserves the Bank maintains with the RMA, this instrument is largely ineffective as a means of controlling credit expansion and additional instruments are also not needed.

The instrument of monetary policy which is most commonly used for controlling liquidity in the financial system is Open Market Operations, sale of government securities and central bank bills in time of excess liquidity and their purchase by the central bank in times of inadequate liquidity. So far, the RMA Bills alone have managed to sterilize about 50% of the excess liquidity and, with the introduction of the Government bonds, the entire liquidity overhang would be removed.

The active participation of the financial institutions in the securities market is expected to develop a modest secondary market, the RMA encouraging repurchase of transactions to enhance their liquidity in the secondary market.

Interest Rate Liberalization

The existing controlled interest structure does not reflect the actual cost of intermediation of the financial system and is therefore partly responsible for growth of excess liquidity, especially with the Bank of Bhutan.

The liberalization of the interest structure is an essential ingredient of the present financial sector reform. The introduction of the RMA Bills and the Government Bonds will open the way for interest rate liberalization. The discount rate determined through the interplay of supply and demand for RMA Bills will establish a short-term rate of return which the market participants determine appropriate for such a maturity. The yields offered on bills and bonds will reflect as benchmarks for interest rates bills for short-term and bonds for long-term risk-free rates of interest.

The immediate step in liberalization on interest rates will be the deregulation on corporate deposit rates. At present, the non-bank financial institutions and large government corporations are depositing their financial surpluses with the BOB. The Bank, by virtue of being the only commercial bank, has the obligation to accept the deposits at the rates fixed by the RMA. Since the demand for loanable funds from the private sector does not keep pace with the deposits, the Bank accumulates excess reserves, jeopardizing its profitability and causing distortions in the financial sector. The RMA Bills and the Government Bonds will absorb the excess liquidity but, without liberalizing the interest rates, the instruments will not be effective.

The liberalization of interest rates is expected to improve resource mobilization of financial savings by the financial sector and boost the efficiency of allocation of those resources for investment. Lending rates would reflect the underlying cost of the resources mobilized, cost of intermediation, and the general credit and business risk.

Restructuring GEPF

The current practice of offering a guaranteed 10% fixed rate of return has placed RICB in a financially unsustainable position. In its attempt to generate high rates of return, the RICB has been either forced to invest in high yielding investments, especially mortgage loans, or deposit with the Bank of Bhutan at lower interest rates. The former investments have inherently higher risk and have led to high default rates and accumulation of bad debts, while the deposits with the Bank not only result in losses for the RICB, but also contribute to the liquidity overhang in the financial system.

In an attempt to reform the GEPF, so that funds can be appropriately invested and maintain a healthy financial position, the current high fixed return on funds will be reviewed. On the other hand, in order to avoid erosion of funds in real terms,  some guaranteed minimum level of return on these funds will be established. This minimum level of guarantee should be offered within the budget allocation thus creating a contingent liability. Any additional income must depend exclusively on the performance of the financial institution. The restructuring of GEPF will also be examined with a view to establishing it as a distinct entity, either as a corporation or as a charitable trust under its own Board of Directors, and thus dissociating it from the RICB.

Elimination of Foreign Exchange Restrictions and Adoption of IMF's Article VIII Status

Statistical evidence on the external sector shows that Bhutan has, since 1989/90, maintained a viable overall balance position and a healthy import cover. Over the past five years, import cover, measured as a ratio of imports to gross reserves has been averaging around 13 months. These  facts have led to a recommendation that the RGOB should consider the adoption of Article VIII of the Articles of Agreement of the IMF.

This particular Article requires the members not to impose restrictions on payments and transfers for current international transactions. It also requires that the Ngultrum be treated as a convertible currency. Though the acceptance of the obligation under this article is viewed as a                   sign of economic and financial maturity of a country, the real test of this argument should be based on the nation's potential current account( excluding official transfers) position which should be maintained at sustainably low levels to maintain macroeconomic stability and growth.

The current account balance, excluding official transfers, has not performed well enough during the past five years. Although the position measured by the percentage of current account(excluding official transfers) to GDP has been steadily improving, the current level of 21.5%, is still too high. Until this ratio is brought down to a satisfactory level, it is felt that adoption of Article VIII status should not be pursued.

Non-performing Assets

The latest statistics based on December 1994 performance show, after allowing for provisions for bad debts and doubtful loans, the ratio of bad debts in total loans standing at about 17%, which is high. The Loan Recovery Committee will therefore act under its clearly defined mandate to bring about the necessary legislative and administrative changes which will help to restructure the balance sheets of the financial institutions concerned.

In 1993, with the assistance of ADB, the Royal Securities Exchange of Bhutan was established. At inception, there were seven listed companies. The four financial institutions, namely, BOB, RICB, UTB, BDFC were founding members of the RSEB, each establishing a fully owned subsidiary brokerage firm. The recent Penden Cement primary offering was conducted through the Exchange. All the RMA bills and Bonds transactions will be carried out by RSEB. It is envisaged that the activities both in terms of volumes and new listings of companies will greatly increase during the 8 FYP which will deepen and widen the financial system.

CHAPTER 14. POPULATION AND DEVELOPMENT

Overview

Population in Bhutan is growing at a rapid rate of  3.1% per annum. At this rate, the population of Bhutan is expected to almost double in 20 years. The population will continue to grow for     many years even if fertility is reduced drastically to the replacement level of two surviving children per woman by 2012, as targeted by the RGoB. This is attributed to population momentum, resulting largely from a young age structure.  Given a total fertility rate of 5.6, and a youthful population (below 15 years of age) constituting 43% of the total, Bhutan's economic and demographic prospects look very grim.  The high dependency burden has not only a great in- built potential for rapid population growth, but is also detrimental to the economic growth, as it neutralizes much of the gains obtained through developmental efforts and leaves little surplus for investment after meeting the social overhead costs of maintaining the increasing number of dependent population.

