1. Development strategy

Bhutan is a small Buddhist kingdom located in the eastern Himalayas. The country, which is mostly mountainous and has a rugged terrain, is roughly the size of Switzerland. With only 675,000 people, Bhutan is sparsely populated; most people live in rural areas and are dependent on subsistence agriculture and livestock. In addition to arable land, Bhutan’s main natural resources are hydropower, with estimated electricity generation potential of around 12,000 MW; forests, covering over 70 percent of the land; and minerals such as dolomite, limestone, and gypsum. Bhutan has an exceptional concentration of endangered species and well preserved fauna and flora unique to the region. The authorities have attached high priority to preserving the environment, a task that has been assisted by the small population and relative inaccessibility of the country.

Until the early 1960s, the country’s remoteness and its self-imposed isolationist policy resulted in Bhutan being virtually cut off from the rest of the world. Since then, the government has moved away from its isolationist stance and embarked on the process of economic development. Notwithstanding the difficult conditions, substantial progress has been made over the last thirty years in expanding the productive base of the economy and improving social welfare. To guide the development process, the authorities have relied on blueprints set out in successive “five year plans”. From the outset, the development strategy has emphasized maintaining a balance between material wealth and other objectives, such as preservation of Bhutan’s cultural traditions and environment. In addition, the strategy has sought to ensure that benefits of economic development are widely distributed. The authorities believe that although the emphasis on preserving Bhutan’s cultural and ecological heritage could lead to slower growth in the short run, this development strategy would lead to higher sustainable growth in the medium to long run.

Since the 1980s, considerable importance has been placed on developing resource-based industries--spearheaded by large government hydropower, forestry, and mining projects--financed mainly with concessional foreign assistance. Consistent with the country’s development philosophy, exploitation of forests has been carefully controlled due to concerns about the impact on the environment. Hydropower plants have, however, been actively promoted and are at the core of the government’s development strategy in view of Bhutan’s comparative advantage in this area. Hydropower is generally considered to have a limited impact on the environment, as most projects are run-of-the river schemes which do not rely on the creation of dams. Industries such as cement and ferro-alloys, which are energy-intensive and utilize available mineral deposits, have also been established.

Utilizing the revenues from these industries, along with generous donor assistance, development plans have also focused on constructing physical infrastructure, building administrative capacity, and providing basic social services such as education and health care. The country’s rugged terrain, however, has made the provision of social and economic infrastructure difficult and expensive. Despite these impediments, after starting with virtually no road network in the 1960s, there are now about 3,100 kilometers of roads (of which over half have asphalt topping). Water supply and sanitation have improved and half the population now has access to piped water. There are presently close to 300 schools (compared with only 11 in the late 1950s), and primary school enrollment more than doubled in the last 15 years to around 70 percent at present (Table 1); the authorities foresee 90-100 percent primary school enrollment by the end of this decade. In addition, major indicators of basic health including mortality rates, incidence of various diseases and infections, immunization rates, and nutrition deficiencies have improved markedly in the past three decades. As a result, Bhutan is close to meeting the “United Nations Year 2000” goals of primary education and health care for all. Bhutan’s per capita GDP is estimated to be around US$380 in 1994, somewhat higher than its South Asian neighbors. The forceful drive to provide social services has bestowed a better quality of life than would be expected from such low levels of income, and Bhutan has been able to avoid the extreme manifestations of poverty that are evident elsewhere in South Asia.

Table 1.

Bhutan: Social and Demographic Indicators ^1/

Sources: Data provided by the Bhutanes authorities; and World Bank, Social Indicators of Development, 1995.

^1/Estimates are for 1994 or most recent available data.

^2/Including Afghanistan, Bangladesh, India, Maldives, Nepal, Pakistan, and Sri Lanka.

Table 1.

Bhutan: Social and Demographic Indicators ^1/

	Bhutan	Comparable income group in Asia 2/
GDP	US$255 million	…
GDP per capita	US$380	US$310
Population	0.675 million	…
Population growth rate	3.1 percent	2.1 percent
Life expectancy at birth	66 years	60 years
Access to safe water (percent of population)	58	69.5
Infant mortality (per thousand live birth)	70	84
Population per physician	3,822	2,850 persons
Daily calorie supply	…	2,416 calories per person
Adult illiteracy (percent)	46	54
Primary school enrollment (percent of school-age population)	70	106

Sources: Data provided by the Bhutanes authorities; and World Bank, Social Indicators of Development, 1995.

^1/Estimates are for 1994 or most recent available data.

^2/Including Afghanistan, Bangladesh, India, Maldives, Nepal, Pakistan, and Sri Lanka.

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Table 1.

Bhutan: Social and Demographic Indicators ^1/

	Bhutan	Comparable income group in Asia 2/
GDP	US$255 million	…
GDP per capita	US$380	US$310
Population	0.675 million	…
Population growth rate	3.1 percent	2.1 percent
Life expectancy at birth	66 years	60 years
Access to safe water (percent of population)	58	69.5
Infant mortality (per thousand live birth)	70	84
Population per physician	3,822	2,850 persons
Daily calorie supply	…	2,416 calories per person
Adult illiteracy (percent)	46	54
Primary school enrollment (percent of school-age population)	70	106

Sources: Data provided by the Bhutanes authorities; and World Bank, Social Indicators of Development, 1995.

^1/Estimates are for 1994 or most recent available data.

^2/Including Afghanistan, Bangladesh, India, Maldives, Nepal, Pakistan, and Sri Lanka.

The shortage of both skilled and unskilled labor has been a significant constraint on development. ^1/ In response, the seventh plan (1992/93-1996/97) has placed particular emphasis on enhancing the human resource base. ^2/ Other key principles embodied in the current plan are regionally balanced development and development of the private sector. The authorities are currently formulating the eighth plan (1997/98-2001/2002). The focus of the plan is expected to be broadly similar to the seventh plan, but with greater emphasis placed on consolidation and improving efficiency rather than initiating new projects.

In addition to labor shortages and lack of managerial skills, a number of inhibiting features of the present system--including discretionary trading and industrial licensing procedures; restrictive foreign investment policies; tight controls on employment of expatriate workers; discretionary exchange and trade controls on non-rupee transactions; and distortions in an underdeveloped financial sector--continue to hamper private sector development. The initial impetus for several of these controls came from the desire to preserve Bhutan’s cultural and ecological heritage and prevent foreign domination of the economy. In addition, the exchange and trade controls were aimed at conserving convertible currency reserves. The government’s long-term commitment, however, is that any activity of a commercial nature should be undertaken by the private sector, except for those projects that are too large to be financed privately. Against this background, priority is being given to establish a “legal enabling environment” for private sector development, and work is underway to draft a commercial code, bankruptcy legislation, a real estate law, and a national environmental protection act.

