Document of The World Bank Group FOR OFFICIAL USE ONLY Report No. CPF0000049 INTERNATIONAL DEVELOPMENT ASSOCIATION INTERNATIONAL FINANCE CORPORATION MULTILATERAL INVESTMENT GUARANTEE AGENCY COUNTRY PARTNERSHIP FRAMEWORK FOR THE KINGDOM OF BHUTAN FOR THE PERIOD FY25-FY29 April 3, 2025 Bangladesh and Bhutan Country Management Unit, South Asia Region The International Finance Corporation, Asia & Pacific Region The Multilateral Investment Guarantee Agency This document is being made publicly available prior to Board consideration. This document may be updated following Board consideration and the updated document will be made publicly available. The date of the last Country Partnership Framework was June 6, 2018 CURRENCY EQUIVALENTS (Exchange rate as of March 31, 2025) Current Unit = Bhutanese Ngultrum (BTN) US$1 = 85.44 BTN FISCAL YEAR January 1 – December 31 ABBREVIATIONS AND ACRONYMS Acronym Full name Acronym Full name ABPE Annual Business Planning Exercise DP Development Partners ACCESS Accelerating Transport and Trade DPC Development Policy Credit Connectivity in Eastern South Asia ADB Asian Development Bank DPF Development Policy Finance AF Additional Finance ECB External Commercial Borrowing AMCHP Accelerated Maternal and Child Health ECCD Early Childhood Care and Development Program ASA Advisory Services and Analytics e-GP Electronic Government Procurement BLSS Bhutan Living Standard Survey e-PEMS Electronic Public Expenditure Management System BPC Bhutan Power Corporation ESF Environmental and Social Framework BTN Bhutan Ngultrum ESG Environmental and Social Safeguards CAT Catastrophe EU European Union CCB Climate Co-benefits FAO Food and Agriculture Organization CCDR Country Climate and Development FDI Foreign Direct Investment Report CEA Country Environment Analysis FMU Forest Management Unit CEM Country Economic Memorandum FY Financial Year CF Community Forest FYP Five Year Plan CIB Credit Information Bureau GCP Global Challenges Program CLR Completion and Learning Review GCF Green Climate Fund CPF Country Partnership Framework GEF Global Environment Facility CPPR Country Portfolio Performance Review GER Gross Enrolment Rate CPSD Country Private Sector Diagnostic GST Goods and Services Tax CRW Crisis Response Window GFDRR Global Facility for Disaster Reduction and Recovery CSI Cottage and Small Industries GHG Greenhouse Gases DDO Deferred Drawdown Option GII Global Infrastructure Index DHI Druk Holding and Investments GMC Gelephu Mindfulness City DHPP Dorjilung Hydroelectric Power Project GNH Gross National Happiness DMS Debt Management Strategy HSDRRP Hydromet Services and Disaster PBA Performance Based Allocation Resilience Regional Project ii Acronym Full name Acronym Full name IA Implementing Agencies PCE Private Capital Enabling IDA International Development Association PCM Private Capital Mobilization IEG Independent Evaluation Group PEFA Public Expenditure Fiduciary Assessment IFC International Finance Corporation PEMS Public Expenditure Management System IFMIS Integrated Financial Management PER Public Expenditure Review Information System IMF International Monetary Fund PFM Public Financial Management IPF Investment Project Financing PforR Program for Results IUFR Interim Unaudited Financial Report PIU Project Implementation Unit JICA Japan International Cooperation PLR Performance and Learning Review Agency JSDF Japan Social Development Fund PPA Performance and Policy Action LMIC Lower Middle-Income Country PPP Public Private Partnership LMIS Labor Market Information System PSW Private Sector Window MDF Multi-Donor Fund REDD Reducing Emissions from Deforestation and Forest Degradation MIGA Multilateral Investment Guarantee RETF Recipient Executed Trust Fund Agency MOF Ministry of Finance RF Results Framework MSME Micro, Small, and Medium Enterprises RGoB Royal Government of Bhutan MW Megawatt RMA Royal Monetary Authority MYRB Multi-year Rolling Budget RNR Renewable Natural Resources NBFI Non-Banking Financial Institution SCD Systematic Country Diagnostic NCHM National Center for Hydrology and SME Small and Medium Enterprises Meteorology NDC Nationally Determined Contributions SOE State-Owned Enterprise NDS National Digital Strategy SOFI State-Owned Financial Institution NEET Not in Employment, Education or SUW Scale-Up Window Training NPL Non-Performing Loan TF Trust Fund OHS Occupational Health and Safety UNDP United Nations Development Programme PASA Programmatic Advisory Services and WB/ WBG World Bank /World Bank Group Advisory IDA IFC MIGA Vice President: Martin Raiser Riccardo Puliti Deepti Jerath (Acting) Director: Cecile Fruman (Acting) Imad Fakhoury Sebnem Erol Madan Task Team Leaders: Adama Coulibaly Louisa Leila Zhang Persephone Economou iii FY25-FY29 COUNTRY PARTNERSHIP FRAMEWORK FOR THE KINGDOM OF BHUTAN INDICATIVE TABLE OF CONTENTS I. INTRODUCTION .................................................................................................................. 1 II. COUNTRY CONTEXT AND DEVELOPMENT AGENDA .......................................................... 1 2.1 Social and Political Context .............................................................................................. 1 2.2 Recent Economic Developments ..................................................................................... 2 2.3 Poverty and Shared Prosperity on a Living Planet - Profile ............................................. 4 2.4 Main Development Challenges ........................................................................................ 5 III. WORLD BANK GROUP PARTNERSHIP FRAMEWORK ....................................................... 10 3.1 Government Program .................................................................................................... 10 3.2 Proposed WBG Country Partnership Framework .......................................................... 10 Lessons learned.................................................................................................................... 10 Selectivity ............................................................................................................................. 11 Consultations ....................................................................................................................... 12 3.3 CPF Outcomes Supported by WBG Program ................................................................. 12 IV. IMPLEMENTING THE CPF: A BUSINESS PLANNING APPROACH ....................................... 19 4.1 Financing Envelope and Instruments............................................................................. 19 4.2 Fiduciary Framework ..................................................................................................... 19 4.3 Operationalizing the CPF................................................................................................ 20 V. MANAGING RISKS TO THE CPF PROGRAM .......................................................................... 23 Annex 1: CPF Results Matrix and Short-Term Business Planning ............................................ 26 Annex 2: Bhutan CPF FY21-FY24 Completion and Learning Review ....................................... 32 Annex 3: Streamlined Bhutan Systematic Country Diagnostic (December 2024)................... 63 Annex 4: Selected Indicators of Bank Portfolio Performance and Management ................... 75 Annex 5: Operations Portfolio (IBRD/IDA and Grants) ............................................................ 76 Annex 6: Statement of IFC’s Held and Disbursed Portfolio .................................................... 77 Annex 7: IBRD/IDA Pipeline for FY25-FY26 ............................................................................. 78 Annex 8: Statement of IFC’s Pipeline for FY 25/26 ................................................................. 79 iv I. INTRODUCTION 1. This Country Partnership Framework (CPF) sets out how the World Bank Group (WBG) can support the Royal Government of Bhutan’s (RGoB) 13th Five Year Plan (FYP 2025-29). The CPF, which covers the period FY25-FY29, focuses on the overarching goal of accelerating economic growth and job creation while safeguarding Bhutan’s cultural heritage and fragile ecosystems. It comes at a critical moment in Bhutan’s history as the country seeks to tackle growing issues of unemployment, particularly of youth, and outmigration and responds to a sharply increased level of ambition and demand for WBG services by the Government. II. COUNTRY CONTEXT AND DEVELOPMENT AGENDA 2.1 Social and Political Context 2. Bhutan is a small, landlocked country deep in the eastern Himalayas between India and China. Over a horizontal distance of just 100–150 kilometers, the elevation rises from about 150 meters above sea level in the south to over 7,000 meters in the north. The country’s population of about 735,000 is scattered across steep mountain slopes and valleys, many in remote and far-flung hamlets, making Bhutan one of the most sparsely populated countries in the world. With forest coverage exceeding 70 percent, Bhutan is one of only three countries that absorb more greenhouse gas emissions than they produce. 3. Despite its location between two large regional powers, the country has preserved its political independence and rich cultural heritage. Bhutan’s political system has evolved rapidly, from an isolated absolute monarchy into a democratic constitutional monarchy in 2008, with a remarkable degree of stability and continuity. Having opened to other countries only in the early 1970s, Bhutan maintains strong relations with India and enjoys good bilateral and multilateral relations with its diplomatic partners and neighboring countries. The current government, which assumed office in January 2024, is the fourth elected government of Bhutan. The political environment is stable and Bhutan’s governance track record is sound, ranked as the 18th least corrupt country in the world. 1 4. Bhutan’s history shapes its current approach to economic development. The Constitution directs the state “to promote those conditions that will enable the pursuit of Gross National Happiness” (GNH). First coined by the 4th King of Bhutan, King Jigme Singye Wangchuck, in the late 1970s, the concept of GNH conveys Bhutan’s commitment to a holistic and responsible approach to development that promotes the social, ecological and spiritual well-being of Bhutan and preserves the country’s cultural and religious heritage of Buddhism. Through its Gross National Happiness Index, Bhutan has sought to create a tool to measure GNH and inform policymaking and society. 5. Bhutan’s ability to compete and thrive in the modern world have required it to accelerate reforms in recent years. A drive to modernize the public administration was launched in 2020 by royal decree, with implementation from 2022. Approximately 40 percent of senior official positions were dissolved following a comprehensive assessment process, the cabinet was reorganized, and the number of Ministries reduced to nine. In December 2023, the People’s Democratic Party won a majority in parliament, pledging, among others, to create a business-friendly environment and more job opportunities in response to rising unemployment rates, particularly for youth. In his July 4, 2024, State of the Nation Address, H.E. Prime Minister Tshering Tobgay identified migration as the biggest challenge facing Bhutan noting the recent emigration of approximately 64,000 Bhutanese people i.e., approximately 9 percent of the population. Migration has since continued, although at a slower pace. 1 2024 Corruption Perception Index. 1 6. A clear sign of the country’s determination to confront economic and social challenges came with the announcement in 2023 of the creation of the Gelephu Special Administrative Region. The initiative is unprecedented in the history of Bhutan in terms of scope and ambition. The region known as Gelephu Mindfulness City (GMC) will serve as a laboratory for successful approaches (among others, in health and wellness, ecotourism, digital services, and agritech) that could be rolled out in the rest of Bhutan at a later stage, following a ‘one country, two systems’ approach. GMC aims to transform Gelephu into a gateway city, a regional intermodal trade hub, an international commercial center, and a motor for creating jobs. This ambitious project, located at the southern border with India at the junction of the Southern East-West Highway corridor and three central north-south transport routes, will require significant public and private investment in energy, digital infrastructure, and transportation, including roads, railways, waterways, logistics, and an international airport. By leveraging Bhutan’s green energy and cultural values, GMC aims to create a sustainable, innovative environment for economic growth and holistic development. GMC integrates Singapore’s common law and Abu Dhabi Global Market (ADGM) regulations to govern company incorporation, employment, taxation, and financial services. This framework ensures efficient legal processes for businesses and individuals seeking to operate in the region. GMC will face challenges including attracting sufficient private investment, ensuring the consistent supply of healthy and safe food, waste management and other service delivery for the over 1 million people expected to live there, building the skills of local Bhutanese to enable them to compete for jobs made available in the new city, creating productive linkages with the Bhutanese economy, and striking a balance between openness and safeguarding the country’s cultural identity. 7. Closely following the announcement of the creation of GMC, the parliament approved the 13th FYP (covering July 2024 to June 2029) in June 2024. The FYP is an ambitious plan for development alongside respect for the country’s unique heritage. It includes a 10-year strategic framework in support of the country’s long-term goal of becoming a High Income GNH Economy by 2034 (see further below). It complements, but is separate from, the GMC initiative with a focus on preparing the rest of Bhutan for an eventual integration with the more advanced regulatory model of GMC. The FYP was supplemented in March 2025 by the ‘21st Century Economic Roadmap: 10x National Economic Vision’ which sets ambitious economic targets to 2050 and emphasizes diversifying the economy and driving economic transformation; developing leadership in priority sectors such as agriculture, tourism and services; building a knowledge and innovation driven economy; and growing sustainability and environmental leadership. 2.2 Recent Economic Developments 8. Bhutan’s economy has been significantly affected by a series of external shocks and a major strategic national investment in crypto mining. The trade and tourism-dependence of the small landlocked economy left it susceptible to pandemic-induced shocks, and the economy contracted by 2.5 and 3.3 percent in FY19/20 and FY20/21, respectively. COVID-19 relief measures and subdued revenue performance have resulted in high fiscal deficits and public debt since FY20/21. To stimulate the Bhutanese economy while accelerating its digital transformation, the state holding company, Druk Holding and Investments (DHI), invested US$539 million (21 percent of FY21/22 GDP) in crypto asset mining operations over FY21/22 and FY22/23, which was financed by foreign currency loans from the Royal Monetary Authority (RMA), 2 leading to a sharp contraction of international reserves by around 2 Crypto asset mining operations are highly energy intensive as reflected in domestic electricity consumption projections. Imports of related IT equipment are reflected in trade statistics and DHI loans from the RMA and their repayment appear in the public debt statistics, the balance of payments (BOP), the 2021 SOE report, and the 2023 national Debt Sustainability Analysis (DSA). However, the production and cross-border trading of the cryptocurrencies are not reflected in DHI’s audited financial statements and annual reports, national accounts, and the external accounts. The lack of information in how much Bitcoin DHI currently holds and how much it expects to generate over the next two years make it difficult to assess the feasibility of timely repayments of the DHI loans. 2 30-40 percent. The current account deficit (CAD) significantly increased to 28.1 percent in FY21/22 and 34 percent in FY22/23 due to imports of information technology (IT) equipment and related goods for crypto mining. DHI established a joint venture with Bitdeer, a Singapore-based company in 2023, and has continued to expand and invest in green crypto mining. Box 1: Macroeconomic Impacts of Bhutan’s Crypto Investments The macroeconomic impact of crypto asset operations is significant, although uncertain, and it is only partially reflected in the macroeconomic framework. Although crypto asset investments could boost exports and fiscal revenues, returns are uncertain due to Bitcoin's high volatility, potentially adding pressure to the external balance and international reserves. While the price of bitcoins has been favorable to Bhutan in recent months, lower-than-expected returns from crypto asset operations could hinder repayment of RMA loans. Materialization of fiscal risks from SOEs and financial sector contingent liabilities could further erode fiscal buffers. By better incorporating crypto asset operations into its macroeconomic framework, Bhutan could improve its capacity to monitor and manage the impact on fiscal revenues, and external balances, reducing the risk of economic instability. Understanding how crypto assets influence tax revenues and public resources also helps the government make informed decisions about public investments and revenue mobilization. 9. The current account deficit narrowed from a peak of 34 percent in FY22/23 but remains elevated at 22.7 percent of GDP in FY23/24. This reflects a reduction in crypto asset mining related IT imports and continued recovery of the tourism sector. Hydropower exports have declined, despite the commissioning of the Nikachhu hydropower plant, due to increased domestic consumption. Gross international reserves were US$624 million in June 2024 (4.7 months of imports), much lower than pre-pandemic levels. 10. Real GDP in Bhutan grew by 5.3 percent in FY23/24 (July 2023 to June 2024) and 7.2 percent in FY24/25 supported by the tourism sector and to some extent agriculture, mining and quarrying. The services sector grew by 8.7 percent, led by tourism-related services, while agriculture returned to the pre-pandemic growth rate of 3.4 percent after stagnating in previous years. Despite a strong growth for mining and quarrying, industry growth stalled at 0.2 percent due to contracting hydropower and construction sectors that account for 72 percent of the industry sector. Demand-side growth was driven by non-hydropower exports and consumption. Bhutan’s real GDP growth is driven by the public-led hydropower sector, resulting in growth spikes during the construction and completion of hydropower plants. However, the hydropower sector employs less than one percent of the labor force while the subsistence agriculture sector employs over 40 percent. 11. The fiscal deficit narrowed by 3.9 percentage points in FY23/24 to 0.8 percent of GDP. This was due to improved domestic revenue and reduced capital expenditures despite increases in public sector wages. Domestic tax revenue amounted to 12 percent of GDP in 2021/22 and is projected to increase to 14 percent in 2024/25, still below pre-COVID-19 levels. Increasing domestic tax revenues further should be at the core of Bhutan’s fiscal strategy including implementation of the Goods and Services Tax (GST) in 2025. 3 Table 1: Macro Economic Indicators FY20/21 FY21/22 FY22/23 FY23/24 FY24/25 FY25/26 FY26/27 FY27/28 FY28/29 (act) (act) (act) (est) (proj) (proj) (proj) (proj) (proj) Real GDP growth, at constant price (3.3) 4.8 5.0 5.3 7.2 6.6 4.5 3.5 3.0 Private consumption 0.3 1.5 6.9 5.6 3.1 3.7 2.2 1.9 1.3 Public consumption 5.4 1.9 (0.5) 6.4 5.2 0.3 0.9 1.0 1.7 Gross fixed capital investment (3.4) 25.4 5.6 (7.6) 5.9 7.3 6.7 5.6 6.8 Exports, Goods and Services (10.4) (3.6) 9.8 19.1 12.0 12.3 3.8 (3.6) 6.7 Imports, Goods and Services (0.5) 13.2 7.5 0.2 4.0 5.5 2.2 (2.6) (0.6) Sectoral growth Agriculture 2.7 0.1 0.1 3.4 5.3 5.0 4.8 4.6 4.4 Industry (5.9) 4.8 2.7 0.2 10.1 12.9 6.2 3.7 1.7 Services (1.2) 6.3 7.4 8.7 6.1 3.3 3.5 3.3 4.2 Current account balance (11.1) (28.1) (34.0) (22.7) (17.5) (9.3) (7.6) (16.3) (12.8) CPI inflation (FY average) 8.2 5.9 4.6 4.3 1.1 4.0 4.0 4.0 4.0 Revenues (%of GDP) 30.9 25.1 25.3 26.4 26.5 29.6 28.2 26.0 25.6 Fiscal balance (% of GDP) (5.8) (7.0) (4.7) (0.8) (4.4) (2.5) (3.7) (4.3) (2.9) Primary balance (% of GDP) (4.8) (5.6) (3.0) 1.1 (2.4) 0.5 0.1 0.0 2.2 Debt (% of GDP) 123.3 118.8 116.1 110.7 104.8 121.6 122.3 124.0 142.5 International poverty rate ($2.15 in 2017 PPP)a,b .. 0.0 .. .. .. .. Lower middle-income poverty rate ($3.65 in 2017 PPP)a,b .. 0.5 0.4 0.3 0.3 0.2 Upper middle-income poverty rate ($6.85 in 2017 PPP)a,b .. 8.4 7.7 6.9 5.9 5.0 Total GHG emissions growth (mtCO2e) 0.1 (1.7) (1.8) (1.6) (1.6) (1.5) Energy related GHG emissions (% of total) (14.3) (15.6) (17.0) (18.3) (19.5) (20.7) Source: Macro Poverty Outlook, October 2024. World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data from Climate Watch and Organisation for Economic Co-operation and Development. Notes: e = estimate, f = forecast a/ Calculations based on SAR-POV harmonization, using 2022-BLSS. Actual data: 2022. Nowcast: 2023. Estimates are from 2024 to 2026. b/ Projection using neutral distribution (2022) with pass-through = 0.7 (Low (0.7)) based on GDP per capita in constant LCU. 2.3 Poverty and Shared Prosperity on a Living Planet - Profile 12. Bhutan has made remarkable progress reducing poverty in recent years, graduating in December 2023 from the UN’s least developed country category. It is estimated that poverty fell from 28 percent in 2017 to 11.6 percent in 2022.3 Extreme poverty (at the international poverty line US$2.15 per day per person 2017 PPP) and food poverty had essentially been eliminated by 2022 (World Bank 2024). Although the poverty levels are not directly comparable, these achievements were substantial and represent a continuation of Bhutan’s progress on poverty reduction between 2007 and 2017, during which national poverty fell by 24.3 percentage points. Non-monetary well-being dimensions such as education and sanitation also improved. Remittances have been crucial to improving welfare among recipient households. 13. Shared prosperity has improved but spatial, gender and other inequalities persist. As measured by the Gini index, income inequality improved from 37 to 28. Poverty reduction was greater in rural areas, yet spatial disparities persist with the poverty rate ranging from 1.5 percent in Thimphu to 41 percent in Zhemgang. Poverty rates are projected to decline, with the US$6.85/day poverty rate falling to 5.9 percent in FY24/25 and 5.0 percent in FY25/26. However, a substantial share of the population (19 percent of the total population or 200,000) remains vulnerable to poverty due to climate change hazards, with nearly half of the poor exposed to landslides (forthcoming Bhutan Poverty and Equity Assessment 2025). 3Based on the latest Bhutan Living Standard Survey (BLSS) implemented in 2022, Bhutan’s national poverty rate was 12.4 percent (about 95,000 people), calculated using the national poverty line of BTN 6,204 per month per person. The 2022 BLSS was not strictly comparable to the 2017 BLSS. The figures reported here are based on adjustments to allow comparability between consumption aggregates and poverty measurement methodologies between the surveys. 4 14. Bhutan is one of a few countries that are carbon-negative, but it has not yet leveraged its remarkable natural assets and is increasingly vulnerable to climate risks. Forests are the defining feature of Bhutan’s landscapes, part of its national identity, and an important asset, with over 70 percent of the country’s total land area covered with forests. Several forest resource assessments show that Bhutan could substantially increase its forest utilization without compromising its forest cover targets by increasing timber harvest within sustainable levels and expanding the forest area under sustainable forest management. In addition to creating economic value, using forest products presents multiple job creation opportunities along the value chain. Bhutan's landscapes offer various natural resources, ecosystem services, and favorable diverse agroecological and climate conditions for producing food and cash crops, but the process of diversification, commercialization, and transformation in the agricultural sector has been slow. Bhutan has not yet fully capitalized on the opportunity to monetize carbon credits and ensure benefit-sharing with contributing communities. Further, biomass burning, an expanding transport sector, and the inefficient use of energy are on the rise and have contributed to a significant increase in emissions, air pollution, and related mortality. Bhutan’s municipal waste management is also a pressing issue, partly driven by Bhutan’s rapid urban population growth rate. While Bhutan has successfully exported its renewable electricity to neighboring countries in the region, helping to support the share of power generated by renewable sources in those countries, high dependence on this sector leaves Bhutan’s economy vulnerable. Changing climate patterns will further add pressure and increase vulnerability. 2.4 Main Development Challenges 15. Bhutan’s primary development challenge, as further detailed in the annexed Streamlined Systematic Country Diagnostic (SCD), is a lack of sufficient quality jobs to meet the goals and aspirations of Bhutan’s youth. Specific challenges are detailed in the SCD under People, Prosperity, Planet, Infrastructure and Economic Management. A small and unproductive private sector has not generated enough skilled jobs. Opportunities to overcome the constraint of a small domestic market through regional integration are not being seized in part due to inadequate cross-border transport links and trade facilitation, under-developed cross-border payments systems, and slow progress developing the country’s potential in the global broadband market. Human capital has made progress but with significant regional disparities; resilience to natural disasters and climate change is low; and economic management capacity inadequate to deliver the green, job-rich transformation the country seeks. Private sector job creation 16. The private sector in Bhutan is largely comprised of low-productivity microenterprises and the role of the state continues to loom large. Over 95 percent of firms employ less than five people and they lack dynamism, diversification, and productive job opportunities. Only 2.7 percent of firms is new at any point in time, indicating a lack of entrepreneurial activity in a small domestic market dominated by State Owned Enterprises (SOEs). Thirty-five SOEs continue to play a significant role in the economy. Despite some privatization and divestment, many sectors remain controlled by government-owned enterprises or monopolies. This limits competition, entrepreneurship, and development of the private sector. Annual net inflows of FDI in recent years (2019-23) have averaged just US$7.5 million per year i.e., less than 1 percent of GDP. Private investment has not trended favorably, reducing from 57.8 percent of GDP in 2012 to an estimated 32.8. percent in 2024, with a significant dip during COVID years. Reaching the levels of domestic and foreign private investment needed to diversify the economy and create jobs will require a significant change in the role of the State and a higher level of ambition. 17. The private sector faces multiple regulatory hurdles, limited access to finance and markets, and ineffective payment systems. Firms face investment climate challenges and high trade costs. Firms consider tax rates and access to finance as the biggest hurdles, followed by inadequately 5 educated workforce and labor regulations. 4 Uneven access to bank credit, complex loan procedures, and limited bank instruments make it difficult for firms, in particular SMEs, to get financing. In 2020, State Owned Financial Institutions (SOFIs) accounted for 60 percent of the banking system’s assets and 51 percent of the assets of non-banking financial institutions (NBFIs). High levels of non- performing loans (NPLs) have increased fiscal risks. Although 79.5 percent of the adult population held savings accounts in 2021, only 22.9 percent had access to credit, of which 43.3 percent were women. Despite a high mobile phone penetration rate of 95 percent, access to eMoney was only 21.6 percent. Many rural communities still lack access to formal remittance services, preventing them from benefiting from modern electronic and online payment systems. The penetration of bank branches and ATMs is lower than any other country in South Asia. A lack of adequate mechanisms to facilitate cross-border payments between Bhutan and third countries restricts the secure and efficient cross- border transfer of funds, reduces the share of transactions visible to formal banking systems and tax authorities and, ultimately, reduces growth. The new Economic Stimulus Program launched by the RGoB in 2024 includes a collateral-free loan to promote small and medium enterprises, but less than 10 percent of the available bank liquidity has been disbursed so far. To increase the uptake of these loans, additional measures will be needed to provide risk mitigation, increase financial literacy among potential borrowers and tackle the lack of capacity among lenders to assess business proposals for the priority sectors of agriculture, livestock and tourism, as well as for identified underserved populations. 18. In agriculture, the shift from primary production towards a more commercial agrifood system is still at an early stage. The primary sector (agriculture, livestock, and forestry) contributed, on average, 15 percent of national GDP, 43 percent of employment, and 14 percent of exports during the last decade while receiving just 10 percent of public spending. If all production, services, and manufacturing activities are accounted for, the renewable natural resource (RNR) sector employs 58 percent of Bhutanese and accounts for two-thirds of establishments in 2022. The reallocation of labor outside the sector is happening to some extent but driven by rural outmigration and the associated labor shortages and feminization of agriculture rather than sustainable productivity increases. Labor productivity is constrained by low and increasingly variable yields of primary crops and farm systems that lack scale and access to input and output markets. These challenges are compounded by an uncertain business climate and large transaction costs for quality upgrading across value chains, resulting in high levels of food loss and waste 5 and delays to meet market demands and food safety requirements. While half of agricultural spending is allocated to public agricultural infrastructure and support to consumers, only 6 percent is allocated to promote value addition and marketing. 6 The agricultural sector can be transformed into a dynamic and commercial food system by improving the labor productivity of those that stay on the farm while facilitating the relocation of labor into higher- paying manufacturing and service jobs within the food system. This transformation will require new investment in climate resilience and diversification towards high-end products but also a repurposing of existing agricultural spending to promote more value addition and export. 19. The Government has identified sectors that have the greatest potential for job creation as well as the investments required to support these sectors. The FYP and the ‘21st Century Economic Roadmap: 10x National Economic Vision’ lay out a strategy for improving the performance of sectors that contribute to growth and jobs, namely: agriculture and high value agribusiness; green energy; hydroelectricity, during the construction phase and through building engineering expertise; tourism; digital businesses, including business and knowledge process outsourcing; wellness and education services; and selected manufacturing and mining sectors. The Economic Roadmap also identifies seven 4 WBG Enterprise Survey for Bhutan (2024) 5 Some estimates show that up to 32 percent of all food produced on the 4 percent of Bhutan’s arable land is being lost or wasted, accounting for 9 percent of greenhouse gas (GHG) emissions, and costing 4 percent of the country’s GDP. 6 Bhutan Agricultural Expenditure and Incentive Review, World Bank, 2025. 