Independent Evaluation Group (IEG) Implementation Completion Report (ICR) Review Bhutan - DPC (P175758) Report Number: ICRR0023743 1. Operation Information Operation ID Operation Name P175758 Bhutan - DPC Country Practice Area (Lead) Bhutan Macroeconomics, Trade and Investment Non-Programmatic DPF L/C/TF Number(s) Closing Date (Original) Total Financing (USD) IDA-69280 30-Jun-2022 34,865,892.00 Bank Approval Date Closing Date (Actual) 23-Jun-2021 30-Jun-2022 IBRD/IDA (USD) Co-financing (USD) Original Commitment 35,000,000.00 0.00 Revised Commitment 35,000,000.00 0.00 Actual 34,865,892.00 0.00 Prepared by Reviewed by ICR Review Coordinator Group Alma Pekmezovic Jennifer L. Keller Gabriela Chamartin Escobar IEGEC 2. Program Objectives and Pillars/Policy Areas DEVOBJ_TBL a. Objectives The project development objective (PDO) of the Development Policy Financing (DPF) for Bhutan (the operation) was to strengthen policies for economic resilience and environmental sustainability and enhance programs to address the economic, social and health impact of COVID-19, (Project Document (PAD) p. iii). The PDO was not stated in the Financing Agreement. Page 1 of 20 Independent Evaluation Group (IEG) Implementation Completion Report (ICR) Review Bhutan - DPC (P175758) For the purposes of this ICR review, the PDO is taken as:  PDO 1: strengthen policies for economic resilience;  PDO 2: strengthen policies for environmental sustainability; and  PDO 3: enhance programs to address the economic, social and health impact of COVID-19. b. Pillars/Policy Areas The DPC was structured around two main pillars:  Pillar 1: (i) Strengthening policies for economic resilience; and (ii) strengthen policies for environmental sustainability;  Pillar 2: Enhancing programs to address the economic, social and health impact of COVID-19. The pillars correspond with the three objectives of the operation. c. Comments on Program Cost, Financing and Dates The DPC operation consisted of a disbursement of USD $34.9 million and was approved on 23 June 2021. It became effective on 24 June 2021. The operation closed on 30 June 2022 (as planned). 3. Relevance of Design a. Relevance of Objectives Country Context and Background: The COVID-19 Crisis Response Development Policy Credit was developed against the backdrop of the global pandemic, which imposed both a health emergency and an economic crisis on Bhutan. Despite the prompt efforts of the Royal Government of Bhutan (RGoB) to control infections and alleviate economic repercussions, there was a pressing need to facilitate the COVID-19 vaccine rollout, create fiscal space to safeguard households and businesses, and set the stage for recovery. Prior to the pandemic, Bhutan had experienced robust economic growth, but the crisis resulted in 2.3 percent and 3.3 percent GDP declines in FY19/20 and FY20/21, respectively. Tourism and industrial sectors were severely affected, and nationwide lockdowns disrupted consumption and investment. Government interventions helped mitigate the impact on vulnerable populations, although fiscal deficits and rising public debt ensued due to increased spending and reduced tax revenue. The establishment of the National Resilience Fund and external grants provided some relief, while an expedited vaccination program aimed to stabilize the situation. In this context, the stand-alone crisis response DPC operation had a primary focus of alleviating the fiscal, economic, and social ramifications caused by the COVID-19 crisis. It was designed in accordance with the World Bank Group's (WBG) COVID-19 Crisis Response Approach Paper (June 2020), with direct emphasis on addressing four core pillars: i) preserving lives, ii) safeguarding the well-being of the impoverished and vulnerable, iii) fostering sustainable business growth and job creation, and iv) enhancing policies, institutions, Page 2 of 20 Independent Evaluation Group (IEG) Implementation Completion Report (ICR) Review Bhutan - DPC (P175758) and investments to facilitate a more resilient recovery. This operation sought to provide crucial financial support to the RGoB as it grappled with the social and economic repercussions of COVID-19 while also tackling Bhutan's underlying structural challenges on the path to a robust recovery. Alignment with prior DPC series and Country Partnership Framework (CPF) for FY21-FY24: This operation was conceived as a continuation of the preceding DPC series and closely aligned with the objectives set forth in the Country Partnership Framework (CPF) for FY21-FY24. It aimed to advance reforms related to fiscal management and growth, building upon initiatives initiated in the earlier Strengthening Fiscal Management and Private Sector Employment Opportunities DPC series. The operation was harmonized with Bhutan's CPF goals, which focus on enhancing economic