2. Growth, investment, and savings trends ^1/

Investment rates in Bhutan have been high, with gross domestic capital formation averaging over 35 percent of GDP per year during 1980-1993 (Chart 1). Much of this investment was financed by foreign aid and was undertaken by the government and public enterprises. Modern public sector industries in areas such as hydropower, cement, calcium carbide, wood, and mining were established in the 1980s. As a result, real GDP grew by about 7 1/2 percent per year during that decade. Indeed, the commissioning of Bhutan’s first major hydropower plant (Chukha) in 1987 raised the growth rate for that year to about 18 percent. In the early 1990s, growth slowed to around 4-5 percent as few new projects came on stream. However, growth is estimated to have picked up temporarily to around 6 percent in 1994 and further to 7 percent in 1995 due to the completion of a ferro-alloy plant and the expansion of both Chukha hydropower and the Penden cement plant. Nonetheless, Bhutan’s economy remains very small, with GDP in 1994 estimated at US$255 million. For the rest of the 1990s, the growth rate is expected to remain at about 4 percent per year until the Dungsum cement plant begins production at the end of this decade.

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BHUTAN: GROWTH, SAVINGS, AND INVESTMENT, 1981-1993

Citation: IMF Staff Country Reports 1995, 135; 10.5089/9781451806212.002.A001

Sources: Data provided by the Bhutanese authorities; and staff estimates and projections.

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Gross domestic savings were negative in the early 1980s, and have steadily increased to around 18 percent of GDP at present. Negative savings in the early 1980s reflected government dissavings while private savings were small. Since the late 1980s, government savings have generally been positive and private savings have also grown rapidly. The increase in government savings in the past decade is related to a broadening of the revenue base and efforts to contain recurrent expenditures. The general rise in incomes and the development of the financial sector were likely the most significant factors behind the increase in measured private savings. Bhutan has relied on substantial foreign savings to cover the large gap between domestic savings and investment. With the increase in domestic savings since the late 1980s, however, the domestic savings-investment gap has decreased from over 40 percent of GDP in early 1980s to less than 15 percent of GDP in the early 1990s.

3. Economic structure

Two contrasting sectors have emerged in Bhutan: agriculture, which is largely unmechanized and subsistence, and a modern hydropower and industrial sector. There have been significant structural changes in the economy over the last decade as the modern sector has grown rapidly while the traditional sector has grown more modestly. Thus, the composition of GDP has changed substantially over the last fifteen years as the share of agriculture (including forestry) in total output has fallen from 57 percent in 1980 to 41 percent in 1993. By contrast, the combined share in GDP of electricity, manufacturing, and mining has risen from a mere 4 percent in 1980 to 20 percent in 1993 (Chart 2).

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BHUTAN: COMPOSITION OF GDP

(In percent of GDP)

Citation: IMF Staff Country Reports 1995, 135; 10.5089/9781451806212.002.A001

Sources: Data provided by the Bhutanese authorities; and staff estimates and projections.

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Notwithstanding the significant achievements over the last decade, the industrial base of the economy is still very narrow, dominated by a handful of public sector enterprises that were established in the 1980s. As noted earlier, the private sector is underdeveloped and, except for a few privatized public enterprises and agriculture, it consists mainly of small wholesale and retail shops in urban areas. Foreign investment has also been negligible because of severe restrictions imposed by the authorities.

Bhutan’s economy is closely linked to India through various bilateral exchange, monetary, and trade arrangements. The national currency (the ngultrum) is pegged at par to the Indian rupee which also circulates freely in Bhutan, and price movements in Bhutan tend to follow those in India with some lag. There is free movement of goods between the two countries and India is Bhutan’s largest trading partner, accounting for over 80 percent of total trade. India also provides substantial foreign assistance, financing about a quarter of public expenditure, including grants for major investment projects. In addition, there are a sizeable number of Indian expatriate skilled and unskilled workers in the public and private sector.

Bhutan has been making efforts to cultivate closer relations with countries other than India (referred to as “third countries”) in recent years. Trade with third countries, especially Bangladesh, has been growing albeit from a small base. In addition, the sources of foreign aid have been diversified and Japan, Denmark, Switzerland, the Netherlands, Austria, and Kuwait are now the other major donors.

1. The fiscal strategy and outlook ^1/

In view of Bhutan’s fixed exchange rate and open trade and financial relations with India, there is little scope for an independent monetary policy. As such, preserving macroeconomic stability depends upon maintaining prudent fiscal policies. Recent budgetary developments and trends, however, have underscored the challenges to fiscal policy in Bhutan: a narrow and inelastic revenue base; pressures on expenditure stemming from the extensive development needs and rugged terrain; and difficulties in monitoring developments on a timely basis to enable appropriate policy adjustments. ^1/

Recognizing the central role of fiscal policy, the authorities have adopted a more cautious fiscal stance since 1990/91. Their objective is to ensure that domestic revenue is sufficient to cover all recurrent expenditure, while capital spending is financed almost entirely by foreign grants and concessional loans. As a result, the current fiscal balance shifted from a deficit averaging 2 3/4 percent of GDP during the second half of the 1980s to a small surplus in the 1990s. Bhutan’s public debt is modest and external debt is primarily on concessional terms; the government is a creditor vis-à-vis the domestic banking system, with net deposits totalling 3 1/2 percent of GDP at end-1994/95.

There has been a sharp increase in foreign assistance in recent years, with grant aid rising from about 13 percent of GDP in the early 1990s to an estimated 33 percent in 1994/95. ^2/ As noted earlier, foreign aid has become more diversified--whereas India accounted for nearly 70 percent of total grants in 1984/95, ten years later its share had declined to 32 percent. Substantial donor support is expected to continue into the medium term, offering Bhutan an opportunity to accelerate the process of economic and social development. However, the surge in foreign aid and the associated accumulation of international reserves has complicated macroeconomic management in the short run, placing an even greater burden on fiscal policy and straining the absorptive capacity of the economy. ^1/

Achieving a balance on current fiscal operations has been a difficult task, in large part because Bhutan’s revenue base remains narrow and inelastic. The authorities have made concerted efforts over the past several years to broaden the tax net and improve administration and enforcement. As a result, taxes on income and profits have nearly doubled as a share of GDP, accounting for almost 40 percent of tax revenue in 1994/95 (Table 2). Taxes on international trade have also risen as commerce with third countries has expanded and as collection procedures have been improved.