The persistence of high rate of population growth will seriously impair the country's prospect of achieving the goal of sustainable development.  The economy which is already under strain to provide for the existing population will find it even more difficult to provide for the growing population.  To achieve the replacement level fertility of two surviving children per woman by 2012, there has to be a drastic reduction in fertility  by 61% within a short period of 15 years (from 5.05 in 1997 to 2.10 in 2017).  The burden on the government exchequer to meet the basic needs of the growing population will be much heavier, if the goal of achieving the replacement level fertility is delayed even by 5 years, from the targeted year 2012 to 2017.  This is amply demonstrated by the findings of the medium variant projection with the objective of achieving the same by the year 2017.

Population and development issues

Growth and size of the population

The total population is expected to increase from 600,000 in 1996 to 931,711  by the end of the projection period (2017), if fertility were to drop to the replacement level of two surviving children per woman in 2017, from its level of 5.32 in 1996.  It shows that the total population of Bhutan will continue to increase considerably even under the assumption of an accelerated decline in fertility.

School age population

There will be a considerable increase in school age population and cost of schooling at all levels, even if fertility were drastically reduced, except for the primary level.  The junior and high school population of age 13-16 years will be around 79965  ( 51%) larger in the year 2017 than              in 1996. The primary school going  population will be around 95,899 ( 21.2%) lower in the year 2017 than in 1997.  The size of primary school age population will marginally increase by 1.14% from 118,168 in 1997 to 126,244 in 2017.

The estimated recurrent cost of schooling at junior and high school levels, at the current level (adjusted for inflation), will be around Nu. 342.5 m ( 71%) higher in the year 2017 than in 1997. The cost of schooling at primary level will increase by 12%, from Nu. 231.0 m  in 1997 to Nu.

258.5 m in 2017.

Working population

The size of the working population of Bhutan enumerated at 336,000 in 1997 will increase to at least 623,000 or by 81% in 2017.  At least 267,000  new jobs must be created to provide employment at the level of 1984 to the growing labour force by the year 2017. This would  indeed be a difficult task to accomplish, even to create minimum units of new jobs, as this will require huge investment of national income.  A large labour force also will require an investment of a good proportion of the national income (some three times the annual percent rate of increase of the labour force) to prevent productivity (per head) from falling.  Given the estimated growth rate of labour force, 7 to 9% of national income must be invested during the period 1997-2017, only to keep the productivity at the current level, let alone the increment required for economic investment.

Health facilities

Basic Health Units

The number of Basic Health Units (BHUs) required, at the current level, will be 190% larger in the year 2017 than in 1997. To provide for the additional number of BHUs to meet the needs of the growing population, the RGoB has to spend an amount of Nu. 86.7 m  ( 111%) larger in the year 2017 than in 1997. The required number of doctors, nurses and hospital beds will be 46% larger in the year 2017.

Pressure on land carrying capacity

The per capita availability of agricultural land which is already one of the lowest in the world will further deteriorate with the increase in population.  If the 3.1% rate of growth remains unabated, the per capita availability of agricultural land will drastically reduce by 54.5% in 23 years,  a bleak prospect to contemplate.  Even if the RGoB is successful in achieving the replacement level fertility by the year 2012, the per capita agricultural land will be reduced by 27%. However, if the replacement level fertility is achieved five years later i.e., in 2017, the land-man ratio will be reduced to 33% lower than in 1997.  The per capita availability of land would be much lower than what was estimated, if allowances were made for the loss of agricultural land to meet the growing needs of housing, schools, hospitals, roads, factories, recreation space, etc., associated with high rate of population growth.

Shortage of food

Other factors remaining constant, the shrinking land-man ratio will lead to shortage of food supply,  as more food will be required from the same or declining agricultural land. At the current rate of per capita consumption, Bhutan will need, an additional 37,597 and 22,000 metric tons of wheat and rice respectively in the year 2017, even if we are able to achieve the replacement level fertility by the same year.

To meet the additional demand of rice, the RGOB has to spend, at the current price, about Nu.

144.31 m in 2017, over and above the expenditure of Nu. 31.78 m that would be required to meet the deficit of rice in 1997.  The corresponding expenditure will be around Nu.120.68 m in 2017  to meet the deficit of wheat over and above the expenditure of Nu.62.6 m that would be required to meet the shortage of wheat in 1997.

The pressure on the limited and shrinking agricultural land will not only lead to food shortage but also to the fragmentation of landholdings and increasing incidence of landlessness and marginal non-subsistence land-holdings.

Rapid urbanization

The failure of agriculture to absorb the growing labour force and limited non-agricultural activities in rural areas will lead to the exodus of people from rural to urban areas in search of employment opportunities.  The increasing rate of rural to urban migration, as a consequence of higher rate of population growth, will lead to rapid urbanization of Bhutan.  Even though the population of Bhutan is predominantly rural, the process of urbanization is accelerating mainly due to migration from the rural areas.  According to one projection, the urban population will increase by 327% in 2020.  This will put severe strain on the existing inadequate urban services and pose serious developmental and environmental problems such as increasing noise and air pollution levels, shortage of safe drinking water and electricity, inadequate hygienic and sewerage facility, unemployment and proliferation of urban slum and squatter settlements due to shortage of housing.

Environmental degradation

The decline in per capita availability of agricultural land and shortage of foodgrain, due to high rate of population growth, and lack of alternative job opportunities outside of agriculture in rural areas, will lead to over-exploitation of resources, including cultivation of marginal land and steep hilly terrain to meet the increasing demand of the growing population.  This will not only damage natural resource base - land, water and air, but also threaten the sensitive balance of a           fragile mountain eco-system.  Some of these likely adverse impacts are already in the horizon.