6 enablers to power the priority sectors, such as private sector development, market access, innovation ecosystem, infrastructure and connectivity, and human capital development. Economic management and institutional capacity 20. To promote private sector development and enable effective and efficient delivery of policy reform, economic management and implementation capacity need to be strengthened. Sound macroeconomic policies (fiscal, monetary and external) containing inflation, stabilizing debt and ensuring external competitiveness are at the core of a business environment conducive to private sector development. Similarly, the consequences of poor implementation capacity across various socio-economic sectors are serious constraints to sustainable growth. Bhutan’s CPIA ratings for economic management dipped from a peak of 4.3 in 2021 to 3.7 in 2023, reflecting: (i) a high current account deficit, (ii) high fiscal deficits, and (iii) missed annual publication of the Debt Management Strategy. Measures to address the current account deficit, ensure debt sustainability and improve disaster risk management (DRM), given the impact of natural disasters on multiple sectors including the energy and agriculture sectors, are key. The Public Expenditure Financial Accountability (PEFA) Reports and the RGoB’s Public Financial Management (PFM) Reform Strategy 2023-2028 identify capacity building and ICT systems as critical to these and other reform efforts. RGOB is addressing the gaps identified in the Methodology for Assessing Procurement Systems (MAPS) report to improve public procurement. Building resilience to natural disasters and climate change 21. Bhutan is highly vulnerable to climate change, ranked 34th most vulnerable and the 67th most ready country.7 The rugged terrain and climatic conditions of the Himalayas contribute to multi- hazard risks and extreme weather events. The hydropower, agriculture, and tourism sectors, which account for 35 percent of GDP, are both dependent on and affected by climate variability and other natural hazards. Glacial lake flood outbursts, heavy and variable rainfall, droughts, and forest fires are already pressing concerns. The country’s high levels of biodiversity, with multiple habitat types, are also threatened. Assets equivalent to approximately 2.3 percent of GDP are damaged each year due to natural disasters. Yet, disaster risk financing is currently limited to General Reserves as a risk retention measure. Bhutan plays an active role in regional and global cooperation on climate change, sharing data and pooling resources to expand its capacity to tackle the challenges it faces. 22. The agriculture sector is highly vulnerable to increasing temperatures, erratic rainfall, and natural hazards, requiring significant investment in adaptation measures. Climate change-induced water stress and increased temperatures have negatively impacted the production and yield of fruits and rain-fed crops, disrupted irrigation systems, damaged crops on farm and during transport, and made supply chains less reliable. In addition, rising temperatures lead farmers to move the production of crops and timber species to higher altitudes and affects animal health and fodder availability. Pests and diseases sensitive to temperature and floods, such as citrus greening, have become more prevalent. Efforts to build resilience through climate-smart agricultural practices and other adaptive strategies are necessary to secure the future of Bhutan's agricultural productivity and sustainability. The World Bank has developed Climate Smart Agricultural Investment Plans that outline the on-farm, value chain, and cross-cutting investments needed to improve the resilience of government priority commodities for food security and export revenue generation (rice, dairy, citrus, potato). Infrastructure and Connectivity 23. In Bhutan, electricity is a key driver of the economy, supporting growth and making a substantial contribution to both government revenues and exports. The demand for domestic 7 University of Notre Dame Index of Vulnerability, 2024. 7 electricity has been rapidly increasing in the recent years. 8 This trend is expected to continue as industrial load increases to diversify Bhutan’s economy and projects like the GMC materialize. Additionally, South Asia is the fastest growing region in the world and would continue to need energy to maintain economic growth and lift millions out of poverty. This is expected to increase the demand for hydropower exports from Bhutan to supplement shortages in India and, potentially, Bangladesh. Bhutan has significant hydropower potential (estimated at 23.8 GW) to meet the increasing demand. However, only 2.4 GW has been developed so far, and the sector is highly vulnerable to climate change, due to increasing flood levels and sediment yields which negatively affect hydropower. Bhutan will need a paradigm shift towards public and private sector partnerships to facilitate mobilization of the requisite levels of capital through private sources.9 24. Lack of adequate transport and trade-enabling infrastructure prevent land-locked Bhutan from fully reaping the benefits of enhanced regional integration and agglomeration. Road transport is the dominant mode of transport in Bhutan carrying more than 90 percent of trade traffic. In the absence of north-south links and a continuous Southern East-West Highway (SEWH), Bhutanese trade traffic currently must travel south and go through Indian roads to move from one part of the country to another, resulting in costly delays. The country is overly reliant on the Phuentsholing border crossing, which handles 76 percent of its trade. 10 Bhutan is also exploring the feasibility of other, greener and more efficient modes of transport, including railway and Inland Waterway Transport (IWT). These challenges are compounded by complex, lengthy and costly trade processes: in 2023, Bhutan ranked 118th in the Global Infrastructure Index (GII), and 97th in the Logistics Performance Index, and behind the regional average for timeliness of shipments. 11 Non-tariff technical trade barriers, such as food safety and phytosanitary requirements, remain problematic. Trade integration remains low: Bhutan has adopted only 28 percent of key United Nations Economic and Social Commission for Asia and the Pacific trade facilitation measures, and less than 5 percent of Bhutanese firms have any internationally recognized quality certifications. 25. Bhutan has made strides in digital connectivity, but significant challenges remain. Bhutan's international segment of the broadband value chain remains constrained largely due to its reliance on India to access undersea cables. As a result, Bhutan has experienced several major internet interruptions, and the country’s international bandwidth cost is among the highest in the region. 12 Access to fixed broadband remains below 1 percent of households and unaffordable for smaller businesses and the poor. The country's mountainous terrain is an obstacle to connecting remote areas of the country. Efforts to digitalize trade and other services are also undermined by poor data governance and lack of data sharing. Weak data infrastructure and safeguards make critical systems and data vulnerable to natural disasters and cyber-attacks. 26. Bhutan’s cities, especially Thimphu and Phuentsholing, are key drivers of economic growth and urban migration aided by pull factors, including higher wages and education, but they are 8 Electricity demand grew by 64 percent from 2022 to 2023, driven by crypto mining, data centers and the ferro-alloys industry. Peak demand more than doubled from 420 MW in 2021 to 956 MW in 2023. 9 Historically, hydropower projects in Bhutan have been developed with support from the Government of India which provided financial, technical, and operational assistance to develop the plants under Government-to-Government agreements. This approach also included the signing of long-term power purchase agreements with Indian off-takers, following a cost-plus-margin approach for tariff determination. 10 India is by far Bhutan’s largest trading partner, accounting for 80 percent of Bhutan's total exports and about 82 percent of imports. 11 Timeliness of shipments in reaching destination within the scheduled or expected delivery time. Logistics Performance Index (2023): https://lpi.worldbank.org/international/scorecard/radar/C/BTN/2023/R+SAS+2023. 12 Bhutan’s international bandwidth price was ~US$5 per Mbps/month in 2024. This is still higher than available data in 2021 for neighboring countries Nepal (US$4), Bangladesh (US$3.25), India (US$4), Pakistan (US$2). 8 hampered by weak infrastructure and service delivery systems. 13 The urban public transport system is weak (for example, in Thimphu, there are only 4 buses per 10,000 people) and the urban water supply and sanitation system is inadequate. Cities also face challenges in municipal solid waste disposal and insufficient drainage. Rapid urbanization has also increased emissions and risks of flooding, landslides and heat effects. The ability of the cities to deliver the infrastructure and services is constrained by limited funding and institutional capacity. Municipal institutions are ill-equipped to deliver reliable and quality water services, with insufficient investments in infrastructure maintenance to avoid premature deterioration. Human capital and active labor market measures 27. Bhutan has made remarkable strides building its human capital. However, education quality remains uneven and there are significant spatial differences in health provision. Since the country’s first Five-Year Plan in 1961, RGoB has invested to promote and expand modern education alongside monastic education. Participation levels in education have progressively risen as a result and literacy rates have increased tremendously. According to the Bhutan Living Standard Survey 2022, the overall literacy rate for the population aged 6 years and above was 42.9 percent, with a male literacy rate of 53.9 percent, and female literacy rate of 32.8 percent. Bhutan has made substantial progress in educational attainment on average, although quality issues remain. For example, the expected length of schooling is 10.2 years, but this falls to 6.3 years when adjusting for the quality of the learning. 14 Bhutan has made progress in providing core health services despite geographical challenges but faces issues with non-communicable diseases (NCDs) such as cardiovascular disease, diabetes, and mental health disorders. The stunting rate declined slightly but remains high at 21 percent. At the same time, the health system struggles with limited and unevenly distributed diagnostic and treatment infrastructure, insufficient essential medicines, and a shortage of specialized health workers. Universal health coverage is stagnant at 51.3 percent, with low availability of recently trained providers. Mental health issues, particularly among youth, are rising, with 16.2 percent of anxiety and depression cases reported among those aged 15 to 19. The expected productivity of a child born in Bhutan today is only 48 percent of its full potential had the child enjoyed complete education, balanced nutrition and good health. This matches the average for South Asia and low- and middle-income countries. These challenges to human capital accumulation are not homogenous with stark differences in human development outcomes across the rural-urban divided, as well as across districts. This is related to the challenges in physical and digital access that complicate service delivery. 28. More active approaches to link less-educated workers, self-employed and own-account workers, microenterprises, and job seekers with employment opportunities are also needed. In 2022, a higher percentage of job seekers (58 percent) held a secondary degree compared to employed workers (29 percent), indicating an oversupply of educated individuals. The share of people not in employment, education or training (NEETs) has also increased sharply to 19 percent in 2022. The public sector and SOEs cannot absorb the expanding and increasingly educated labor force, and a lack of good job opportunities has likely contributed to emigration, particularly among skilled workers in the public sector. Yet, firms often demand workers with less education and specific technical skills, particularly in the services sector. Compared to 61.6 percent of men, as many as 82.7 percent of women are in vulnerable employment, i.e., the least likely to have formal work arrangements, social protection, and safety nets to guard against economic shocks. Employment support programs provide limited job-relevant skills and are not inclusive enough of women. There is scope to strengthen labor market policies and programs by: improving program design to enhance efficiency and effectiveness; 13 The share of the urban population in the country has increased from 7.5 percent in 1974 to 44.4 percent in 2023. Median household incomes in urban areas are nearly triple those in rural areas and the literacy rate of urbanites is 23 percent higher than in rural areas. Source: Urban Policy Notes, World Bank, 2019. 14 World Bank (2020) Human Capital Index: Bhutan. World Bank. 9 redesigning existing programs and strengthening system linkages to address gaps; and reducing program fragmentation and scaling up programs proven to be relevant and impactful. III. WORLD BANK GROUP PARTNERSHIP FRAMEWORK 3.1 Government Program 29. The CPF seeks to support the RGoB’s 13th FYP. The strategic objectives of the 13th FYP are to transform Bhutan into (i) a Upper Middle income Country by 2029 (with a GDP of US$6 billion); (ii) a High-Income country by 2034 (with a GDP of US$12 billion); (iii) a healthy and productive society founded on equitable services to all with high-quality healthcare, education and social protection; (iv) a safeguarded and strengthened sovereignty with territorial integrity, security, unity, well-being, resilience and economic prosperity; and (v) a country with a stronger governance system that promotes economic growth and improves people’s lives. The Plan proposes significant investments in strategic infrastructure in energy and connectivity. Inclusion of women, youth, persons with disabilities, and other disadvantaged groups is central to Bhutan’s vision for sustainable and equitable development. 3.2 Proposed WBG Country Partnership Framework 30. The CPF draws on the findings of the streamlined SCD, which identified eight priorities for reducing poverty and achieving shared prosperity in Bhutan. SCD priorities comprise: (i) continued investment in people; (ii) a better functioning labor market; (iii) strengthened economic management; (iv) increased private investment; (v) enhanced agricultural productivity; (vi) enhanced disaster and climate resilience; (vii) infrastructure for transport, energy and urban development; (viii) improved digital connectivity. The WBG cannot support all these priorities. Rather, the three CPF outcome areas focus primarily on ‘increased private investment’, which also relies on a better functioning labor market and sound economic management; ‘enhanced disaster and climate resilience’; and ‘infrastructure and connectivity’. Lessons learned 31. Lessons identified in the CLR of the FY21-FY24 CPF also inform this new CPF. The CLR found that progress towards the previous CPF’s three Development Outcomes was broadly ‘Unsatisfactory’ with the objective on human capital not achieved and the two objectives on economic and environmental resilience partially achieved. This is in large part attributable to the fact that the results framework was not updated through a Performance and Learning Review (PLR) making it difficult to substantiate results achieved. The lessons learned during the FY21-24 CPF have shaped the design of this CPF and will influence its implementation as described below. • Lesson 1: Development Policy Credits (DPCs) could have been better leveraged to achieve meaningful reform. Many prior actions were linked to changes in policies and guidelines rather than laws and secondary regulations, and these could have been better supported by measures to institutionalize reforms and ensure sustainability. Policy actions in the DPCs could also have been more ambitious. The WBG will do more under this CPF to support policy reforms that have significant impact on boosting private sector-led growth, economic diversification and jobs, resilience and sustainability. It will support the reform process with a mix of technical assistance, capacity building and WBG investments to increase sustainability and impact. • Lesson 2: the sustainability of development outcomes in Bhutan is fundamentally reliant on capacity development. To address the limited capacity of government institutions as WBG engagement in Bhutan grows and becomes more complex with larger infrastructure projects, the WBG will apply the lessons from its experience in small countries (such as the Pacific Islands) to establish the most effective models for project implementation. Efforts will also continue to be deployed to 1) build sustainable institutional capacity in line ministries and improve service 10 delivery and 2) promote greater interministerial coordination to support delivery of development outcomes. • Lesson 3: the overall quality of Advisory Services and Analytics (ASA) and their delivery has been high, but more can be done to disseminate findings and link them to reform and project implementation. During the CPF, there will be a deliberate attempt to engage relevant stakeholders and RGoB counterparts more in the development of ASA to increase ownership, build capacity, and actively disseminate findings to multiple audiences to increase uptake of the recommendations, as well as track the influence of ASAs completed on target audiences. • Lesson 4: the lack of a robust results framework in the previous CPF undermined the country team’s ability to monitor and evaluate progress towards the CPF objectives. The results framework of this CPF relies on a small number of indicators drawn from the WBG Scorecard (client context and results indicators) and these indicators will be monitored and reviewed annually through the Annual Business Planning Exercise. Efforts will also be deployed to build client capacity in M&E and statistics. • Lesson 5: it was difficult to realize the vision of a One World Bank Group approach in Bhutan during the FY21-FY24 CPF as IFC and MIGA faced limited engagements. 15 The WBG will engage as one to address binding constraints to private investment through policy dialogue and lending, create more opportunities for IFC and MIGA activities, and further explore proof of concept interventions that leverage joint capabilities of the WBG (e.g. in the hydro and renewable energy sectors). • Lesson 6: effective interaction between the WBG and the RGoB has increased trust in recent years and led to expanded use of World Bank instruments. The WBG Opinion Survey of FY23 shows that WBG perceptions in Bhutan outperform other IDA countries and have improved since FY19, with higher ratings for levels of trust, relevance, alignment with the country’s development priorities, and effectiveness in achieving results. Stakeholders view the WBG as an effective and responsive partner. The new CPF’s overarching objective is well aligned with the Government’s vision, but with the step change in Government ambition, the WBG will need to align its support by leveraging more resources and expanding the range of financial instruments available, bringing the best global knowledge to bear on critical issues combined with reinforced country presence, and remaining responsive to the country’s needs. Selectivity 32. The CPF applies five selectivity criteria. First, activities selected in the CPF are prioritized according to: country development goals and client demand as expressed in the 13th FYP, active and open dialogue with RGoB, and clear preferences communicated by RGoB on the development partners they wish to work with; the WBG triple mission which aligns well with FYP; and WBG comparative advantage as a partner of choice, bringing a mix of relevant financing, knowledge and advisory services. Priority has been given to areas where the WBG has a strong track record and expertise through ongoing or recently closed operations and active dialogue through ASA, including through the most recent SCD, CEM and upcoming CCDR. Second, the small baseline lending envelope of IDA Performance Based Allocation (PBA) available to support the Government’s ambitions forces choices. While it is expected that Bhutan will seek to leverage its PBA envelope to the maximum with other IDA windows, grants and other sources of finance, resource constraints require trade-offs. Third, given fiscal sustainability concerns, the government is sensitive to financing instruments and terms and will be selective in availing itself of less concessional sources of finance, depending on the nature, size and purpose of the projects. Fourth, the CPF prioritizes areas where synergies with DPs can lead to greater impact and is explicit about not engaging where other partners are in the lead. For example, the WBG will not be active in governance and capacity building of local governments where UNDP and EU are 15 WBG collaboration with the private sector and civil society has improved, according to the WBG 2023 Opinion Survey, but remains lower than other aspects of WBG engagement in Bhutan and needs further enhancement. MIGA has not had engagement in Bhutan to date. 11 in the lead, nor in technical and vocational training or river basin management where the Asian Development Bank (ADB) leads. Finally, the WBG is not directly engaged with the GMC which is a Special Administrative Region, legally outside the oversight of the Government. However, the WBG will maintain a watching brief on the continued evolution of GMC structure, organization and regulatory frameworks, and assess options for supporting GMC as and when conditions allow. Consultations 33. Intensive consultations with a broad range of stakeholders validated the priorities identified in the CPF. Stakeholders consulted included government officials, parliamentarians, youth, development partners, representatives from the private sector, and civil society organizations, as well as online consultations with citizens that gathered suggestions from 1,600 participants. These revealed strong consensus that the priorities identified by the WBG are well aligned with the government’s 13th FYP and the country’s most pressing development needs. The consultations highlighted job creation among the top priorities, with a focus on youth and women. Other priority areas identified included: addressing constraints to private sector growth, improving the regulatory environment for businesses, enhancing access to finance, supporting micro, small, and medium enterprises (MSMEs), and attracting foreign direct investment. To enhance Bhutan’s labor market efficiency, investing in human development will be critical, particularly in early childhood care, health services, and skills development to foster a more competitive workforce. Climate resilience efforts were also highlighted, with discussions on protecting biodiversity, tackling pollution, and exploring carbon credit monetization. The need to strengthen infrastructure, such as digital connectivity, multimodal transport and renewable energy projects, to enhance connectivity both within Bhutan and with neighboring countries was also emphasized. Participants further highlighted the necessity of building government capacity to manage increasingly complex investments, coordinating better among development partners, and improving the dissemination of analytical work to ensure more effective implementation of policies and projects. 3.3 CPF Outcomes Supported by WBG Program 34. Reflecting the above considerations, the CPF FY25-29 proposes a selective approach that focuses on three interconnected outcomes: Outcome 1, increased private investment; Outcome 2, enhanced climate resilience; and Outcome 3, resilient infrastructure for improved connectivity. The three outcomes are interconnected in several ways including, for example, the contribution of increased private investment to infrastructure in Outcome 3 which will, in turn, underpin climate resilience in Outcome 2. The CPF outcomes contribute to WBG Scorecard Outcomes Areas as illustrated in Figure 1, with one CPF outcome contributing to more than one Scorecard outcome area in some instances. All three CPF Outcomes contribute to the WBG cross-cutting Scorecard Outcome Area of ‘More and Better Jobs’ and the overarching goal of accelerated growth and job creation while safeguarding the country’s cultural heritage and fragile ecosystems. Progress is measured using WBG Scorecard Indicators and responds directly to Lesson 1 above on the need for a robust M&E platform to underpin the CPF. Fostering inclusion and building resilience are interwoven across the CPF. 35. A One WBG approach in Bhutan will leverage complementary and joint instruments (reflecting Lessons 5 and 6 above) to support the proposed outcome areas. In each of the outcome areas, the private sector can play an increasingly important role, subject to removing enabling environment constraints for its expansion. This is an area where operating as One WBG has proved challenging in the past, but where WBG-supported policy reforms and upstream interventions by the WB and IFC can help unlock private investment and private capital mobilization. A Joint WBG representation in Bhutan from July 2025 will be instrumental in this regard. Following the sequencing of reforms, IFC, using investment approaches as well as blended finance through IDA Private Sector Window (PSW), and MIGA, through its suite of instruments under the WBG Guarantee Platform and using IDA PSW as needed, can step in to support the private sector and help Bhutan attract domestic 12 and foreign investment. There will be a special focus on using a One WBG approach for projects under Outcomes 1 and 3. This includes reforms that can unleash the private sector, including FDI, at scale (Outcome 1) and investing in infrastructure (Outcome 3). The one WBG approach enhances the effectiveness of WBG support for sustainable and inclusive growth and will be strengthened by the annual business planning process. Figure 1: CPF Outcomes and WBG Scorecard CPF Outcome 1: Increased private investment 36. This Outcome supports increasing private investment in job-rich sectors, creating more and better jobs through an integrated One WBG approach, adopting an “If and Then” approach. This outcome will address institutional and regulatory barriers that have impeded IFC and MIGA from enabling and mobilizing private investment in Bhutan and stood in the way of greater domestic and foreign investment. “If” key reforms take place, “then” WBG will be well placed to help Bhutan boost the private investment it needs to accelerate growth and job creation and meet its ambitious target of increasing private investment to 60 percent of GDP by 2029 (up from 32. 8 percent in 2024). The key reforms that are prioritized are: (i) extension of External Commercial Borrowing to the financial sector; (ii) a revision of FDI policy and legal framework, making it more attractive for foreign investors to do business in Bhutan; (iii) policy changes to allow the creation, enforcement and perfection of security interest over immovable collateral for foreign lenders at par with domestic lenders; (iv) changes in government policy on SOE reform to improve effectiveness and allow for more opportunities for private sector; and (v) creating a legal framework for venture capital to provide firms with alternative financing mechanisms. These reforms will be supported through a series of Development Policy Credits focused on growth and jobs. The “if and then” approach will allow for a phased approach where progress in structural reforms will determine the choice of WBG engagement instruments and the level of ambition. This CPF outcome will contribute to the following Scorecard Outcome Areas: (i) More Private Investment; (ii) Effective Macro and Fiscal Management; and (iii) More and Better Jobs including in, for example, agriculture and renewable natural resources, tourism and the digital sector. 37. The WBG will help strengthen economic management as a central element of a strategy to create more and better private sector-led jobs. Bhutan’s overarching goal to tap hydropower potential and to develop GMC to accelerate its economic transformation calls for a strong economic 13 management to minimize boom-bust cycle risks inherent to natural resource-based growth models and the risks associated with GMC. Effective macro-fiscal management and a stable financial sector containing inflation, stabilizing debt and ensuring external competitiveness are at the core of a business environment conducive to private investment and job creation. The WBG will therefore support macro-fiscal and financial stability to maintain Bhutan debt sustainability at a moderate level. It will respond to Lesson 1 above, namely the effectiveness of DPCs in Bhutan in supporting policy reforms that have a significant impact on boosting private sector-led growth, economic diversification and jobs, resilience and sustainability. This will be subject to an assessment of the adequacy of the macroeconomic policy and fiduciary frameworks required for policy-based operations. In addition, the WBG will support these efforts through the implementation of Performance and Policy Actions (PPAs) under the IDA’s Sustainable Development Finance Policy and technical assistance on the Medium- Term Macroeconomic Framework and debt management. This will be complemented with a scaled- up ASA engagement anchored on a robust public finance management, financial sector stability and inclusion, and trade and private sector development to reduce poverty and inequality through the creation of good jobs with due attention to the importance of planning upfront for use of ASA to influence decision-making and project design (following Lesson 3 above). 38. The WBG will support improvements to the business environment and financial systems, with a particular emphasis on improving access to finance and payment systems. Priority will be given to efforts that bolster the institutional and regulatory framework to promote more domestic private investment and attract FDI by eliminating barriers to entry, simplifying the tax structure and promoting entrepreneurship. With IFC, the focus will be on measures to strengthen the Public-Private Partnership (PPP) framework, mobilize private capital, attract FDI, increase engagement with private financial sector and foster resilience to climate change in the private sector. MIGA will leverage the WBG Guarantee Platform and its regional representation for South Asia Region for opportunities to de-risk private investment. MIGA will also seek to support prospective foreign investors to boost FDI, including in PPPs, potentially with IDA PSW. Efforts to improve access to finance (SME, trade and micro-finance) will be completed by actions to address cross-border payments that hold back the growth of e-commerce, tourism, and digital services, by upgrading payment systems to enhance connectivity with global payment networks. Many rural communities still lack access to formal remittance services, preventing them from benefiting from modern electronic and online payment systems. IFC will seek to implement measures that facilitate formal remittances. MIGA will continue to collaborate with the WBG and discuss with RGoB potential support for the mobilization of remittances and diaspora financing through its political risk guarantees. WBG could support initiatives to foster innovation and the start-up eco-system. 39. To support the diversification agenda, the WBG will adopt a sectoral lens in line with the “Jobs Accelerator” initiative in the South Asia Region. Interventions will aim to improve the investment climate for local and foreign investors in job-rich sectors, such as renewable natural resources, agribusiness, tourism, digital and creative industries, and facilitate access to finance and payment systems to expand the market potential of these sectors. The WBG has conducted deep dive analysis in these sectors and can mobilize IDA, IFC and MIGA financing and guarantee instruments to bring to bear a package of support that includes policy reforms, strengthening of farmer groups to make them more bankable and linked to buyers through productive partnerships, investments in critical public infrastructure and trade facilitation (e.g., standards and certification), skills development (including IT skills for new digital jobs), and innovative financing approaches and derisking instruments. Leveraging the instruments of the WBG Guarantee Platform, MIGA will seek to support private sector investment and job creation in value chains in these sectors. IFC is supporting the Royal Monetary Authority of Bhutan to improve the regulatory frameworks around digital financial services, microfinance sector development, financial infrastructure, external commercial borrowing, and local currency solutions development. IFC will continue to support the growth of the tourism sector, MSME 14 and women’s access to finance, entrepreneurship and employment, and private sector employment creation in IT, e-commerce and digital services. 