Table 2.

Bhutan: Distribution of Tax Revenue

(As a percent of total)

Source: Data provided by the Bhutanese authorities.

Table 2.

Bhutan: Distribution of Tax Revenue

(As a percent of total)

	1984/85	1989/90	1994/95
Taxes on domestic goods	57.6	50.9	33.2
Taxes on income and profits	24.2	30.6	38.9
Taxes on international trade	10.6	16.4	24.5
Taxes on property	3.8	1.7	0.9
Other taxes	3.8	0.4	2.6
Ratio of tax revenue to total domestic revenue	47.5	24.5	36.1
Ratio of tax revenue to GDP	6.2	5.0	7.4
Ratio of nontax revenue to GDP	6.8	15.2	15.1

Source: Data provided by the Bhutanese authorities.

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Table 2.

Bhutan: Distribution of Tax Revenue

(As a percent of total)

	1984/85	1989/90	1994/95
Taxes on domestic goods	57.6	50.9	33.2
Taxes on income and profits	24.2	30.6	38.9
Taxes on international trade	10.6	16.4	24.5
Taxes on property	3.8	1.7	0.9
Other taxes	3.8	0.4	2.6
Ratio of tax revenue to total domestic revenue	47.5	24.5	36.1
Ratio of tax revenue to GDP	6.2	5.0	7.4
Ratio of nontax revenue to GDP	6.8	15.2	15.1

Source: Data provided by the Bhutanese authorities.

Nevertheless, total tax collections have risen by only around 2 percent of GDP over the past decade to about 7 percent of GDP at present, a ratio that is low in comparison with other countries at similar income levels. This reflects, inter alia, the limited number of private nonagricultural enterprises (there are only 85 corporate taxpayers); a manufacturing base that is not geared toward supplying the domestic market; the difficulty of taxing personal incomes (including through presumptive taxes and indirect levies on agricultural income) with a population dispersed across mountainous terrain; and the limited yield of customs duties given the free trade agreement with India and the potential for smuggling over Bhutan’s open southern border. Trade taxes--typically an important source of revenue in developing countries--yielded less than 2 percent of GDP in 1994/95.

As a result, the government has relied heavily on nontax revenues in the form of profit transfers from public enterprises. However, here too the revenue base is inelastic. Most nontax revenue is generated by hydro-electric projects, whose scale of production is fixed in the short run, whose international tariffs are set by treaty with India, and whose domestic tariffs are heavily subsidized. ^1/ Transfers from other public enterprises have declined since 1992/93 as several firms have been privatized. ^2/ Many of the newly privatized companies are at present highly leveraged thus affecting their contribution to the budget through corporate income taxes. Over the longer term, however, there is likely to be a more significant compensating increase in tax revenue from these enterprises.

At the same time, demands on current expenditure have mounted. The increase in donor support together with the revenues generated by new industries has been used to expand rapidly Bhutan’s social infrastructure, especially health and education facilities. However, the cost of maintaining these facilities is considerable. Bhutan’s topography and scattered population, together with the high wages paid to skilled labor, have resulted in high costs of maintaining infrastructure and providing basic social services.

In light of these pressures, the government is seeking to increase the buoyancy of the revenue base by further strengthening tax administration, improving the excise duty drawback system with India (which could yield about 1/2 percent of GDP in additional revenue), and including property and rental income in the tax net. ^3/ The authorities are also studying the feasibility of introducing a personal income tax in the early years of the eighth plan period. In addition, the government has pressed ahead with plans to construct a number of large, export-oriented industrial ventures, particularly in the power sector. Three major hydroelectric plants are expected to be commissioned over the next decade, increasing Bhutan’s electricity generation substantially. ^1/ In the interim, the authorities intend to impose strict controls on the growth of recurrent expenditures. In recent years increases in recurrent spending have been kept below the growth rate of GDP; for certain categories, current expenditure has fallen in real terms since 1988/89 (see Tables 3 and 4).

Table 3.

Bhutan: Growth of Current and Capital Expenditures, 1988/89-95/96

(Average annual increase, in constant prices)

Sources: Data provided by the Bhutanese authorities; and staff estimates.

^1/1995/96 figures represent budget estimates.

Table 3.

Bhutan: Growth of Current and Capital Expenditures, 1988/89-95/96

(Average annual increase, in constant prices)

		Current expenditures	Capital expenditures
General public services		3.8	14.8
Economic services		-1.3	19.8
	Agriculture and irrigation	0.7	22.3
	Animal husbandry	-4.3	18.1
	Industries, mining, trade and commerce	-17.9	0.5
	Public works, roads and housing	3.2	-3.1
	Communication	-4.9	-2.8
	Power	8.2	48.0
Social services		-0.6	33.0
	Education	-4.1	19.9
	Health	4.7	47.0
	Urban development	7.4	25.4
Total		0.8	15.2

Sources: Data provided by the Bhutanese authorities; and staff estimates.

^1/1995/96 figures represent budget estimates.

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Table 3.

Bhutan: Growth of Current and Capital Expenditures, 1988/89-95/96

(Average annual increase, in constant prices)

		Current expenditures	Capital expenditures
General public services		3.8	14.8
Economic services		-1.3	19.8
	Agriculture and irrigation	0.7	22.3
	Animal husbandry	-4.3	18.1
	Industries, mining, trade and commerce	-17.9	0.5
	Public works, roads and housing	3.2	-3.1
	Communication	-4.9	-2.8
	Power	8.2	48.0
Social services		-0.6	33.0
	Education	-4.1	19.9
	Health	4.7	47.0
	Urban development	7.4	25.4
Total		0.8	15.2

Sources: Data provided by the Bhutanese authorities; and staff estimates.

^1/1995/96 figures represent budget estimates.

Table 4.

Bhutan: Distribution of Current Expenditures by Economic Classification, 1988/89 and 1995/96 ^1/

(As a percent of total)

Sources: Data provided by the Bhutanese authorities; and staff estimates.

^1/1995/96 figures represent budget estimates.

Table 4.

Bhutan: Distribution of Current Expenditures by Economic Classification, 1988/89 and 1995/96 ^1/

(As a percent of total)

	1988/89	1995/96
Wages and salaries	49.3	32.6
Goods and services	38.7	49.2
Subsidies and transfers	10.0	7.5
Interest payments	2.0	10.7
Current expenditure/total expenditure	43.4	37.9
Current expenditure/GDP	21.9	18.4

Sources: Data provided by the Bhutanese authorities; and staff estimates.