and environmental resilience and fostering human capital development. Specifically, the operation bolstered economic resilience through support for the implementation of the Goods and Services Tax (GST), efforts to enhance debt transparency, improvements in debt management, the adoption of a new national tourism policy, and the establishment of a new credit guarantee scheme. It also contributed to environmental resilience by promoting environmental standards and low emission strategies within human settlement and industry sectors. Furthermore, the operation played a role in advancing human capital development by facilitating the distribution of the second dose of COVID-19 vaccines through the COVAX facility and supporting initiatives to combat gender-based violence. Alignment with the Sustainable Development Finance Policy (SDFP) (2020) and Bhutan’s Performance and Policy Actions (PPA) Matrix: Additionally, the operation was in alignment with the SDFP and lent support to actions outlined in Bhutan's PPA matrix. Thus, Bhutan’s 2016 Public Debt Policy mandates the preparation of a debt management strategy to ensure that borrowing is consistent with sustainable debt level targets. According to the 2016 Public Expenditure and Financial Accountability (PEFA) report, Bhutan performed poorly on “transparency of government in relation to fiscal reporting” because key documents— such as in-year budget execution reports—were not disclosed to the public. (PD, p. 14). As part of the FY21 PPAs, in alignment with the SDFP, the publication of quarterly fiscal accounts and debt reports (supported by the DPC) was considered to play a crucial role in enhancing oversight over public spending and increasing debt transparency. b. Relevance of Prior Actions Rationale The operation consisted of three objectives and ten PAs. PAs 1-4 were in line with Objective 1 (to strengthen policies for economic resilience); PAs 5-7 supported Objective 2 (to strengthen policies for environmental sustainability), and PAs 8-10 supported Objective 2 (to enhance programs to address the economic, social and health impact of COVID-19). Table 1: Prior Actions and the indicative triggers (ITs) PDO1: Strengthen policies for economic resilience PA1: To strengthen domestic resource mobilization, the government enacted the new GST Act on January 16, 2020, replacing the previous sales tax with a value-added tax system set to be implemented from July 2021. PA2: To enhance debt transparency and management, The Ministry of Finance has published (i) quarterly fiscal accounts for Q1 FY2020/21 and Q2 FY2020/21 and (ii) quarterly debt reports Page 3 of 20 Independent Evaluation Group (IEG) Implementation Completion Report (ICR) Review Bhutan - DPC (P175758) with debt profile, cost and risk indicators (covering central government and central government- guaranteed debt) for Q1 FY2020/21 and Q2 FY2020/21. PA3: To strengthen the connection between borrowing and macroeconomic policy, the Government adopted and publicly released a Debt Management Strategy for the fiscal years FY2020/21-FY2022/23, which received approval from the Minister of Finance and outlined specific objectives for both domestic and external borrowing, as well as a comprehensive assessment of the preceding debt strategy, in accordance with the provisions of the Public Debt Policy 2016. PA4(i): To facilitate the recovery of Bhutan's vital tourism sector, the Cabinet approved a new 2021 National Tourism Policy, supported by the DPC, with an accompanying action plan guiding its implementation. PA4(ii): To support the recovery of the tourism sector, as part of PA#4, the Government enacted the Tourism Levy Act 2020. PDO2: Strengthen policies for environmental sustainability PA5: To reduce greenhouse gas emissions and air pollution, the National Environment Commission (NEC) has adopted the Environmental Standards 2020. PA6: To identify suitable policy pathways to decouple economic growth from greenhouse gas emissions, the Ministry of Economic Affairs has approved the Low-Emission Development Strategy for the Industrial Sector. PA7: To reduce greenhouse gas emission, the Ministry of Works and Human Settlement has approved the Low-Emission Development Strategy for Human Settlements. In addition to these efforts, the government has promoted the use of electric cars to address the pollution from the transportation sector. Moreover, the government adopted a new Biodiversity Strategy and Action Plan and a Biological Corridor to preserve biodiversity. PDO3: Enhance programs to address the economic, social and health impact of COVID- 19 PA8: To support the flow of credit to cottage and small industries, (i) the Cabinet has approved the establishment of the National Credit Guarantee Scheme (NCGS), and (ii) the Ministry of Finance has approved a monitoring and evaluation