40. His Majesty’s ambitious vision for the GMC is that it spearheads private sector job creation in Bhutan. The prospective demand from having over 1 million people living in Gelephu creates a significant market opportunity for the rest of Bhutan as modernized and efficient value chains develop to supply the organic food, timber and other products and services needed in Gelephu, as well as a vehicle to build the skills needed to enable Bhutan’s workers to participate directly in the job opportunities offered by GMC. As such, WBG support to Bhutan’s efforts to diversity the economy and attract more private investment will leverage GMC for good job creation in the rest of the country and support active linkages between both economies, in line with the ‘one country, two systems’ approach. The WBG’s support of GMC during the CPF period will initially be limited to technical assistance for the multiple workstreams, based on demand, and by helping to facilitate investments by the domestic and foreign private sector through the WBG Guarantee Platform’s instruments. Outcome 2: Enhanced climate resilience 41. This outcome aims to enhance resilience of over 250,000 people to climate risks. 16 To assist RGoB in managing significant climate change risks and strengthening resilience, the World Bank will provide support in policy, institutional capacity, infrastructure, and disaster-contingent financing. This support will include strengthening policies and regulations on national hydromet and agromet services, hydropower development and dam safety guidelines, and building regulations that promote low- carbon and resilient construction practices. Additionally, the World Bank will help improve the institutional capacity of various government agencies, including the National Center for Hydrology and Meteorology, Ministry of Infrastructure and Transport, Ministry of Energy and Natural Resources, and Ministry of Agriculture and Livestock, in areas such as early warning systems for natural disasters, multi-hazard risk decision support systems, agromet decision support systems, seismic codes, community-based forest management, and climate-smart agriculture and integrated water resources management. Potential private sector engagement in smart agriculture and the water sector could be supported by WBG guarantees. Furthermore, the World Bank will assist in integrating climate risks into infrastructure development by ensuring that new hydropower projects adopt a catchment-wide approach and adapt to geohazard risks, and that critical facilities such as roads and urban infrastructure are built to withstand natural hazards. 17 The support will extend to adaptive social protection systems and community resilience, with a focus on vulnerable communities. The outcome will contribute to the Scorecard Outcome Areas: (i) Green and Blue Planet and Resilient Populations; and (ii) the cross-cutting outcome More and Better Jobs, in, for example, renewable natural resources and climate-smart agriculture. 42. Bhutan will continue to pursue its development path valuing natural resources and environmental quality. To support these efforts, the World Bank will focus on the sustainable management and value enhancement of natural resources and the creation of associated jobs. By operationalizing investments in climate-smart agriculture technologies and practices, mechanization, and standardization outlined in the Climate Smart Agricultural Investment Plans, the World Bank will assist RGoB in improving labor productivity and enhancing climate resilience in the agrifood systems, as well as efficient use of increasingly variable water resources. While supporting the country’s efforts to maintain forest cover and carbon-negative status, as reaffirmed by Bhutan’s second nationally determined contributions (NDCs) in 2021, the WBG will help diversify the utilization of forest resources by enhancing the potential of the wood-based economy throughout the value chains, 16See detail under Outcome 2 in the result matrix in Annex 1. 17The CCDR highlights that protecting the productivity and competitiveness of key sectors from climate impacts is essential for sustaining Bhutan’s growth and prosperity. It emphasizes climate adaptation in hydropower and agriculture—current economic drivers—and in urban areas and infrastructure where major future capital investments will be concentrated. 15 including ecotourism, timber industries, and high value non-timber forest products, engaging more community-led practices. All these activities have the potential to create employment in the rural sector. Coordinated agriculture-forestry support will contribute to the country’s economic diversification and rural transformation while preserving environmental and ecological quality. This support will be complemented by the World Bank’s regional initiatives aimed at creating a cleaner and greener environment through the reduction of plastic waste pollution, the consequent decrease in greenhouse gas emissions, and the improvement of air quality management, which is growing into a keen concern in Bhutan, mostly in the southern areas bordering India (including Gelephu). Activities will include DRM and climate adaptation measures aimed at women and other vulnerable groups, and inclusive social protection systems that promote economic inclusion and safeguard vulnerable populations. 43. This outcome will further promote the development and monetization of carbon markets, as well as the equitable distribution of benefits from carbon credits. As Bhutan moves from concessional funding following its graduation from the least developed country status to achieving self-sustained climate resilience and green growth, it is crucial to mobilize innovative climate finance mechanisms and develop domestic solutions, such as the Bhutan Climate Fund, to capitalize on its carbon-negative status. Building on previous support from the Forest Carbon Partnership Facility, Climate Warehouse, and Partnership for Market Implementation, the WBG will continue providing technical assistance on carbon markets infrastructure, including a national registry system and a digital measurement, reporting, and verification (MRV) system. This support will also strengthen the country's carbon market policy framework and institutional capacity, facilitate the monetization of carbon credits to sovereign buyers and voluntary carbon markets, and assist benefit-sharing with contributing communities. Through the WBG Guarantee Platform, MIGA can support growth in carbon markets by reducing risks for private sector investments. 18 Outcome 3: Resilient infrastructure for improved connectivity 44. This outcome supports infrastructure development as a key driver of growth and economic diversification. The 13th FYP sets out quality infrastructure, connectivity, and energy as essential for boosting productivity and creating jobs. To achieve these goals, the Plan recommends strategic investments in (a) hydropower, a traditional growth driver; (b) roads, bridges, airports, and railways to enhance connectivity and reduce transportation costs; (c) digital connectivity and economy, a key enabler and new source of growth; and (d) improving the livability of urban settlements. The WBG will support the government in implementing this strategy, by focusing on specific interventions, following the principles of selectivity and comparative advantage, building upon previous analytics and strategic engagements with the government, while enhancing complementarity with other development partners. 45. Infrastructure plays a crucial role in driving economic growth, attracting private investment, and generating employment in Bhutan. Strategic investments in missing road links, cross-border infrastructure and simplification of processes will enhance transport connectivity and trade efficiency, which, in turn, will lower transportation, logistics and trade costs, making it more attractive for private businesses to invest in Bhutan. Guarantee Platform’s de-risking instruments will seek to support infrastructure investments by the private sector. Sustainable financing models will potentially attract private investment into hydropower generation and other renewable energy projects, and the 18Carbon developers in Bhutan face various risks, notably political and regulatory uncertainties, due to the nascent nature of the carbon credit market. Examples include revocation of carbon ownership rights, a ban on the carbon credit export, and repudiation of corresponding adjustments. However, in the absence of a complete legal and regulatory framework for carbon projects, or the Government’s binding commitment through a separate agreement, seeking legal recourse would appear challenging. MIGA helps mitigate the political risks associated in the carbon project by deploying its Breach of Contract coverage, which provides protection against losses arising from a government’s breach or repudiation of a contract with an investor, resulting in non-enforcement of an arbitration award. 16 consequent additions to supply will spur private sector growth and employment generation by reducing energy shortages. The focus on developing the digital economy and making cities more livable and resilient will also provide a conducive environment for businesses to thrive, creating numerous job opportunities. Attention to effective management of hydropower rents will also be emphasized to address the potential adverse effects (such as Dutch Disease) and support economic diversification by investing tangible assets to stimulate the public or private sectors through subsidized credits, production or export subsidies. 19 The outcome will contribute to the following three Scorecard Outcome areas (i) digital connectivity; (ii) connected communities; and (iii) the cross-cutting outcome of more and better jobs, directly during construction and operation of roads, digital infrastructure, and hydropower, and indirectly through the contribution of these sectors to economic growth. 46. The WBG will support Bhutan’s ambitious plans to increase hydropower and other forms of renewable energy generation. Bhutan expects to commission multiple projects aiming for an installed capacity of around 7GW by 2032. Sustainable financing models involving the private sector will be crucial for realizing these plans. It is equally important to ensure that these financing models designed to mobilize substantial quantum of capital maintain Bhutan’s macroeconomic and macro-financial stability. WBG will support the development of the 1,125 MW Dorjilung Hydro-electric Power Project (DHPP), a priority project, through a combination of IDA and possibly IBRD resources and private capital. DHPP will be the first gigawatt-scale hydropower project in Bhutan to benefit from a long- term development strategy alongside a private partner through a Public-Private Partnership (PPP). The Project is a key opportunity to not only meet domestic energy needs but also support the energy security and climate targets of the region through regional electricity exports and could serve as a template for developing other projects in future. DHPP would use the best international industry practices in construction, operation, management of environment and social impacts, as well as climatic and seismic risks. The WBG will work closely with Druk Green Power Corporation Limited (DGPC) and the strategic partner from India to structure an optimal financing solution for DHPP. In addition to the IDA loan, supplemental financing might include commercial financing that may require WBG Guarantee Platform risk mitigation instruments and other windows, such as the IBRD Scale-Up Window (SUW) and IBRD Enclave. Beyond the financing of DHPP, the WBG would support DGPC in meeting the Government’s ambitious hydro development targets through a portfolio approach that leverages a mix of WBG instruments and other financing sources. The RGoB is also eager to expand its renewable energy mix by leveraging the private sector to further explore potential investments in geothermal, solar, and green hydrogen, and to expand transmission capacity domestically and for electricity export. The WBG through the WBG Guarantee Platform, will continue to pursue opportunities to support private investment in hydropower, solar and other renewable energies, as well as in power transmission and distribution, including through PPPs. 47. The WBG will invest in improving transport connectivity, within Bhutan and with its neighbors, as a means of unlocking economic opportunities and supporting trade efficiency. The government prioritizes consolidating and improving transport links, logistics, and trade, particularly in the southern belt, to reap benefits of economies of agglomeration and enhance Bhutan’s regional integration and trade. The WBG will prioritize investments that support green, resilient and safe road connectivity (with a focus on greenfield investments to fill missing road links along the Southern East West Highway); strengthen road asset management and maintenance; and improve multimodal connectivity to reduce the over-reliance on road transportation and enhance network-level resilience. Complementary measures to increase efficiency and resilience of trade and transport infrastructure will include solutions to eliminate manual and paper-based processes for efficient and streamlined trade and border crossings through digitally automated solutions (e.g., National Single Window). In addition, investment in quality and value chain infrastructure for trade facilitation and strengthening 19Bhutan Country Economic Memorandum, Maximizing Bhutan’s Potential for Economic Diversification and Structural Transformation, 2024. 17 of food safety and quality compliance will promote agricultural export, reduce food loss and waste, and lead to improved nutrition outcomes. The World Bank will provide support as part of a regional Multi-Phase Approach project, the Accelerating Transport and Trade Connectivity in Eastern South Asia (ACCESS), with Bhutan joining the second phase. In urban areas such as Thimphu, the WBG will support modal shifts to low-carbon public transport through investments in electric bus fleets and terminals, dedicated bus lanes and road safety and walkability improvements, thus improving access and labor mobility, as well as increased opportunities for small businesses to attract customers (including tourists) along walking routes. Potentially, support for private investment in transport infrastructure will be provided through the WBG Guarantee Platform. 48. The WBG will support more reliable and affordable digital connectivity and the development of a better enabled digital economy. Bhutan’s National Digital Strategy (NDS) 2024 aims to empower more than 400,000 Bhutanese by 2029 by strengthening the underlying digital infrastructure, enablers, and capabilities to support a vibrant digital economy. The WBG will support improving digital connectivity and data infrastructure resilience through the supply of bulk international bandwidth capacity for Government Networks under an indefeasible right of use (IRU) agreement or through refill of capacity from other neighboring countries; enhanced last mile access for targeted trade, agricultural, and logistics centers, building on existing infrastructure to expand or upgrade connectivity; and enhancing and strengthening disaster recovery capabilities of the existing Government Data Center. The WBG will support enhancements to the Digital Public Infrastructure (DPI, or “digital stack”) for the deployment and modernization of reusable, horizontal foundations for seamless and efficient digital transactions and services across the public and private sectors, with use cases in various sectors such as the National Single Window (NSW) for trade. Support will also be offered to enhance legal, regulatory, and institutional enablers for trusted data sharing and cybersecurity. Additionally, the WBG would engage in supporting public and private sectors to create digital jobs and strengthen digital capabilities and skills. 49. The WBG will invest in making Bhutan’s main cities more livable, resilient and competitive. The Government of Bhutan aims to make the Thimphu-Paro capital metropolitan region one of top livable cities in the world. The WBG will support this ambition by helping Bhutan’s urban centers thrive and be more resilient through investments in resilient, low-carbon ways of delivering critical urban infrastructure services, including green public transport, water supply, sanitation, and waste disposal; and enhancing institutional systems and technical, managerial and operational capacities for better resource management, improved city planning and effective delivery of services. WBG Guarantee Platform instruments will seek to support private sector investment in urban infrastructure services. All infrastructure investments will prioritize universal access, with inclusive urban planning, accessible, safe, and reliable transport for women and youth, and expanded digital connectivity. More and Better Jobs 50. All three CPF outcomes will contribute to supporting the creation of more and better jobs and will be supplemented by a focus on labor markets. The WB will support the supply-side of the labor market and skills development to help Bhutan develop a skilled and more employable workforce. In the area of labor market programs and systems, technical assistance will support the design and evaluation of Active Labor Market Programs (ALMPS) to improve employability of aspiring workers, and of employment services and systems (like Employment Service Centers, and Labor Management Information Systems) to reduce skills mismatch and improve job matching. This will include supporting skills development programs with a focus on enhancing the quality of training and expansion of trades to cover critical digital skills, and employment and entrepreneurship programs focused on underserved target groups like women, youth, and returning migrants. Support to workforce development will be focused in critical areas like healthcare, education, and Early Childhood Care and Development through analytical support on workforce capacity assessments, targeted retention 18 strategies, and professional development initiatives. Focusing on these strategically important areas with substantial labor supply constraints will have the secondary benefits of strengthening the healthcare system, improving the quality of education, improving the school readiness of children, and addressing social constraints to greater female labor force participation (e.g. childcare). Strategic analytics will include a deep dive on international migration to better understand the drivers of migration and return migration, profiles of the migrants, and reviews of relevant policies and programs to help the government better leverage migration for development. This engagement will not just reduce the high rates of youth not in employment, education, or training, but will also complement demand-side interventions and increase female labor force participation. 51. The focus on jobs will promote the inclusion of women, youth, and other disadvantaged groups in labor markets. This is central to Bhutan’s vision for sustainable and equitable development and aligns with the WBG Gender Strategy 2024-2030, Disability Inclusion Strategy (2024), and Environmental and Social Framework (2018). Activities will include developing gender-responsive policies, targeted financial solutions, capacity building, and measures to strengthen the conversion of education into jobs. Increasing participation of women and youth in the labor force and their capacity to benefit from financial solutions and regulatory reforms targeted at entrepreneurs are key. This includes bridging the gender gap in digital payments and enhancing access to formal remittance services. Other priorities include ensuring equitable access to high-demand skills, with a focus on Science, Technology, Engineering and Mathematics and digital literacy for rural youth, and gender- based violence prevention and response measures. IV. IMPLEMENTING THE CPF: A BUSINESS PLANNING APPROACH 4.1 Financing Envelope and Instruments 52. The WBG’s indicative lending envelope for FY25–29 could range from US$175 million (PBA) to an ambitious US$1 billion, if large infrastructure projects materialize. The estimated PBA of US$175 million (approximately US$35 million per year) could be significantly increased by leveraging access to available IDA windows. In IDA21 this is expected to include the Scale-Up Window and the Global and Regional Opportunity Window (GROW) for projects that address climate adaptation and mitigation and/or address global challenges while contributing to cross-border externalities. IFC investments including from the Private Sector Window, and IBRD scale-up and enclave financing over the CPF period could further increase the available envelope. Over the CPF period, IFC’s direct investments and mobilization can reach US$100 million or more, subject to government addressing key binding constraints that would enable IFC to invest/finance. MIGA’s potential guarantees through the WBG Guarantee Platform could complement the lending envelope. This would be the first time that the WBG seeks to deploy such a broad suite of instruments in Bhutan. 53. CPF objectives will be achieved by leveraging the full suite of WBG instruments. Together, the WBG will make use of a range of instruments to meet the needs of the country and make the best use of the WBG’s comparative advantage. These instruments are likely to include Development Policy Financing (expected not to exceed half of PBA envelope); results-based instruments such as performance-based financing or Programs for Results (PforR); Investment Project Financing (IPF); or financing solutions combining IPF with blended finance, risk mitigation instruments, credit, or guarantee instruments under the WBG Guarantee Platform. IFC will continue to support through various avenues including direct investments and advisory services. An ASA Program in Bhutan will support the lending program through a combination of technical assistance, policy notes, and other knowledge products, conducted jointly by WBG whenever relevant. 4.2 Fiduciary Framework 54. The overall fiduciary framework is adequate to support program implementation. The most recent PEFA Report 2023 finds that at an overall level, the RGoB’s performance continues to be sound. 19 Although challenges remain, the core elements of an adequate PFM system, including publication of the budget, are in place. RGoB remains committed to: (i) strengthening the legal framework; (ii) enhancing institutional capacity and the internal control framework; (iii) improving the financial management information system; and (iv) strengthening the oversight of public finances. Together, these actions aim to increase accountability and improve the timeliness, quality, transparency, and reliability of the government’s accounting and reporting functions. In accordance with PEFA, Government has made progress in the PFM environment, notably the launch of the electronic Public Expenditure Management System (e-PEMS), implementation of the electronic Government Procurement (eGP) system, creation of Cluster Finance Services (CFS), notification of International Public Sector Accounting Standards (IPSAS), and inclusion of gender and climate aspects in the annual National Budget Report. However, Public Investment Management has been noted as an area for improvement. Moreover, financial reporting will also need attention consequent to MoF’s decision to adopt Cash Basis International Public Sector Accounting Standards, so the Annual Financial Statements of the Bank-financed/administered operations will also be prepared accordingly. Audit timeliness has improved, however the risk of delay in submission of Results-based financing operations remains due to limited understanding of the PforR instrument. 55. Bhutan’s public procurement system is open to competition, includes checks and balances, and is audited. Bhutan Public Procurement System was assessed following Methodology for Assessing Procurement System (MAPS). Overall, the procurement system is well functioning with some critical gaps which RGoB is working towards addressing. Reforms to the public procurement system over the last decade are evident. The government demonstrated its commitment to further develop the procurement system by implementing Phase 1 of eGP, and Phase 2 is underway. In August 2022, the World Bank adopted the eGP module for procurement of Goods through Request for Quotation method under World Bank financed projects (for contract value less than US$30,000 equivalent). 56. The World Bank will continue to support stronger fiduciary systems through a combination of ASA, program support and policy lending with a focus on economic management. The RGoB applies its own country systems to prevent fraud and corruption in externally financed programs and to remedy or prevent its recurrence. However, PEFA Reports and the RGoB’s PFM Reform Strategy 2023-2028 identify capacity building and ICT systems as critical for a more effective administration. More than 25 cluster finance service offices have been established across the country to strengthen internal controls at decentralized levels, reduce payment time, and enhance efficiency and effectiveness. The Cluster Finance Service reform is now being replicated by other departments and ministries. A significant number of Ministry of Finance staff and parliamentarians have received training, which has helped in implementing reforms in their respective areas. A significant step taken by the RGoB was to legislate the GST Act and it is now ready to implement the GST as soon as the required ICT application is developed and rolled out. The most immediate reform being prioritized is the implementation of Integrated Financial Management Information System. 4.3 Operationalizing the CPF 57. Annual Business Planning Exercise (ABPE). The CPF FY25-29 is designed to support the 13th FYP with the flexibility to adjust to evolving circumstances and shocks. The CPF period currently runs from FY25 up to FY29, with an optional PLR in FY27 to assess progress and course-correct if priorities or circumstances change significantly (including lack of sustained traction in some areas). A One WBG Annual Business Planning Exercise will be conducted with Ministry of Finance prior to each Spring Meeting to inform pipeline programming, knowledge and analytical needs, and advisory services. The ABPE process will be informed by the Country Portfolio Performance Review and periodic program reviews for IFC to assess portfolio implementation progress and address operational bottlenecks. It will take stock of progress through a review of results, risks assessment, and adjustments to the program and pipeline to respond to emerging opportunities, in line with CPF priority outcomes. The 20 process will begin with the validation of scorecard results. ABPE will make explicit expected priority reforms in each outcome area and progress will guide the extent of additional WBG investment and advisory work, potentially including in GMC. Monitoring and evaluation of progress in the outcome areas and support to fill in data gaps will be integral to the annual business planning process. Monitoring and evaluation will be undertaken across the WBG portfolio. The National Statistics Bureau will participate in this effort, with a particular focus on outcomes, and receive support as needed. 58. A One WBG approach. The establishment of the new joint country representation provides a unique opportunity to develop joint engagement projects leveraging the experience and advantages the WBG can bring, particularly to help increase foreign direct investment and private capital mobilization. As DHI operates increasingly as a Sovereign Wealth Fund, there is an opportunity for IFC Advisory TA and services to inform its financial investment decisions inside and outside Bhutan. The World Bank, IFC, and MIGA will work closely to identify (i) priority areas to mobilize private capital using the “cascade principle,” including upstream policy reforms, financing and guarantees, when appropriate, and (ii) opportunities to open sectors for private investment in support of the diversification drive initiated by the RGoB. The ABPE will provide further opportunities to refine the approach. 59. Crisis preparedness and response. Bhutan has signed the omnibus amendments to include a Climate Resilient Debt Clause to defer, for up to two years, principal payments and/or interest payments on their IDA credits upon the occurrence of a pre-specified severe natural disaster that meets certain trigger event thresholds. In addition, given the exposure of Bhutan to climate-related and multi-hazard disaster risks, the CPF will use the tools offered by the new Crisis Preparedness and Response Toolkit, particularly the possibility of quick repurposing of parts of undisbursed resources (as part of the Rapid Response Option (RRO)) and other contingency resources that can be deployed quickly. 60. Citizen Engagement. WBG efforts in ongoing and future engagements will include components that intensify and broaden outreach to grassroots communities and all stakeholders, particularly the most vulnerable (such as women, youth, persons with disability, seniors and remote communities). The CPF will emphasize the use of digital technologies and data, including the introduction of data-driven feedback loops in implementing citizen engagement. 61. Contributions to Global Challenges. The CPF will make important contributions to, and benefit from, four of the six WBG Global Challenges Program (GCP). The program provides a strong emphasis on facilitating energy transition and efficiency by supporting an ambitious scale up of hydropower and other sources of renewable energy (solar, geo-thermal), for the benefit of the people of Bhutan as well as it neighbors. This is supported by a regional investment in transboundary transmission lines and facilitating a regional market for electricity trade. The program focuses on strengthening water security and climate adaptation including improving irrigation in agriculture, as well as strengthening urban water resilience and more effective water policies and institutions, working closely with other development partners. Climate adaptation is at the core of the program, with a strong focus on enhancing capacity to implement effective disaster risk solutions and promoting community resilience by strengthening their capacity to adapt to climate change. The program will also make an important contribution on decarbonizing transportation. On accelerating digitalization, the WBG will support the Kingdom’s ambitious goals to improve connectivity and governance, lower costs, digitize services, and develop more digital skills for digital jobs of the future. The program will also promote forests for development, climate, and biodiversity by helping Bhutan to enhance the value of its forests and biodiversity through sustainable forestry practices and eco-tourism. 21 Partnerships 62. The CPF also reflects the interventions of other development partners to leverage complementarities and opportunities for joint financing. The financing of the country’s 13th FYP will be funded mainly through domestic revenue and Official Development Assistance (ODA) from Multilateral Development Banks and bilateral partners, except for GMC which will rely mostly on private and foreign direct investment. India is Bhutan’s largest trading partner and largest bilateral donor, offering important economic opportunities for both countries. India announced an annual grant program of about US$250,000 to Bhutan for 2025, making Bhutan the largest recipient of Indian foreign aid, equivalent to 39 percent of India’s foreign aid. Other donors include Kuwait, ADB, the EU, JICA, and UN agencies. 