For example, in some valleys, the forest lines are receding to make way for cash crop plantation such as oranges, apple and cardamon. The pressure on the forest will further increase with over grazing and accelerated use of forest products for fuel wood, fodder and construction due to persistent high rate of population growth.  The depletion of natural resource base and the adverse impact on forest, which threatens the existence of all life,, are matter of serious concerns for sustainable development of the country.  This underscores the need of formulating a comprehensive population policy and programme by closely examining the implications of population growth and spatial distribution for employment, environment, health care, quality of life, and overall sustainable development.

Demographic objectives during 8FYP 

Short Term Objective

Against the backdrop of the preceding analysis, it is clearly evident that the unabated high rate of population growth will pose a serious challenge to the sustained economic growth and sustainable development of the country.  This calls for a drastic reduction in growth rate within the     shortest possible time.  With this objective in view, the RGOB aims to reduce growth rate by   1% during the 8 FYP, from 3% in 1996 to 2.48% in 2002.  During the 8FYP, the Total Fertility Rate (TFR) is slated to decline by 26%, from 5.05 in 1996 to 3.74 in 2002.  For the corresponding period, the crude birth rate will decline from 37.7 in 1997 to 30.8 in 2002, while the Crude Death Rate (CDR) will decline from 8.5 in 1997 to 6.0  in 2002.  To attain this goal, the Contraceptive Prevalence Rate (CPR) has to be doubled from its current level of 24.16% in 1997 to about 45.44% in 2002.  It implies an increase in number of current acceptors of modern contraceptives by 188%, from 18.8 thousand in 1997 to 46.6 thousand in 2002.  At the current price, about US $ 0.95 million will be needed to provide contraception for 195,000 users during the 8 FYP period.  The year-wise projected targets for fertility reduction,  population growth  rates and total fertility rates, with the required contraceptive prevalence rate are given in Table 14.1.

Table 14.1      Projected population size, growth rates and TFR and corresponding CPR ( 1997-2002)

Although the relative mix of practice of different methods will be determined on the basis of voluntary choices, a year-wise projection of users of different methods is prepared for the 8 FYP, based on current pattern of method mix.  The data are presented in Table 14.2.

Table 14.2 Yearwise contraceptive prevalence rates and number of users by method mix, 1997-2002

LongTermObjective

The long term objective of the RGOB is to achieve replacement level fertility of two surviving children per woman by the year 2012.

The demographic goals envisaged to be achieved by the Royal Government, to be ambitious, are not out of reach.  The necessary political and logistical support services are available to ensure successful implementation of the programme.  These include, among other things, the following:

-                strong political commitment on the part of the RGOB to reduce drastically the population growth rate,

-                an adequate, improved and expanded, nation-wide primary health care network to be put in place to deliver reproductive health care and family planning services at the grassroots level and

-                expansion of primary health care and maternal and child health services  to improve the physical quality of life of people in rural areas.

Policy approach and strategy

To achieve the desired demographic goals, a multi-pronged approach will be adopted to influence key variables that will impinge on fertility and lead to an accelerated decline in growth rate.

The specific strategy that will be adopted to achieve the cherished demographic goals includes the following:

Awarenessraising

Revise the activities already being undertaken by the various sectors so that the value of  small family, particularly its benefits on the health of mothers and children; economic, social and health benefits of delayed marriage and spacing of births; various methods of contraception - their advantages and disadvantages are understood, appreciated and practised.

Supply/accessto contraceptives

Improve access to wide range of contraceptive facilities including most modern, safe, affordable and effective methods.

Strengtheningofexisting maternal and child Health Services

Strengthen the maternal and child survival component of the family planning programme through the nationwide primary health care network to reduce the infant, under-five and maternal mortality rates. The infant, under-five and maternal mortality rates in Bhutan are estimated to be

around 70, 96 and 3.8 per 1,000 live births respectively which are still high by world standard.  It, therefore, calls for immediate reduction of infant, under-five and maternal mortality rates.  This will be addressed through provision of neo-natal care including safe delivery of births, reduction of high risk pregnancy and provision of tetanus toxoide to mother and immunization of children.

Quality of care

Provide unhindered support to quality of care by implementing routine pre-natal and post-natal care at all levels, arranging detection and referral of high risk pregnancy cases to specialists.

Supportingspecialprogrammefor adolescents

Bring the adolescents and youths aged 15-24 years under the programme by catering to their special reproductive and sexual health needs.  In Bhutan, about one-third of births in a given year are attributed to women in the age-group, 15-24 year.  But only less than 1% (0.73) of women in the age-group, 15-19, and 7% of women in the age-group, 20-24, are currently practising contraception.  This may have adverse consequences, both at the individual and national level.

Beyondfamilyplanningmeasures

Education, particularly female education, has been and continues to be the single most important predictor of fertility in which education is inversely related to actual and desired fertility and positively to the use of contraception.  However, the effect of education on fertility behaviour is more pronounced beyond primary level.

Bhutan is yet to attain 100% enrolment ratio at primary school level.  The gross enrolment ratio at primary school level was only 72%.  Also, the enrolment ratio is higher for males than females and this holds good for every level of education.  For example, the number of girls constituted 73%, 58% and 41% of boys enroled at grades 6, 8 and 10 respectively in 1993.  Every effort will be made to attain 100% enrolment ratio at primary level and beyond for both boys and girls.  To promote enrolments in schools, consideration will be given to provide modest stipend to the poor but meritorious students, particularly females.

Female participation in gainful activities is also considered one of the important measures to enhance women's social status and to curtail fertility.  There is evidence to suggest that access to resources, particularly credit facility, empowers rural women by strengthening their economic roles and this leads to higher use of contraception.  Strategies would therefore be worked out to empower women through vocational and skills training, income generation and credit facility in rural areas.

Greaterparticipationofthe community

Involve community in planning and implementation of the population programme to ensure greater success of the programme by fostering in community a sense of ownership.  A detailed mechanism on community participation will be worked out during the 8 FYP.

