BT: DPC 2

closed

The development objectives of the Second Development Policy Credit Program (DPC2) for Bhutan are: (i) promoting government efficiency and effectiveness through sound fiscal and public financial management and procurement, and a strong public administration; (ii) fostering private sector development by improving the policy environment and facilitating productive employment opportunities; and (iii) expanding access to infrastructure in a sustainable manner. The DPC2 reinforces reform areas supported by the First Development Policy Credit (DPC1) and builds the earlier policy-based operations. The DPC2 is aligned with World Bank's strategic directions set out in the Country Partnership Strategy (CPS, FY11-14). The main risks are: (a) aggregate demand pressures could linger resulting in persistent rupee shortage. Mitigating factors include: recent monetary and fiscal tightening; a calibration of capital spending by the Royal Government of Bhutan, or RGoB based on foreign grants or loans; and commitment at high levels of the RGoB (in close coordination between Ministry of Finance, the Royal Monetary Authority, in consultation with the World Bank) to targets as evidenced by quarterly review of macroeconomic performance. The expansion of the existing line of credit with the Government of India as well as the currency swap arrangement should help ease pressures on the rupee; (b) capacity constraints due to the small scale of government, mitigated by the RGoB's ongoing capacity building efforts (in many areas supported by development partners); and (c) political risk of changing government priorities, mitigated by the RGoB's wide consultations on the development agenda and its commitment to sustaining reforms.