63. Given the government’s sensitivity to the terms and cost of borrowing, the WBG will seek opportunities for co-financing with other partners through grants or concessional financing. This includes cooperation with GCF, GEF, EU, regional connectivity trust funds, and global trust funds such as ESMAP and GFDRR, to support synergies and better development outcomes. WBG works closely with ADB in the areas of public sector management, private sector development, transportation, hydropower, climate adaptation, and disaster resilience. Opportunities to take advantage of the Full Mutual Reliance Framework will be explored during this CPF period. The collaboration with JICA has allowed them to provide budget support to RGoB using World Bank prior actions of the preceding year. The collaboration with EU and the Austrian Development Agency (ADA) on public financial management has been successful and could be pursued, as could the collaboration with UNDP on reducing plastic pollution. The Global Partnership for Education (GPE) offers an opportunity to partner with UNICEF to strengthen human capital. The Bank is working with the GCF, UNDP and GEF on resilient urban development and with FAO and UNDP on modernization of the agriculture sector. Table 2: Partnerships During the CPF Period Themes WB IMF UNDP ADB EU JICA Others Increased private investment Economic management Resilience to UNICEF, WHO, FAO, climate risk GCF, UNOPS, GEF, UNFPA Infrastructure EIB, GEF, GCF, OPEC (digital, transport, Fund hydro) Note: illustrative only, coverage is not exhaustive 64. The new ABPE can be leveraged to strengthen donor coordination in Bhutan. While some thematic groups have been established, a more formally structured donor coordination mechanism would foster closer collaboration to ensure complementarity, avoid duplication and broaden the collective impact, and serve as a structured input into ABPE. The WBG will continue to explore partnerships in common areas of engagement to maximize impact and avoid aid fragmentation. Support for Capacity Enhancement 65. The CPF will support client capacity to mitigate implementation challenges. Following the civil service reform and as a result of outmigration, line ministries are thinly staffed and have struggled to replace leaders, particularly at senior levels. As the WBG begins to support larger and more complex infrastructure projects this is a concern as it will strain the government’s implementation and monitoring capacities. This challenge will be addressed through (a) capacity building and mobilizing more expertise as part of individual projects; (b) introducing good practices from elsewhere, such as 22 establishing centralized service units for core functions like procurement, contract management, and financial management to support multiple projects; (c) intensive use of technology and AI for remote monitoring and automated data collection and analysis for decision-making; (d) strengthening environmental and social risk management systems and capacity, and (e) building up statistical and M&E capacity to systematize data collection and monitoring. The WBG will also be very mindful of keeping project design as simple as possible, with a limited number of implementing agencies. Further, the WBG will continue to support coordination efforts across ministries for joint results. 66. ASAs will be chosen to support the CPF outcome areas in a selective way, with an emphasis on engaging with stakeholders in developing the ASAs and on active dissemination. The WBG will provide policy design and implementation support through a range of knowledge services. To help RGoB identify areas for private sector development, a Country Private Sector Diagnostic may be undertaken during the CPF period. To support RGoB’s ambitious change agenda, ASA may include evaluations of effectiveness of past models and introduction of more innovative development solutions. The World Bank will engage clients and stakeholders through technical workshops, consultations and other bespoke means to design sound analytics. Attention will be placed on disseminating the findings to a broad range of stakeholders to ensure that there is ownership of these findings so they can inform policy making and project design. V. MANAGING RISKS TO THE CPF PROGRAM 67. The overall risk facing the CPF has increased since the last CPF and is now rated as substantial. Five risks are substantial, notably: (i) macroeconomic (notably the risk of economic volatility); (ii) technical; (iii) fiduciary; (iv) institutional capacity (reflecting weak service delivery capabilities); and (v) environmental and social. As noted above, there has been a step change in the ambition of the Government resulting in a markedly higher level of demand for WBG support, for projects of increased complexity and levels of financing far superior to past years. 68. Macroeconomic risks are substantial. This reflects delays in hydro projects and fiscal consolidation and the materialization of financial sector contingent liabilities. Vulnerabilities in the financial sector with high NPL levels have increased fiscal risks, given that about 60 percent of assets of the financial sector are controlled by the public sector. External risks include high commodity prices and lower tourism demand that could exert further pressure on the country’s external balance and international reserves. Continued emigration of the educated workforce could also negatively affect the economy in the medium-term. Crypto asset operations and the GMC project entail significant upside and downside risks given the multitude of crypto assets of unclear origin and market and asset price volatility among others. While GMC is intended to uphold the values of integrity, trust and honesty, concerted efforts will be required to guard against the risks of illicit money transfers and other illegal trading activities as well as fiscal risks. Macroeconomic risks are partially mitigated by the government’s commitment to ensure macro-financial stability, including through (i) gradual fiscal consolidation by increasing domestic non-hydropower revenues and expenditure rationalization measures; (ii) reforms to monitor and manage fiscal sustainability risks from a large SOE sector; (iii) financial sector reforms; and (iv) sound oversight and governance arrangements for GMC. A stable peg with the India Rupee will further underpin macro-financial sustainability. The World Bank’s macroeconomic policy dialogue, including through the Development Policy Credit series and related technical assistance on the medium-term macroeconomic framework, Performance and Policy Actions (including support for timely repayments of DHI loans and incorporation of crypto operations in macroeconomic framework) under the IDA Sustainable Development Finance Policy, along with regular WB-IMF joint Debt Sustainability Analyses, also partially mitigate macroeconomic risks. 69. Technical risks are substantial. The WBG will be investing in large hydropower plants and complex road infrastructure projects that carry a much higher technical risk than projects supported 23 in the past. Climate change is exacerbating risks by accelerating glacial melt, increasing the frequency and intensity of extreme weather events, and altering hydrological patterns. The WBG is helping RGoB to strengthen its design guidelines to prepare more resilient hydropower projects. For the DHPP, the mitigation of these risks has already been considered with external expert support in the technical design, including for the safety of communities and infrastructure. Road and urban infrastructure investments are equally subject to climate risks and their design will need to be adapted to heightened levels of risks. Sound road and bridge design, construction management, comprehensive technical evaluations, surveying, and modeling will be required. There are also risks associated with the continued use of Development Policy Credits which, as highlighted in the CLR, have not sufficiently leveraged changes in the legal and regulatory framework in key sectors for maximum impact. This risk will be mitigated by elevating the level of ambition of DPCs to support the Government’s transformational goals and move from a business-as-usual scenario to one where reforms result in accelerated economic diversification and job creation. 70. Institutional capacity risks are substantial. Bhutan’s Country Policy and Institutional Assessment rating for economic management averaged 4.1 during 2019-2023 and 4.0 for public sector management and institutions, higher than the average for the region. However, the more ambitious WBG-financed program places additional demands on institutions, potentially exacerbating limited capacity, overstretched resources, and weak interagency coordination. The WBG will help build sustainable capacity in line ministries and in data capacity. Given the risks, a non-standard approach may be needed, including increased supervision budget, dedicated staffing, enhanced support for implementation from other ministries and parties, and new models for implementation (e.g., centralized PMUs). Hands-on Expanded Implementation Support (HEIS) is planned to build local capacity in areas like procurement, occupational health and safety, and safeguards assessment and implementation. 71. The fiduciary risk is substantial. This stems, among others, from the financial management risks associated with the foreign exchange control environment of the RMA. Mitigation measures include a dedicated bank account for DPC disbursements, recent technical assistance from the Bank and other development partners including a review of foreign exchange management internal control at RMA, financial audits of the RMA’s annual financial statements, and continued follow-up by the Bank on required actions from the RMA’s internal control review report. On the procurement side, the scale of procurement and associated risks are likely to increase. The World Bank will double down on building procurement capacity in government, with training on contract management, early market engagement and rated criteria. The Bank's strategy to reinforce procurement systems and ensure robust financial management has already proved effective in supporting the broader portfolio’s objectives: as part of the PFM-MDF project (P162196), the RGoB introduced the electronic Public Expenditure Management System (ePEMS), and the Integrated Financial Management Information System (IFMIS) has allowed efficient and timely government payments to vendors, salaries and pensions, thus also contributing to the safety of government officials and beneficiaries. Fiduciary risks will further be mitigated through capacity strengthening and knowledge sharing sessions being arranged for Project staff, agencies, and Royal Audit Authority. 72. Environmental and social risks are substantial. Some engagements under the CPF will take place in ecologically sensitive areas such as national parks, forests, and cultural heritage sites. For example, the planned expansion of hydropower at Dorjilung, but also including the construction of trails, access roads, and sanitation facilities, could lead to localized biodiversity loss, habitat disturbance, and challenges with waste management. Such risks can be effectively mitigated through proper environmental and social risk assessment and management following WBG and national requirements. For large-scale hydropower (e.g., DHPP) and complex road projects (e.g., ACCESS Bhutan), environmental risk can be particularly high due to the type and scale of civil works, their 24 potential impacts on ecologically sensitive areas and species of conservation concern, and a lack of experience managing such risks. WBG provides strong support to implementation agencies in conducting appropriate risk assessment, institutional capacity building and implementation support. IFC and MIGA Performance Standards can be adopted where appropriate to address environmental and social risks for private investments. On the social side, there are risks associated with labor influx and working conditions and Occupational Health and Safety (OHS), land acquisition and loss of livelihood and ensuring inclusive community development. Some local social and cultural groups that may be affected by projects have distinct cultural practices and languages. Large labor and population influx may also lead to significant community health and safety risks, and increased risks for Sexual Exploitation and Abuse and Sexual Harassment (SEA/SH). Vulnerable groups may have less representation in decision-making due to their population size and demographic characteristics. Inclusive stakeholder engagement will be promoted across the portfolio. Large infrastructure projects may lead to economic and physical displacement from land acquisition. Bhutan’s regulatory framework provides a solid foundation for managing these risks, but here are gaps in areas like stakeholder engagement, OHS, and biodiversity management. These will require mitigating measures in line with the World Bank’s Environmental and Social Framework (ESF) including Environmental, Health and Safety Guidelines. Risk Category Rating (High, Substantial, Moderate, Low) 1. Political and Governance Moderate 2. Macroeconomic Substantial 3. Sector strategies and policies Moderate 4.Technical design of project Substantial 5. Institutional capacity for implementation and sustainability Substantial 6. Fiduciary Substantial 7. Environment and Social Substantial 8. Stakeholders Moderate Overall Substantial 25 Annex 1: CPF Results Matrix and Short-Term Business Planning CPF Outcome 1 Increased private investment Indicator Baseline (date) Target (date) Total private capital mobilized US$200 million (2029) of which US$1 million (2024) (PCM)* US$25 million IFC Total private capital enabled US$0 (2024) US$200 million (2029) (PCE)* Country risk of debt distress 20 Moderate (2024) Moderate (2029) Cross-cutting indicator: % of youth not in employment, education or training (NEET), of 19% (women: 22.5%) (2022) na which women* *Scorecard indicators (italics = client context) PCM target includes private capital mobilized by WB, IFC and possibly MIGA, and is contingent on regulatory reforms allowing ECB in the financial sector, other PCM enabling reforms, and implementation of the Dorjilung Hydropower project. PCE measures the impact of enabling reforms to allow more domestic and foreign investment, supported through dialogue and the DPC series. Intervention Logic • Rationale for the CPF Outcome area: The Bhutanese economy has been unable to create enough quality jobs to absorb the various cohorts of jobseekers produced by its education system. Workers and jobseekers have left the country in large numbers over the past few years since the lifting of travel restrictions imposed during the Covid-19 pandemic. To reverse this trend, the RGoB needs to (i) improve macro-fiscal and financial stability and ensure strong and stable macro fundamentals (low inflation, stable debt, competitive external position, strengthened PFM and PPP framework, increased domestic resource mobilization); and (ii) enable and scale up private investment by improving the business environment and access to finance and payments, and addressing external commercial borrowing restrictions to include financial institutions to be support the development of MSMEs. • In a major change to how Bhutan authorizes projects in the hydropower sector the Cabinet in 2024 approved private sector to own up to 49 percent in hydropower projects with the Government retaining at least 51 percent. The decision follows from the RGoB’s Renewable Energy Road Map that aims to add 20,000 MW of renewable power by 2040. The Dorjilung Hydro-electric Power Project (DHPP) is a 1,125 MW plant being developed by Druk Green Power Corporation (DGPC) to meet domestic electricity requirements and avail foreign currencies by selling electricity surplus to India. The expansion of compatible transmission lines will help operationalize a regional power pool for electricity trade through a regional grid network. Overall, infrastructure investments play a crucial role in driving economic growth, attracting private investment, and generating employment in Bhutan. IFC will pursue investment opportunities to further expand solar and other renewable energies, as well as power transmission and distribution, including through PPPs. By involving local companies in the Dorjilung supply chain, as well as providing energy for a more diversified economy, the Dorjilung investment offers the prospect of more sustainable jobs in the tourism sector, women’s entrepreneurship, IT, e-commerce and digital services. 20 Source, WB-IMF Debt Sustainability Analysis. While not a Scorecard indicator, this indicator aligns closely with the Scorecard. 26 • To which Scorecard Outcome Area(s) does it link and how? WBG supported activities will be clustered around the Scorecard area of ‘More Private Investment’ measured by the indicators of Total Capital Mobilized and Total Capital Enabled. The second Scorecard Area supported by this CPF Outcome Area is ‘Effective Macroeconomics and Fiscal Management.’ By supporting macro-fiscal and financial stability, public financial management, domestic resources management and debt sustainability management, the World Bank can contribute to Bhutan’s 13th FYP focus on effective economic management which would attract more FDIs. The chosen indicator is to remain as a country at only moderate risk of debt distress. The third Scorecard Outcome Area supported by this CPF outcome is the cross-cutting Outcome Area ‘More and Better Jobs.’ By supporting the RGoB in improving economic management and the overall enabling environment for private sector development in key new sectors and facilitating access to finance, the WBG will support the effort to diversify the economy with the goal of creating more and better-quality jobs, in particular for youth and women. This will be supported through efforts to improve employability of aspiring workers, and of employment services and systems (like Employment Service Centers, and Labor Management Information Systems) to reduce skills mismatch and improve job matching. WBG supported activities will cluster around the Client Context indicator ‘Number of youth not in employment, education or training.’ • Lessons learned: As discussed in the CLR, efforts to increase private sector investment in Bhutan have been limited by the small size of the private sector and the market, limited opportunities within that market, the ongoing exclusion of the financial sector from accessing External Commercial Borrowing (ECB), and a restrictive policy framework for foreign direct investment. Increasing private sector investment, and job creation, would necessitate structural reforms to create incentives for such investment, particularly in sectors with high potential for job creation, such as cottage and small industries, agribusiness, digital economy, and tourism. Developing physical and digital infrastructure to enhance connectivity within the country and with neighboring countries would be important for facilitating private investment and for integrating Bhutan’s local producers into regional and global value chains. • Key risks: The risks to boosting private sector mobilization and investment include the potential delay or failure to implement the necessary structural reforms and incentives for such investments. Additionally, the dominance of SOEs can continue to limit growth opportunities for the private sector, potentially crowding out private firms in some areas. However, there are encouraging developments that bode well for increasing private sector investment in the country. A new FDI policy aims at liberalizing the foreign direct investment regime, which can contribute to attracting substantially higher levels of FDI and support private sector mobilization and job creation. Removing the exclusion of the financial sector from accessing ECB would address the highest risk to enabling and scaling up PCM and increasing private sector investment. Fiscal risks arise from the following three major sources: (i) an expected decline in grant receipts coupled with a limited stream of non-hydropower revenue potential; (ii) a structural procyclical fiscal policy stance; and (iii) contingent liabilities from SOEs and the impact of climate change in case of a major drought that leads to limited hydropower generation prompting much longer months of electricity imports at a higher cost. Ongoing WBG Support The following financial support will contribute to Outcome 1 by building the macro and investment framework needed for increased investment and investing in human capital: • Bhutan Cat-DDO strengthening the technical and institutional capacity of the RGoB to manage the risk of climate change and natural disasters. • Human Capital Recovery & Resilience Program which is helping to build, protect and utilize human capital in Bhutan. TA to support framework for increased private investment and jobs: • Public Sector Reform PASA • Bhutan trade and private sector development PASA 27 • TA on Medium-Term Macroeconomics Framework (MTMF) • TA on Medium Term Debt Strategy • Country Climate and Development Report • Bhutan Poverty and Equity Assessment • Support to active labor markets • SDFP PPA Planned WBG Support • DPC series with a focus on growth and jobs • Accelerate Bhutan’s Job Transformation through Renewable Natural Resource Value Chains (IPF) • Financial sector stability and financial inclusion for jobs (ASA) • SME Access to Finance - Develop financial infrastructure services (IFC) • One hydro, one financial institution, and one hospitality deal (IFC high probability pipeline) • Public Finance Review CPF Outcome 2 Enhanced climate resilience • Baseline (date) Bhutan trade and private sector Indicator Target (date) development PASA # people with enhanced 0 (2025) 250,000 (2029) resilience to climate risk* *Scorecard indicators (italics = client context) Intervention Logic This includes the following aspects: • Rationale for the CPF Outcome Area: While maintaining the carbon-negative status, Bhutan is the 34th most vulnerable country in the world. Bhutan’s unique terrain and climatic conditions of the Himalayas expose the country to multi-hazard risks such as drought, flash floods, glacial lake outburst floods, landslides, forest fires, earthquakes and extreme weather condition, impacting natural resources, economy and people. Bhutan’s economic foundation—hydropower, agriculture, and tourism sectors—are particularly dependent on and affected by climate variability and other natural hazards. By strengthening institutional capacity for climate and disaster risk management and adopting disaster-contingent financing, Bhutan can better protect economy and people against climate shocks and build resilience in critical infrastructure. Resilience measures in infrastructure financed by the bank would help set up these practices for specific projects to strengthen the implementation framework. Further, Bhutan can leverage the country’s unique opportunity to capitalize on abundant natural resources for sustainable growth. Agriculture production systems need to be more climate- smart in light of increasing climate shocks and water variability and for food security. The economic potential of forestry and ecosystem services could be valuated and better tapped. The country’s deteriorating water, land, and air quality needs to be tackled. As Bhutan transitions from the least developed country status to self-sustained climate resilience and green growth, it is crucial to mobilize innovative climate finance mechanisms such as the Bhutan Climate Fund and monetize carbon credits. Building on the principles of the 2018 Environmental and Social Framework, development interventions need to integrate measures for local community development including those to build climate resilience and biodiversity. IFC will continue to foster resilience to climate change in the private sector through engagements across all sectors and leverage private sector recommendations in the CCDR. 28 • To which Scorecard Outcome Area(s) does it link and how: This outcome links to the Scorecard Outcome Area ‘Green and blue planet and resilient populations.’ By strengthening policy, institutional capacity, developing climate-resilient infrastructure, and adopting disaster-contingent financing, this outcome contributes to the corporate scorecard result ‘Millions of people with enhanced resilience to climate risks’. The target of 250,000 benefiting from enhanced resilience to climate risk has been calculated based on projected outcomes of existing projects in the portfolio, in line with the Scorecard methodology. The third Scorecard Outcome Area supported by this CPF outcome is the cross-cutting Outcome Area ‘More and Better Jobs.’ By supporting the renewable natural resources sector and climate smart agriculture, the WBG can contribute to Bhutan’s 13th FYP focus on green growth, increase private investment in key value chains and support employment generation, in particular for youth and women. WBG supported activities will cluster around the Client Context indicator ‘Number of youth not in employment, education or training’. • Lessons learned: - Addressing Bhutan’s vulnerability to climate change requires integrating resilience into investment planning and development. This includes ensuring that infrastructure and development projects systematically consider climate risks and incorporate measures to mitigate these risks. - Engaging with relevant stakeholders and development partners is essential for the successful implementation of climate resilience projects. Sharing the results of technical studies and garnering funds for priority investments through collaboration can enhance the effectiveness of resilience efforts. - There are significant potential benefits from cooperating with neighboring countries on shared climate change-related challenges. This cooperation can enhance disaster response and resilience efforts. - Building national skills through hands-on extended support from WBG specialists could support implementation of international standards for environment and social safeguards. • Key risks: Higher than anticipated climate risks putting infrastructure and populations at peril. While the 13th FYP pushes to transform the agriculture and forestry sector, price fluctuations due to seasonality and cheap imports can affect competitiveness. Complementary public investments in trade facilitation regulation and infrastructure may also require time to become fully operational. Ongoing WBG Support • Country Climate and Development Report (ASA), providing analytical evidence and guiding the country on pathways of how strengthening resilience in critical economic sectors will help sustain Bhutan’s growth and prosperity. • Strengthening Risk Information for Disaster Resilience in Bhutan (RETF), enhancing Bhutan’s capacity for risk-informed decision making and development planning in critical sectors such as hydropower, agriculture, roads and urban infrastructure. • Food Security and Agriculture Productivity Project (RETF, recently closed), promoting sustainable agricultural productivity improvement, including adopting climate-smart agriculture and irrigation technologies, increasing crop yields, and improving market linkages. • Cat-DDO (DPF), supporting policy, institutional capacity, infrastructure design, and disaster-contingent financing, in areas of hydromet and agromet services, early warning systems for natural disasters, hydropower development and dam safety guidelines, building regulations, multi-hazard risk decision support systems, and community-based forest management. • Plastic Free Rivers and Seas (RETF), supporting innovative approaches to plastic waste management and circular-economy solutions. Clean Air for the Indo-Gangetic Plain and Himalayan Foothills (Regional ASA) • Supporting Resilient Regional Development in the Hindu Kush Himalayas (Regional ASA) • South Asia Technical Assistance for Regional Capacity and Engagement on Hydromet and Early Warning Services (Regional ASA) 29 Planned WBG Support • Accelerate Bhutan’s Job Transformation through Renewable Natural Resource Value Chains (IPF), improving labor productivity and enhancing climate resilience in the agrifood systems, as well as efficient use of increasingly variable water resources through operationalizing investments in climate- smart agriculture technologies and practices, mechanization, and standardization. • ACCESS Regional Project (IPF), improving resilience in transport connectivity and reducing climate- related roadblock incidences. • Livable and Resilient Cities Project (IPF), providing climate-resilient water supply and sanitation services and supporting climate-informed capital investment plans and climate risk-based asset management systems in Thimphu. • Strategic Planet Engagement (ASA), providing analytical support for sustainable management and value enhancement of natural resources such as agriculture, forestry, and water. • Bhutan Gender Equality and Social Inclusion Platform (ASA), supporting gender and social inclusion in policy, regulation, institutional capacity, and infrastructure development. CPF Outcome 3 Building Resilient Infrastructure for Improved Connectivity Indicator Baseline (date) Target (date) # people using digitally enabled 4,000 (women: 2,000) (2025) 65,000 (women: 32,000) (2029) enhanced services, of which women # people that benefit from 10,000 (women: 5,000) (2025) 180,000 (women: 90,000) (2029) improved access to sustainable transport infrastructure and services, of which women *Scorecard indicators (italics = client context) Intervention Logic This includes the following aspects: • Rationale for the CPF Outcome Area: Bhutan has an ambitious program to develop its hydropower resources as well as other sources of renewable energy. As a landlocked country with a complex geomorphology in an area prone to multi-hazard risks, Bhutan needs a reliable multi-modal transport Infrastructure that facilitates the movement of people, goods and services within and across its border. Digital connectivity, and domestic and cross-border power transmission lines are needed to link Bhutan to regional and global markets, but also to increase digital literacy to promote research and innovation inside the country. Connected communities will contribute more effectively to the emergence of a knowledge economy with improved quality of service delivery and business activity. Digital connectivity will also allow the establishment of international payment systems linking Bhutan to global markets. • To which Scorecard Outcome Area(s) does it link and how: This outcome links to the Scorecard Outcome Areas ‘Digital Services’, and ‘Connected Communities’. By supporting connectivity, the WBG can contribute to Bhutan’s 13th FYP focus on green growth, increase service delivery in health, education and social protection. Connected communities are included communities with reduced disparities. WBG supported activities will cluster around achieving the following scorecard indicators: ‘Millions of people using digitally enabled enhanced services’; and ‘Millions of people that benefit from improved access to sustainable transport infrastructure and services’. While the associated projects for these two indicators have closing periods beyond the CPF period, major construction activities are expected to be completed by the end of the CPF and are therefore included as part of the CPF results 30 framework. No indicator related to the generation of hydropower has been included given that the results of investments made under this CPF period will only be realized in the next CPF period. The third Scorecard Outcome Area supported by this CPF outcome is the cross-cutting Outcome Area ‘More and Better Jobs’. By supporting the RGoB in building resilient infrastructure for improved connectivity, the World Bank will help diversify the economy with the goal of creating more and better- quality jobs, in particular for youth and women. WBG supported activities will cluster around the Client Context indicator ‘Number of youth not in employment, education or training’. • Lessons learned: The sustainability of development outcomes in Bhutan relies on capacity development. A deeper commitment by the RGoB will be required to ensure that new technical staff are properly trained to facilitate timely implementation. The Bank will consider an optimal institutional arrangement to reduce PIU related transaction costs and implementation monitoring challenges. • Key risks: While the 13th FYP pushes to increase connectivity, regional political dynamics, geopolitics and the impact of international instability pose moderate risks. Technical and Environmental & Social risks are substantial (see Risks Section). Ongoing WBG Support • Digital Development for Inclusive Growth and Regional Integration ASA to support the development of the digital sector. • Sustainable Hydropower Development Project (RETF, recently closed) providing technical assistance in support of developing hydroelectric power Planned WBG Support • Dorjilung Hydropower Regional project (IPF) to develop additional hydroelectric power to supply Bhutan’s needs • ACCESS Regional Project (IPF) supporting an increase in the efficiency and resilience of trade and transport along selected corridors in Bhutan. • Livable and Resilient Cities Project (IPF) to improve urban public services and resilience 31 Annex 2: Bhutan CPF FY21-FY24 Completion and Learning Review COUNTRY: Royal Kingdom of Bhutan COVERAGE: Country Partnership Framework FY21-FY24 DATE OF PERFORMANCE AND LEARNING REVIEW: na I. INTRODUCTION 1. This Completion and Learning Review (CLR) assesses the performance of the World Bank Group (WBG) FY21-FY24 Country Partnership Framework (CPF) for the Kingdom of Bhutan. The review: (i) assesses the achievements of the CPF program outcomes as measured by the CPF Results Framework (RF) and additional evidence; (ii) evaluates the WBG performance in designing and implementing the CPF program, while discussing its alignment with the WBG’s Twin Goals; and (iii) draws lessons learned that will inform the design of the next CPF. The CLR has drawn on discussions with Bank Group staff, as well as WBG documents, other reports, and discussions with government counterparts. 