Come December 2023, and Bhutan would graduate from the least developed countries (LDC) category and become a lower middle-income country.
The country has officially entered into the preparatory period of five-years to graduate from the LDC category that will end on December 13, 2023.
Foreign minister Dr Tandi Dorji announced this development at the Friday Meet yesterday.
The 73rd session of the United Nations General Assembly (UNGA) on December 13 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.
The resolution for Bhutan’s graduation was endorsed by the UNGA.
UN’s Committee for Development policy found reasonable Bhutan’s request to align its effective graduation date with 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, with the support of the UN system and in cooperation with its bilateral, regional and multilateral development and trading partners.
Lyonpo Dr Tandi Dorji said the government welcomes the progression towards 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.
The foreign minister said the 12th Five Year Plan is the last plan as a LDC and shall 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 is based on three criteria – gross national income (GNI) per capita, human assent index (HAI) and 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 regardless of its HAI and EVI scores. To be recommended for graduation, a country must be found eligible at two successive triennial reviews.
What does this mean?
During the round table meeting in November last year, a United Nations Economic and Social Commission for Asia and Pacific (UNESCAP)’s official said 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 case of Bhutan, the trade scenario would be largely unaffected because its main trading partner is India and doesn’t have much trade with other countries.
Graduating from LDC indicates that the country is doing well with a stable political and social setting, which could attract FDI.
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 2B, is going to be a huge challenge.
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 composition of the Official Development Assistance (ODA.)
A graduated country loses access to multilateral LDC specific funds. In trade, graduation could imply a loss of duty free access to foreign markets.
During the transition phase, Bhutan can avail of funds through various funding windows from the UN to support smooth transition to the middle income.
However, the country is expected not to bear immediate impact as it still has the support of bilateral relationships such as India and Japan.
Most of the multilateral development partners have already phased out.
Prime Minister Dr Lotay Tshering said that graduation is an achievement of long-term visionary leadership and plans since the 1960s.
“I’m highly cognizant and appreciative of the measured steps 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 GNI per capita is USD 2,277 while the requirement is USD 1,242 (three-year average), and the HAI score improved from 45 in 2000 to 67.9 today. While Bhutan easily meets two of the three criterion, economic vulnerability index remains a challenge.
Bhutan’s EVI improved from 43.04 in 2000 to 40.2 today. Higher the EVI, 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. Bhutan’s economy has a larger share of agriculture, forestry and fisheries in Gross Domestic Product, which implies higher exposure to shocks, both in relation to terms of trade and to natural disasters.
“With a highly fragile mountain eco-system, Bhutan is increasingly prone to natural disasters that have negative impacts on economic progress and pose a major challenge to development of strategic infrastructure,” the GNHC review report stated.
On the trade side, 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 health and education since 2003.
The graduating country, however, is normally given a grace period o three years before graduation takes 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, so that the planned loss of LDC status does not disrupt the socioeconomic progress of the country.
Bhutan has been categorised as a LDC since the establishment of this categorisation by the UNGA in 1971.