The challenges after Bhutan’s LDC Graduation and how to meet them

On 13 December 2023 Bhutan is due to exit from the category of Least Developed Countries (LDCs) as we have met two out of the three thresh-holds viz. Per Capita Income and Human Asset Index (HAI). The HAI is a composite of health and education indicators.  The third threshold is Economic Vulnerability Index (EVI), which Bhutan is apparently very close to achieving.  

The Maldives, which was among the first LDCs to graduate, argued vigorously that the UN criteria for the LDC Graduation is flawed because it does not take into account the situation of Small States like the Maldives which is sea-locked and vulnerable to economic shocks.  Needless to say, Bhutan and Maldives situation are similar.

Nepal, Bangladesh and Laos PDR sought and were granted approval by the UN General Assembly in 2021, five instead of three years to cope with the post Covid-19 pandemic. Hence these three countries will receive the benefits of an LDC until 2026 to help them during the critical transition phase. 

IMPLICATIONS

While our departure from the LDC group is a positive sign and good for the country’s image upon graduation Bhutan could face short and long-term challenges:

i. The Covid-19 pandemic has not only put pressure on Bhutan’s health system but also adversely affected economic activities across the country. The containment measures that included closure of international borders had a huge bearing on the revenue. The GDP growth rate dropped to an all-time low in 2020. Gross National Income (GNI) was recorded at 7.23 percent in 2020 a drop of more than 12 percentage points from the previous year.

ii. Bhutan relies heavily on the development and growth of the hydropower sector, which contributes around 30 percent of the national revenue. Geological surprises have escalated the cost of hydropower projects like Punatshangchu I and lock downs have delayed completion of hydropower projects such as Punatshangchu II. (Nevertheless hydropower is an important renewable resource that generates income for Bhutan).

iii. Bhutan’s other main source of revenue the tourism sector, has been devastated by the pandemic. In 2020 tourist arrivals dropped by 91 percent.  Out of the 16% of the population employed in the tourism industry, around 32 percent lost their jobs. Many Bhutanese working overseas returned home, leading to a sharp increase in unemployed and underemployed Bhutanese, particularly among the youth.

iv. Bhutan has a narrow economic base and high dependency on a single export market.  Non-hydro industrial activities were also adversely impacted by foreign labor shortages and trade disruptions with India.

v. Around 60 percent of our population relies on agriculture. Agriculture productivity is low due to persistent crop and livestock loss to wild life, pests and diseases. And almost 30 percent of arable land is currently fallow due to labor shortage while less than 20 percent is irrigated. 

vi. A reduction or withdrawal by Bhutan’s traditional development partners whose Overseas Development Assistance (ODA) has always been a significant source of funding will be a reality. After graduation some of the development partners may switch from grants to concessional loans. 

vii. International support for LDCs spearheaded by the UN system in areas of trade, financial and technical assistance, COVID-19 response and participation in international forums including the UN General Assembly in New York could cease once Bhutan graduates.

viii. Concessional loans and grants from the World Bank and Asian Development Bank could also be affected as donors and financial institutions often assess a country’s need by its development status at the UN. 

ix. Not being a member of the World Trade Organization (WTO) Bhutan does not enjoy any of the tariff waivers and flexibilities under WTO Special and Differential Treatment provisions be it in our exports or on accession negotiations. Bhutan will have to fulfill stringent obligations in the WTO if it wants to accede after graduating from the LDC group.

x. Despite efforts, Bhutan has had limited success in attracting global investors. In 2015 only 0.4 percent of the GDP was attributed to FDI, which is far less compared to other LDCs in South Asia. The country recorded a 40 percent decline in FDI in 2021.

xi. More than 5 percent of Bhutanese are multi-dimensionally poor and around 93 percent are in the rural areas where opportunity for employment outside agriculture is limited. Urban poverty is on the rise due to rural-urban migration and looking for job opportunities in urban areas. Due to the pandemic many are at risk of falling below the poverty line and surviving thanks to the Royal Kidu.

In order to mitigate the impact of the pandemic and ensure a smooth transition to a developing country following steps may be worth considering:

i. Do a thorough analysis of the ODA and trade implications with Bhutan’s bilateral and multilateral partners and develop a clear transition strategy to mobilize ODA to recover from the pandemic recession after 2023.

ii. Diversify economic activities including the growing ICT sector, develop or improve trade and transport infrastructure including in major trade hubs in the border and adopt appropriate and new technologies after LDC graduation.

iii. Improve trade and diversify tradable products with India and Bangladesh. Join the BBIN Motor Vehicle Agreement (MVA) as it will enhance logistics and transportation connectivity within the South Asian sub-region and beyond.  Bhutan could make it conditional that heavy vehicles carrying cargo should stop at the border areas. The present leadership of India and Bangladesh would be amenable to any genuine / special requests by Bhutan as we do not pose economic and environmental threats to our friendly neighbors. 

iv. Identify the policies impeding Foreign Direct Investment.  FDI will bring revenue, create jobs, acquire modern technology and improve the quality of goods and services.  At the same time, nurture and support existing Foreign Direct Investors by easing visa procedures and making profits easier.

v. Emulate Bangladesh, whose Prime Minister appointed a Special Advisor to Head the National Task Force to implement the road map for Bangladesh’s LDC Graduation in 2016. In April 2021 the Prime Minister’s Office formed a high-powered committee that also includes the private sector to find out the possible challenges of the country after graduating from the LDC group and how to overcome those challenges.

vi. Harness hydropower energy for economic development and continue to make it the cornerstone of our relationship with India based on the intergovernmental model. With India’s support and understanding export hydropower to Bangladesh as well.

No country wants to remain in the Least Developed Category and all Bhutanese should be proud that due to the impressive socio-economic progress made by Bhutan under the dynamic leadership of our Monarchs our country is poised to graduate from this group. However we are in the midst of a global pandemic whose impact on our economy may take years to recover. It may therefore be prudent to further streamline and coordinate the way ahead so that Bhutan’s graduation from the LDC category takes place in smooth, deliberate and less painful manner.

By Sonam Tobden Rabgye, Ambassador (Rtd.)

This article is based on a presentation I made last year at the request of the Centre for Research on Bhutanese Society (CRBS) for a Panel discussion on the implications of Bhutan’s LDC Graduation organized by the International Institute of Sustainable Development (IISD), Geneva and Think Tanks in Bangladesh, Bhutan and Nepal. It is a modest contribution as a Member of the Royal Society for Senior Citizens. It is based on feed back from experienced and reliable sources both domestic and international as well official records of the RGOB and the UN.

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