2. The FY21-24 CPF was approved by the Board of Executive Directors on January 14, 2021. The overarching challenge facing Bhutan in 2021, when the CPF was approved, was the need to create more high-quality jobs that would help keep young people employed in the country and allow Bhutan to benefit from a demographic dividend. This would require structural reforms to create incentives for private sector investments, including in sectors with high potential for job creation, such as cottage and small industries (CSIs), agribusiness and tourism while maintaining a balance with the country’s constitutional commitment to cultural preservation and environmental conservation. To facilitate private investments, physical and digital infrastructure were needed to improve connectivity, within the country and with neighbours, and to bring Bhutan’s local producers into regional and global value chains. 3. Guided by the priorities set out in the 12th Five-Year Plan (2018-2023) and drawing on a Systematic Country Diagnostic (SCD) completed in 2019 the CPF comprised three objectives: (i) improving human capital; (ii) increasing economic resilience; and (iii) increasing environmental resilience. The World Bank’s active lending program during FY21-FY24 comprised 16 operations. Total net commitments amounted to US$229.8 million. The International Finance Corporation’s (IFC) committed portfolio in Bhutan was US$14.2 million as of June 2024 for one equity investment in the financial sector. IFC’s program did not expand during the CPF period due to COVID-19, policy constraints and limited private sector opportunities. The advisory portfolio includes projects focused on strengthening agribusiness, financial sector reform and bank level advisory, upstream engagement in infrastructure including Environmental and Social Safeguards (ESG) advisory and access to financial services. 4. Despite an increase in demand for World Bank services in Bhutan, the overall CPF outcome is rated Unsatisfactory, due in part to an inadequate results framework, and WBG performance fair. The ambitions of the Government have increased substantially over the past years, resulting in higher demands of the World Bank as a partner of choice. Yet one of the three objectives in the CPF was not achieved (Human Capital), one was partially achieved (Environmental resilience) and one mostly achieved (Economic Resilience). This reflects, in part, the lack of a sound basis for assessing progress. A Performance and Learning Review (PLR) was initiated late, only in the final year of the CPF, because of a major restructuring of ministries and the civil service during 2022. Once initiated, the PLR was not 32 completed as the scope of the Government’s request for support increased to the extent that preparation of a full CPF became an urgent imperative. A waiver for the PLR was requested and granted in December 2024. Consequently, the inability to update the results framework in a timely manner in the PLR prevented comprehensive evaluation of the program’s achievements. Otherwise, the program’s design reflected a strong application of selectivity criteria, WBG implementation of the program was effective, and there is a sound program of ongoing and planned activities to underpin the next CPF. II. PROGRESS TOWARDS CPF DEVELOPMENT OUTCOMES 5. This Review finds that progress towards the CPF Objectives was ‘Unsatisfactory’. Objective 1, Improved Human Capital, was not achieved, as all indicators were either not achieved or not verifiable. Action to address Gender-Based Violence (GBV), although not explicitly targeted under Objective 1, saw substantial progress, with the National Commission for Women and Children (NCWC) approving a response plan to mitigate the risks of GBV during the pandemic. Bhutan has seen a steady increase in the United Nations Development Programme (UNDP) Human Development Index in recent years. However, these achievements do not themselves change the overall rating. Objective 2, Increased Economic Resilience, was mostly achieved. The World Bank supported several successful efforts that enhanced economic diversification and access to finance. Objective 3, Increased Environmental Resilience, was partially achieved. The World Bank supported climate action and substantial improvements in disaster preparedness and response capacities over the course of the CPF. Had a PLR been completed in a timely manner at mid-term, adjustments could have been made to the program and results framework which would likely have led to better documenting results achieved, and possibly better ratings. CPF Objective 1: Improve Human Capital 6. CPF Objective 1: ‘Improve Human Capital’ was Not Achieved. All indicators included in the results matrix for Human Capital are either Not Achieved (increased participation in income support programs) or ‘Non-Verifiable’ (reduced stunting, improved antenatal care, and increased primary school readiness). The Royal Government of Bhutan (RGoB) could not fund the cash transfer program of the Accelerated Maternal and Child Health Program (AMCHP, P180904) due to a constitutional clause that prevents funding recurrent expenditures with loans. It took until 2023 to secure a Japan Social Development Fund (JSDF) grant for the WB components of the program to materialize upon effectiveness in April 2024. However, other Partners (United Nations Children’s Fund – UNICEF, Japan International Cooperation Agency – JICA, and World Health Organization, WHO) who jointly contributed to this program, were able to start implementing their components in a timely fashion and made good progress. Beyond results captured in the results framework, the World Bank provided significant additional support. This included, for example, crucial support to the RGoB to mitigate the financial impact of the COVID-19 pandemic and strengthen preparedness. 21 See ‘Additional Evidence for Objective 1’ in Results Matrix. CPF Objective 2: Improve Economic Resilience 7. CPF Objective 2: Improve Economic Resilience was Partially Achieved. With World Bank support, one indicator was achieved: amendments to the Credit Information Bureau (CIB) Rules and Regulations and approval of the supervision manual expanded the number of reporting entities to include utilities and telecom companies, resulting in an increase in entities reporting to the CIB; two were partially achieved (an increase in non-hydropower revenue as a share of Gross Development Product (GDP); and support for cottage and small industries, CSIs); one was not achieved (new private investments in high value 21 Development Policy Finance (DPF) with Catastrophe Deferred Drawdown Option (CAT DDO) with Pandemic Emergency Financing Facility (PEF) (P173008). 33 agribusiness). The indicators relating to the business environment show that the strength and vibrancy of Bhutan’s small-scale industrial sector has increased, as reflected by growth in the number of CSIs. During the CPF period, IFC achieved an increase in outstanding loans to CSIs of US$22 million through the SME A2F program, while also supporting an increased number of CSIs 19, 565 (2023) against a target of 25,000, but fell short of meeting the CPF target of US$305 million (2025). Although not anticipated in the Results Matrix, during COVID-19, the World Bank also helped provide critical financial assistance to these CSIs to ensure their sustainability. See ‘Additional Evidence for Objective 2’ in Results Matrix. CPF Objective 3: Improve Environmental Resilience 8. CPF Objective 3: Improve Environmental Resilience was Partially Achieved. Two of five indicators were achieved (maintenance of a carbon neutral status and development of disaster management and contingency plans); one was not achieved comprising establishment of a climate fund; and two not verified (approval of sustainable forest plans; and, because the CPF did not include a baseline or target, climate co-benefits). See also ‘Additional Evidence for Objective 3’ in Results Matrix. III. WORLD BANK GROUP PERFORMANCE 9. Overall WBG implementation performance is rated as fair. The CPF was relevant, selective, showed sound intervention logic, and incorporated lessons learned in the CLR. However, the results framework was poor and insufficient attention was put on building client capacity to collect and monitor data on results. Joint implementation and supervision were good, but the quality of fiduciary management varied. The Advisory Services and Analytics (ASA) program was sound, although the CPF could have shown its links to programs more clearly. Risk management was sound and the WBG showed good flexibility. However, there was no PLR. Design & Relevance Selectivity and coherence of intervention logic 10. According to the CPF document, the following selectivity criteria were applied to maximize impact of the limited lending envelope available for Bhutan: (a) catalyzing existing government initiatives and the private sector by making use of programs, projects, or plans developed by the government (including the National Key Results Areas in the 12th Five Year Plan - FYP), leveraging and strengthening existing planning capacity; (b) creating sustainable impact through supporting programs with clear, measurable outcomes; and (c) optimizing WBG engagement by diversifying and targeting the instruments it uses to support Bhutan. The CPF significantly reduced the complexity of the design as compared to the previous one (down from 3 focus areas to 2, and from 7 Objectives to 3). 11. The framing of focus areas and objectives in the CPF, however, was unsatisfactory. The first focus area, Human Capital, comprised just one objective with essentially the same title ‘Improving Human Capital’. It is unclear what purpose was served by constructing the objective at the same level of generality as the focus area. More useful would have been to split the objective into two objectives, one on education and training and the other on health, especially for mothers and children, a strategic goal of the CPF. This would have provided a more transparent Intervention Logic and strengthened the Results Framework (RF) as a tool for assessing progress during the Completion and Learning Review. 12. The CPF also included a cross-cutting foundation of leveraging digital technologies to overcome social disparities and strengthen government capacity. The World Bank re-energized its policy dialogue with the Government on digital development through an ASA entitled “Bhutan: Digital Development for Inclusive Growth and Regional Integration.” This ASA paved the way for a government request for lending 34 support to strengthen digital trade and regional logistics systems through improving regional digital connectivity, resilient data infrastructure, and cross-cutting enablers and cyber security. 13. In practice, alignment with Government strategy was complicated by the Government’s own changes in strategic direction during the CPF period. The strict restriction measures imposed on people movement which disrupted the government’s work and World Bank Group support and missions, resetting of Government priorities during the Covid 19 pandemic, the civil service reform and cabinet reshuffling with reconfiguration of some Ministerial jurisdiction which led to the departure of senior officials contributed to loss of institutional memory and capacity and further implementation delays, including the later than expected adoption of the 13th FYP (which was launched in June 2024, following the December 2023 elections and appointment of a new cabinet that started operating only in February 2024). The need for sustained commitment to more ambitious and challenging reforms remains critical to Bhutan’s ongoing economic recovery and long-term sustainability. Strength of Results Framework 14. The results framework did not provide a solid basis for evaluating the CPF partly because planned statistical capacity building did not materialize as expected. Each objective had an average of about four indicators which were broadly relevant. However, five of the 13 indicators were non-verifiable, i.e. more than one third of the entire results framework, including three of the four measuring the first objective on human capital. There were four progress indicators of which four were non-verifiable. The CPF noted the importance of building capacity for data and statistics. It was expected that new International Development Association (IDA) projects (as well as trust-funded projects and ASAs) would be designed to help track performance under the indicators in the CPF RF rather than relying on a small, standalone TA to build statistics capacity. In practice, despite some exceptions such as the Health Service Delivery Indicators (P170544) ASA, the planned capacity building did not materialize. In some instances, key projects were delayed, sometimes because of the COVID-19 pandemic (such as AMCHP Outcomes, P1707878) and in others there was no WBG support as in the case of primary education. In addition, nine of the 13 indicators had no dates associated with either the baseline or targets. None of the indicators was gender-aggregated (and just one indicator directly focused on women i.e. maternal health) and none of them captured spatial gaps, even though both (gender and spatial inequality) were cited as key priorities by the CPF. Yet, several projects included women’s empowerment and other gender-related priorities among their objectives and achieved results accordingly. Equally there were no indicators capturing the digital economy which was the cross-cutting foundation of the CPF. 15. The urgent need to prepare a new CPF and why a PLR could not be completed. A PLR was drafted in 2023-2024 aiming to extend the FY21-24 CPF by one more year and support the new 13th FYP that was being prepared. However, a series of circumstances delayed the launch of the 13th Five-Year Plan to June 2024, in particular the implementation of the Civil Service Reform in 2022 which led to a significant number of officials leaving, a Cabinet reshuffle in 2023 and a reconfiguration of the administration to fewer ministries; Parliamentary elections in 2023; and heightened attention to what was perceived as an “existential threat”, the unprecedented surge in outmigration (around 9 percent of the Bhutanese population migrated to wealthier countries by July 2024) combined with declining fertility rates. Under these circumstances, the PLR could not be completed, and emphasis was placed on responding to urgent government requests to avail more IDA resources to accelerate economic growth through investments in infrastructure and connectivity projects. Consequently, the CPF FY21-24 results framework could not be updated in time for this CLR and a request to waive the PLR was submitted and granted in December 2024 to allow for preparations of the CPF FY25-29. A new CPF was urgently required to reflect the Kingdom’s new ambitions laid out in the 13th Five-Year Plan and in the announcement of Gelephu Mindfulness City. 35 Notably, RGoB requested a trade and transport connectivity project as part of the Accelerating Transport and Trade Connectivity in Eastern South Asia (ACCESS) Multiphase Programmatic Approach (which covered Bangladesh and Nepal in its first phase) and preparation of a large hydropower plant, Dorjilung, with the ambition of accessing regional IDA for both projects, benefiting from the Small State Status preferential financing terms. This implied an FY25 engagement program more than fifteen times greater than previous annual engagements. Design of WBG interventions 16. The Bank sought to diversify its financing instruments, acknowledging that more varied tools could enhance impact in a small country like Bhutan, but this was not followed through in practice. Projects benefited from thoughtful designs that addressed significant implementation risks, incorporating lessons from previous operations and adapting their design to the unique challenges of Bhutan's development landscape. However, the share of non-DPF operations in Bhutan increased only marginally as compared with the previous CPF. Only one PforR – the Human Capital Recovery & Resilience Program (P174399) – was approved during the period and one IPF - COVID-19 Emergency Response and Health Systems Preparedness Project (P173787), in addition to six recipient-executed grants. Delivery of the CPF thus failed to respond adequately to the previous CLR’s finding that the use of Investment Project Financing (IPF) and/or PforRs would allow the Bank to address Bhutan’s perennial institutional capacity deficits more effectively. DPFs thus continued to be the primary delivery vehicle in Bhutan. Although the CPF included more sector-specific reforms in new DPFs, the scope of DPFs approved during the period still appeared broad. The COVID-19 Crisis Response Development Policy Credit (P175758) sought reforms for both economic resilience and environmental sustainability, while addressing the economic, social, and health impacts of COVID. The Green and Resilient Growth Development Policy Credit, DPC (P177712 & P178635) series includes a similarly broad agenda. More importantly, DPC policy actions could have been more ambitious. Many prior actions were linked to changes in policies and guidelines rather than laws and secondary regulations and could have been better supported by measures to institutionalize reforms and ensure sustainability. Trade-off between Risk and Development Impact 17. The CPF assessed overall risks to the program as moderate and proposed mitigation measures that did not overly prejudice the potential developmental impact of the program. Two risks were assessed as substantial, namely the macroeconomic and institutional risks. The COVID-19 pandemic was rightly assessed as posing substantial economic risks, in the form of reduced demand for exports, including tourism. Import shortages and rising prices were also assessed to pose additional macroeconomic risks, as did a domestic outbreak of COVID-19 accompanied by lockdowns and social distancing measures. In addition, the CPF assessed limited technical capacity, a complex organizational structure, and weak interagency coordination as posing risks to the achievement of CPF’s objectives. To mitigate this risk, the CPF proposed a focus on developing capacity and fostering coordination across implementing agencies. Both sets of mitigation measures struck a reasonable balance between risk and development impact. Integration of Lessons from the Previous CPF 18. The previous CLR identified the following lessons, to which the CPF responded well both in design and implementation: • The need for more diversified instruments to support institutional capacity building. The CPF acknowledged that diversifying IDA financing instruments to include IPF and/or Performance for Results (PforR) instruments would enable more effective support for institutional capacity building. 36 • Enhanced effectiveness of DPF to support implementation of reforms. The CPF noted that inter- ministerial coordination had been weak during the previous CPF. The COVID-19 Crisis Response DPC (P175758) provided the opportunity to strengthen coordination between the Ministry of Finance, Ministry of Economic Affairs, Gross National Happiness Centre, Royal Monetary Authority (RMA) and other relevant ministries. • Strategic use of trust fund (TF) resources for advisory services and analytics (ASAs). The CPF acknowledged the need to make the ASA program more strategic and selective and better complement financing operations. Under the CPF, the ASA pipeline was to be limited to core and extended-core diagnostics. Stronger client ownership would be sought in implementing ASAs. The number of ASAs fell from 60 during the previous CPF (of which 19 were dropped or cancelled) to 31 (of which 5 dropped or cancelled). The overall program of ASA was clearly tighter and more focused than was the case previously with many fewer dropped or cancelled. Several ASA benefited from cross-sectoral work: AMCHP (P170787) succeeded in embedding AMCHP in a broader dialogue on human capital development in Bhutan. Public Expenditure and Financial Accountability Assessment III (PEFA,2022) (P177877) highlighted the importance of working across multiple departments to tackle cross-cutting issues such as climate, gender and disaster management. • Technical Assistance (TA) has helped the government improve its implementation capacity. In view of this finding—as well as the SCD finding that gaps remain between policy making and policy implementation—the CPF proposed that TA would continue to be included in relevant operations as appropriate going forward, aiming to improve the capacity of implementation agencies. In practice, there was little significant evidence of a major uplift in TA delivered through operations during the CPF, reflecting in part, the limited number of non-DPF operations. The Human Capital Recovery & Resilience PforR) operation included technical assistance (TA) that supported safeguards training for environment ministry personnel, and vocational training for new graduate students. The Sustainable Hydropower Development Project included tailored TA that supported capacity building at Druk Green Power Corporation to help finance and develop hydropower projects (such as the Dorjilung Hydropower Project) in alignment with the best international technical, environmental and social standards. This TA engagement and policy dialogue paved the way for the sustainable development of 1,125 MW Dorjilung Hydro-Power Project in the FY26 pipeline. • Collaboration within WBG. The WBG worked jointly on the Bhutan Country Climate Development Report (CCDR) which is still ongoing, and its recommendations. The World Bank and IFC worked jointly on the Country Economic Memorandum (CEM). An IFC review of cross-country experience on FDI rules and regulations helped inform the DPO series on Fiscal Sustainability and Investment Climate (P157469) and IFC also helped on implementation. IFC’s Advisory Service on Financial Infrastructure Bhutan Project (600759) supported implementation of several prior actions for the same DPO series including the Movable and Immovable Property bill, establishment of the Central Registry for Secured Transactions and the Credit Information Bureau, and the insolvency bill. Beyond this there were few opportunities for WBG collaboration. While the DPOs supported policy reforms in sectors that are relevant for IFC and the Multilateral Investment Guarantee Agency (MIGA), e.g. tourism, agriculture and renewable energy, there were no follow up investments or guarantees by IFC or MIGA. This was partly due to the External Commercial Borrowing ECB reforms being only partially achieved. While ECB reform was critical to open up BTN-linked financing, it continued to exclude the financial sector from borrowing from international financial institutions, including IFC. MIGA, which does not have any projects in Bhutan, actively engaged in business development activities, however, no guarantees were issued during the CPF period. • Citizen engagements. The CPF noted the importance of citizen engagement in designing and implementing WBG operation. Citizen engagements were well integrated in the preparation of this CPF, including a 2023 Country Opinion Survey that revealed a request to increase direct interactions 37 with the private sector, civil society organizations and grassroots communities. In 2023, the World Bank sponsored a National Traditional Textile design and weaving competition conducted jointly with the Royal Textile Academy to engage grass roots communities and youth groups. The main objective was to integrate the use of digital technology in traditional textile design to empower women in the sector and better curate Bhutanese traditional design while attracting youth into the sector. Program Implementation Portfolio performance 19. Operations supporting CPF objectives during FY21-FY24 comprised a range of different instruments: five development policy credits (DPC), of which two were approved just prior to the CPF, eight Recipient Executed Trust Fund grants (of which two approved before the CPF), and two IDA financed IPFs (of which one approved prior to the CPF) and one PforR. The active portfolio in June 2024 comprised five operations with total net commitments of US$35.4 million (of which US$22.5 million financed by IDA and US$12.9 million by Trust Funds). 22 Portfolio performance during the CPF was broadly satisfactory both in terms of progress towards development objectives and implementation. The moderately unsatisfactory IEG outcome rating for the Strengthening Fiscal Management and Private Sector Employment DPC was an outlier within the portfolio. Key issues affecting performance of the portfolio included: the need for better coordination among Project Implementation Unit (PIUs); high turnover of professionals and thin human resources; delay in submitting Interim Unaudited Financial Report (IUFR) approvals; the need for capacity building for project coordinators especially regarding IUFR submissions and regular procurement training; some lengthy approvals between the WB and implementing agencies (IAs); inadequate delegation of authority and responsibility-sharing among IAs; lack of full ownership and commitment by project managers; and delays, notably as a result of the COVID-19 pandemic. AMCHP (P1707878), is now expected to be completed by 2027 i.e. within the lifetime of the next CPF. IFC’s portfolio currently consists of one investment in the financial sector and IFC has generated a pipeline of investment projects in the hospitality, transmission and distribution, and the financial sector for FY25, despite the regulatory hurdles around ECB. The advisory portfolio expanded to include four new programs in sustainable clean energy, financial infrastructure, digital agri-finance and agribusiness and financial inclusion. Joint Working – Collaboration Across the WBG and Partnerships 20. The CPF aimed to strengthen collaboration across the WBG to address Bhutan's pressing needs for private sector development and economic diversification, building on lessons from the previous CPF. The IFC focused on support to microfinance, digital financial services, and high-value agribusiness producers. IFC and WB worked closely on several ASA products as well as the Fiscal Sustainability and Investment Climate DPO series (P157469). IFC has also continued to work closely with RGoB on their request for guidance on expanding the ECB guidelines to the financial sector. MIGA actively pursued opportunities to support the foreign private sector through its guarantees, facilitated by its representative in India. However, none of these leads materialized during the CPF period. 21. The WBG collaborated closely with many other development partners. Partnerships in support of Objective 1 (and beyond) during the COVID-19 pandemic were critical. The World Bank worked closely with the IMF and others in support of Objective 2 (Economic Resilience) and a wide range of UN and other partners in support of Objective 3 (Environmental Resilience). Details are presented in Annex 7. 22 Recipient Executed Trust Funds approved during the CPF comprised: Strengthening Risk Information for Disaster Resilience in Bhutan (P175081); Accelerating Maternal & Child Health Outcomes Project (P180904); Bhutan Green Transport Project (P171012); Sustainable Hydropower Development Project (P174327); Human Capital Recovery & Resilience Program (P174399); Food Security and Agriculture Productivity Project (P155513). 38 Supervision of the Portfolio 22. Bank supervision of the portfolio over the period, was characterized by frequent missions, strong technical assistance, and effective collaboration with government counterparts. Frequent missions and continuous follow-up with all implementing agencies allowed the World Bank team to maintain a productive dialogue with Bhutanese authorities and be responsive to their needs and priorities, even during periods of political change and the disruption caused by COVID-19. This has been supported by continuity in the Bank’s supervision teams. Supervision teams provided continuous support to Project Management Units in matters relating to safeguards and fiduciary compliance. Consequently, there was no problem project during the CPF period. Staffing grew in the Thimphu Country Office to bring technical staff closer to the client and make the WBG more responsive to client requests and needs for assistance. Advisory Services & Analytics (ASA) 23. WB ASAs had an outsized role in helping to shape thinking and reorient policy in Bhutan in a coordinated manner across ministries. ACCESS Programmatic and Digital Development for Inclusive Growth and Regional Integration ASA enabled the Bank to advance dialogue on several key thematic areas critical for enhancing transport, digital and trade infrastructure and connectivity, and thus informed and aided the design and preparation of the ACCESS project (P181278 currently under preparation) which also includes support for digital identity (ID) and enablers, data governance and cybersecurity. In the energy sector, the continued dialogue played a critical role in establishing and stepping up engagements in the areas of hydropower, geothermal and transmission. Finally, the third PEFA Assessment (P177877) highlighted the importance of working across departments to tackle issues such as climate, gender and disaster management. Several study tours, workshops, discussions with key international experts, and technical trainings were conducted to inspire policy makers and increase their technical capacity. AMCHP (P170787), an ASA and precursor to the much-delayed lending project by the same name, became an opportunity to engage in a broader dialogue on human capital development in Bhutan. This provided greater opportunities for dialogue not only with the technical counterparts in the Ministry of Health but also with Ministry of Finance and other key stakeholders. Flexibility – Responsiveness to Changing Circumstances 24. The World Bank showcased flexibility and adaptability, reflected in the proactive restructuring of projects to enhance relevance and adjust to emerging circumstances. The COVID-19 pandemic prompted the RGoB to make policy decisions that proved successful in Health and Social Protection, but less effective for the economy. The 12th Five-Year Plan was reprioritized to focus on preventing community transmission of the virus and providing relief measures to people and businesses. The WBG program responded adequately to the COVID-19 pandemic and helped increase preparedness for future crises. In addition to the COVID-19 Emergency Response and Health Systems Preparedness Project (P173787) and (drawing on the Crisis Response Window) the Bhutan DPF with Catastrophe Draw Down Option (CAT DDO; P173008) that were ongoing, the Bank quickly allocated US$10 million in Additional Finance through the Emergency Covid-19 Health Systems Response and Preparedness project to help strengthen the Kingdom’s capacity to respond and prepare for future similar emergencies. In addition, in response to increasing rates of joblessness and emigration, the WBG convened a workshop in September 2024 focusing on job creation and bringing together experts in tourism and digital economy from around the world to brainstorm options with RGoB officials at the highest levels. The WBG used the output of this workshop to inform WBG support for the RGoB’s job creation efforts. Significantly, in response to the government’s heightened ambitions in the 13th Development Plan, the World Bank was able to mobilize considerable IDA resources in FY25 through the Regional IDA and Scale Up Windows, bringing the program to new levels, on preferential terms, leveraging Bhutan’s Small State Status. The World Bank responded quickly to increasing demands and grew the size of the country office to meet the level of ambition. 