^1/1995/96 figures represent budget estimates.

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Table 4.

Bhutan: Distribution of Current Expenditures by Economic Classification, 1988/89 and 1995/96 ^1/

(As a percent of total)

	1988/89	1995/96
Wages and salaries	49.3	32.6
Goods and services	38.7	49.2
Subsidies and transfers	10.0	7.5
Interest payments	2.0	10.7
Current expenditure/total expenditure	43.4	37.9
Current expenditure/GDP	21.9	18.4

Sources: Data provided by the Bhutanese authorities; and staff estimates.

^1/1995/96 figures represent budget estimates.

This stop-go approach to public expenditure management has had efficiency costs. Across-the-board limits on recurrent spending have diminished the effectiveness of existing programs; for example, schools and hospitals are understaffed due to strict controls on government employment. Moreover, the rapid increase in capital spending on health, education, rural and urban development (which have higher recurrent costs than other capital projects) has outpaced the growth of recurrent expenditure. As a result, the effectiveness of future projects could be severely handicapped by manpower shortages and deteriorating physical infrastructure.

Civil service wages have borne the brunt of the fiscal correction. Despite a general wage increase in 1994/95, government salaries have fallen in real terms by more than a third since the last general increase in 1988, making it more difficult to attract and retain qualified personnel (Tables 5). There is a risk that low salaries and staffing shortages could undermine the morale and effectiveness of Bhutan’s civil service, which has a reputation for dedication and integrity.

Table 5.

Bhutan: Wage Developments, 1988/89-1995/96

Sources: Data provided by the Bhutanese authorities; and staff estimates.

Table 5.

Bhutan: Wage Developments, 1988/89-1995/96

		1988/89	1995/96
Wage bill
	(in millions of Ngultrum)	448	610
	(in percent of GDP)	(10.8)	(6.0)
Civil service employment		11,500	13,500
Average salary (Ngultrum)		38,950	45,185
CPI (1990 = 100)		83.6	152.6
Average real salary (Ngultrum)		46,590	29,620
Real wage erosion 1988/89-95/96 (percent)			36.4

Sources: Data provided by the Bhutanese authorities; and staff estimates.

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Table 5.

Bhutan: Wage Developments, 1988/89-1995/96

		1988/89	1995/96
Wage bill
	(in millions of Ngultrum)	448	610
	(in percent of GDP)	(10.8)	(6.0)
Civil service employment		11,500	13,500
Average salary (Ngultrum)		38,950	45,185
CPI (1990 = 100)		83.6	152.6
Average real salary (Ngultrum)		46,590	29,620
Real wage erosion 1988/89-95/96 (percent)			36.4

Sources: Data provided by the Bhutanese authorities; and staff estimates.

Conscious of these risks, the authorities have sought to establish priorities and streamline expenditures. Preparations for the eighth plan will involve careful scrutiny of all projects. Departments and agencies have been encouraged to levy user fees for government services wherever possible, elicit greater community participation in development programs, and privatize some maintenance services. As far as capital expenditures are concerned, the emphasis is on consolidation of existing projects; approval of new projects will depend on their revenue potential, manpower requirements, and the availability of donor funds for the associated recurrent costs.

Even so, fiscal pressures are likely to intensify over the next several years. No large new industrial projects will come on stream until the turn of the century, while the scope for increasing tax revenue will depend upon the gradual development of Bhutan’s private sector. A civil service salary increase is likely in the next two to three years, and more funds will need to be allocated for operations and maintenance. Moreover, interest expenditures will continue to rise as a result of increased borrowing to finance hydropower investments. Meeting these needs could contribute to a widening of the current fiscal deficit by the end of the decade.

Part of the shortfall could be met through increased donor contributions to the recurrent costs of capital projects. The authorities are asking donors to finance 10 percent of recurrent expenditures in the areas of education and health, which have high social rates of return. ^1/ Government bonds could also be used to close part of the current fiscal gap and to finance the local-currency cost of capital projects with high cash returns--such as infrastructure development for private industrial ventures. Higher domestic and foreign borrowing would lead to a temporary rise in the debt-to-GDP ratio by the end of the decade; however, the debt burden would be reduced sharply following the commissioning of cement and hydropower projects early in the next century. Thus, with prudent management Bhutan’s fiscal position should remain sound.

2. Monetary policy and the financial system ^2/

Bhutan’s financial sector consists of the Royal Monetary Authority (RMA) which has evolved to become the central bank; the Bank of Bhutan (BoB) which is the single commercial bank; and four nonbank financial institutions: the Royal Insurance Company of Bhutan (RICB), the Unit Trust of Bhutan (UTB), the Government Employees Provident Fund (GEPF), and the Bhutan Development Finance Corporation (BDFC). As part of the effort to encourage private sector development, the RMA has taken a number of steps to strengthen the small and predominantly government-owned financial system. This task has been complicated, however, by the financial institutions’ lack of skilled personnel and modern technology, as well as the limited pool of attractive investments for which they all vie. Encouraging progress has nevertheless been made over the past few years in developing indirect instruments of monetary control, strengthening prudential norms and supervision, and enhancing competition in the financial system. ^3/

Turning to trends in the growth of money and credit, as noted earlier the currency peg and other close links with India leave little scope for an independent monetary policy in Bhutan. The principal objective of monetary policy has thus been to ensure that interest rates (which are administered) remain broadly in line with Indian rates. There are no direct credit controls and monetary developments have been closely tied to movements in the balance of payments. The past few years have witnessed rapid growth in monetary aggregates, stemming in large part from the accumulation of convertible currency reserves. Convertible currency net (and gross) reserves totalled about US$120 million at end-June 1995 (some 50 percent of GDP), providing about 13 months of import cover. So far, the increase in liquidity has not contributed to a weakening of the overall balance of payments, although imports from India have risen and net rupee reserve liabilities amounted to the equivalent of US$22 million at the end of 1994/95. Nor has there been a general rise in inflation, which is influenced largely by price developments in India (Chart 3). ^1/

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BHUTAN: MONETIZATION AND PRICE TRENDS, 1983-1994

Citation: IMF Staff Country Reports 1995, 135; 10.5089/9781451806212.002.A001

Sources: Data provided by the Bhutanese authorities; and staff estimates and projections.

