Prime Minister Dasho Dr Lotay Tshering at LDC meet, Doha

Bhutan is a star at LDC meet as it graduates but an uncertain future awaits

The United Nations Least Developed Countries (UNLDC) conference which is a once in a 10-year meeting of 46 LDC countries, UN agencies and donor countries was held this year in Doha, Qatar from March 5 to 9.

LDC countries simply put are the world’s 46 poorest and most vulnerable countries that gets special concessions on trade tariffs, grants, financing and some sponsorship for UN related activities and trips. Bhutan is one of the LDCs since 1971 when the grouping first came up and has been benefitting from the status.

Bhutan is a star

Bhutan represented by the Prime Minister Dasho Dr Lotay Tshering was the star of the conference as Bhutan is the only country that will be graduating in 2023 (December).

The Prime Minister was crowded for meeting requests by UN agencies heads, other LDC leaders seeking meetings, advice, photos and future official visits to beautiful Bhutan.

His speeches about Bhutan’s story that interlaced GNH with GDP and its determination to graduate got attention in a conference where empty chairs of bored delegates more interested in local sightseeing are more common.

Bhutan with its scenic landscape, happiness tag, and rich environment skilfully branded through GNH has always been a darling among the far less glamorous LDCs, but this year the attention was even more due to the graduation status.

This comes as island countries like Solomon Islands and Tuvalu have backed out to delay their graduation, while Angola in Africa is trying to back out.

Even much bigger and more resilient economies like Bangladesh and Nepal, who are the two undeclared heavyweights of the LDC countries in population and GDP, have delayed their graduations till 2026.

Bhutan has always been a ‘Mini-Guru’ of sorts on the world stage due to GNH and happiness, but this time the Guru was even more elevated due to our graduation status, and the PM while mentioning Bhutan’s certain vulnerabilities and need for transition support cited Bhutan’s determination to graduate and how countries can talk to Bhutan and learn.

The UN agencies, officials and donor were thrilled with the success of Bhutan, and it also fell in line with their UN assessment reports on how well Bhutan is doing and is ready to graduate.

The PM’s messaging and mainly optimistic tone contrasted with the more desperate tone of other LDC countries leaders talking about problems in their countries, how they are not ready for graduation, the impact of the pandemic, climate change, un met promises, Ukraine war and more.

The PM’s speeches alluded to climate change and inflation, but did not mention the mass migration to Australia and Middle East, the declining foreign reserves, low tourism numbers and the depressed state of the Bhutanese economy.

Lyonchhen Dasho Dr Lotay Tshering in an interview to The Bhutanese said, “It is only correct that we graduate with honour and pride and be very grateful to the donor partners. So give them the opportunity to feel happy about it rather than begging for another year to two which simply does not make sense.  I personally feel that in this modern era of the 21st century there should not be a block of countries called the LDC countries. This is the perfect time and we are not seeking any revisions.”

UN Reports says Bhutan ready and minimal impact

There are three indicators for graduation which are Gross National Income (GNI) per capita, Human Asset Index or HAI (health, education etc), and Economic and Environmental Vulnerability Index (EVI).

The process started from 2015 when Bhutan exceeded the GNI and HAI indexes but graduation could not happen to the EVI index.

Finally, as per the last report in 2021 Bhutan had USD 2,982 GNI per capita as opposed to the USD 1,222 mark required for graduation, its HAI was 79.5 as opposed to 66 and above criteria for graduation and its EVI was 25.7 when the criteria is 32 and below.

In short Bhutan had a great mark sheet as per the UN. The Committee for Development Policy (CDP) which works under the ECOSOC of the UN decided that Bhutan is ready.

Even in terms of the Impact Assessment done by the CDP for Bhutan again the country came off with flying colours as it was assessed that on the basis of available information, the graduation of Bhutan from the LDC category is likely to have a ‘limited impact’.

It said Bhutan’s graduation is expected to have no impact on market access for current exports to the main destinations such as Bangladesh, India and Nepal including diversification of exports.

It said graduation is unlikely to have a big impact on the possible diversification of current exports into new markets.

The bulk of Bhutan’s grants comes from bilateral partners and here too the report says most bilateral donors have confirmed that there would be no abrupt changes in development cooperation with Bhutan after graduation, or their development assistance plans and strategies in place seem to have been established regardless of Bhutan’s status as an LDC.

In terms of loans the Asian Development Bank (ADB) and the World Bank play the most important role for Bhutan in financing for development. The report says Bhutan’s access to funds provided by the ADB and the World Bank is not contingent on its status as a LDC.

It also says aid from most multilateral partners is not associated with Bhutan’s LDC status, and therefore graduation would have minimal impact on the development cooperation for Bhutan.

Lyonchhen said, “Whether we are ready or not depends on how we look at it. I don’t think there is any single dollar that we will lose upfront.”