39 Risk Management 25. Bank-financed projects in Bhutan faced recurring challenges related to political and institutional capacity risks which were often underestimated. The effects of drastic lockdowns in combination with the lay-offs under the civil service reform have been associated with the massive out-migration observed since 2023, which has further diminished an already weak capacity base. The lame duck 2023 pre- and post-election period led to slowdowns in the dialogue and Government activities, delaying project preparation and implementation. Fiduciary and Safeguards 26. The portfolio generally demonstrated solid financial management and procurement, although challenges persisted, particularly early in the CPF. Fiduciary risks to transparency and accountability were significant during the CPF. Mitigation measures included a dedicated bank account for the DPF disbursements and its audit, technical assistance from the Bank and other development partners including a review of foreign exchange management internal control at RMA, and financial audits of the RMA’s annual financial statements jointly by an international and a local audit firm from the Royal Audit Authority’s panel of approved audit firms. Joint audit by development partners was conducted for the Special Project (a new legal entity established for crypto operations). As part of PFM-MDF project, (P162196) the RGoB introduced the electronic Public Expenditure Management System (ePEMS) which became vital for efficient government payments to vendors, salaries and pensions. Financial management was typically rated as satisfactory across projects. In procurement, initial delays were common, but resolved during implementation, and procurement performance improved over time. The electronic Government Procurement (e-GP) system supported under PFM-MDF facilitated online procurement. Safeguards 27. The World Bank's handling of environmental and social safeguards has been satisfactory. The overall management of both environmental and social safeguards in Bank-supported operations is deemed ‘Satisfactory’ since no project during the CPF period required special safeguard arrangements. Use of Country Systems during the CPF 28. FM and Procurement policies and practices are moderately well aligned between the RGoB and the WBG. As noted above, the World Bank has supported increased efficiency, accountability and transparency of the PFM system in Bhutan. In relation to procurement, the Bank along with MOF, RGOB conducted a Bhutan Public Procurement Assessment. The report identified the gaps in the procurement system and the RGoB is preparing an action plan to address the gaps. Bank financed projects are implemented following the Bank’s Procurement Regulations. IV. ALIGNMENT WITH CORPORATE GOALS 29. The CPF was well aligned with corporate goals. The first focus area, human capital, targeted health outcomes that would disproportionately benefit the poor. This included increased participation in income support programs and reduced child stunting. The 2022 Poverty Analysis Report was published by the National Statistics Bureau in December 2022, mid-way during the CPF period. Extreme poverty (based on US$2.15 per day) was eliminated in 2022. However, results from the 2022 Bhutan Living Standard Survey suggest that an estimated 12.4 percent of the population lives below the national poverty line (approximately US$79 per month, the amount needed to secure the necessities of life) amounting to approximately 97,000 thousand people. Poverty remains more prevalent in rural areas, where 17.5 percent of the poor live. There are also significant disparities in poverty across Dzongkhags (districts), with 40 a poverty rate as high as 41 percent in Zhemgang and as low as 1.5 percent in Thimphu. Samdrup Jongkhar, Samtse and Trongsa are the districts with the next highest poverty rates. 30. The second focus area, economic resilience, was particularly well aligned with the goal of shared prosperity. This included efforts to support MSMEs, entrepreneurship and access to finance. Although not yet part of the WBG’s overall vision at the time, the third focus area, environmental resilience, was clearly well aligned with issues now covered under Livable Planet. The Gini index, which measures income inequality, decreased from 37 in 2017 to 28 in 2022. Nonetheless, the share of per capita real expenditure of the richest quintile in Bhutan is more than four times higher than that of the poorest, suggesting that there is still progress to be made in terms of shared prosperity. Urban areas, however, show a slightly less unequal distribution, while rural areas show almost the same level of inequality as the national level. Despite Bhutan’s progress, spatial inequality does remain a significant challenge, with the Gini index as high as 0.32 in Zhemgang district and as low as 0.24 in Punakha, Sarpang and Thimphu districts. V. LESSONS LEARNED 31. Lessons from the CPF are summarized below (with further detail in Annex 6): • Lesson 1: DPCs could have been better leveraged to achieve meaningful reform. Many prior actions were linked to changes in policies and guidelines rather than laws and secondary regulations, and these could have been better supported by measures to institutionalize reforms and ensure sustainability. Policy actions in the DPCs could also have been more ambitious. The World Bank will do more in the new CPF to increase the development contribution of DPCs. • Lesson 2: The sustainability of development outcomes in Bhutan relies on capacity development. Given the high rate of attrition due to the protracted surge in outmigration and the growing portfolio, this requires a deeper commitment by the RGoB to ensure that new technical staff are properly trained to facilitate timely implementation. The Bank should consider an optimal institutional arrangement to reduce PIU related transaction costs and implementation monitoring challenges. • Lesson 3: The overall quality and delivery of ASAs and core knowledge products was high. However, more could have been done to disseminate and operationalize findings. ASAs and core knowledge products played a critical role in the dialogue to underpin policy reform and broaden the scope of engagement to include transport, digital, etc. But more could have been done to increase ownership and link them to reform and project implementation. • Lesson 4: The CPF lacked a robust results framework which undermined the country team’s ability to monitor and evaluate progress towards the CPF objectives. Several indicators were linked to projects that were delayed (such as the AMCHP), others lacked baselines or targets or were composite indicators that were hard to reproduce. Activities that were planned to build capacity of government to collect data and monitor progress did not materialize as planned. • Lesson 5: It was difficult to realize the vision of a One World Bank Group approach in Bhutan as IFC and potential MIGA operations have been limited by factors constraining private investment. These factors included, inter alia, the small size of the private sector, and hence market for IFC’s and MIGA’s offerings, limited opportunities within that market, the ongoing exclusion of the financial sector from accessing ECB, and until recently a restrictive policy framework for foreign direct investment. More perhaps could have been done as One WBG through joint analytical work and policy dialogue. • Lesson 6: Building trust with the RGoB led to wider use of World Bank financing instruments. The RGoB became more receptive to tapping a wider spectrum of Bank funding sources including the Regional Window, Crisis Response Window (CRW) and Scale Up Window (SUW) to meet the increased needs of the country. This allowed taking advantage of the Small State Status of Bhutan to significantly increase the volume of Bank engagement beyond the limited IDA National Performance Based Allocation. 41 CLR Annex 1: Status of Bhutan FY20-FY24 CPF Results Matrix (Summary Table) Description Status at CLR Overall Rating Focus Area 1: Human Capital Objective 1: Improve Human Capital Indicator 1.1: Increased participation in income support programs aimed at vulnerable households with young children Not achieved Indicator 1.2: Reduced stunting among children under five, in both urban and rural areas) (%) Not verifiable NOT ACHIEVED Indicator 1.3: Improved antenatal care: increase in utilization of antenatal, maternal and early childhood health Not verifiable services Indicator 1.4: Increased primary school readiness Not verifiable Focus Area 2: Resilience Objective 2: Improve Economic Resilience Indicator 2.1: Number of cottage and small industries (CSIs) Partially achieved MOSTLY Indicator 2.2: Total new private investments in high-value agribusiness Not achieved ACHIEVED Indicator 2.3: Number of entities reporting to credit information bureau Achieved Indicator 2.4: Non-hydropower revenue (as percent of GDP) Achieved Objective 3: Improve Environmental Resilience Indicator 3.1: Maintenance of carbon-neutral status Achieved Indicator 3.2: Approvable of sustainable forest management plans Not verifiable PARTIALLY Indicator 3.3: Development of disaster management and contingency plan Achieved ACHIEVED Indicator 3.4: Establishment of a climate fund to aggregate emission reductions Partially achieved Indicator 3.5: Climate co-benefits total IDA commitments FY2018–21 Not verifiable 42 CLR Annex 2: Bhutan – FY20-FY24 CPF Results Matrix Evaluation Objective Overall Indicators Baseline/ Target Status at CLR Lessons Learned WBG Program Rating Instruments CPF FOCUS AREA ONE: HUMAN CAPITAL CPF Not Indicator 1.1: Baseline: 0% 1.1. Not Achieved Lesson 1: The paucity of IDA Objective 1: achieved Increased Target: 60% Actual: This indicator was to be complementary 6. COVID-19 Improve participation in measured as number of poor operations or technical Emergency Human income support receiving AMCHP. As AMCHP assistance hindered the Response and Capital programs aimed at implementation was delayed progress of reforms in Health Systems vulnerable (because the Government had to critical sectoral areas, such Preparedness households with refocus on combating COVID-19) as health and education Project (P173787) young children the result is 0. (and environmental 7. Development sectors – lesson for Policy Finance (DPF) Source: N/A Objective 3). with Catastrophe Indicator 1.2: Baseline: 21.2% 1.2. Non-Verifiable Deferred Drawdown Reduced stunting Urban 16.0% Actual: The data for the baseline Lesson 2: For People at Option (CAT DDO) among children Rural: 26.1% comes from the National Nutrition least, the PforR, AMCHP with Pandemic under five, in both Survey undertaken in 2015, post PforR, and COVID-19 Emergency Financing urban and rural Target: 19.0% which there has NOT been another operation were major Facility (PEF) areas) (%) Urban: 14.0% National Nutrition Surveys contributions to the (P173008) Rural: 24.0% conducted to provide a comparable country program trend in status of stunting amongst expansion (beyond DPCs). ASA children <5 years of age. The Global 8. Bhutan: Health Nutrition Report 2022, or the Lesson 2: the RGoB Service Delivery World Development Indicators only became much more open Indicators (P170544) refer to the Multiple Indicator to non-DPC instruments, 9. Accelerating Cluster Survey (MICS) conducted in including the PforR for the Maternal and Child 2010 for status of stunting in first time, over the course Health and Learning children < 5 years of age, which of the CPF period. Some of Outcomes indicates a rate of 33.5%, with 28% this openness has been (P1707878) (urban) and 35.8% (rural). There facilitated in the post- 10. Bhutan Poverty have been no follow-up MICS COVID period due to and Equity conducted. engagement with the Assessment RGoB to build capacity to (P179594) Source: N/A even use these 43 Objective Overall Indicators Baseline/ Target Status at CLR Lessons Learned WBG Program Rating Instruments Indicator 1.3: Baseline: 54% 1.3. Non-Verifiable instruments successfully, 11. PER for Nutrition in Improved antenatal Target: 62% Actual: This indicator is a e.g. incentivizing the RGoB Bhutan (P168567) care: increase in customized, non-standard indicator to develop an utilization of which is a composite of several independent verification 12. Bhutan: Health antenatal, maternal other indicators, the results of assessment to be able to Service Delivery and early childhood which are unclear. use PforRs Indicators (P170544) health services 13. Bhutan Poverty Source: N/A Assessment Indicator 1.4: Baseline: 1.4. Non-Verifiable (P172464) Increased primary Numeracy Skills: 29.0% Actual: N/A. There was no WBG 14. Encouraging school readiness Literacy Skills: 16.0% engagement in support of this Private Sector Youth Socio-Emotional indicator. Employment Development: 34.0% (P165569) Source: N/A 15. Bhutan Target: Programmatic Numeracy Skills: 40.0% Poverty Work Literacy Skills: 26.0% (P165528) Socio-Emotional 16. Bhutan Development: 45.0% Development Update (P171578) Progress Indicator Baseline: 0 P1.1. Not Achieved 17. Bhutan Policy 1.1: Participation in Target: 15,000 Actual: As AMCHP launch was Notes (P168930) the income support delayed as the RGoB refocused on 18. Bhutan Public program to expecting COVID-19. Result is 0. Expenditure Review and new mothers (P175042) under the AMCHP Source: N/A 19. Bhutan poverty Progress Indicator Baseline: GER 25%, P1.2. Mostly Achieved and equity program 1.2: Increased gross disparity estimated at Actual: Current enrolment is 38 (P175092) enrolment rates 0.5 (rural/national GER) percent. Disparity between urban – (GER) to early Target: GER: 35%, disparity rural: no data available. childhood care and 0.75 development while Source: Ministry of Education reducing disparity between rural and urban GER 44 Objective Overall Indicators Baseline/ Target Status at CLR Lessons Learned WBG Program Rating Instruments Additional Evidence: Early results from the Bhutan Human Capital Recovery and Resilience Project (P174399) suggest the World Bank has successfully supported shifts to digital modalities via the Learning Management System (LMS), achieving an access and use rate of 86 percent by 2023 against an initial target of 80 percent. This may support better delivery of education and improved educational outcomes. In the Health sector, there were noteworthy achievements in maternal health, despite some delays in lending. COVID-19 led to budget constraints and shifting priorities that prevented the Accelerated Maternal and Child Health Program (AMCHP), which was supported by the Strengthening Fiscal Management and Private Sector Employment Opportunities DPC series, from launching. The AMCHP as a government Program was approved in May 2019 with the support of the DPC 2 "Strengthening Fiscal Management and Private Sector Employment Opportunities (P168166). The DPC had the following prior action 8 (new): ‘The Ministry of Health has approved the Accelerating Maternal and Child Health Program for investing in human capital.’ Bhutan’s strong existing health systems and commitment to maternal and child health facilitated positive outcomes, including more than 75 percent of pregnant women completing eight antenatal care visits in 2021 alone. The prior action in DPC2 was intended to focus on the first 1000 days of a child’s life which have a significant impact on skills attainment and physical and mental health and productivity. This action was also intended to contribute to skills enhancement. During the year following approval of the DPC, the WB held multiple discussions about the activities or programs that could be implemented in the first years of the Program to improve 1000 days. One activity/program discussed was a cash-transfer program, and the Government (MoH and MoF) agreed on starting development of the program that would be financed in 2021. As a result, the following DPC "Strengthening Fiscal Management and Private Sector Employment Opportunities Development Policy Credit (P171780)" had the following Prior Action 8, defining the first activity/program design and implementation to be financed approved. " The Recipient, through its MoH, has approved the Operational Manual for implementing the Accelerating Mother and Child Health Program (AMCHP) on January 22, 2020; as evidenced by letter Ref. MOH-PPD/PPMS/26/2020/9895 of the same date.” Grant financing was mobilized through the kick-off implementation of the AMCHP. Data with respect to the use of maternal and early childhood health services, on the other hand, are less available, and this CLR is unable to identify either positive or negative changes in this indicator. Likewise, a lack of data from the National Nutrition Survey or Multiple Indicator Cluster Survey means the indicator on stunting is non-verifiable. On the other hand, the COVID-19 Emergency DPC played an important role curbing the spread of the COVID-19 virus through the roll out of an efficient and effective vaccination plan, with Bhutan achieving a 100 percent vaccination rate for the eligible population: 8.3 percent of the population was provided primary series of the COVID-19 vaccines (Numerator: 62,394 persons were provided 0.5ml dose 45 Objective Overall Indicators Baseline/ Target Status at CLR Lessons Learned WBG Program Rating Instruments of Moderna vaccine as primary series; Denominator: 756,129 total population. This comprised 48.6 percent males and 51.6 percent females provided primary series of vaccination through IDA financing). 45.8 percent of population was boosted with a single vaccine dose, in line with WHO/South Asia Gender and Energy Facility guidance (Numerator: 346,571 persons >18 years received 0.25 ml per dose of Moderna vaccine as booster; Denominator: 756,129 as total population. This comprised 50.5 percent males and 49.5 percent females boosted through IDA financing). The World Bank also helped the RGOB mitigate the financial impact of the COVID-19 pandemic through the DPF with a Catastrophe Deferred Drawdown Option (CAT DDO; P173008). This operation provided immediate liquidity of US$15 million and grant financing of approximately US$1 million from the Pandemic Emergency Financing Facility to support initial COVID-19 emergency response efforts. One of the prior actions - the Bhutan Public Health Preparedness and Response Plan and Standard Operating Procedures – helped Bhutan weather the pandemic relatively well, through improved health governance and preparedness. These results were not anticipated in the original results matrix but are nevertheless important to note given the unexpectedly prolonged nature of COVID. The active Bhutan: COVID-19 Emergency Response and Health Systems Preparedness Project (P173787) and its Additional Financing (P178656) now aim to support effort to further strengthen the resilience of the health system to future pandemics and health emergencies, suggesting that, with World Bank support, Bhutan may have successfully leveraged its COVID response to support wider and more sustained impacts in the Health sector. World Bank lending was supported by ASA including under the Primary Healthcare Performance Initiative Assessment (FY23), the Bhutan Human Capital Acceleration PASA - (P175646) and Bhutan Health Service Delivery Indicators ASA (P170544) under which there were two pieces of TA namely: i) the Service Delivery Indicators ( ) health survey; ii) Primary Health Care Performance Assessment and Vital Signs Profile, iii) and Primary Healthcare Performance Initiative Assessment (FY23) Sustainable Health Financing Issue Briefs, and iv) Bhutan Healthcare Costing Analysis. CPF FOCUS AREA TWO: RESILIENCE Objective 2: Mostly Indicator 2.1: Baseline: 18,032 (2018) 2.1. Partially Achieved Lesson 1: The DPC WB: Improve achieved Number of cottage Target: 25,000 (2025) Actual: The total of CSIs supported instrument needs to 20. Bhutan DPF with Economic and small industries by RGoB reached 30,177 CSIs by carefully balance CAT DDO (P171780) Resilience (CSIs) June 2023 of which 19565 ambition, selectivity, and 21. Bhutan Green and (increment of 1533) by IFC. capacity. Future DPCs Resilient Growth could consider focusing on DPC-1 (P177712) Source: CSI Promotion Division at a narrower set of critical 22. COVID19 the Ministry of Economic Affairs (by and impactful reforms Emergency email dated November 3, 2023). (encompassing both 23. DPC (P175758) 46 Objective Overall Indicators Baseline/ Target Status at CLR Lessons Learned WBG Program Rating Instruments Indicator 2.2: Total Baseline: 0 (2020) 2.2. Not Achieved macro-fiscal and sectoral 24. Green and new private Target: $10 million (2025) Actual: There has been no new areas) for which strong Resilient Growth investments in high- private investment in agribusiness government buy-in exist DPC-1 (P177712) value agribusiness supported by the WBG to date. and for which efforts 25. Green and However, the Second Green and towards implementation – Resilient Growth Resilient Growth DPC (P178635) both on the Bank’s and Response and Health supported the Food and Nutrition the client’s side – can be Systems Security Policy, which aims to pooled. Preparedness (MPA) facilitate the transition towards a (P173787) commercially sustainable, climate- Lesson 2: Rural projects 26. Second Green and smart, and resilient agricultural aimed at promoting rural Resilient Growth sector that does not undermine employment should DPC (P178635) food and nutrition security. In clearly define the intended 27. COVID-19 Crisis addition, IFC initiated an upstream type of employment, the Response DPC-2 advisory program to support a target beneficiaries, and (P178635) pipeline of projects. develop a suitable targeting mechanism. IFC: Different types of • (48965) BPC Source: P171780 – Strengthening entrepreneurs require transmission Fiscal Management and Private distinct approaches to skill investment Sector Employment Opportunities development (basic skills • 603621 - SME A2F Development Policy Credit. vs advanced skills) and Bhutan Indicator 2.3: Baseline: 998 (2016) 2.3. Achieved financial support (seed • 606345: South Asia Number of entities Target: At least 20 percent Actual: The number of entities grant vs matching grant). ESG Firm reporting to credit increase by 2025 reporting to the CIB increased from information bureau 988 to 4,202 (425%) ASA: Source: P168166 – Strengthening World bank Fiscal Management and Private 28. Support for Local Sector Employment Opportunities Government Finance Indicator 2.4: Non- Baseline: 12.8 (2019/20) 2.4. Achieved and Service Delivery hydropower revenue Target: 15.0 (2024/25) Actual: Non-hydropower revenue (P171526) (as percent of GDP) (as percent of GDP) increased to 29. Bhutan Finance 16.8 percent in FY2023/24. and Competitiveness 47 Objective Overall Indicators Baseline/ Target Status at CLR Lessons Learned WBG Program Rating Instruments Source: MoF and WB Macro Policy Engagement Framework (estimated number, the (P167615) ratio increased due to the 30. Bhutan #D024 increased in transfers from Druk Insurance Holding and Investment (DHI). It Regulatory and was 12.8 percent in FY22/23). Supervisory Supported by Development Policy Framework Credit 2: Fiscal Sustainability & (P166323) Investment Climate (P157469). 31. Bhutan Trade Progress Indicator Baseline: Ngultrum 18,976 P2.1. Partially Achieved Analytics and Policy 2.1: Increase in million (2018) Actuals: Ngultrum 20,829 million Dialogue: Focus on outstanding loans to Target: Ngultrum 26,557 (2023) 23 E-commerce CSIs million (2025) Source: (IFC 603621 - SME A2F (P172143) Bhutan) 32. Bhutan Macroeconomic CSI Promotion Division at the Monitoring Quarterly Financial Sector (P175057) Performance report, RMA; 33. Bhutan Jobs https://www.rma.org.bt/publicatio Platform (P165860) n/41/ 34. Bhutan Medium- Term Debt Progress Indicator Baseline: No P2.2. Partially Achieved Management 2.2: Updating of Target: Yes (2025) Actual: The ECB Guidelines were Strategy TA foreign direct revised in 2023 in a significant (P175649) investment (FDI) reform that took several years to 35. Bhutan The regulations/revisions implement with support from the Medium-Term Debt of external Second Green and Resilient Growth Management commercial DPC (P178635). As part of the Strategy (P175643) borrowing (ECB) Strengthening Fiscal Management 36. Improving policies revised and Private Sector Employment employment and Opportunities Development Policy inclusion impacts of Credit (P171780), the government entrepreneurship 23 i.e., an additional US$22,251,840 or Ngultrum 1,853 million. 48 Objective Overall Indicators Baseline/ Target Status at CLR Lessons Learned WBG Program Rating Instruments has revised the Foreign Direct interventions in Investment (FDI) Policy, but there Bhutan (P168206) have been no updates since. 37. Creation of a Functional Labor IFC and WB worked jointly to Market Information highlight the importance of System in Bhutan bringing the Banks into ECB. The (P170574) Collateral Free loans to SMEs and 38. Bhutan: Public start-ups initiated by the Stimulus Expenditure and program is implemented through Financial the Banks as a variant of the Accountability revised ECB regulation. Assessment III Source: P171780 – Strengthening (PEFA,2022) Fiscal Management and Private (P177877) Sector Employment Opportunities 39. From Pixels to Development Policy Credit. Fabrics: Digital Design in Traditional Source: For 2023 ECB Guidelines: Weaving (P505629) https://www.mof.gov.bt/wp- 40. Bhutan Crisis content/uploads/2023/03/ECBGuid Preparedness Gap elines300302023.pdf Analysis (P500630) Progress Indicator Baseline: 0 P2.3. Not Achieved 41. Bhutan 2.3: Revenues Target: 20 percent of Actual: The GST Act was supported Development collected under the FY2016 revenue (2024) by the third Strengthening Fiscal Update (P171578) goods and services Management and Private Sector 42. Bhutan Policy tax (GST) Employment Opportunities DPC Notes (P168930) (FY20) and the GST Rules and 43. Bhutan Public Regulations have been supported Expenditure Review by the COVID-19 Crisis Response (P175042) DPC (FY21). 44. Bhutan poverty No amount was collected from GST and equity program as the GST has not been (P175092) implemented as of today. The rollout of the GST has been delayed IFC: due to delayed development of the 49 Objective Overall Indicators Baseline/ Target Status at CLR Lessons Learned WBG Program Rating Instruments IT system. Once the GST system is • 603621 - SME A2F deemed ready, the Government Bhutan will have to seek approval from the • Digital Agri-finance and Parliament for the enforcement of agribusiness advisory the GST. program • SME Access to Finance Source: P175758 – Bhutan – COVID- in Bhutan Advisory 19 Crisis Response DPC Project Progress Indicator Baseline: No (2020) P2.4. Partially Achieved • Upstream infra and 2.4: Publication of Target: Yes (2025) Actual: The Government has been ESG AS with Bhutan quarterly fiscal and issuing quarterly debt reports since Power Corporation debt reports) the COVID-19 Response DPC (BPC) (FY21) and the FY21 Performance • FIG AS with RENEW and Policy Actions. However, it has Microfinance Pvt. Ltd. stopped issuing quarterly fiscal reports. Source: MoF website. https://www.mof.gov.bt/publicatio ns/reports/budget-reports/; https://www.mof.gov.bt/publicatio ns/reports/public-debt-report/ Progress Indicator Baseline: No (2020) P2.5. Partially Achieved 2.5: Publication of Target: Yes (2025) Actual: The Government has issued quarterly aggregated annual SOE reports for SOEs under SOE reports with the MoF and DHI as part of the First financial and and the Second Green and Resilient operational Growth DPC (P177712, 178635), as performance well as the FY21 and FY22 indicators Performance and Policy Actions. Source: https://www.mof.gov.bt/publicatio ns/reports/annual-soe-report/ Additional Evidence: 50 Objective Overall Indicators Baseline/ Target Status at CLR Lessons Learned WBG Program Rating Instruments The World Bank also supported increased employment opportunities and entrepreneurship opportunities for the rural population. The Bhutan Community-Based Rural Entrepreneurship Project (P143795) piloted a phased-in approach of providing an enabling environment, skill development, and financial assistance for Youth-Led Enterprises (YLEs) to create (self-)employment for rural youth. Out of the 877 youth trained by the project, 42 percent of these or 368 resulted in new jobs being created including 107 operational YLEs. Although a small absolute number relative to the total labor force, this is an encouragingly high conversion rate from training to jobs, although it is uncertain whether the new employment created for trainees and new YLEs has led to more productive employment and it. In agriculture specifically, and despite the national trend of stagnating or declining productivity trends, the Food Security and Agriculture Productivity Project (P155513) has already exceeded targets for productivity of targeted crops and for increases in the volume of marketed produce. Improving employment and inclusion impacts of entrepreneurship interventions in Bhutan (FY22) helped strengthen government capacity and informed the design of upcoming Human Capital Recovery and Resilience PforR (P174399). The ASA ‘Creation of a Functional Labor Market Information System (LMIS) in Bhutan’ (FY22) helped support RGoB to establish the LMIS to improve relevance of employment support and skilling programs provided by the Ministry of Labor and Human Resources and the Ministry of Education. World bank support also raised interest in World Bank support for Bhutan’s entrepreneurship strategy, and further reforms in agriculture and food nutrition security policy, and biodiversity. Subsequent Additional Financing, including the FY25 pipeline AF build on evidence generated through knowledge products like the Bhutan Labor Market Assessment (FY24). Additional World Bank support that complemented these efforts included support to attract FDI (Strengthening Fiscal Management and Private Sector Employment Opportunities Development Policy Credit (P171780), strengthen competition policy (e.g. Bhutan Finance and Competitiveness Dialogue, P167615), and enhance access to finance through digital payments and credit reporting (DPC, P171780). IFC developed a pipeline of investable projects that will support skilling and job creation through the development of the high-value tourism sector. Support for Bhutan’s e-commerce policy, access to external markets, and access to international finance were all also important contributions to increasing economic resilience. Although transformational reforms with respect to fiscal stabilization and revenue collection have stalled, there is a strong commitment to implement PFM reforms. The World Bank supported reforms that have enhanced public financial management, public debt management, and fiscal transparency. Through the PFM-MDF Financed Strengthening Public Financial Management Project (P162196), the World Bank helped develop new PFM systems and integrated other stand-alone systems such as the Electronic Public Expenditure Management System (ePEMS), which was then integrated with the Multi-Year Rolling Budget (MYRB), the Revenue Administration Management Information System, Electronic Government Procurement (eGP) system, the Zhiyog Electronic System, the Electronic Daily Allowance and Travel System (eDATS) and the banks. This has significantly reduced the administrative processes, reduced leakages and improved service delivery. The World Bank also supported development of a Cluster Finance Services model that helped 51 Objective Overall Indicators Baseline/ Target Status at CLR Lessons Learned WBG Program Rating Instruments improve efficiency and uninterrupted service delivery at local government levels; reduced paper usage; prompted addressing of pending bills; and laid the groundwork for future digitization. The World Bank also supported increased transparency through Strengthening Fiscal Management and Private Sector Employment Opportunities DPC (P171780), by helping to introduce international best standards and practices in budgeting, accounting and financial reporting; increased accountability by strengthening internal audit to enhance control of budget execution; and capacity building (mostly training) across a range of relevant departments. The preparation and initial publication of the Debt Management Strategy was a positive development, although publication of the (DMS) S was missed in FY23/24 and FY24/25. The 2024 World Bank Debt Transparency Heatmap is now red for Bhutan, indicating a deterioration in Bhutan’s score in the Heatmap. However, the GST implementation, which has been supported through several DPC operations, has been delayed due to delayed development of the IT system, hampering domestic revenue collection. While the government has established the Bhutan Economic Stabilization Fund, the DPC-supported government framework and fiscal rules have not been implemented. Nonetheless, the recent completion of the Public Expenditure and Financial Accountability (PEFA) Assessment has facilitated the preparation of a comprehensive PFM Performance Report (PFM-PR), paving the way for the implementation of recently published PFM Reform Strategy and Action Plan 2023-2028, which holds promise in further enhancing fiscal sustainability. In addition to the PFM, the PEFA Climate and PEFA Gender reports were also prepared. A public expenditure review was completed in FY23. ACCESS Programmatic and Digital Development for Inclusive Growth and Regional Integration Analytical and Advisory Services (ASA) enabled the Bank to support and advance dialogue on several key thematic areas. These are critical for enhancing transport, digital and trade infrastructure and connectivity, and thus informed and aided the design and preparation of the ACCESS Bhutan project which also includes support for digital ID and enablers, data governance and cybersecurity. In the energy sector, the continued dialogue played a critical role in establishing and stepping up engagements in the areas of hydropower, geothermal and transmission. IFC worked to strengthen financial inclusion and financial infrastructure by improving the credit reporting system and promoting movable asset financing in the financial sector through the SME Access to Finance in Bhutan Advisory Project. Substantial progress has been made, including the successful adoption of two recommendations from an IFC report to RMA and several others adopted by the Credit information Bureau of Bhutan (CIB). To deliver on IFC’s strategic objective to deepen financial inclusion and provide local currency solutions for private sector investment, IFC’s country team and Treasury have been providing support to the RMA, in the context of the amendment to the External Commercial Borrowing guidelines. IFC worked closely with the Government of Bhutan on expanding the guidelines to include the financial sector – a hurdle that presents the largest constraint to private sector development in Bhutan. IFC also signed an Advisory Engagement Letter with RENEW Microfinance Pvt. Ltd and delivered a Microfinance Sector Development Assessment to RMA while the Digital Financial Services Assessment Report is being finalized. 