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The combination of rapid money growth, a strong balance of payments, and moderate inflation points to rapid monetization of the Bhutanese economy in recent years. The ratio of broad money to GDP has risen steadily over the past decade, from about 17 percent in the mid-1980s to around 30 percent at present (Chart 3). The income elasticity of money is estimated at 2 1/2 to 3, a level that is indicative of the rapid spread of monetary instruments in Bhutan. ^2/ Despite the financial deepening, broad money as a fraction of output is lower than in other countries at similar income levels. ^3/ This likely reflects Bhutan’s relatively recent emergence as a market economy; even in 1970 most transactions were carried out through barter. It is therefore likely that money demand will continue to grow rapidly over the next decade.

In addition to the monetization of Bhutan’s economy, the prudent fiscal stance, financial institutions’ cautious approach to extending credit, and the strict exchange and trade controls on third-country imports have also served to limit the impact of money growth on the balance of payments. The rapid growth of broad money has been accompanied by a rise in excess reserves of the banking system, which totalled about half of the deposit base at end-June 1995. ^4/ Financial institutions attribute the buildup of excess reserves to a shortage of viable lending opportunities. This may reflect in part Bhutan’s nascent entrepreneurial tradition, as well as the obstacles posed by the country’s difficult terrain and limited domestic market. However, bureaucratic controls are probably also a significant impediment to the development of private sector activity. In particular, private investors and financial institutions cite licensing requirements, controls on the use of expatriate labor, and guidelines aimed at ensuring regionally balanced development as significant obstacles to private credit growth.

The emergence of excess reserves in the financial system also reflects continuing rigidities in the determination of domestic interest rates. In particular, the stipulated 10 percent minimum rate of return on investments by the Government Employee Provident Fund acts as an effective floor for all other rates in the system. The existence of such a floor, together with the high level of indebtedness of many private borrowers, has probably impeded the absorption of domestic liquidity. It may also have induced the financial institutions to undertake riskier investments than they would otherwise have done, thereby undermining the quality of the portfolios.

In the wake of the rising default rates associated with the rapid expansion of credit in the late 1980s and the early 1990s, however, financial institutions lending practices have become more conservative and there has recently been a drop in private credit growth. ^1/ The RMA’s strengthened prudential and supervisory role has encouraged greater attention to project quality among all of the financial institutions. Finally, the Bank of Bhutan’s monopoly position in the financial system (which has enabled it to secure the most attractive public sector projects, and to generate a large fee-based business) may have reduced its incentive to lower excess reserves by cultivating new private sector clients.

To strengthen financial institutions’ balance sheets, the authorities have taken a number of remedial measures, including: introducing new prudential guidelines and more forceful bank supervision; transferring rupee liabilities from the Bank of Bhutan to the RMA; introducing 91-day RMA bills; and reducing administered deposit rates relative to lending rates (and aligning them more closely with rates in India).

These measures have helped to ease pressures on financial institutions’ profitability, but have been insufficient to resolve the problem of excess reserves on a lasting basis. The authorities recognize the need for a medium-term strategy which would enable the economy to absorb foreign savings in a manner conducive to rapid growth and low inflation. In a context of continued fiscal prudence, the reform agenda includes:

• Drafting new legislation to clarify private property rights, bankruptcy procedures and company law. Problems of nonperforming assets could thus be dealt with at an early stage and on a lasting basis.

• Continuing steps to strengthen bank supervision and loan appraisal.

• Fostering greater competition in the financial system by converting the Unit Trust of Bhutan--which already performs many banking functions--into a full-fledged commercial bank.

• Reforming the Government Employees Provident Fund so that its rate of return is based upon the actual performance of the Fund; if a defined benefit from the plan is considered to be desirable it would be preferable to do this directly as a contingent liability of the national budget.

• Developing a market in government bonds to promote financial deepening.

• Deregulating interest rates (in conjunction with reform of the GEPF, conversion of the UTB into a commercial bank, and creation of a government bond market).

Progress is underway in several of these areas, with technical assistance from the IMF and other donors. Even with these financial reforms, however, it will be important to adopt more transparent and liberal policies toward domestic and foreign investment, third-country trade and exchange transactions, and labor imports to facilitate the development of Bhutan’s private sector.

3. Structure of trade and the balance of payments ^1/

Bhutan’s balance of payment position has generally been comfortable over the last decade, enabling the authorities to build up substantial reserves (Chart 4). External debt and debt service are within manageable levels. Although balance of payments developments continue to be dominated by Bhutan’s close ties with India, trade with third countries has been growing in recent years as the government has encouraged export diversification. In addition, aid from third countries has risen markedly, compensating for the decline in financial assistance from India.

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BHUTAN: BALANCE OF PAYMENTS, 1988/89-1994/95

(In millions of U.S. dollars)

Citation: IMF Staff Country Reports 1995, 135; 10.5089/9781451806212.002.A001

Sources: Data provided by the Bhutanese authorities; and staff estimates and projections.

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With the establishment of the hydropower sector and allied export-oriented industries during the past decade, exports increased rapidly in the 1980s. As a result, the share of exports in GDP has grown from 10 percent in 1982 to 25 percent in 1994. Exports are dominated by electricity (26 percent of total exports in 1993), agricultural products (20 percent), wood and wood products (15 percent) and cement (9 percent) (Chart 5). Despite the recent drive to increase exports of fruit to Bangladesh, total exports have been fairly stagnant for the past few years as no major new projects have begun production in the early 1990s. ^2/ The completion of a ferro-alloy plant in 1995 as well as the expansion of existing hydropower and cement plants will, however, provide a boost to exports.

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BHUTAN: COMPOSITION OF EXPORT

(In percent of total exports)

Citation: IMF Staff Country Reports 1995, 135; 10.5089/9781451806212.002.A001

Sources: Data provided by the Bhutanese authorities; and staff estimates and projections.

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Imports, by contrast, have been rising rapidly in the 1990s as work has began on several new projects. A detailed breakdown of imports is not compiled and available data indicate that the major import items are hydrocarbons (6 percent of total imports in 1993), transport equipment (5 percent) and miscellaneous goods including consumer goods (82 percent). ^1/ As a result of the rapid growth in imports, the share of imports to GDP has increased to around 40 percent in recent years from about 30 percent in the late 1980s.

As regards the services account, the contribution of tourism has been small (US$4.6 million in 1994/95), largely because of controls on the number of incoming tourists, while interest payments associated with concessional project loans disbursed in the last few years have been rising. Together with the worsening trade balance, this has resulted in the current account deficit increasing to around 20 percent of GDP in 1994/95, from less 10 percent in early 1990s.