framework for the NCGS. PA9: The Ministry of Health has approved the National COVID-19 Vaccine Deployment Plan to establish the institutional framework for effective COVID-19 vaccine deployment. PA10: The National Commission for Women and Children (NCWC) has approved the Gender and Child Protection Emergency Preparedness and Response Plan During COVID-19 Pandemic to address gender-based violence and provide child protection. PDO 1: To strengthen policies for economic resilience. PA1 was strategically designed to achieve greater economic resilience in Bhutan. Specifically, its primary objective was to enhance economic resilience by implementing the Goods and Services Tax (GST), with the aim of strengthening domestic resource mobilization. Prior to the implementation of this action, Bhutan faced a situation where revenue earnings from the hydropower sector were subject to volatility, and the anticipated decline in overseas development aid (ODA) grants due to LDC graduation added further fiscal challenges. The GST reform was envisioned as a solution to improve tax collection from the non-hydropower sector, providing an essential source of additional revenue. This, in turn, was expected to contribute significantly to bolstering fiscal sustainability and Page 4 of 20 Independent Evaluation Group (IEG) Implementation Completion Report (ICR) Review Bhutan - DPC (P175758) macroeconomic stability in Bhutan. This low and volatile revenue collection significantly hampered the government’s ability to respond promptly and adequately to economic shocks. The approval of the rules and regulations for the GST, as outlined in PA 1, was regarded as a pivotal step in fortifying domestic revenue streams, ultimately facilitating the diversification of Bhutan's resource base and strengthening its economic resilience amidst external uncertainties and challenges. This situation underscored the urgent need for a stable revenue source, making PA1 essential for Bhutan's economic stability and resilience. In addition, by diversifying the revenue base, PA1 sought to create a stable and sustainable source of income for the government. Rating PA1=Satisfactory. PA2 aimed to enhance financial reporting in Bhutan, addressing several pre-existing challenges. Prior to its implementation, Bhutan faced issues highlighted in the 2016 Public Expenditure and Financial Accountability (PEFA) report, particularly concerning the transparency of government. Key documents, such as in-year budget execution reports, were not disclosed to the public. While the Royal Monetary Authority (RMA) published quarterly debt statistics on external PPG debt, there was room for improvement in disclosing information on domestic debt. Although Bhutan had made strides in debt management, anchored by the 2016 Public Debt Policy, there remained a need to strengthen risk assessments and public debt monitoring. The publication of quarterly fiscal accounts and debt reports for Q1 FY2020/21 and Q2 FY2020/21, as outlined in PA2, was regarded as a step toward enhancing oversight over public spending and increasing debt transparency. However, these one-off measures fell short of a statutory requirement that would have institutionalized the regular publication of debt reports. Rating PA2=Moderately Satisfactory. PA3 represented an effort to enhance debt transparency and management. It entailed the publication of the Debt Management Strategy (DMS) for the fiscal years FY2020/21-FY2022/23, which received approval from the Minister of Finance. The DMS strategy included well-defined targets for both domestic and external borrowing and involved a comprehensive review and assessment of the prior debt strategy, aligning with the guidelines set forth in the Public Debt Policy of 2016. Prior to the adoption of PA3, Bhutan did not have a DMS which contributed to it receiving a “Red” score on the World Bank Transparency Heatmap of 2022. PA3 was one of Bhutan's Performance and Policy Actions (PPA) under the SDFP. The adoption and publication of this DMS were intended to strengthen the connection between borrowing activities and macroeconomic policy, thereby fostering a more coherent and effective approach to managing the country's debt. However, coherence is a function of the content of the strategy not the publication of a strategy. And while improved debt transparency has intrinsic value of its own, its direct link to improved economic resilience in Bhutan is not clear. Rating PA3=Moderately Satisfactory. PA4 was primarily designed to contribute to the recovery of the tourism sector, a vital component of Bhutan's economy that had been severely affected by the pandemic. The prior action centered on the approval of the Tourism Policy and the enactment of the Tourism Levy Act 2020, which were expected to play a pivotal role in revitalizing the tourism