52 Objective Overall Indicators Baseline/ Target Status at CLR Lessons Learned WBG Program Rating Instruments Taken together, the improvements in Bhutan’s business environment and growth of its private sector contribute positively to the economic resilience of the population. If sustained, these results should help to foster more diverse sources of income, job creation, and innovation, thereby reducing dependency on a single sector and mitigating the impact of economic shocks. (see ‘Additional Evidence for Objective 2 in Results Matrix). Objective 3: Partially Indicator 3.1: Baseline: 1:3 (i.e. ratio of 3.1. Achieved Lesson 1: Regional WB: Improve achieved Maintenance of CO2e emissions to CO2e Actual: 1:6.6 (The GHG sink collaboration in weather 45. Food security and Environment carbon-neutral status sequestered) capacity of Bhutan in 2022 – latest forecasting and climate Agriculture al Resilience Target: 1:3 data published during the CPF - was services is critical for Productivity (FSAPP) 11,450.45 Gg CO2e, comprising of Bhutan. For example, the AF (P155513) the more than 70% forest cover Hydromet Services project 46. Sustainable and other land use. This figure now leveraged NCHM’s Hydropower includes sequestration by participation in the South Development underground biomass and by Asia Hydromet Forum, Project (P174327) perennial crops (including with Bhutan representing 47. Strengthening Risk agroforestry and orchards), in the vice-chair of the Information for addition to forest. Emissions in Forum Executive Council. Disaster Resilience 2022 were 1,742.51 Gg CO2 (P175081) equivalent (CO2e) excluding Lesson 2: The World Bank 48. Accelerating emissions from deforestation, can support joined up Transport and Trade wood removals and non-CO2 Government for climate Connectivity in emission from fire disturbance in action through its TA. The Eastern South Asia – forest. These emissions were Department of Local Bhutan Phase 2 affected by COVID-19 and its Governance and Disaster (P181278) aftermath. Management under the 49. Hydromet Services Ministry of Home Affairs is and Disaster Source: Data published in responsible for preparing Resilience Regional December 2024 in biennial the National Disaster project (P154477) submission to UNFCCC. Management and https://unfccc.int/documents/6452 Contingency Plan ASA: 93 (NDMCP) as stipulated in 50. Roadmap for The First and the Second Green and the Disaster Management Remaining Untapped Resilient Growth DPC (P177712, Act. The NDMCP was Hydropower 178635) supported reforms that prepared in July 2024 with 53 Objective Overall Indicators Baseline/ Target Status at CLR Lessons Learned WBG Program Rating Instruments contribute to maintenance of the financial and technical Potential in Bhutan carbon-neutral status, for instance support from the (P162996) the Forest and Nature Conservation Strengthening Risk 51. Bhutan: Climate Bill; the National Food and Information for Disaster Mitigation Financing Nutrition Security Policy; the Resilience project and Disaster Biodiversity Act and the (P175081). It adopts a Resilience (P169256) Biodiversity Rules and Regulations; whole-of-government 52. ASA to Bhutan's and Carbon Market Rules. Also, approach to crisis Flagship Program on P174327 – Sustainable Hydropower preparedness. It defines Organic Farming on Development Project. responsible institutions, the key elements of strategies, and cross- a certification sectoral coordination regime for organic mechanisms for effective production debt management (P173379) processes at national and 53. Bhutan Water local levels, involving 35 Sector Assessment government agencies, and Strategic academia, and CSOs. The Support (P169363) plan outlines procedures 54. Bhutan Human Indicator 3.2: Baseline: No 3.2. Not verified and protocols for Capital Acceleration Approval of Target: Yes Actual: N/A emergency preparedness, PASA (P175646) sustainable forest response, and recovery 55. Country management plans Source: N/A from all types of disasters. Environment Indicator 3.3: Baseline: Two agencies 3.3. Achieved It also outlines a clear Analysis (CEA) for Development of Target: All agencies Actual: The Department of Local mechanism for Building Back a disaster management Governance and Disaster coordinating inter-agency Better and and contingency plan Management has finalized the response to disasters. Environmentally National Disaster Management Sustainable Bhutan Contingency Plan (defining climate (P176555) and disaster risk management 56. Bhutan: Country programs and emergency Economic preparedness and response Memorandum measures) to be implemented by (P175063) 35 government agencies. 54 Objective Overall Indicators Baseline/ Target Status at CLR Lessons Learned WBG Program Rating Instruments Source: P175081 – Strengthening 57. Bhutan Crisis Risk Information for Disaster Preparedness Gap Resilience in Bhutan Indicator Analysis (P500630) Policies and strategic plans for 58. Bhutan promoting disaster and climate Development resilience enhanced (Number, Update (P171578) Custom) 59. Bhutan Policy Indicator 3.4: Baseline: No 3.4. Not Achieved Notes (P168930) Establishment of a Target: Yes Actual: Substantial progress made 60. Bhutan Public climate fund to toward the design of the fund Expenditure Review aggregate emission through the ASA Invest for Climate (P175042) reductions (P178409), including the approval 61. Bhutan poverty of the Carbon Market Rules by the and equity program NEC providing a policy basis for the (P175092) fund’s operation and progress with the development of market infrastructure (registry system) for trading emission reduction credits. Preparation of a Bhutan Climate Fund RETF ongoing. Source: N/A Indicator 3.5: Baseline: N/A 3.5. Non-verifiable (no baseline or Climate co-benefits Target: N/A target set) total IDA Actual: In practice Climate Co- commitments benefits (CCB) of Bhutan for total FY2018–21 IDA commitments have lagged those in the region and have declined over time. CCBs during FY2018–21 amounted to US$ 30.02 million with US$ 9.85 million Adaptation CCB and US$ 20.17 million Mitigation CCB. Total IDA Commitments were US$ 154.8 million from FY 18 to 21 resulting in 55 Objective Overall Indicators Baseline/ Target Status at CLR Lessons Learned WBG Program Rating Instruments a ratio of CCB to total commitments of 19.4 percent. This compares with an average across South Asia in 2021 of 34 percent. During FY21- 24, the Bhutan achieved 17.9% climate co-benefits with 4.5% towards adaptation and 13.4% towards mitigation. In FY24, while the South Asia portfolio surpassed the corporate climate commitment target of 45% and achieved 52% climate co-benefits, Bhutan achieved 19.3% climate co-benefits. (Source: Climate Finance Dashboard). Source: World Bank calculations Progress as of August 2023: US$30.01 million (FY21 to-date) Source: Climate Co-Benefit Dashboard based on analysis across Bhutan portfolio. Progress Indicator Baseline: N/A 3.1. Non-Verifiable 3.1: Increase in Target: N/A Actual: Climate Co-benefits (CCB) of investments in Bhutan for total IDA commitments modern forest FY2018–21 was US$ 30.02 million technology in Forest with US$ 9.85 million Adaptation Management Units CCB and US$ 20.17 million and Community Mitigation CCB. Total IDA Forests (in US$) Commitment was US$ 154.8 million from FY 18 to 21 resulting in a ratio of CCB to total commitments of 19.4 percent. 56 Objective Overall Indicators Baseline/ Target Status at CLR Lessons Learned WBG Program Rating Instruments Source: World Bank calculations Progress Indicator Baseline: N/A 3.2. Non-Verifiable 3.2: FMU and CF Target: N/A Actual: N/A forest area managed under revised forest Source: N/A management plans (hectares) Progress Indicator Baseline: N/A 3.3. Non-Verifiable 3.3: Increase in Target: N/A Actual: $5 million planned under investments in early ACCESS for an impact-based warning systems forecasting and early warning (US$) system for roads, rails, and aviation. WBG is ready to leverage regional IDA for further investments as requested by NCHM, should the MOF be request this. Source: ACCESS, P181278 Progress Indicator Baseline: N/A 3.4. Non-Verifiable 3.4: Reduction in Target: N/A Actual: AGF FSAPP is a net carbon carbon emissions sink of 10,012 tCO2e emissions through WBG- over 20 years, and -501 tCO2e per supported year. Gross emissions in the project interventions scenario are 72,003 tCO2e emissions. Due to the adoption of Climate Smart Agriculture practices in annual crops (-9,520 tCO2e) and improved water management in paddy rice (-22,576 tCO2e) and growing of biomass of perennials (- 9,155 tCO2e), the project achieves a carbon sink of -41,251 tCO2e emissions over 20 years. 57 Objective Overall Indicators Baseline/ Target Status at CLR Lessons Learned WBG Program Rating Instruments In contrast, the conversion of grassland to perennials (22,923 tCO2e) and the construction of agricultural infrastructure and increased fertilizer use (8,317 tCO2e) result in a net carbon source of (31,240 tCO2e). The project arrives at an annual net carbon sink of 501 tCO2e emissions. Source: AGF FSAPP Additional Evidence: The World Bank contributed to broadly maintaining Bhutan’s carbon-neutral status. For example, the Strengthening Fiscal Management and Private Sector Employment Opportunities DPC series, through development of the National Climate Change Policy, contributed to an update of Bhutan’s NDCs. Given the essential role NDCs have within the Paris Agreement, this is an important step forward for Bhutan with respect to climate mitigation. These policies have underpinned the development of four Low Emission Development Strategies that were later supported by the World Bank COVID-19 Crisis Response DPC. Similarly, significant reforms such as the (i) Forest and Nature Conservation Bill; the (ii) National Food and Nutrition Security Policy; the (iii) Biodiversity Act and Rules and Regulations; and (iv) Carbon Market Rules are concrete results of the World Bank’s dialogue through the Green and Resilient Growth DPC series. Forest cover is now over 70 percent of total land area, having increased slightly between 2010 and 2016. The World Bank’s engagement in the agricultural sector has also contributed to building more productive and resilient food systems. The Food Security and Agriculture Productivity Project (P155513) has been instrumental in improving the resilience, efficiency, and productivity of the food systems in Southwestern Bhutan. Through the project’s support to the Agricultural Research and Development Centers, the center developed and facilitated outreach of innovative, high-yielding, and climate smart technologies and production practices. The project also supported the formation and strengthening of individual farmers into (semi-)organized groups which are the main channel to target public support in agriculture. In addition, the project financed the improvement of irrigation infrastructure and service delivery and promoted climate smart agricultural technologies to almost 7,000 beneficiaries. The World Bank was instrumental in supporting the establishment of critical emergency infrastructure in the country and building capacity in the Department of Disaster Management. The Hydromet Services and Disaster Resilience Regional Project (HSDRRP, 58 Objective Overall Indicators Baseline/ Target Status at CLR Lessons Learned WBG Program Rating Instruments P154477) helped (i) operationalize a state-of-the art weather forecasting and dissemination platform that halved the time needed for daily forecasts; (ii) improve aviation safety at the Paro International Airport; and (iii) develop an Agromet Decision Support System to provide weather and climate services to vulnerable farmers in five pilot districts. The World Bank, building on HSDRRP, further helped enhance the country’s multi-hazard risk preparedness in terms of approval key plans and policies (the National Disaster Management and Contingency Plan, the National Hydromet Policy, an Agromet roadmap, Construction Quality and Compliance Mechanism, and revisions of Building Regulations), and revitalization of the Inter-ministerial Taskforce. and enhancing the technical capacity for assessment of various disaster risks (See also ‘Additional Evidence for Objective 3 in Results Matrix. 59 CLR Annex 3: World Bank Lending Portfolio 60 CLR Annex 4: World Bank Advisory Services and Analytics FY21-FY24 P number Name CPF objective Year P168567 PER for Nutrition in Bhutan 1 2020 Bhutan: Accelerating Maternal and Child Health and Early P170787 Learning Outcomes 1 2022 P170544 Bhutan: Health Service Delivery Indicators 1 2023 P171526 Support for Local Government Finance and Service Delivery* 2 2020 P167615 Bhutan Finance and Competitiveness Policy Engagement 2 2020 Bhutan #D024 Insurance Regulatory and Supervisory P166323 Framework 2 2020 Bhutan Trade Analytics and Policy Dialogue: Focus on E- P172143 commerce 2 2021 P175057 Bhutan Macroeconomic Monitoring 2 2021 P165860 Bhutan Jobs Platform 2 2021 P175649 Bhutan Medium-Term Debt Management Strategy TA** 2 2021 P175635 Bhutan The Medium-Term Debt Management Strategy** 2 2021 Improving employment and inclusion impacts of P168206 entrepreneurship interventions in Bhutan 2 2022 Creation of a Functional Labor Market Information System in P170574 Bhutan 2 2023 Bhutan: Public Expenditure and Financial Accountability P177877 Assessment III (PEFA,2022) 2 2023 P505629 From Pixels to Fabrics: Digital Design in Traditional Weaving* 2 2024 Roadmap for Remaining Untapped Hydropower Potential in P162996 Bhutan 3 2020 P169256 Bhutan: Climate Mitigation Financing and Disaster Resilience 3 2020 ASA to Bhutan's Flagship Program on Organic Farming on the P173379 key elements of a certification regime for organic production** 3 2021 P169363 Bhutan Water Sector Assessment and Strategic Support 3 2023 P175646 Bhutan Human Capital Acceleration PASA 3 2024 Country Environment Analysis (CEA) for Building Back a P176555 Better and Environmentally Sustainable Bhutan 3 2024 P175063 Bhutan: Country Economic Memorandum 3 2024 P172464 Bhutan Poverty Assessment 1 and 2 2020 P165569 Encouraging Private Sector Youth Employment 1 and 2 2021 P165528 Bhutan Programmatic Poverty Work 1 and 2 2021 P500630 Bhutan Crisis Preparedness Gap Analysis 2 and 3 2024 P171578 Bhutan Development Update All 2020 P168930 Bhutan Policy Notes All 2020 P175042 Bhutan Public Expenditure Review All 2023 P175092 Bhutan poverty and equity program All 2023 P503407 Bhutan 2024 Post-Elections Policy Notes All 2024 * Dropped ** Cancelled 61 CLR Annex 5: IFC Portfolio FY21-FY24 IFC Investment Portfolio as of June 30, 2024 Outstanding Portfolio (US$ millions, as of November 2024) MAS INR FIG CDF Long-term Debt, equity 0 0 14.2 0 and quasi-equity Short-term finance 0 0 0 0 Total 0 0 14.2 0 Top exposures (project names and outstanding Bhutan National Bank (FIG, $14.2m equity) amounts) IFC Advisory Portfolio as of June 30, 2024 Amount (US$ Project name Sector Description millions) Develop financial infrastructure SME A2F Bhutan FIG 0.72 services TOTAL 0.72 M 62 Annex 3: Streamlined Bhutan Systematic Country Diagnostic (December 2024) 1. This streamlined Systematic Country Diagnostic (SCD) assesses Bhutan’s development challenges and future priorities. It draws on World Bank Group analytical work and recent social and economic data and reflects the 13th Five Year Plan priorities published in July 2024 as well as the country’s ambitious vision for Gelephu Mindfulness City (GMC). 24 It summarizes Bhutan’s progress towards poverty reduction, shared prosperity and environmental sustainability in the pursuit of Gross National Happiness, discusses key challenges to achieving sustainable progress towards the country’s ambitious development goals, and identifies priorities that address those challenges. Recent Developments: Rapid Economic Growth and Falling Poverty Rates with Insufficient Pace of Job Creation and a Protracted Surge in Outmigration 2. Real GDP grew by 5.3 percent in FY23/24 (July 2023 to June 2024), continuing a relatively strong recovery following a series of shocks. A small, landlocked country located deep in the Himalayas between India and China, Bhutan’s GDP per capita grew by 5.18 percent annually between 1990 and 2019, supported by substantial hydropower resources and tourism revenues. The Covid-19 pandemic revealed the country’s trading dependence on food imports from India and per capita GDP fell by 10 percent in 2020 before rebounding by 4 percent in 2021. Policy changes to make up for tourism revenue losses during the pandemic proved flawed and delayed the sector’s recovery. Real GDP growth is projected to rise to 7.2 percent in FY24/25, led by commissioning of Puna-II hydropower plant and growth in the non-hydropower industry (base metals and ferro-silicon) and tourism sectors. On the demand side, growth is supported by non-hydropower exports and the 13th FYP-related public investments. Medium-term growth will be driven by robust electricity production, construction, and services sectors on the supply side and growth of exports and public investment on the demand side. 3. Bhutan graduated from the United Nations (UN) least developed country (LDC) status in December 2023. It has also moved closer to the threshold dividing lower middle income from upper middle-income countries. 25 The fiscal deficit narrowed by 3.9 percentage points in FY23/24 to 0.8 percent of GDP, driven by improved domestic revenue and reduced capital expenditures despite major increase in public sector wages. The CAD remains elevated at 22.7 percent of GDP in FY23/24, albeit reduced from a peak of 34 percent in the previous year despite lower hydropower exports, due to a reduction in currency mining related IT imports and continued recovery of the tourism sector. 4. However, the pace of economic diversification, inclusive growth and job creation has been insufficient to meet the goals and aspirations of Bhutan’s youth. Since the 2020 SCD, and following the COVID-19 pandemic, unemployment has spiked and there has been a surge in outmigration. Unemployment rates in Bhutan rose from an average of 2.8 percent between 2015 and 2019 to 5.9 percent in 2022, with urban areas, particularly young and educated individuals, experiencing the highest increase, with youth unemployment estimated at 19 percent in 2024. The average number of Bhutanese migrating increased significantly with the reopening of borders after the COVID-19 pandemic in mid-2022, reaching 5,000 per month in early 2023 up from less than 500 before the pandemic. 26 Push factors include limited economic diversification, limited private sector development 24 These include: Country Economic Memorandum (2024), the Public Expenditure Review (2023), PEFA PFM, Climate, and Gender Assessments (2023), a Country Environmental Analysis (2024), CCDR (forthcoming), a Poverty and Equity Assessment (2024), a note on Promoting Gender Equality in Bhutan (2024), a Crisis Preparedness Gap Analysis (June 2024), RGoB’s PFM Reform Strategy and Action Plan 2023-202824, PEFA Reports 202324, a Poverty Note (2022), Post-elections Policy Notes prepared for the Royal Government of Bhutan (RGoB) in 2024, biannual Macro-Poverty Outlook, Bhutan Development Updates, and CPIA reports. 25 Bhutan’s GNI per capita reached US$3,590 in 2022 while the threshold dividing lower from upper middle-income countries was US$4096 in 2022. 26 Migration is assumed for Bhutanese who exited but have not reentered the country. Data is restricted to Paro Airport and does not include other land exits. See https://kuenselonline.com/migration-of-bhutanese/ 63 and job opportunities exacerbated by the 2022 civil service reforms, which heightened uncertainty. A recent rapid phone survey administered by the World Bank highlighted the central role that the labor market plays in migration decisions and how labor policies that expand quality private sector jobs and opportunities for career advancement could reduce emigration and loss of human capital. Pull factors include still favorable (although recently tightened) visa conditions in Australia and social pressure to follow successful migrants. Progress since the last SCD and emerging challenges and opportunities 5. Economic growth and redistribution (through social transfers and remittances) have helped drive down poverty rates, albeit with variations across the country. Bhutan has made remarkable progress in poverty and consumption-based inequality reduction, with the poverty rate falling from 28 percent to 11.6 percent between 2017 and 2022 based on adjustments to ensure comparability between these points in time. Poverty remains largely a rural phenomenon with 87 percent of the poor (83,000 out of 95,000 people) found in rural areas. However, poverty reduction was particularly sharp in rural areas, due mostly to increases in agricultural productivity. Remittances increased sharply during the COVID-19 pandemic, although risks to remittances are on the downside. Consumption- based inequality also decreased significantly between 2017 and 2022 with the Gini index falling by nearly 10 points from 37 to 28.1. However, per capita income inequality is still stark with the income- based Gini index at 56 (in 2022), one of the most unequal income distributions in the world. 6. There has also been good progress in shared prosperity, although gender disparities persist. Per capita consumption expenditure of the bottom 40 percent of the population grew by 7.4 percent year-on-year, between 2017 and 2022, compared to 1.6 percent annually for the whole population. However, gender disparities persist, and the quality of jobs is lower among women as they are more likely to work in low-paying sectors such as agriculture. The Labor Force Participation Rate for males is 73.4 percent, 19.9 percentage points higher than for females at 53.5 percent. Closing this gap – by strengthening provision of childcare services and other measures) could lead to significant increases in GDP per capita. Bhutan’s laws give men and women equal rights but traditional perceptions about gender roles are still a major barrier to gender parity. Harmful socio-cultural norms and stereotypical practices that justify and sustain GBV continue to prevail. 44.6 percent of women and girls experienced one or more forms of partner violence during their lifetime. The prevalence of GBV is known to affect human capital accumulation, impeding women’s access to paid work and employment, and has negative economic costs to countries. 7. There has been positive progress against key development indicators since the last SCD with a few exceptions. Indicators related to poverty, people, prosperity, planet, infrastructure, digital economy, FCV, private investment and some employment indicators all showed progress or at least remained stable or were already fully achieved (e.g. access to electricity). There was negative progress in terms of the share of youth not in employment, education, or training (NEETs). People 8. Hydropower revenues and tourism proceeds have enabled substantial levels of public investment in basic services but the pace of returns to such investments has been quite slow: Bhutan has made progress in providing core health services despite geographical challenges but faces significant issues with non-communicable diseases (NCDs) such as cardiovascular disease, diabetes, and mental health disorders. Stunting rates have dipped since the last SCD. But the health system struggles with limited and unevenly distributed diagnostic and treatment infrastructure, insufficient availability of essential NCD medicines, and a shortage of specialized health workers. Universal health coverage is stagnant at 51.3 percent, with low availability of recently trained providers. Mental health issues, particularly among youth, are rising, partly because of COVID-19: depression rose from an average prevalence of 9 per 10,000 between 2011 and 2019 to 16 per 10,000 in 2020 and 32 per 10,000 in 2021. Similarly, anxiety rose from an average prevalence of 18 per 10,000, to 29 per 10,000 64 in 2020, and 55 per 10,000 in 2021. There are disparities in access and health outcomes between urban and rural areas. Students in Bhutan experienced significant learning losses due to prolonged disrupted education services following the COVID-19 pandemic outbreak. Nevertheless, Bhutan has made substantial progress in educational attainment on average, although quality issues remain. For example, the expected length of schooling is 10.2 years of schooling, but this falls to 6.3 years when adjusting for the quality of learning. 27 9. Access to clean water and air quality are being threatened, especially in urban areas. Although access to basic water, sanitation and handwashing facilities is nearly universal and edged up since the last SCD, access to safely managed drinking water, according to the Joint Monitoring Program for Water Supply, Sanitation and Hygiene, is just 38 percent. 27 percent of the rural population have access to safely managed drinking water services while in urban areas, close to 49 percent of the population have intermittent water supply, ranging from 4 to 12 hours per day. In addition, air quality has been deteriorating in urban areas such as Thimphu and industrial areas due to growing CO2 emissions. Since 2009, the PM10 levels have been consistently higher than the standards set by the World Health Organization (WHO). A recent UNICEF report (October 2024) showed that lead poisoning affects 76 percent of Bhutanese children. Prosperity and Jobs 10. Bhutan’s biggest development challenge continues to be job creation, particularly for the youth. Gross Private Investments as percentage of GDP has increased between 2020 and 2022 (from about 30 to 38 percent). However, the labor market has performed poorly and is facing the challenge of a lack of attractive jobs for educated individuals and labor shortages for workers with less education and skills looking for jobs in the private sector. 28 Limited development of the private sector has restricted economic diversification and created a mismatch between job seekers’ education levels and skills and available jobs. In 2022, a higher percentage of job seekers (58 percent) held a secondary degree compared to employed workers (29 percent), indicating an oversupply of educated individuals. The share of NEETs increased sharply since the last SCD. Many active labor market programs are small and do not offer childcare or transport solutions. Links between employers and TVET institutes are weak. There were only 401 TVET graduates in 2022, and over 45 percent of graduates remain unemployed one year after completing training. The TVET sector needs a major revamp to attract more youth and lead to better employment opportunities. 11. The lack of sustainable job creation is caused by limited diversification, a narrow economic base, poor performance of the labor market and skills mismatch. The expansion of hydropower in Bhutan has undermined the competitiveness of other sectors ("Dutch Disease" symptoms like those observed following the discovery of fossil reserves and other resources elsewhere). Large foreign currency inflows during the construction and export phase of hydropower projects caused the real exchange rate to appreciate, negatively impacting the competitiveness of the non-hydro sector. The private sector in Bhutan is largely comprised of low-productivity microenterprises, lacking dynamism, diversification, and productive job opportunities. In 2022, only 2.7 percent of firms were new, indicating a lack of entrepreneurial activity and over 95 percent of firms are microenterprises and employed less than five people (Figure 23). These very small firms tend to remain small, likely due to restrictions on growth, and inefficient firms are not exiting the market. 27 The expected productivity of a child born in Bhutan today is 48 percent of its potential if the child enjoyed complete education and full health, i.e. slightly lower than the average for South Asia and LMIC: World Bank (2020) Human Capital Index: Bhutan. World Bank: Washington DC. 28 Based on Alaref, J.; Laurine, M.; Mariana Viollaz; Alvin N.; and Phillippe, L. forthcoming, Bhutan Labor Market Assessment Report. Social Protection & Jobs Global Practice. World Bank: Washington, DC 65 12. FDI is generally low and SOEs play a significant role in the economy. Annual flows of FDI in the last five years have averaged US$7.5 million per year i.e. less than 1 percent of GDP. SOEs are prominent in the provision of critical infrastructure services and developing strategic sectors often with mixed consequences for economic diversification. Bhutan has 35 state-owned enterprises operating across multiple sectors including agriculture, energy, manufacturing, real estate, wholesale and retail trade, banking, insurance, telecommunication, aviation, manufacturing and mining. 13. Limited access to finance is one of the top constraints for firms. Relieving this constraint is thus a priority for private sector development, diversification and job creation. Uneven access to bank credit, complex loan procedures, narrow sectoral focus of banks on construction and housing, and the limited range of financial instruments offered by banks make it difficult for firms, particularly MSMEs, to get financing. There is thus an opportunity to leverage lending to diversify the economic base and support job-creation. Urgent steps are needed to boost access to finance for MSMEs. For example, the new Economic Stimulus Program recently launched by the RGoB in 2024 includes a collateral-free loan to promote SMEs. To increase the uptake of these loans, measures will be needed to increase financial literacy among potential borrowers and lack of capacity among lenders to assess business proposals for the priority sectors of agriculture, livestock, etc. Capital markets remain shallow and require proactive steps to increase the small number of listed companies, relative to other regional markets, and increase liquidity and trading activity. 