These current account deficits have been more than covered by capital account surpluses reflecting rising foreign aid in the form of grants and concessional loans. Recorded foreign direct investment has been negligible with cumulative inflows so far of only around US$1 million. ^2/ Commercial borrowing is also very small except for the rupee overdraft of the Royal Monetary Authority (see below).

Errors and omissions have traditionally been large and uneven; in some years they were over 5 percent of GDP and exceeded the overall balance in magnitude. The large errors and omission is partly due to substantial unrecorded border trade with India as well as the deterioration of trade data upon dismantling of government owned trading houses. ^3/ The authorities have been making efforts to improve the data situation but have been hampered in part by lack of trained manpower.

Although the overall external situation is comfortable, there has been a current account deficit with India for the last three decades. As noted earlier, India is Bhutan’s largest trading partner, accounting for over 85 percent of exports and about 80 percent of imports. However, in view of the limited domestic production base, both consumption and investment imports from India are substantial, amounting to more than 30 percent of GDP, which is in excess of exports to that country. Interest payments, project-related service payments, and private transfer outflows have also resulted in deficits in the service account. Until the late 1980s, grants and concessional loans from India were able to more than cover the current account deficit. With the slowdown in aid from India since the early 1990s, however, the authorities have chosen to finance these current account deficits by using rupee overdraft facilities with Indian commercial banks. The structural deficit with India is not expected to be reduced until new cement and hydropower plants begin production early next century, thus increasing exports to India.

The overall balance of payments surpluses have resulted in gross international reserves rising to US$126 million by June 1995, equivalent to 13 months of imports. Net rupee liabilities amount to around US$20 million due to the RMA’s use of overdraft facilities. Maintaining this overdraft while conserving convertible currency reserves has proven to be expensive for the RMA because of the relatively high interest rate on rupee liabilities. ^1/ In view of this, the RMA has recently begun to pay down the rupee overdraft by liquidating some of its ample convertible currency reserves.

External debt is estimated to be the equivalent of nearly US$130 million (46 percent of GDP) as of June 1995, of which around 40 percent is owed to India (Chart 6). Other major creditors are the International Development Association, the Asian Development Bank, the International Fund for Agricultural Development, and the Kuwait Fund. Although the bulk of the debt is highly concessional the debt service ratio has risen in the 1990s due to interest payments on the rupee overdraft and payments on loans disbursed in the 1980s. At 15 percent of exports (of goods and nonfactor services) in 1994/95, the debt service ratio nevertheless remains manageable.

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BHUTAN: EXTERNAL DEBT AND DEBT SERVICE, 1988/89-1994/95

Citation: IMF Staff Country Reports 1995, 135; 10.5089/9781451806212.002.A001

Sources: Data provided by the Bhutanese authorities; and staff estimates and projections.

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Bhutan has essentially a dual trade regime. On the one hand, trade with India is free of restrictions and tariffs are not levied on this trade. On the other hand, trade with third countries is restricted and governed by regulations that are cumbersome and subject to discretion. Specifically, imports from third countries are permitted through two routes. The first route is through individual baggage and is governed by ad hoc rules. The other route is more formal and requires obtaining import licenses which are issued on a case-by-case basis. In some instances the granting of licenses has been quite liberal whereas in other instances--e.g., for relatively large imports for commercial sale--it is fairly strict. Capital goods and raw materials are generally exempt from tariffs, while a uniform 100 percent tariff is levied on other imports.

Turning to the foreign exchange regime, there are no exchange restrictions on current transactions with India, except for those on payments for large capital goods which require approval from the Ministry of Finance. For the import of capital and intermediate goods from third countries, foreign exchange is released by the RMA on a case-by-case basis and is usually given only to export-oriented units. For other importers of capital and intermediate goods, proof of the ability to make the foreign exchange payments on their own must be presented before an import license is granted. Similar procedures apply to imports of consumer goods from third countries as the RMA does not provide foreign exchange and the importer has to make the necessary exchange arrangements. The strict exchange controls have had negative consequences for private sector development as it is extremely difficult for legitimate businesses to obtain foreign exchange to import goods.

Foreign exchange for payments on invisibles such as medical and education expenses abroad are also not provided; however, the government covers the full cost of medical treatment abroad upon recommendation by the appropriate medical authorities and also provides scholarships to qualified students. Foreign exchange for travel is provided only to exporters that can justify their trip as a way to promote business activities and is based on government cost guidelines. Other travelers receive no foreign exchange from the RMA.

1. Power and industry

The industrial sector (including the power sector) is likely to be a major source of economic growth in Bhutan for the foreseeable future. The government’s strategy to accelerate industrial growth has included large public investments in hydropower; financing and implementing large projects in other sectors (e.g., cement) that are seen as beyond the present capacity of the private sector; acting as a catalyst in the case of small to medium-scale projects by providing the private sector with improved access to credit, markets and entrepreneurial skill training; privatization of large industrial corporations; and providing incentives for regionally balanced growth including by creating industrial estates in different parts of the country.

Currently hydropower is Bhutan’s major economic resource after agriculture, accounting for nearly 9 percent of GDP, 26 percent of exports, and about 20 percent of government revenues. The rapid descent of the rivers flowing through the country makes hydropower not only plentiful--electricity generation capacity is estimated to be 12,000 MW--but also fairly cheap. In many cases reservoirs are not needed and projects such as Chukha can produce up to 336 MW of electricity from a run-of-the-river facility costing US$235 million. ^1/ India provides a virtually unlimited market for future production. The Chukha facility was financed by Indian aid in exchange for guaranteed exports at a low fixed price (except for ad hoc adjustments for inflation). This approach has assured Bhutan of steady revenue flows without the financial and technical risk.

At present, two mid-sized hydropower plants (Basochu and Kurichu) are being developed largely to supply domestic power needs, and the feasibility study for the next major project (Tala, also known as Chukha II) has been completed. ^2/ In a recent study the World Bank noted that although the option of a Chukha-style financing model should continue to be explored for future projects, Bhutan should also move toward commercializing its power sector and consider mobilizing private financing. This approach would open up more options and increase the probability that viable projects would be financed. In addition, the power sector’s contribution to the budget could be increased by raising domestic tariffs to achieve full cost recovery. ^3/

Development of the power sector has enabled growth of allied energy-intensive industries. Albeit from a small base, the manufacturing sector is estimated to have grown by an average of 18 percent per year since 1985. This growth has been the result primarily of a large discrete increase in industrial output from three industrial plants (Penden Cement, Bhutan Carbide and Chemicals, and Bhutan Board Products). Bhutan Ferro Alloys (a large ferro-silicon plant) also began production this year. ^4/ In addition to these plants, industrial production is concentrated in the wood industry, the vegetable and fruit-based industry, and alcohol and beverage manufacturers. The capacity of the Penden cement plant is expected to be doubled by mid-1996, and toward the end of this decade a new cement plant (Dungsum) is expected to begin production. The industrial sector, however, remains narrow and fairly underdeveloped, but with considerable potential.