Legalmeasures

Vital registration

Existing vital registration law involving both birth and death will be amended, to the effect that birth certificate will be required to prove age for marriage and for other public purposes such as admission in school, appointment in government services, issue of passport, etc., while death certificate will be required to settle legal matters particularly inheritance. Health outreach personnel will play a major role.

Multi-sectoralapproach

Promote well coordinated multi-sectoral population policies and programmes in which all the sectoral ministries and agnecies, particularly those which maintain regular public contact, viz. Ministry of Health and Education, Bhutan Broadcasting Service, Ministry of Trade and Industry, Ministry of Agriculture, etc. will be required to incorporate population concern into their mainstream development activities and employ their outreach and extension workers and facilities, whenever feasible, for demand creation and service delivery.  Each sectoral ministry shall identify a focal person responsible for integrating population concerns into the ministry's regular programme of activities and the concerned ministry shall be responsible for  implementing its own population scheme under its administrative control.

Role of each sectoral Ministry

The activities of sectoral ministries are identified as follows:

The Health Division, Ministry of Health and Education will be responsible for advocay and delivery of reproductive health care including family planning services through its primary health care network.

The Education Division, Ministry of Health and Education will continue to emphasise on population education in the syllabus and curricula of formal educational institutions at all levels and in the programme of adult education.  The Division will also consider developing special programmes for training in population and related matters for religious teachers to enlist their support in the task of promoting small family size norm.

The Bhutan Broadcasting Service  will develop innovative messages on the social, health and economic benefits of delayed marriage, postponement of first birth and wider spacing of birth and the overall value of small family and deliver these messages to every eligible couple in the country using radio and television.

The Ministry of Trade and Industry will offer Family Welfare Education Programme for the workers in the organized sector.

The Ministry of Agriculture will be integrating family planning, health and nutrition activities in its agricultural extension programmes.  Under the programme, the extension workers of the Ministry will be given training on aspects of reproductive health, nutrition and family planning and their support service will be solicited for the promotion of small family size norm, family planning, health care and nutrition education.

The Ministry of Planning will be responsible for integration of population concerns into development planning at all levels, preparation of integrated population and development plan, data collection, research and external evaluation of the programme.

InstitutionalFramework

Coordination Committee(s)

In addition to the institutional frameworks that currently exist to implement the policies and programmes for population management, there may be a need to constitute a policy making body on population. The Committee will be mandated to issue broad policy directives, and to coordinate, monitor and review all population programmes in the country, and to develop specific policies and programmes on population and environment.

There may also be a need to establish such  Coordination Committees at national and district levels to ensure successful implementation of multi-sectoral population programmes. The Health Division will work out the details of a suitable monitoring and coordination mechanism and determine data needs for proper coordination.

Research

Strengthen national capability to conduct basic, applied as well as evaluation research to formulate population policies and programmes based on scientific knowledge and information. The major areas of research identified include the following: (i) socio-cultural determinants of fertility, (ii) the dynamics of relationship between population, poverty alleviation, environment,

sustained economic growth and sustainable development, (iii) demographic impact of population policies and programmes, including development programmes and projects, (iv) operational research to improve programme efficacy and management and quality of services, and (v) reproductive and contraceptive research on the safety, effectiveness and acceptability of different contraceptives in the socio-cultural context of Bhutan.

Training

Support training of manpower in the collection and analysis of socio-demographic and health related data, policy and programme formulation and evaluation, and management of reproductive health and family planning, undertaking policy analysis and operational research and training of field workers in all aspects of reproductive health care, including counselling.

DataCollection

Strengthen national capability, in general, and the capability of the Central Statistical Organization (CSO) of the Ministry of Planning, in particular, in the collection and analysis of valid statistical data for population programmes and project development, implementation, monitoring and evaluation; through regular conduct of population census, sample surveys, intercensal studies, etc.  For this purpose, the technical competence of CSO will be strengthened.

In this respect of data collection, the Management Information System (MIS) unit of the Health Division of the Ministry of Health and Education will also be strengthened to collect and analyse necessary service statistics to effectively carry out the tasks of proper management, monitoring and internal evaluation of the programme.

CHAPTER 15. RENEWABLE NATURAL RESOURCES

Basic Situation

Structureofthe Sector

The renewable natural resources (RNR) sector under the Ministry of Agriculture, covers forestry, livestock and agriculture, including horticulture.

Economic Activity

Although the economic importance of the RNR sector has declined in recent decades as the economy has diversified, it remains the single most important sector accounting for 40.7% of GDP in 1993 down from 56.7% of GDP in 1980.  85% of population are engaged in farming. Between 1990 and 1993 agricultural output grew by an estimated 2% p.a, livestock production by 2.3% and forestry output by 2.7% p.a. in real terms.

Table 15.1 Crop Production Data, 1992

reliable and consistent information on cropping areas, yields and production, and by the absence of time series data.  However, it is estimated that arable and horticultural production together account for about 53% of sector output, with rice and maize being the principal food crops.  The most recent crop production estimates are those provided by the agricultural extension service for 1992 (Table 15.1).

Livestock production is estimated to account for around 21% of sector output.  Cattle predominate and are owned by 90% of households.  Meat and livestock products are mostly  retained for home consumption and consequently, marketed surpluses are small. Cattle  have a crucial role in the farming system as providers of draught power and manure.  Apart from a steady increase in the number of cross-bred cattle, no clear trends are discernible in livestock populations, reflecting problems with recent livestock census data.

Although stocking densities are regarded as close to their sustainable limit, there is no consistent evidence of grazing pressure causing long-term land degradation.

Crop        Area (ha)

Yield(Kg/h a)

Productio n

(t)

Forest products account for 26% of sector output and consist of timber and firewood supplied to domestic markets and the export of sawn timber and unsawn logs to India.