14. Cross-border transactions face significant challenges, blocking incomes in tourism and digital. Unlike domestic payments that have a 99 percent success rate, cross-border transactions account for only 61 percent at ATMs and 70 percent for Points of Sale (PoS). Key obstacles include an insufficient cross-border payments infrastructure and limited membership of Bhutanese banks in international card networks, restricting seamless cross-border transactions. Further, recent regulatory frameworks, including the Foreign Exchange Rules and Regulations (2022) and the Inward Remittances Rules and Regulations (2023) impose limitations on cross-border payments and inward remittances, with transaction declines and rejections due to compliance requirements. These limitations pose major obstacles for tourists trying to make large payments and for digital businesses aiming to engage in international e-commerce, stifling sector growth and economic diversification. 15. In the agriculture sector there is an opportunity to narrow productivity gaps with the introduction of technology and developing value chains to accelerate a structural transformation. In Bhutan, agriculture accounted for just 14 percent of GDP in 2017, yet 44 percent of the population relies on it for their livelihoods. There is also a growing feminization of agriculture as relatively more men than women migrate abroad. The transformation of the agrifood sector – if adequate training is provided, particularly for women – is typically associated with a reallocation of agricultural labor away from the farm towards the service sector off the farm (value addition) or outside the sector. In addition, the agrifood sector will become more market-led and informed by the preferences and taste requirements by higher-end consumers. Domestically, the establishment of the Gyalsung academies, 29 growing urban incomes, and high-end tourist destinations will require higher quality and more convenient food. The prospective demand from having 1.3 million to 1.5 million people living in Gelephu creates a potential market for the rest of Bhutan as modernized and efficient agricultural value chains develop in Bhutan’s hinterland to supply the organic food needed in Gelephu. Planet 16. Bhutan continues to absorb significantly more greenhouse gas than it emits and is committed to remaining carbon negative. Bhutan’s contribution to global GHG emissions is limited by its small population, high renewable energy consumption rate (over 80 percent), and minimal land 29Four centers that train Bhutan’s youth as part of the country’s national service, Gyalsung, launched by HM the King in 2019. 66 conversion rates. Emissions in 2020 (latest data) were 2,723 Gg CO2 equivalent (CO2e) excluding emissions from deforestation, wood removals and non-CO2 emission from fire disturbance in forest. Although emissions per capita have increased by 50 percent over the past decade, this is not yet a major concern due to a very low baseline. The GHG sink capacity of Bhutan in 2020 was 9513 Gg CO2e, including more than 70 percent forest cover. 17. However, Bhutan ranked as the 34th most vulnerable country in the world in 2023. The rugged terrain and unique climatic conditions of the Himalayas contribute to flash floods, glacial lake outburst floods, landslides, forest fires, falling rocks, earthquakes and extreme weather events. Urbanization has also changed the country’s risk profile because population and assets are now more heavily concentrated in urban areas. Geographic disparities in access to services (e.g. water, health, education and the internet) are striking. These factors pose significant risks to the economy, natural resources, physical infrastructure and people necessitating a focus on adaptation and resilience. Infrastructure 18. Bhutan is a landlocked nation with a small domestic market, poor cross-border connectivity, weak regional integration and under-served urban spaces. Bhutan is ranked 97th in the 2023 logistics performance index. 30 The country's main trade route through Phuentsholing in the south-west of the country is congested, handling 76 percent of trade. A southern east–west highway is also needed to ease economy-wide constraints on connectivity, better link producers to markets, and allow Bhutan to take advantage of opportunities in the region and globally. Bhutan has adopted only 28 percent of key trade facilitation measures advocated by the United Nations Economic and Social Commission for Asia and the Pacific. In addition, several of the largest Thromdes (second tier administrative districts) suffer from infrastructure and service delivery backlogs, shortages of serviced land and affordable housing, and environmental pollution. For example, Thimphu and Phuentsholing have the highest number of households without reliable water and experience severe traffic congestion, and only 20 percent of households in Thimphu Thromde have sewer connections. 19. Bhutan’s approach to developing its hydropower sector is evolving in response to an increased need to generate more power. In 2023, electricity imports significantly increased, driven by a 64 percent year-on-year increase in domestic demand (led by industrial and data mining consumption). To address this widening gap, Bhutan has developed an ambitious plan to add 18 GW of hydropower and 5 GW of solar capacity by 2040, including through the Dorjilung Project. Bhutan has been reluctant to encourage full private sector led development at scale, but this stance is now evolving. Bhutan is now sponsoring the Dorjilung Hydro-electric Power Project (DHPP), a 1,125 MW plant being developed by Druk Green Power Corporation (DGPC). It will also be used to meet domestic electricity requirements during the dry season. The RGoB has decided to introduce a strategic partner from India. The strategic partner is expected to be a minority shareholder in the DHPP. Economic Management 20. To promote private sector development and enable effective and efficient delivery of policy reform, economic management and implementation capacity need to be strengthened. Sound macroeconomic policies (fiscal, monetary and external) containing inflation, stabilizing debt and ensuring external competitiveness are at the core of a business environment conducive to private sector development. Similarly, the consequences of poor implementation capacity across various socio-economic sectors are serious constraints to sustainable growth. The PEFA Reports and the RGoB’s PFM Reform Strategy 2023-2028 identify capacity building and ICT systems as critical for an effective bureaucracy. In the water sector, for example, government institutions are ill-equipped to deliver reliable and quality water services. Failure to maintain any physical infrastructure can lead to premature deterioration of Bhutan’s public infrastructure stock, negatively affecting growth. A robust 30 Logistics Performance Index (2023): https://lpi.worldbank.org/international/scorecard/radar/C/BTN/2023/R+SAS+2023 67 economic management is therefore critical for Bhutan’s overarching goal of accelerating the creation of attractive jobs through economic diversification and private sector-led resilient growth. Development Priorities 21. Faced with these mounting difficulties, H.M. the King in his December 17, 2023, National Day address announced the creation of the Gelephu Special Administrative Region. The initiative is unprecedented in the history of Bhutan in terms of scope and ambition. The Region known as Gelephu Mindfulness City (GMC) will have its own jurisdiction and laws. It will also serve as a laboratory for successful approaches that could be rolled out in the rest of Bhutan at a later stage. GMC will face challenges including attracting sufficient private investment, ensuring food security, waste management and other service delivery for the 1.5 million people expected to live there, building the skills of local Bhutanese to enable them to compete for jobs made available in the new city, and striking a balance between openness and safeguarding the country’s cultural heritage. Mm 22. The analytical framework for selecting the priorities below comprises two key criteria: (i) relevance to Bhutan’s challenges especially the need for diversification and job creation; and (ii) feasibility – technical, financial, political. Drawing on existing World Bank ASA, they incorporate the five previous SCD priorities i.e. (i) boosting private-sector development to increase the creation of competitive jobs; (ii) strengthening macro-fiscal stability particularly domestic revenue mobilization and management of hydropower rents; (iii) investing in human capital and improving service delivery to ensure equal opportunities across regions and gender; (iv) enhancing resilience to natural disasters and climate change; and (v) ensuring better implementation of public policies. These priorities are all still relevant. Emerging or increasingly urgent priorities comprise ‘horizontal’, cross-sectoral reforms, such as labor market reform, as well as sector-specific reforms. These include agriculture as well as new, higher value opportunities in eco- and other tourism, as well as energy-intensive sectors such as data processing and other forms of digital economy, for which Bhutan is well placed to meet their needs in a sustainable manner through hydropower as well as potential new sources of green energy such as geothermal, solar, wind, and green hydrogen. I. People: Ensuring that Human Capital Investments Generate Higher and faster Returns 23. Priority 1: Continued investment in people. Bhutan urgently needs to provide quality social services to its people and foster the creation of more attractive jobs to help reverse the emigration trend. Investing in people entails investing in quality education, modern healthcare, and social protection services for all, including minorities and people with disabilities; developing skills for sectors attractive to youth; and promoting gender equity and female labor force participation. a carefully managed role for the private market in health could bring potential benefits, if capacity is strengthened in public sector oversight and management. Furthermore, strategic health workforce planning and retention is needed to align with Bhutan’s evolving demographic and epidemiological landscape. Bhutan could consider: • Continuing to expand early childhood care and development services to remote and vulnerable populations so that young children grow to their fullest human capital potential. • Harmonizing existing education sector roadmap initiatives into an updated National Education Policy, addressing teacher development. • Adopting a health financing strategy to ensure sustainability for the sector given expected increases in health care costs, to establish a care network and patient empanelment system that links patients with facilities and providers and strengthening health facility accessibility infrastructure and healthcare provider capacities • Adopting a social protection strategy and developing an integrated social registry • Strengthening Gender Based Violence prevention and response • Supporting the implementation of National Youth Policy and ensuring youth inclusion. 68 24. Priority 2: Better functioning labor market. Reforms in the labor market are needed to support workers' mobility and firms' access to labor. These include: labor regulations that facilitate job switching, a functional Labor Market Information System (LMIS) to identify available skills, and skills-related policies to enhance managerial practices and soft skills, and increasing female participation in the labor force, Upskilling policies including vocational training and more demand- driven TVET programs, are also needed to help integrate the youth and low-skilled (particularly women) into the labor market and emerging industries. Additionally, on-the-job assistance, including for incubation and acceleration centers, is needed to support self-employed and family workers with low education levels, helping them find wage employment opportunities in different regions. Employment service centers under the Ministry of Industry Commerce and Employment (MoICE) can play a significant role in facilitating these efforts. Other needed measures include: (i) expanding employment service centers, upgrading childcare provision and strengthening LMIS to better connect the supply of skills with the needs of the private sector and incentivize the economic participation of working-age females; (ii) creating strategic partnerships with universities to create tailored executive programs to meet specific needs of the Bhutanese context; (iii) leveraging the skills of non-resident Bhutanese for the transfer of learning, technology, and social capital back to Bhutan. II. Prosperity: Strengthening Public Sector Performance and its Effectiveness in Creating an Enabling Environment for Private Sector-Led Growth Priority 3: Strengthened economic management 25. The country will have to divert a larger share of its domestic resources, including resource rents, towards capital investments, which will require tighter management. Bhutan’s public investment program is primarily funded by external grants. Yet official development assistance (ODA) is expected to decline in the long term. To help offset this, a stronger Public Investment Management (PIM) system will be needed, as well as identifying projects with potential for delivery by the private sector, to help expand high quality infrastructure services and crowd in private investments including into climate objectives. A comprehensive financing strategy for the hydropower project pipeline is needed to meet Bhutan’s ambitious goal to generate almost 7,000 megawatts (MW) of electricity from 13 hydropower projects by 2035, with an estimated financing requirement of around US$14 billion. 26. Bhutan also needs to put in place measures to better manage monetary, financial and fiscal volatility. Sources of volatility include global oil prices as well as crypto asset prices for which strategies are needed to: (i) ensure that the risk and return profile from Druk Holding and Investments’ (DHI) crypto asset investment and holding strategy are appropriate for Bhutan; (ii) minimize the effects of these fluctuations on recurrent government spending; (iii) Reduce Non Performing Loans (NPLs) to mitigate contingent liabilities, (iv) increase domestic resources mobilization and reduce CAD to mitigate fiscal risks; (v) closely monitor public debt sustainability and (vi) ensure that the benefits are shared equitably across generations of Bhutanese. The Bhutan Economic Stabilization Fund should also be operationalized to help manage fiscal volatility. In addition, the new goods and services tax still needs to be implemented 31: increased revenues will ensure proper funding for social services. There is also room for efficiency and equity gains in the provision of basic services. According to the Bhutan Public Expenditure Report (PER) 2023, the country ranks 68th in education expenditure per school-age child, and 86th based on learning adjusted years of schooling, out of 131 countries. Upgrading the Procurement Management and Development Division (PMDD) would also help facilitate the procurement management, operation and management of the e-GP solution and effective analysis of procurement data by the country’s authorities. 31 Note the GST bill was withdrawn from the current session in Parliament. 69 27. To maximize the positive impact of the above reforms cross-sectoral coordination and public accountability, including for SOEs, should be strengthened and civil society engaged. This includes increasing the efficiency, effectiveness and equity of public expenditure as well as complementarity between public and private investment. Given their weight in the economy, there is an urgent need to strengthen SOE oversight and corporate governance. Priorities include implementing a more centralized ownership model with clear reporting lines and responsibilities. Additionally, it suggests reviewing the current compact system and performance-based compensation of DHI and MoF to improve performance management. Gender Responsive Budgeting (GRB) and Locally led Climate Action approaches should be considered. To enhance public accountability, the oversight institutions, including Anti-Corruption Commission (ACC), internal audit, the Royal Audit Authority, (supreme audit institution) and Parliamentary Committees on public accounts and budget need technical assistance and capacity building. Citizen engagement, especially the youth, needs to be strengthened. Youth feel that their voices are not heard. addressing gender gaps in economic outcomes and leadership. Priority 4: Increased Private Domestic and Foreign Direct Investment. 28. The potential for the private sector to create jobs is likely to be highest in forestry, commercial agriculture, tourism and digital, but this will require closer partnership between the RGoB and the private sector to attract FDI and improve the business enabling environment. Bhutan’s competitive advantage lies in natural resources, with scope to add value to raw material, e.g. through sustainable commercialization of forest resources, and capitalize the value of eco-tourism and wellness-tourism in Bhutan, and their potential for poverty reduction. There is potential for ICT- enabled services, which would support food safety requirements, regional trade, and integration. There is also scope for investment in health: the cost of free healthcare, including care outside Bhutan, is prompting the RGoB to explore the possibility of allowing private clinics to complement the existing public health system. Financial sector reform is needed to facilitate greater business opportunities, particularly for women entrepreneurs, and enable the creation of jobs in the private sector. Potential reforms include a partial credit guarantee scheme and, with supervisory oversight and regulations, extending external commercial borrowing to larger companies, including financial institutions. I. Planet: Promoting Green, Resilient and Inclusive Growth Priority 5: Sustainable management of renewable natural resources including agriculture and forest eco-systems. 29. Bhutan's landscapes offer diverse natural resources, ecosystem services, and favorable environments for producing high-value and niche food (fruit and spices), livestock (yak products), timber, and non-timber forest products (NTFP), such as bamboo and mushrooms, including the high- value medicinal cordyceps. By strengthening the capacities of emerging value chains to supply high- quality food and forest products, Bhutan can cater to new niche market opportunities as they arise and accelerate the economic transformation of the country. In response to growing market opportunities, Bhutanese farmers are relocating resources away from essential commodities towards export-oriented, high-value commodities. This can be accelerated by promoting risk-sharing and agribusiness models. Growth policy can facilitate this transformation while enabling investments in technologies that compensate for the labor movement and compliance with more stringent food safety requirements and, thus, higher cost of production. Investing and enabling private investment into climate smart agriculture (CSA) technologies and practices is critical to increase yields, adapt to climate change and contribute to economic growth. Policy priorities include: • Facilitating the transformation of the agrifood sector by upgrading the input and service ecosystems to timely deliver improved inputs and tailored and gender-friendly mechanization (services). This will require an enabling regulatory framework to import or develop modern inputs, hybrid seeds, and machinery. It will also require stronger central and local public advisory systems and introducing digital solutions and public-private partnerships to increase the engagement of 70 the private sector and youth groups for service delivery. Public-private partnerships are also needed for establishing and managing climate-smart and green infrastructure to provide access to value-added, storage, and transport services at strategic locations. • Reducing risks and transaction costs in making investments in agribusiness. Agriculture in Bhutan, as a landlocked mountainous country, is inherently a risky business because of small and scattered farms, seasonal production, small volumes, large logistics costs, and banks unwilling to lend to the sector. All these challenges are compounded by the impacts of climate change. As documented in the recently completed Agricultural Public Expenditure Review, Bhutan underinvests in fundamental R&D, marketing, and value addition services that can reduce agribusiness risk. De-risking the sector requires setting horizontal partnerships between producers to achieve scale and vertical partnerships between buyers and producers to promote commercial agriculture. To further improve coordination, value chain partnerships that bring together a wide set of stakeholders to inform how market demand and best practices. Targeted support measures such as guarantees for financial sector loans, matching grants, or direct, well- targeted subsidies to promote profitable CSA, such as drip irrigation in horticulture, could help offset upfront costs. 30. Priority 6: Enhanced disaster, climate and environmental resilience. To support this, the Government could consider the following immediate policy actions and investments: • Advance policy reforms to strengthen the country’s resilience to climate and environmental shocks and protect lives and critical infrastructure. For example, the planned Construction and Transport Act could enforce strict quality standards to ensure the resilience of critical infrastructure services. Similarly, amending the Disaster Management Act of 2013 could enable effective and timely emergency preparedness and response to less frequent, but more severe disasters such as earthquakes and glacial lake outburst floods (GLOFs). Finally, the Building Code requires revision to incorporate country-specific seismic codes and green building standards. • Strengthen Bhutan’s disaster risk financing capacity and diversify sources of climate finance. Access a contingent line of credit to provide immediate liquidity in the aftermath of natural disaster. Improve property and land valuation profession and services for accurate disaster risk insurance. Explore external financing components such as non-concessional funding, private investments, and remittances. Use innovative financial structuring like carbon-linked bonds and Diversified Payment Rights (DPR) to leverage additional resources. • Invest in enhancing the resilience of critical buildings and infrastructure based on detailed multi- hazard vulnerability assessments and risk-informed urban planning. Prioritize retrofitting of infrastructure assets built before the introduction of new seismic codes in the early 2000s, including 315 schools, health facilities, and government buildings; conduct a freight network vulnerability assessment to determine the critical network and pilot a landslide early warning system; implement the Flood and Stormwater Management Plans for priority municipalities; and develop GIS-based climate and disaster risk portal and asset management systems for critical infrastructure to enable risk-based investments, O&M planning, and service continuity. • Play a catalytic role in promoting regional cooperation for climate and hydromet services and become the Regional Center of Excellence (CoE) in mountain meteorology. To save lives and livelihoods and support adaptive operations and planning of climate-sensitive sectors such as agriculture and hydropower, prioritize investments for modernizing the hydromet infrastructure and ICT systems for producing and delivering impact-based forecasts and early warnings of extreme weather events including GLOFs. Such investments will help Bhutan become a Regional CoE in mountain meteorology in collaboration with Nepal and the South Asia Hydromet Forum. • Develop the policy framework and data systems needed to manage international carbon markets transactions. The finalization of an Article 6 policy framework and launch of the National Carbon Registry would encourage carbon markets. Successful implementation of the Bhutan 71 Climate Fund will allow Bhutan to monetize high-quality credits, capture carbon revenues, and channel a portion of the revenues toward national climate goals. II. Infrastructure: Strengthening the Infrastructure Required to Further Economic Growth Priority 7: Infrastructure for transport, energy and urban development 31. To address the issues of urban congestion, slow transit through key cross-border points, and the need for investment in a renewable energy mix and other infrastructure, priorities include: in the short term, identifying leading and emerging sectors and clusters in Tier I and Tier II cities and towns that can support private sector led job creation; and implementing a phased program in the largest urban centers of land use planning and land management, filling infrastructure and service delivery resilience and safety gaps, and adding affordable housing and civic amenities. In energy, the Government has recently relaxed restrictions on private investment in the hydropower sector. Priorities include developing a comprehensive debt and equity fundraising strategy to provide US$14 billion of financing for 13 hydropower projects to generate 7,000 MW of electricity by 2035 as well as exploring options for additional sources of renewable energy (e.g. geothermal, wind, solar and green hydrogen) and sharing benefits with local communities. Medium-term priorities include deeper regional integration (via hydropower exports and trade facilitation with south Asian countries); and developing a Master Transport Plan to reduce reliance on road transport and explore greener forms of transport such as inland waterways and railways, both within Bhutan and with India. To enhance trade with neighbors, a series of regulatory, institutional and operational reforms are needed. Such measures can boost the earning expectations of prospective rural entrepreneurs and encourage them to stay and take investment risks. Embracing the World Trade Organization Trade Facilitation Agreement could cut trade costs by 30 percent. Strengthening supply chain logistics and processes for certification, testing, and traceability could enhance Bhutan’s competitiveness in agricultural trade. Priority 8: Improved digital connectivity 32. Digital connectivity is critical to promote financial inclusion, especially in Bhutan where cash still dominates the payment system, to promote cross-border payments, and to enable the development of new digital technologies. Citizens face challenges in accessing finance, with limited access to credit due to banks' reliance on collateral rather than financial viability. Many rural communities lack access to formal remittance services and digital payment systems, with low presence of bank branches and ATMs. To promote financial inclusion, digital technologies are crucial, enabling faster and affordable payments, promoting collateral-free lending, and introducing innovative capital market and insurance products for retail customers. Digital cross-border payments are a requirement to grow tourism, e-commerce and other forms of IT services. Investment in digital technologies, including blockchain, can drive innovation, manage risks, reduce fraud, and facilitate secure transactions, but will need updated internet policy frameworks and more investment in data governance, privacy, and cybersecurity. 33. Better internet connectivity, and a more resilient data infrastructure, will also have positive spillovers for the rest of society. For example, a National Single Window for Trade that streamlines clearance procedures under one platform for businesses and traders could facilitate trade. In carbon credit markets, Bhutan could issue digital carbon assets (tokens) at scale, using blockchain technology. This will make carbon asset management more tangible and participatory by potentially integrating it with the national digital identity. But this will require finalizing the governance framework to operationalize the registry and allow tracking, verifying, and trading of carbon credits can enable. In education, standards for digital connectivity and information and communication technology (ICT)equipment are needed. The country also lacks recent gender-disaggregated data, which is crucial in monitoring gender equality outcomes and informing policy recommendations. 72 SCD Annex 1: Key Development Indicators – Previous SCD and Current, Compared Source: World bank, Corporate Score Card Databank 73 SCD Annex 2: Macro Poverty Outlook for Bhutan (October 2024) 74 Annex 4: Selected Indicators of Bank Portfolio Performance and Management * As of Date 03/31/2025 FY22 FY23 FY24 FY25 Indicator Portfolio Assessment Number of Projects Under Implementation ᵃ 4.0 2.0 2.0 2.0 Average Implementation Period (years) ᵇ 1.2 2.3 1.6 1.7 Percent of Problem Projects by Number ᵃ˒ ͨ 0.0 0.0 0.0 0.0 Percent of Problem Projects by Amount ᵃ˒ ͨ 0.0 0.0 0.0 0.0 Percent of Projects at Risk by Number ᵃ˒ ͩ 0.0 0.0 0.0 0.0 Percent of Projects at Risk by Amount ᵃ˒ ͩ 0.0 0.0 0.0 0.0 Disbursement Ratio (%) ͤ 325.6 30.7 0.0 Portfolio Management CPPR during the year (yes/no) Supervision Resources (total US$) Average Supervision (US$/project) Since FY80 Last Five FYs Memorandum Item Proj Eval by IEG by Number 32 3 Proj Eval by IEG by Amt (US$ millions) 466.9 89.7 % of IEG Projects Rated U or HU by Number 28.1 33.3 % of IEG Projects Rated U or HU by Amt 35.1 44.4 * All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year. a. As shown in the Annual Report on Portfolio Performance (except for current FY). b. Average age of projects in the Bank's country portfolio. c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP). d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the year: Investment projects only. The FY22 disbursement ratio is explained by a small remaining undisbursed balance of US$2.14 million for the only IDA project counting for the indicator calculation (P173787: COVID19 Emergency Response and Health Systems Preparedness Project) at the onset of the FY, followed by a significantly higher disbursement from the Additional Financing (US$10 million) approved under the same project in FY22, which disbursed a total of US$6.97 million very quickly in the same year for vaccine support. 75 Annex 5: Operations Portfolio (IBRD/IDA and Grants) (March 26, 2025) Project Project Name Lending Approval Closing Commitment (US$m) ID Instrument Date Date IDA Others Type P500536 Climate and DPL 11 Dec 24 31 Dec 27 40.00 Disaster Resilience DPC w/CAT-DDO P174399 Human Capital PforR 03 Feb 22 31 Jan 25 20.00 3.00 Recovery and Resilience/AF P180904 Accelerating IPF 09 Apr 24 30 Jun 27 2.87 Maternal and Child Health Outcomes (RE) P175081 Strengthening Risk IPF 26 Nov 21 30 Jun 25 4.18 Information for Disaster Resilience (RE) Total 60.0 10.05 Note: DPL = Development Policy Loan; PforR = Program for Results; IPF = Investment Project Financing 76 Annex 6: Statement of IFC’s Held and Disbursed Portfolio (March 26, 2025) Outstanding Portfolio Outstanding Portfolio (US$ millions) MAS INR FIG CDF Long-term debt, equity 0 0 14.2 0 and quasi-equity Short-term finance 0 0 0 0 Total 0 0 14.2 0 Top exposures (project Bhutan National Bank (FIG, US$14.2, equity) names and outstanding amounts) 77 Annex 7: IBRD/IDA Pipeline for FY25-FY26 (March 26, 2025) Project ID Project Name Lending Type Expected Instrument Commitments – IDA (US$m) 2025 P500536 Climate and Disaster Resilience DPC DPL 40.00 with CAT-DDO P181736 Human Capital Recovery and PforR 46.20 Resilience Project (HCRRP –AF2) P181278 Bhutan: Accelerating Trade and IPF 300.00 Transport in Eastern South Asia (ACCESS Program – Phase 2) P506825 Accelerate Bhutan’s Job IPF 30.00 Transformation through Renewable Natural Resource Value Chains Sub-total (FY25) 416.20 2026 506841 Livable and Resilient Cities Project IPF 20.00 501271 Dorjilung Hydroelectrical Power IPF 300.00 Project DPC-1 Jobs and Growth DPL 25.00 Sub-total (FY26) 345.00 78 Annex 8: Statement of IFC’s Pipeline for FY 25/26 Name Expected commitment FY (US$ millions) FY25 MAS Transaction 7.00 2025 Financial Institutions Group 20.00 2025 Transaction Infrastructure Transaction 20.00 2025 47.00 FY26 Financial Institutions Group 20.00 2026 Transaction Infrastructure Transaction 30.00 2026 50.00 79