In an effort to foster an efficient and dynamic commercial and industrial sector in Bhutan, the government embarked on a program of privatization in the early 1990s. Between 1990/91 and 1994/95 the cumulative sale of government shares in public corporations was equal to Nu 392 million (an average of just over 1 percent of GDP per year). As a result of this program, government holdings in a number of corporations have been significantly reduced (Table 6). In addition, gypsum, slate and coal mines have been semi-privatized. Those enterprises that are considered not ready for privatization have been corporatized (e.g., Druk Air, the national airline) to provide management more flexibility. In part due to Bhutan’s rudimentary financial markets and limited entrepreneurial experience, the privatization process has lost momentum in recent years. The authorities, however, remain committed to continuing with privatization as and when the absorptive capacity of the domestic private sector permits. In this connection, a more flexible approach to foreign investment would be beneficial not only for the privatization program, but would also provide access to modern technology and management skills that are in short supply.

Table 6.

Bhutan: Government Holdings in Selected Public Corporations

(In percent)

Source: Ministry of Trade and Industry.

^1/As of June 1995.

^2/The Army Welfare Project comprises of three distilleries.

Table 6.

Bhutan: Government Holdings in Selected Public Corporations

(In percent)

	Initial holdings	Present holdings 1/
Bhutan Carbide and Chemicals	…	0.0
Bhutan Fruit Products	…	0.0
Bhutan Tourism Corporation Ltd.	100	6.7
Bhutan Board Products Ltd.	85	23.9
Bhutan Ferro Alloys Ltd.	25	25.0
Bhutan Polythene Company	100	39.9
Gedu Wood Manufacturing Corporation	100	48.1
Penden Cement Authority	100	68.7
Army Welfare Project 2/	100	100.0
Bhutan Logging Corporation	100	100.0

Source: Ministry of Trade and Industry.

^1/As of June 1995.

^2/The Army Welfare Project comprises of three distilleries.

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Table 6.

Bhutan: Government Holdings in Selected Public Corporations

(In percent)

	Initial holdings	Present holdings 1/
Bhutan Carbide and Chemicals	…	0.0
Bhutan Fruit Products	…	0.0
Bhutan Tourism Corporation Ltd.	100	6.7
Bhutan Board Products Ltd.	85	23.9
Bhutan Ferro Alloys Ltd.	25	25.0
Bhutan Polythene Company	100	39.9
Gedu Wood Manufacturing Corporation	100	48.1
Penden Cement Authority	100	68.7
Army Welfare Project 2/	100	100.0
Bhutan Logging Corporation	100	100.0

Source: Ministry of Trade and Industry.

^1/As of June 1995.

^2/The Army Welfare Project comprises of three distilleries.

2. Agriculture and forestry

Agriculture, livestock, and forestry have grown modestly and their share in measured output has declined to less than half of GDP. ^1/ These activities, however, still provide employment for over three-quarters of the population. Maize is the largest crop accounting for 55 percent of foodgrain production, while paddy accounts for 33 percent. Cash crops such as oranges, apples, and cardamom are increasing in importance; horticulture is seen as having good potential for export. Livestock is a major component of farming in Bhutan, providing draught power, manure to fertilize the land, meat and milk to supplement the diet, and an important form of savings.

Improved agricultural performance could make a substantial contribution to improving living standards since the majority of Bhutan’s people live in rural areas and are dependent on farming as the sole source of income. World Bank studies have noted that there should be considerable scope to raise agricultural productivity and incomes as irrigation and mechanization are not widespread and use of high-yielding crop varieties is limited. ^2/ These aspects are now receiving higher priority in the authorities’ five year plans, with particular attention on research and extension, input support services (including privatization of these services to the extent possible), manpower training, development of marketing infrastructure (especially to boost cash crop production), and better land use planning.

Forestry in Bhutan is important not only as a source of income but also as a habitat for flora and fauna. A recent land use planning survey indicated that about 73 percent of land area is under forest cover. The authorities’ objective is to sustain a minimum 60 percent forest cover in order to preserve the rich bio-diversity and natural environment. Forestry presently accounts for over 10 percent of GDP, and contributes about 3 percent to government revenues through forest royalties and sales revenue. Wood and wood products also constitute about 15 percent of exports, the largest item after electricity and agricultural products. ^3/

World Bank analysis suggests that there may be scope for additional commercial development of Bhutan’s timber resources on an environmentally sustainable basis. Allocating more resources to the preparation of forest management plans (FMPs) and monitoring industrial forest concessions more closely will enable the government to better utilize this renewable natural resource. ^1/ In addition, improving the regulatory environment and removing domestic price controls on wood that currently encourage excessive use would increase the efficiency of local industry, free up administrative resources for forest protection, and increase forestry…s contribution to government revenues. There is also considerable scope to contract out the logging activities and other functions of the Forest Services Division to encourage the private sector and reduce overhead. In sum, policies of this nature could make a significant contribution to Bhutan’s goal of environmentally sustainable growth and development.

3. Tourism

Tourism makes a very small contribution to Bhutan’s economy. Although there is no official limit on the number of tourists allowed in the country, tourist arrivals are regulated through royalties and the policy of requiring all private visitors to participate in guided or package tours. Tourist arrivals have been limited in part because of infrastructure constraints during the spring and autumn when the Thimphu and Paro festivals take place and the weather is at its best, but also in order to prevent the culture of a small country from being overwhelmed. In 1994, only 4,000 tourists visited the country generating earnings of US$4 million, of which US$1.4 million (35 percent) was received by the government as royalty (Table 7). ^2/ While continuing with the principle of higher value-lower volume tourism, the authorities are developing a strategy to spread tourist arrivals more evenly throughout the year to make better use of available capacity which is underutilized during the off-season. As in other areas, a more flexible foreign investment policy would help enhance Bhutan’s tourism infrastructure.

Table 7.

Bhutan: Tourist Arrivals and Earnings

(In millions of U.S. dollars)

Source: Tourism Authority of Bhutan.

^1/Based on 35 percent royalty.

Table 7.