Exports of wood and wood products to India were valued at Nu 271 m in 1993  (including

m                                                              

Source: Ministry of Agriculture

The RNR sector has continued to contribute a significant positive trade balance. Imports, primarily of rice, wheat, livestock products and edible oils are more than offset by exports mainly of cardamom, oranges, apples, timber and logs.

LandUse

Production Systems

Bhutan’s mountainous environment produces a wide range of agro-climatic conditions, reflecting differences in soil, rainfall, temperature, and slope.  This allows a considerable variety of different crops to be grown. Crop production, livestock and forestry activities are closely interrelated     and interdependent.  Agriculture derives organic material, fuel, fodder, timber, feed,          bedding materials and other basic resources from the forest.  Livestock  provides the draught power and organic nutrients required for food production and in turn utilize feed and fodder from crops.  The forests provide over 90% of domestic fuel in the rural areas as well as the timber used in rural housing and farm buildings.  They are also a source of supplementary food supplies in the form of edible roots, tubers, fungi and leaves of certain plants.  Lemon grass, other essential oils and medicinal herbs provide a significant source of cash income to some rural    communities.

Population growth is resulting in increased pressure on traditional production systems.  With little scope for increasing agricultural land area, this is leading to resources being used more intensively.  While this poses environmental threats from increased livestock numbers and reduced fallow periods, it also opens up opportunities arising from the introduction of the technologies required to intensify production and from the creation of new markets.

Opportunities and Constraints

TheScopeforIncreasedProduction

Despite Bhutan being a relatively high cost producer in both local and regional markets, there is considerable scope for increasing production and incomes from the RNR sector:

Horticulture

Bhutan has significant regional and seasonal comparative advantage in the production of horticulture crops, particularly in sub-tropical and temperate fruits and in the supply of potatoes and vegetables to off-season (summer) markets in neighbouring areas of India and Bangladesh. There are also opportunities for export of high value crops such as asparagus, strawberries, stone fruits and mushrooms.  Production of non-perishable products such as essential oils, medicinal herbs, nuts and dried fruits can bring the benefits of the market to remoter areas.

Traditional Food Crops.

Recent research has shown that there is ample potential for intensifying the production of traditional food crops and this has been reflected in the uptake of new rice and maize varieties. Providing farmers with the technology to intensify production of staple crops contributes towards ensuring household subsistence requirements and food security, and also enables resources to be released for cash crop production.

Livestock.

Livestock provide draught power, manure to the farming system and milk and milk products to households.  Religious sentiments against the culling of cattle limit the scope for supplying meat and livestock products for the market.  Expanding demand in local markets provides opportunities for increased small-scale dairy farming, rearing of pigs and poultry.

Forests.

There is a wide scope for increasing the sustainable utilization of forest resources through improved forest management, more efficient logging techniques and improved sawmill technology.  There are also opportunities for increasing revenues from national parks and protected areas through eco-tourism.

FactorConstraints

The availability of the main factors of production of land, labour and capital together with access to technology determine the range of production opportunities available to the farmer:

Land.

Population pressure has led to fragmentation of land holdings, and an increase in the number of economically marginal farms.  Migration from the rural areas has helped to alleviate land pressure to some extent.  Diversification and the introduction of higher value crops offer opportunities to increase production and income on small farms.

Labour.

In Bhutan labour shortages and seasonal bottlenecks are regarded as key constraints to increasing agricultural production and incomes.  Employment opportunities imply that returns to labour are often higher outside of agriculture.  Small field size and terrain limit the scope for mechanization. Bhutan’s relatively high labour costs and less favourable growing conditions go to show that the production of traditional crops such as cereals becomes less attractive once subsistence requirements are met.  Responding to perceived labour shortages therefore implies the introduction of cropping patterns with less marked seasonal labour peaks and diversification into crops for which labour returns are higher.

Capital.

Technology.

Although agricultural research has achieved notable success, the advice available to farmers does not adequately reflect the range of agro-ecological conditions. Poor agronomic and post-harvest practices result in excessive crop losses reducing food security and lowering returns to cash crop production.  Research and extension need to become more broad-based, less prescriptive and more responsive with the aim of providing a "menu" of technological options to farmers.

EnvironmentalConstraints

Bhutan's mountain environment poses a number of constraints:

-                Climate and topography. In the higher altitude areas of the temperate zone,  low temperatures limit the growing season and the range of crops which can be produced. The very steep terrain, also limits the availability of suitable arable land so that, with increasing pressure on land resources, farmers have to take recourse to cultivating steeper slopes with shorter fallow periods than in the past.  The environmental impact of such changes will  be monitored and measures taken to alleviate land pressure since this could lead to long-term degradation.

-                Diversity.  The diversity of Bhutan's mountainous ecology, and hence of its farms considerably increases the costs of providing effective agricultural research and extension services.

-                Inaccessibility.  The ability of rural communities to develop beyond subsistence production depends crucially on their access to markets. Over half of the rural population live more than half a day’s walk from a road head.  However, the scope for expanding the road network is limited by constraints of terrain, high investment and road maintenance costs.  Identifying niche market opportunities for high value/low weight rural products has an important role in providing enhanced income opportunities to remote communities.

InstitutionalConstraints

Government services to the agricultural sector continue to face a number of institutional constraints which adversely influence their effectiveness:

Information and Data

The lack of reliable data on farming systems and land use has hampered efforts to develop appropriate policies and programmes for the RNR sector.  During the 7FYP considerable progress was made in addressing these constraints through the work of the Land Use Planning Section in MOA.  However, there remains an absence of basic agricultural statistics and only limited information is available on farm-level production systems and constraints.

Trained Manpower.

Limited professional and technical capacities in the research and extension services have severely restricted the ability of the MOA to provide appropriate advice and assistance to the farming community.  Alleviating these constraints through graduate and diploma level training was a major emphasis in the 7 FYP.

Management.

Capacity limitations, inadequate management structures and procedures  within MOA and lack of management continuity has often reduced the effectiveness of field-based programmes.