industry. Prior to these actions, Bhutan for many years followed a ‘low volume, high value tourism’ policy, with higher fee for non-regional tourists compared to regional ones (from India and Bangladesh), indicating a preference for the former. The tourism policy led to issues such as overcrowding at tourist sites, uneven distribution of tourism benefits, declining hospitality quality, revenue loss from regional tourists, and limited revisitation rates. Page 5 of 20 Independent Evaluation Group (IEG) Implementation Completion Report (ICR) Review Bhutan - DPC (P175758) The new 2021 National Tourism Policy, supported by PA4, Part 1, was intended to address these challenges. The policy envisages the establishment of regional tourist information centers as well as the establishment of guidelines and standard operating procedures to regulate, among other things, vehicles used for tourism, the management of tourism waste and the opening of new tourism sites, and the development of a statistical system to better manage the sector (thereby also contributing to environmental sustainability. The policy's implementation was guided by a comprehensive action plan, including the expansion of the pricing system to regional markets through the Tourism Levy Act 2020 (PA4, Part 2). These measures were expected to create the groundwork for sustainable growth in the tourism sector, promoting geographic and seasonal diversification. They aimed to mitigate climate change by reducing the number of tourists, as concerns about air pollution in certain areas were emerging. Rating PA4=Satisfactory PDO 2: to strengthen policies for environmental sustainability. PA5 was designed to address the emerging challenges of greenhouse gas emissions and air pollution in Bhutan. Despite being a carbon-negative country, Bhutan had experienced an increase in greenhouse gas emissions and pockets of air pollution. To combat these issues, the National Environmental Commission (NEC) took action by approving the National Environmental Standards 2020 which set clear and comprehensive environmental standards to regulate and reduce emissions and pollution, thus contributing significantly to environmental sustainability. PA5 was part of a broader effort, along with PA6 and PA7 to directly enhance environmental sustainability by reducing greenhouse gas emissions and air pollution. Rating PA5=Satisfactory. PA6 was designed to facilitate Bhutan's transition towards a more environmentally responsible industrial sector. Prior to PA6, Bhutan recognized the need to chart a course for decoupling economic growth from greenhouse gas emissions within the industrial domain. With the approval of the Low-Emission Development Strategy for the Industrial Sector (LEDS), Bhutan aimed to institute policy measures that would promote low-emission practices and environmental compliance. This was intended to mitigate climate change and reduce pollution, particularly the presence of Particulate Matter (PM), i.e., PM2.5 and PM10, through the establishment of a low- emission industrial system. The strategy includes mitigation actions which were incorporated into the update to Bhutan’s Nationally Determined Contributions (NDCs). To ensure the implementation of the identified mitigation actions within the LEDS, the actions are expected to be integrated into RGoB’s annual performance agreements between the Prime Minister and the line ministries. Additionally, they are expected to be incorporated into the work plans of these line ministries through the regular budgeting process. Rating PA6= Moderately Satisfactory. PA7 was designed to enhance environmental sustainability within Bhutan's human settlements. Prior to PA#7, Bhutan recognized the imperative of reducing greenhouse gas emissions and promoting low-emission practices within human settlements to mitigate climate change and reduce pollution, particularly PM2.5 and PM10. The approval of the Low-Emission Development Strategy for Human Settlements signaled a step towards achieving these goals. This strategy aimed to identify suitable policy measures that would foster environmentally responsible practices within human settlements while strengthening environmental compliance monitoring. Additionally, Bhutan's commitment to preserving biodiversity was reinforced through the adoption of a new Biodiversity Strategy and Action Plan and the establishment of a Biological Corridor. PA7 was a pivotal element of Bhutan's comprehensive approach to environmental conservation and sustainability within human settlements. Page 6 of 20 Independent Evaluation Group (IEG) Implementation Completion Report (ICR) Review Bhutan - DPC (P175758) The mitigation actions proposed under PA7 have been incorporated into the NDC, annual performance agreements between the Prime Minister and the line ministries, as