Bhutan Enters ‘Preparatory Period’ Of Five Years To Graduate From Its Least Developed Countries Status

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The 'preparatory period' will end on 13 December 2023.

Students in Bumthang, Bhutan climbing trees. (Source: Hai Piano)

 

By Tshering Palden | Kuensel

Come December 2023, Bhutan is slated to graduate from the least developed countries (LDC) category to become a lower middle-income country.

Bhutan has officially entered into the preparatory period of five-years to graduate from the LDC category that will end on 13 December 2023.

The country has been categorised as a LDC since the establishment of this categorisation by the United Nations General Assembly (UNGA) in 1971.

Foreign Minister, Dr Tandi Dorji announced this development at the Friday Meet on 14 December.

The 73rd session of the UNGA, held on 13 December considered the report of the ‘Economic and Social Council’ on Bhutan’s graduation from the LDC category at the United Nations headquarters in New York.

Bhutan’s graduation from the LDC category should coincide with the end of the 12th Plan

The resolution for Bhutan’s graduation was then endorsed by the UNGA. The UN’s Committee for Development policy found it ‘reasonable’ for Bhutan to align its effective graduation date at the end of the 12th Plan in 2023.  

During the 12th Plan or between the adoption of the resolution and its graduation from the LDC category, Bhutan needs to prepare its national smooth-transition strategy.

Support will be given by the UN system, in cooperation with its bilateral, regional and multilateral development and trading partners.

 

Source: Hello Magazine

 

Lyonpo Dr Tandi Dorji said that the government welcomes the progression towards the eventual graduation from the LDC category.

“This is a testament to the achievements made by Bhutan in its socio-economic development and the fruitful collaboration with its development partners,” he said.

Bhutan wants to graduate from the LDC category on a sure footing

The Foreign Minister said the 12th Five Year Plan is the last plan with Bhutan as a LDC. It will address the last mile challenges in all sectors and ensure that Bhutan graduates on a sure footing with a strong economy.

Bhutan had met the graduation criteria for the first time at the triennial review in 2015, and again in 2018, making it eligible to be recommended for graduation by the CDP.

The assessment was based on three criteria – Gross National Income (GNI) per capita, human assessment index (HAI) and the economic vulnerability index (EVI).

The thresholds for the three criteria for graduation are a GNI per capita of USD 1,242 or more, which is based on a three-year average; a HAI score of 66 or more; and an EVI score of 32 or below.

A country becomes eligible for graduation if it meets the threshold levels for graduation for at least two of the three criteria.

A country also becomes eligible for graduation under the ‘income only rule’ if its GNI per capita exceeds at least twice the established threshold level regardless of its HAI and EVI scores.

To be recommended for graduation, a country must be found eligible at two successive triennial reviews.

During the round table meeting in November last year, a United Nations Economic and Social Commission for Asia and Pacific (UNESCAP)’s official said that Bhutan is on the cusp of graduation and has more to gain.

When countries graduate, an element they lose in the transition period is the preferential access to markets mainly in developed economies. But in the case of Bhutan, the trade scenario would be largely unaffected because its main trading partner is India and it does not have much trade with other countries.

What graduation from the LCD category would entail for Bhutan

Graduating from the LDC category indicates that the country is doing well, with a stable political and social setting, which could attract more Foreign Direct Investments (FDIs).

However, as the country’s small population is spread thinly across the country, the per capita cost for building infrastructure and the per capita cost for delivering services is much higher than it is in most other countries. This, for an economy of only USD 2 billion, is going to be a huge challenge.

 

Source: Asian Development Bank 

 

One of the three indexes, economic vulnerability is a major concern, given Bhutan’s heavy dependence on hydropower.  Bhutan has a high level of public debt and a financing gap will continue for the foreseeable future.

However, on the brighter side, the 12th Plan is expected to facilitate the leap of graduation. In its quest to become a low middle-income country, the implication could translate into change in modalities and the composition of the Official Development Assistance (ODA.)

A graduated country loses access to multilateral LDC specific funds. In trade, graduation could also imply a loss of duty-free access to foreign markets.

Support that Bhutan can look forward to during the transitional phase

During the transitional phase, Bhutan can still avail of funds through various funding windows from the UN to support a smooth transition to the middle income category.

However, the country is expected not to bear immediate impact as it still has the support of bilateral relationships with countries such as India and Japan. Most of the multilateral development partners have already been phased out. 

Prime Minister Dr Lotay Tshering said that the graduation is an achievement of the long-term visionary leadership and plans that have been implemented since the 1960s.

“I’m highly cognizant and appreciative of the measured steps that our visionary Kings have taken,” he said.

“The government will not spring to celebrating as yet; the main factor being that we haven’t graduated.”

Bhutan’s improvement so far in meeting the criteria for LDC graduation

Bhutan’s GNI per capita is USD 2,277 while the requirement for LDC graduation is USD 1,242 (three-year average). Its HAI score improved from 45 in 2000 to 67.9 today. While Bhutan easily met two of the three criterion, the economic vulnerability index remains a challenge.

Bhutan’s EVI improved from 43.04 in 2000 to 40.2 today. The higher the EVI, the higher is the economic vulnerability of a country.

As per the Gross National Happiness Commission’s (GNHC) review paper in 2013, Bhutan is faced with a narrow economic base and high dependency on external trade.

 

Source: DrukAsia

 

Bhutan’s economy has a larger share of agriculture, forestry and fisheries for its Gross Domestic Product, which implies higher exposure to shocks, both in relation to terms of trade and to natural disasters.

Some of the potential challenges which Bhutan face

“With a highly fragile mountain eco-system, Bhutan is increasingly prone to natural disasters that have negative impacts on economic progress and it could pose a major challenge to the development of strategic infrastructure,” the GNHC review report stated.

Concerning trade, it was stated that Bhutan is heavily dependent on hydropower exports, which are highly vulnerable to hydrological and climatic risks aggravated by India being a monopsony buyer.

“It is unlikely therefore, that Bhutan will meet the EVI graduation threshold for some time,” the review paper states.

However, the recommendation is based on the fact that per capita income almost tripled and Bhutan continues to perform very well in the health and education sectors since 2003.

The graduating country, however, is normally given a grace period of three years before graduation takes full effect.

This period, during which the country remains an LDC, is designed to enable the country and its development and trading partners to agree on a smooth-transition strategy. This is to ensure that the planned loss of LDC status does not disrupt the socio-economic progress of the country.

 

This article first appeared in kuensel  and has been edited for the Daily Bhutan.

 


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