This is also largely the assessment of officials in the Ministry of Foreign Affairs and External Trade.

What Bhutan will lose

While the CDP has assessed a minimal impact for Bhutan’s graduation there will be some losses both known and unknown.

In trade it may be challenging, with a possible loss of trade preference with EU, Japan, Thailand and other potential export markets. A significant tariff increase is expected for dairy products, vegetables and fruits in the EU, Japan and Thailand after Bhutan graduates.  

Bhutan’s efforts to diversify may be limited by the possible increase in duties after graduation for example, should Bhutan graduate, it will lose eligibility for the EBA of EU after a transition period, and become eligible for regular GSP. The average tariff rate would jump from zero per cent under EBA to 55.3 per cent after graduation.

MFN tariff rates imposed by Japan and Thailand on many agricultural products are significantly higher than those under GSP‐LDC scheme. Bhutan may find difficulties in exporting dairy, honey, vegetables and fruits to Japan and Thailand, if it loses trade preference after graduation.

When it come to the UNDP the percentage allocation of UNDP’s core resources to LDCs has been established at a minimum of 60 per cent of the core budget. Bhutan will be out of this focus group but the impact is not measurable.

In terms of climate funding while Bhutan will be eligible to access many funds but when it comes to the Green Climate Fund (GCF) Bhutan would be excluded from the priority group, such as LDCs, SIDS and African States.

UNICEF has a 60% minimum arrangement for its programme budget allocation to LDCs. Bhutan may lose this priority upon its graduation, but the impact is not currently quantifiable because the budget allocation targets are set for LDCs as a group, not for each LDC.  

After a transition period of up to five years after graduation, Bhutan will no longer be eligible for funds supporting travel of representatives to the official meetings of the UN General Assembly.  

The country and its nationals may no longer benefit from other forms of support for travel to participate in international forums or from certain scholarships and fellowships. It would continue to have access to mechanisms dedicated to other developing countries.  

Lyonchhen said, “Maybe at a certain point and time we may lose the opportunity to get grants in little bits and pieces but at the same time it also spoils our habits as we get used to it with easy come and easy go.”

Apart from the above, a UN report itself shows that the 14 indicators used to judge Bhutan’s graduation is not reliable especially taking into concern Bhutan’s vulnerability over its small population, land locked nature and agricultural instability (see story on pg 1).

At a special High-Level Thematic discussion called ‘Supporting Sustainable and Irreversible Graduation from the Least Developed Country Category,’ the Bhutanese delegation represented by a foreign ministry official expressed Bhutan’s fears and expectations over graduation (see story on pg 4).

No Transition Plan and all promises

As Bhutan graduates it is supposed to come up with a transition strategy and plan, however, this is no such plan ready as yet as the entire 13th Plan is being treated as a transition plan.

Technically this is not correct as the transition should be a separate plan. It should list that while a certain benefit is gone how do we work it out in the transition strategy.

The major problem here is that while there are many concrete commitments and plans for LDC countries there is really nothing concrete for LDC graduated countries and everything will have to be negotiated with agencies and countries. The lack of a plan makes such negotiations difficult.

For example, when Bhutan graduates it will face higher tariffs in EU for certain products and the country will have to negotiate with EU which should come in the transition strategy. Then EU will have conditions saying Bhutan as a LDC graduate will have to be a signatory to many international conventions to trade with them.

The Doha declaration talks about a Sustainable Graduation Support Facility (IGRAD) to ensure smooth transition from the LDC category by assisting graduating countries to prepare for graduation and post-graduation sustainable development.

However, here again there are no details and it will all depend on transition plans and strategies and more importantly if donor countries support the IGRAD.

National Pride above all

The main motivation to graduate is about enhancing Bhutan’s pride as a graduating country and serving as an example or model to other countries.

The PM said, “It is about time that we learn to do things ourselves.”

“Today being a LDC member we are talking about having digital identity system. As a LDC member we cannot but accept the fact that we have very close to 100 percent bio data being taken. We are talking about EPIS system in health, we are talking about education and information management system. So these are infrastructure that are not normally there in LDCs,” added the PM.

He also said graduating at these challenging times says that we are truly ready.

“We fought the pandemic like no other country. As for the current economic crisis we are fighting it very positively and rationally. We are championing all the climate actions and interventions and we are far better than other developing countries,” said the PM. 

An official said, “When we graduate we become more popular and we are seen as a model. It gives us more reason to work harder.”

An additional factor is a sense of embarrassment among officials to be members of the LDC countries and attend such meetings.

When Bhutan graduates it will be monitored for three years to ensure that the country does not fall back into a LDC status. There will also be certain support measures for three years as LDC benefits will not be withdrawn in this time period, however, it will also involve negotiations and is largely uncertain.

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