Graduating into a middle-income country means losing access to multilateral LDC specific funds

UN: Bhutan has surpassed the thresholds on GNI per capita and human asset index, which makes it eligible to graduate from the status of a Least Developed Country (LDC) but its weak achievement in economic vulnerability index will be a challenge that Bhutan needs to pay attention to.

This was revealed during a workshop the UN organized on processes and implications for Bhutan on LDC graduation yesterday in Thimphu.

Having fulfilled the two of the three criterion, Bhutan was considered eligible for graduation in the 2015 triennial review early this year. The earliest that Bhutan could be recommended for graduation is at the 2018 triennial review.

Bhutan would then be invited to present its views on the possibility of graduating to the committee for development (CDP) expert group meeting in 2017.

The CDP may then recommend Bhutan’s graduation in 2018 on the basis of the review. Considering the three-year transition period, Bhutan’s graduation would take place at the end of 2021.

United Nations Conference on Trade and Development’s (UNCTAD) chief of LDCs for Africa division, Mussie Delelegn said

hydro power has been the main driver of the economy but heavy dependence on the current market poses risks.

Thus far, he said increased role of state in formulating and implementing polices guided by GNH principles has improved human asset index (HAI) for Bhutan.

HAI is dependent on undernourishment rate, under five mortality rate, secondary enrolment and literacy rate.

To sustain the country’s HAI, Bhutan needs to improve on reducing undernourishment and literacy.

However, the size, remoteness, trade shocks and natural shocks in the economy are few parameters that the country is confronted with.

“The solution is in economic diversification and structural shift in the economy,” he said.

UNDP’s policy specialist, Yumiko Yamamoto said a country with small population is more vulnerable economically. The country, she said is more exposed to shocks of natural disaster in the primary sectors, such as agriculture.

As for the export concentration, she said, Bhutan is below the average score of LDCs.

However, Mussie Delelegn said the country has been successful in diversifying its economy from primary sector to other sectors, which are less vulnerable to natural and economic shocks.

“Bhutan is in the best of the beginnings,” he said because the country’s economy is strategically oriented in the energy sector, which could fuel other sectors.

For instance, total primary energy supply per capita in the country is well above the average of other developing countries. Share of renewable electricity is 100 percent.

“Many countries in the process of graduation lack basic infrastructure,” he said. In Bhutan’s case, the proportion of paved roads, for instance, is also above the LDC average.

The country would, however need to improve the stability of exports of goods and services in terms of value as well as diversify its manufacturing base.

But in its quest to become a middle-income country, the implication could translate to change in modalities and composition of the (Official Development Assistance) ODA.

“A graduated country loses access to multilateral LDC specific funds,” stated a UN concept note. In trade, graduation could imply a loss of duty free access to foreign markets. But bilateral agreement with India would not be affected and majority of the country’s trade is with India.

On a positive front, the senior program officer of the United Nations Office of the High Representative for the Least Developed Countries, Landlocked Developing Countries and Small Island Developing States (OHRLLS), Susanna Wolf pointed out that development banks do not use LDC status as a criteria for ODA allocation.

She said there are various funding windows from the UN to support smooth transition from LDC to middle income.

UN’s Resident Coordinator, Christina Carlson said many speak about LDC graduation negatively. “There seems to be a fear that somehow graduation will fundamentally change the relationship Bhutan has with it’s development partners,” she said. “Bhutan and other small least developed countries are challenged to generate and sustain growth, and to translate growth into jobs for equitable development.”

The graduation also projects a continued sectoral shift in the economy.

In 2018, the share of labour force in agriculture would drop to 47 percent from 80 percent in 2000. Like wise, 36 percent of the workforce would be in the service sector in 2018 from 17 percent in 2000.

Development of domestic manufacturing base, industrial policy, enhancing the role of private sector and promoting diversification, among others, were identified as critical issues related to LDC graduation.

The greater threat for Bhutan, is however in mooring in the “middle income trap,” if the graduation process and post graduation plans are not sustainable.

As per the concept note, the biggest challenge facing LDCs such as Bhutan is not only in their inability to generate and sustain growth for lengthy period but also to translate the growth into job creation and inclusive, equitable and sustainable development.

In other words, post graduation strategy, if not sustainable, could reverse development.

Today 48 countries are included in the LDC category, 16 of which, including Bhutan are land locked developing countries. To date, four countries – Botswana, Cape Verde, the Maldives and Samoa- have graduated from the LDC status.

To be recommended for graduation, a country must be eligible at two successive triennial reviews by the CDP. It graduates from LDC status three years after the General Assembly takes note of recommendations. During this period, the country remains on LDC list and continues to enjoy the LDC benefits.

Tshering Dorji