Institutions

MinistryofAgriculture(MOA)

The MOA is responsible for the promotion of agricultural development. The MOA employs a total of 2,171 staff  of whom 1,160 are in professional and technical positions. The Ministry Headquarter has two service divisions (the Administration and Finance Division and the Policy and Planning Division) as well as the Natural Resources Training Institute at Lobeysa. The services provided by the Ministry are delivered through three operational divisions:

-                The Research, Extension and Irrigation Division (REID) is responsible for promoting innovation and development at the farm level. REID operates through RNR research centres, the Dzongkhag RNR offices, 157 agricultural and 112 animal husbandry extension centres in the gewogs.

-                The Crop and Livestock Services Division (CLSD) responsible for animal health, livestock breeding, mechanization and input supply services.  Under CLSD are the Agricultural Machinery Centre (AMC), the Royal Veterinary Epidemiological Centre, 4 regional veterinary laboratories (RVLs), 1 satellite laboratory, a vaccine production centre, 10 livestock breeding farms and 42 artificial insemination centres.

-                The Forest Services Division (FSD)  responsible for the sustainable management of forest and protected areas.  FSD operates through 10 territorial forest divisions and also manages the 10 national parks and protected areas.  During the 7FYP a social forestry and forestry extension programme was initiated with the appointment of Forest Extension Officers to each Dzongkhag.

Public Corporations

There are four public corporations that are involved in the RNR sector:

-                The Food Corporation of Bhutan (FCB)  is responsible for: (i) import of foodstuffs (mainly rice and edible oils); (ii) the management of WFP assistance; and (iii) the operation of permanent and seasonal auction yards for horticultural produce.

-                The Bhutan Logging Corporation (BLC) undertakes logging operations under commercial forest management concessions on behalf of the FSD.

-                The Druk Seed Corporation (DSC) was established in 1995 and took over the commercial seed and plant supply operations of the former National Seed and Plant Production Programme.

-                The Bhutan Development Finance Corporation (BDFC)  through its network of branches in the Dzongkhags, is the main source of credit for the agricultural sector.  New lending by BDFC to the RNR sector in 1995 totaled Nu 37.6 million divided between 731 seasonal and 2,097 term loans.

Private Sector Operations

It has been policy of the RGOB to promote the role of the private sector in providing services to the RNR sector. The marketing of agricultural produce is entirely in the hands of private traders, the MOA's role being to facilitate improvements through measures such as the FCB auction yard system and the provision of information on prices and quantities traded.

Review of Past Performance

Objectives of the 7FYP

-                Sustainable development of arable production to enable self-sufficiency in food production: involving concepts of household and national food security such that:

(i)  households in the rural areas would be able to meet their food requirements; and (ii) for the country as a whole, agricultural exports would be sufficient to meet the costs of food imports.

-                Sustainable utilization of natural resources involving the management of forest and protected areas and steps to ensure that agricultural intensification was accompanied by measures to maintain soil fertility and prevent land degradation.

Strategiesin the 7FYP

-                Integration and strengthening of project planning and implementation.  This required greater integration between planning and implementation of government interventions which had previously been fragmented along fairly rigid sub- sectoral lines.

-                Institutional strengthening.  Capacity within MOA was to be strengthened through recruiting additional staff and a greater emphasis on staff training.  The private sector was to be encouraged to take a more active role in agricultural marketing and input supply.  A greater community involvement in project planning and implementation was to be achieved.

-                Strengthening of regional development. The area development projects (ADPs) were to be integrated into a regional structure to support greater decentralization of programmes to the Dzongkhag level.

-                Integration of environmental sustainability into all agricultural activities.

Sustainable development was to be based on the introduction of sound conservation practices, land management and land use planning which were to be introduced into the planning of Dzongkhag programmes.

AttainmentofObjectives

The lack of consistent time series information on production, rural incomes and land use, means that it is impossible to develop a full picture of the extent to which the objectives set for the 7 FYP have been achieved.  However, a number of indicators suggest the direction of developments in the sector:

-                The trade balance  in the sector has continued to remain positive although horticultural exports have been affected by large fluctuations in the volume of citrus exports.

-                Production.- Evidence from the level and distribution of FCB grain imports, nutrition studies, and the uptake of new grain varieties suggests that production of staple grains has kept pace with population growth in the rural areas.  Production of horticultural crops has continued to increase and, together with plantation crops it accounts for around 13% of sector output. 

-                Nutrition  surveys of the rural population show that calorific intakes are generally adequate, but that vitamin A deficiencies and anaemia are common.  Nutritional problems in children are closely related to the incidence of diarrhoeal diseases, rather than dietary deficiencies, although there remains scope for improving the quality of diet.

-                With the creation of the Land Use Planning Section in MOA, more systematic information on land use has become available.  This indicates that the area of forest cover remains well in excess of the Government’s long-term target of 60% of total land area, and suggests that long-term land degradation caused by agricultural activity remains limited.

ImplementationPerformance

Table 15.2 shows the actual and expected capital and recurrent expenditures on RNR sector (MOA and Dzongkhag) programmes for the first four years of the 7 FYP.  The overall implementation percentage achieved was 103.7% of the 7 FYP target, reflecting considerably higher than anticipated expenditures on the Paro Valley Development Project (PVDP) and the Agricultural Mechanization Centre (AMC) which together have accounted for 39% of RNR sector expenditures over the four year period.

A little over one tenth of RNR sector expenditures are currently incurred on Dzongkhag implemented programmes (funded from both Dzongkhag budgets and the ADPs).  Improvements to farmer support and advisory services will require a greater share of resources being allocated to Dzongkhag programmes.  However, programmes implemented at the Dzongkhag level have continued to emphasize achievement of input supply targets, rather than impact, and there is a need for a much stronger technical content in these programmes.  This will require closer collaboration and support between Dzongkhag RNR offices and MOA.