Bhutan: Tourist Arrivals and Earnings

(In millions of U.S. dollars)

Year	Total tourists	Earnings	Government revenue 1/
1994	3,971	3.97	1.39
1993	2,984	3.23	1.13
1992	2,748	3.31	1.16
1991	2,106	2.00	0.70
1990	1,538	1.91	0.67

Source: Tourism Authority of Bhutan.

^1/Based on 35 percent royalty.

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Table 7.

Bhutan: Tourist Arrivals and Earnings

(In millions of U.S. dollars)

Year	Total tourists	Earnings	Government revenue 1/
1994	3,971	3.97	1.39
1993	2,984	3.23	1.13
1992	2,748	3.31	1.16
1991	2,106	2.00	0.70
1990	1,538	1.91	0.67

Source: Tourism Authority of Bhutan.

^1/Based on 35 percent royalty.

4. Conclusion

Bhutan remains a poor country with an urgent need to raise the living standards of its people. Excluding the discrete jumps in the level of output due to major new power and industrial projects, the underlying growth rate of the economy is estimated to be about 4 percent per year. Thus, the main challenge over the medium term is to improve the growth potential of the economy. There is considerable scope for raising underlying growth while protecting Bhutan’s environment and cultural traditions. As noted above, raising agricultural productivity and incomes is critical as this is the sector which employs the bulk of Bhutan’s population. More generally, equitable growth will require broadening the productive base and a increasing the contribution of the private sector which remains underdeveloped.

The government has initiated a number of schemes to nurture private sector development. For example, it has provided assistance and training to potential entrepreneurs, conducted feasibility studies for projects, and helped to establish industrial estates. Although these are important steps in Bhutan’s circumstances, the absence of transparent and liberal “rules of the game” will continue to have serious negative consequences for private sector operations by increasing costs and creating uncertainty. This situation also has spillover effects on financial institutions as they find limited lending opportunities in the economy. Fostering a more dynamic private sector--especially small and medium scale ventures--and increasing its contributions to growth will require a reduction in the pervasive controls on economic activity, a strengthening of the incentive structure based on market forces, and greater outward orientation.

(A) Financial Relations

II. General Department

(a)	Quota:	SDR 4.5 million
(b)	Total Fund holdings of ngultrum:	SDR 3.93 million (87.3 percent of quota)
(c)	Fund credit:	None
(d)	Reserve tranche position:	SDR 0.57 million (12.7 percent of quota)
(e)	Current operational budget:	Not applicable
(f)	Lending to the Fund:	Not applicable

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(a)	Quota:	SDR 4.5 million
(b)	Total Fund holdings of ngultrum:	SDR 3.93 million (87.3 percent of quota)
(c)	Fund credit:	None
(d)	Reserve tranche position:	SDR 0.57 million (12.7 percent of quota)
(e)	Current operational budget:	Not applicable
(f)	Lending to the Fund:	Not applicable

III. Current Stand-By or Extended Arrangement and Special Facilities

None.

IV. SDR Department

(a)	Net cumulative allocations:	None
(b)	Holdings:	SDR 0.43 million
(c)	Current Designation Plan:	Not applicable

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(a)	Net cumulative allocations:	None
(b)	Holdings:	SDR 0.43 million
(c)	Current Designation Plan:	Not applicable

V. Administered Accounts

(a)	Trust Fund loans
	(i) Disbursed:	None
	(ii) Outstanding:	None
(b)	SFF Subsidy Account:	Not applicable

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(a)	Trust Fund loans
	(i) Disbursed:	None
	(ii) Outstanding:	None
(b)	SFF Subsidy Account:	Not applicable

VI. Overdue Obligations to the Fund

None.

VII. Country has not used Fund resources to date

(B) Nonfinancial Relations

VIII. Exchange arrangement

Since its introduction in 1974, the ngultrum has been pegged to the Indian rupee at a rate of Nu 1 = Rs 1.

IX. Last Article IV Consultation

Staff discussions were held during June 23-July 2, 1994 (SM/94/245, 9/15/94). Utilizing the short-form summing up, the Executive Board adopted the following decision on October 17, 1994:

1. The Fund takes this decision in concluding the 1994 Article XIV consultation with Bhutan, in light of the 1994 Article IV consultation with Bhutan conducted under Decision No. 5392-(77/63), adopted April 29, 1977, as amended (Surveillance over Exchange Rate Policies).

2. The restrictions on the making of payments and transfers for current international transactions described in SM/94/245 are maintained by Bhutan in accordance with Article XIV, Section 2. In view of the continued strength of the external reserve position, the Fund encourages the authorities to administer these restrictions in a liberal manner and to eliminate them as soon as circumstances permit.

X. Technical Assistance

a. CBD/MAE

Technical assistance was provided in setting up the Royal Monetary Authority of Bhutan in 1983. A technical expert from CBD worked as General Advisor for operations with the RMA from August 1982 until August 1986. A second technical expert was assigned in August 1983 to work as an Advisor for Research and Statistics for a period of one year. In October 1984, a new Advisor for Research and Statistics took up the assignment which ended in 1988. A second General Advisor for operations completed his term in January 1992. A mission visited Bhutan in May 1989 to review the financial system, and another mission visited in February 1991 to consult with the authorities on new financial sector legislation, including the development of supervisory capabilities. A technical expert was assigned in July 1991 to work as an Advisor for Bank Supervision. An MAE mission visited Thimphu in June-July 1992 to advise the RMA on the issuance of government securities. A technical expert has been assigned since July 1993 to implement the mission’s recommendations.

b. Fiscal

Two FAD missions visited Bhutan (in April 1982 and June 1983) to provide assistance on tax policy, budgeting, and accounting. An FAD expert participated in the Legal Department mission in April 1984. In November 1984, an expert from the FAD panel was assigned as General Fiscal Advisor to the Ministry of Finance. The assignment was extended for two more years. A new General Fiscal Advisor began a one-year term in April 1988; this assignment was subsequently extended through October 1989. A three-member technical assistance mission, which visited Bhutan during November-December 1987, completed a report on the tax system and public enterprises; a follow-up mission visited Bhutan during July 7-14, 1989. A technical assistance mission on income taxation visited Bhutan during June 14-29, 1992.

c. Legal

Several visits by a staff member of the Legal Department took place during 1982-84 in connection with the drafting of tax legislation.

d. Statistics

A mission from the Statistics Department visited Bhutan in September 1988 to review trade statistics. During April 24-May 6, 1990, a multitopic mission visited Bhutan to review the statistical database.

e. IMF Institute

An Institute course on financial programming was held in Thimphu during April 24-May 8, 1991.

XI. Resident Representative/Advisor

None.