well as the work plans of relevant line ministries through the regular budgeting process. Rating PA7=Moderately Satisfactory. PDO 3: to enhance programs to address the economic, social and health impact of COVID-19. PA8: Prior to PA8, Bhutan faced the challenge of providing crucial liquidity support to Cottage and Small Industries (CSIs) and self-employed individuals grappling with adverse income shocks. These shocks necessitated short-term assistance to enable these entities to maintain their operations and cover working capital expenses while weathering the economic downturn. Recognizing the potential for lasting economic harm if viable businesses were unable to operate due to short-term liquidity constraints, the RGoB acted by establishing the National Credit Guarantee Scheme (NCGS). PA8, Part 1, of the NCGS offered targeted support to the CSI sector through partial, individual guarantees that covered 70 percent of the approved project loan amount. Initially accessible to clients of Bhutan's three largest public sector banks, PA8, Part 2, focused on the establishment of a robust monitoring and evaluation (M&E) framework developed with technical assistance from the World Bank. This framework was designed to assess the program’s outcomes by monitoring key indicators such as project approval, employment generation, geographical distribution, loan backing, and fiscal impact. This evaluation aimed to identify opportunities for further impact enhancement and ensure the effective support of Cottage and Small Industries during economic challenges. Given the risk aversion within the banking sector towards supporting CSIs during the pandemic, PA8 played a pivotal role in sustaining these industries, safeguarding their access to critical financing, and ultimately contributing to the resilience and survival of Bhutan's cottage and small industries during these challenging times. Rating PA8=Satisfactory. PA9: As part of PA9, the Ministry of Health approved the National COVID-19 Vaccine Deployment Plan to establish the institutional framework for effective COVID-19 vaccine deployment. The National COVID-19 Vaccine Deployment Plan, outlined logistical details, including a comprehensive framework for vaccine allocation. Concrete actions under PA9 included the efficient administration of COVID-19 vaccines. The institutional framework established played a critical role in efficiently administering vaccinations, addressing the health impact of COVID-19 and contributing to the third PDO. The plan incorporated a robust vaccination monitoring system, encompassing the collection and collation of immunization data. Various options for the rollout of this system were provided. Rating PA9=Satisfactory. PA10: This initiative was designed to address the gender-related impacts of the COVID-19 pandemic. The global pandemic's consequences, including lockdowns, economic hardships, and social isolation, led to what has been termed a shadow pandemic of increased violence against women and children worldwide. Bhutan, like many other nations, faced a surge in reported Gender- Based Violence (GBV), which had risen by a staggering 36 percent since the onset of the pandemic. In response to this alarming trend, Bhutan's National Commission for Women and Children (NCWC) approved the Gender and Child Protection Emergency Preparedness and Response Plan. This plan marked a pivotal moment in Bhutan's commitment to addressing the pressing issues of GBV and child protection amid the COVID-19 crisis. PA10 was strategically designed to provide multifaceted support to survivors of GBV and to mitigate the impact of the pandemic on the incidence of GBV. Rating PA10=Satisfactory. Page 7 of 20 Independent Evaluation Group (IEG) Implementation Completion Report (ICR) Review Bhutan - DPC (P175758) Rating Satisfactory 4. Relevance of Results Indicators Rationale PDO 1 had 3 RIs, with RI1 associated with PA1, RI2(a) associated with PA2 and PA3, RI2(b) and RI2(c) associated with PA2 and PA3 respectively, and RI3 associated with PA4. PDO 2 had 2 RIs, with RI4 associated with PA5, and RI5 associated with PA6 and PA7. PDO 3 had 3 RIs, with RI6 associated with PA7, RI7 associated with PA9, and RI8 associated with PA10 respectively. Table 2: Results Indicators (RIs) Actual % Associated RI Baseline Target of RI RI Name Actual PA Relevance (2021) (2022) targeted Achievement changes PDO 1: to strengthen policies for economic resilience RI1: Revenues > BTN 5 collected PA1 S 0.00 0.00 0% Negligible billion under GST Info on loans Info on loans Info on loans Negligible RI2: Score in contracted: contracted: contracted: n/a (Info on loans the World Green (Full Red (N.A.) Red (N.A.) contracted) Bank Debt information) Transparency Heatmap indicators on PA2, PA3 MS Periodicity info on loans Green High (Yellow), Green n/a contracted, (