Table 15.2 7 FYP Budget Performance - RNR Sector (Nu million)

Project monitoring and review reports have generally indicated satisfactory implementation progress, although, for some projects, implementation has been constrained by staff shortages. There have been no excessive delays on projects involving construction work.  Disbursement shortfalls have tended to reflect over-optimistic programming assumptions about the time taken to secure aid financing and for project mobilization, as well as over-budgeting of project costs on some aid funded projects.  Information on project impact is not readily available and the development of an effective monitoring and evaluation capacity remains a priority for MOA.

Input supply programmes have continued to face difficulties such as commission agents’ having insufficient working capital leading to delayed delivery of fertilizers and seedlings and low levels of efficiency in the livestock breeding programme.  Further commercialization and privatization are seen as the eventual solution to these problems.

In recent years, around three-quarters of the RNR sector budget have been financed from aid sources, including almost one third of recurrent costs.  Domestic resource constraints sometimes make it impossible for the RGOB to provide adequate recurrent financing for projects after their completion.  This is a problem which will be addressed through the development of a realistic medium-term financing perspective for RNR sector programmes that takes account of both domestic and aid resources.

InstitutionalDevelopments

Human Resources Development.

The number of graduates working in the MOA increased from 90 at the end of 1991 to 142 at the end of 1995.  However, only 6 out of 20 Dzongkhag RNR offices have graduate staff attached to them, and only 34% of technical (Scientific Support Cadre) positions are filled by diploma level staff.  The shortage of trained staff has been addressed through two initiatives: (i) the Natural Resources Training Institute (NRTI), which began operation in 1992 and offers three-year diploma courses in agriculture, animal husbandry and forestry; and (ii) an expanded programme of professional training funded by the European Union which, on completion in 1999, will have funded 50 undergraduate and 30 postgraduate training placements.

MOA Reorganization

A major reorganization of the MOA took place in 1993 aimed at achieving better integration and efficiency in the services provided to farmers.  This involved merging the agriculture, livestock and forestry research services and combining responsibilities for agriculture and livestock extension services under a single Research, Extension and Irrigation Division.  Veterinary and input supply services were brought under the Crop and Livestock Services Division.  The mandate of the Forest Services Division was left largely unchanged.  Linked to the implementation of the reorganization was a review of research and extension policies and practices.  This led to reorganization of the research system with 4RNR Research Centres (RNR- RCs) each having a regional mandate.  Extension officers are being posted to the RNR-RCs to ensure closer integration between the research and extension services and to improve technical support and supervision of the Dzongkhag RNR programmes.  Measures to strengthen the planning base for the sector have included the establishment of a land use planning section in the Policy and Planning Division of MOA.

Community Participation

The importance of increased community participation in RNR sector programmes has been emphasized both as a way of reducing demands on the government budget and as a means of ensuring the long-term sustainability of programmes beyond their development phase.

Considerable progress has been made in transferring responsibility for irrigation schemes to Water Users’ Associations (WUAs) which were introduced under the new irrigation policy adopted in 1992.  By the beginning of 1996, around 100 WUAs had been established.  Following the winding up of the Bhutan National Potato Programme (BNPP) in 1994, the establishment of potato farmers’ groups has been encouraged to provide input supply and marketing services.  A total of 10 groups were in operation at the beginning of 1996.

Commercial and Private Sector Development

Commercialization and privatization of input supply and marketing services are seen both as a means of reducing demands on the Government budget and of increasing the range of services available to farmers by providing additional opportunities for entrepreneurial activity.  In the 7 FYP greater autonomy was given to FCB and BLC which now operate as fully commercial corporations.  Seed supply has been brought under the Druk Seeds Corporation (DSC) which  will become fully commercial by 1998.  Agricultural input supply, formerly the responsibility of MOA, was transferred to private sector commission agents providing opportunities for the delivery of additional services to rural communities.  Meat processing plants at Phuntsholing and Samdrup Jongkhar, milk processing plants at Phuntsholing and Bumthang and a fruit processing plant at Bumthang have been privatized.

Objectives, Strategies and Programmes for the 8 FYP

Objectives

The objectives for the RNR sector for the 8FYP are:

-                National Food Security.  The objective of national food security has three aspects:

-                Maintaining broad national self-sufficiency level whereby the export of crops for which Bhutan has comparative advantage provides sufficient foreign exchange to cover the costs of food imports.

-                Achieving a minimum of 70% self-sufficiency in food grain production compared with the current level of around 65%.

-                Ensuring household food security whereby the population have assured access to food at all times.

The national food security policy has implications beyond the RNR sector alone and call for a much broader cross-sectoral approach, the requirements of which were addressed under the Comprehensive Food Security Programme developed during the 7 FYP.

-                Conservation of Natural Resources.  An over-riding objective of RGOB is to protect Bhutan’s fragile mountain environment and its unique flora and fauna for future generations.  This requires that natural resources are utilized in a sustainable way and involves trade-offs between short-term economic gains and sustained long-term economic development.  The protection and management of forest areas and improved land husbandry practices in agriculture are essential to achieving this objective, and will be actively pursued during 8 FYP.

-                Sustainable Economic Production and Enhancement of Rural Income.  At the farm level, production has to be both economic and sustainable. The RGOB  will therefore aim to ensure that: (i) appropriate, viable, and ecologically sustainable agricultural technologies are available; (ii) rural communities have access to the benefits provided by the market; and (iii) an enabling regulatory framework is in place which allows economic activity to flourish while ensuring the conservation and protection of the natural resource base.

-                Social and Regional Balance and Equity. The support and services provided by RGOB in the RNR sector will be available and accessible to all, while reflecting differences in local natural and economic conditions.

-                Role of Government. The role of Government in the RNR sector is guided by the principle that agriculture, animal husbandry and to some extent forestry are primarily private domains in which farmers and local communities take initiative, provide their own labour and capital, and take the risks and consequences of their actions.  The RGOB therefore cannot direct and manage economic activity in the sector.  Instead, its role is that of facilitator, extending the range of available opportunities through constructive regulatory measures, appropriate fiscal policies, provision of infrastructure, and cost-effective research, technical support and advisory services.

Strategiesforthe 8 FYP

The strategies for the RNR sector for the 8 FYP focus on the broad cross-sectoral policy measures required to: (i) maintain the natural resource base in the sector, (ii) promote economic growth and development; and (iii) ensure the efficient use of scarce public sector resources.

Improving the Planning Base for the Sector

The limited statistical base, lack of key agro-climatic data and limited understanding of the principal farming systems severely constrain efforts to develop appropriate policies and programme interventions for the RNR sector and to monitor and evaluate programme implementation.  Steps to be taken to improve the planning base for the sector will include (i) the strengthening of agricultural statistics collection, analysis and dissemination; (ii) the provision of consistent land use information; (iii) a more farmer-centred approach in agricultural research and extension; (iv) a greater emphasis on monitoring the impact of government policies and programmes; and (v) strengthening of professional capabilities, particularly at the regional and Dzongkhag levels.

Ensuring an Enabling Regulatory Framework

One of the most important roles of RGOB in the RNR sector is to ensure an enabling legal, economic and social environment that encourages the best possible use of the available natural, human and capital resources.  Certain aspects of the present regulatory framework, particularly in the areas of land use, taxation and trade are inconsistent or place inappropriate restrictions on the rural population.  Greater attention needs to be given to assessing the economic and social impact on the RNR sector of existing and proposed legislation as part of an on-going review and updating of the legislative framework for the sector.

Strengthening Natural Resources Management

The management of Bhutan’s natural resources is the responsibility of both the RGOB and local communities. Ensuring the sustainable management of the state forests and protected areas, requires that the costs to the government are minimized.  In the forest areas, therefore, revenues from forest utilization will be recycled to finance forest conservation and management, while the costs of managing the protected areas are increasingly being covered from the Bhutan Trust Fund. To strengthen natural resource management in the agricultural areas, greater emphasis will be placed on land husbandry practices in agricultural research and extension, and the integration of social forestry into the extension programmes. The legislation on Tseri land passed during the 7 FYP will be implemented in a way that is sensitive to its social and economic impact.

Introducing Improved Technologies

The introduction of technologies and practices that improve the viability of grain production will be pursued, so as to increase self-sufficiency. Improved agronomic and post-harvest practices will also be promoted to help Bhutan to realize its regional and seasonal comparative advantage in horticultural crops.  Initiatives to increase productivity in the livestock sub-sector will focus  on intensification and measures to ensure sustainability of traditional production systems.

Within this context the role of the research and extension services is to provide a "menu" of technological choices to farmers.  To cater for the wide range of agro-climatic zones in Bhutan, the research programme will be conducted across a broad front, emphasizing the utilization of research results from elsewhere rather than focusing on experimentation at a limited number of sites.

Promoting People’s Participation

Local communities are already involved in the planning and monitoring of RNR sector programmes in their areas through the structure of GYTs and DYTs. The role of private individuals in providing input supply and marketing services and basic curative animal health services will be encouraged.  Greater emphasis will also be given to promoting farmers groups to manage rural infrastructure, deliver services and market agricultural produce, building on the successful experiences from the  water users’ associations.

Ensuring Well-Managed, Cost-Effective and Responsive Public Services

There remains considerable scope for improving the efficiency and effectiveness of public services in the RNR sector.  Critical to this will be measures to strengthen management within the MOA.  This will require the elimination of unnecessary bureaucracy, allowing managers greater flexibility in the implementation of their programmes, and better technical back-stopping and supervision of field-based staff.  Research, technical and advisory services will be

(i) restructured to make them more farmer-responsive and cost-effective; and (ii) subjected to regular monitoring and impact assessment.  The imbalance in funding of national programmes implemented by the MOA and district programmes implemented by the Dzongkhags will be addressed and measures introduced to ensure better integration between MOA and the Dzongkhag RNR offices.

Promoting Commercialization and Privatization, and Reducing Subsidies

Input supply services are most appropriately the domain of the private sector which can respond quickly to the demands of the market.  During the 8FYP, the policy of commercialization and privatization will be extended to cover mechanization services and livestock breeding services. Cost recovery will be sought for technical and advisory services provided to commercial horticulture and the scope for such services being provided directly by independent organizations, such as growers’ associations, will be investigated.  Input subsidies distort resource allocation

and impose considerable costs on government.  In future, such subsidies will be retained only where there is a strong economic and social justification.

Improving Access to Markets

For many communities, the opportunity to increase incomes and living standards depends on improved access to markets.  This requires continued emphasis to be given to the development of rural access roads and mule tracks.  Price controls, which may distort market mechanisms and discourage local production, will be reviewed.

Promoting Human Resources Development

The human resources, most decisive for the development of the RNR sector, are those of the rural communities themselves.  Primary education and literacy programmes have a crucial role in opening up capacities for innovation and development among rural communities.  The benefits   of education can be enhanced by making curricula more sensitive to the needs of rural life.

Extension programmes in the RNR sector also help to promote knowledge and understanding

among the adult population in the rural areas.  The RGOB's aim is to improve the quality of education and extension services by providing an appropriately qualified teaching and extension staff, backed up by adequate resources and supervision.

Management and Utilization of External Assistance

In 1995/96 almost 75% of the RNR sector budget was funded under external assistance programmes.  During 8 FYP efforts will be made to ensure that external assistance to the RNR sector reflects more closely government policy and programme priorities, supports institutional capacities and programmes in the sector, and avoids the creation of separately managed project structures which cannot be sustained.  An appropriate balance will also be sought between capital financing, recurrent expenditure support and technical assistance.

Programmes for the 8 FYP