The new World Bank Group Country Strategy for Bhutan envisages a lending program of approximately US$78 million over the period of Fiscal Years 2011-2014 from the International Development Association (IDA) and the International Finance Corporation (IFC) to support the country’s development vision characterized by Bhutan’s unique philosophy of “Gross National Happiness” (GNH). The strategy focuses on economic growth, employment generation, and skills development, while supporting the expansion and sustainability of quality public services.

The Board of Executive Directors of the Bank discussed today the FY2011-2014 Country Partnership Strategy (CPS), a strategy that takes a medium- to long-term vision of Bhutan as a middle-income country.

The CPS is aligned with Bhutan’s unique development philosophy of GNH and prioritizes Bhutan’s development goals as described in its Poverty Reductions Strategy (PRSP), which is underpinned by the Tenth Five-Year Plan.

The CPS is guided by three principles: alignment with the Royal Government’s strategic priorities; partnership with the Royal Government and other development partners, and between the Bank and IFC; and selectivity as reflected in the World Bank Group’s advisory and analytic programs. These principles are based on lessons learned from the previous Country Assistance Strategy and through feedback gained during broad-based consultations with the Royal Government, civil society, private sector, and other development partners.

Bhutan’s Tenth Five-Year Plan, with which the World Bank Group’s CPS is closely aligned, aims to diversify the economy, generate employment through private sector growth, and provide services to people in rural areas and expanding urban areas, while addressing emerging social challenges. As the CPS will span the remaining three years of the Tenth Five-Year Plan and the first year of the Eleventh Five-Year Plan, it was developed to ensure sufficient flexibility to align to new priorities of the Royal Government in future.

As an outcome of the Royal Government’s prudent macroeconomic management, development of hydropower resources, and development partner support, Bhutan has made good economic progress with sound GDP growth over the past ten years. This has been driven largely by hydropower development as Bhutan progressively taps into its large potential with the support of neighboring India.

While hydropower generation will likely bring increased economic gain to Bhutan, it is not expected to be a major source of employment. Increased economic diversification and prudent planning and management of resources will be necessary. The CPS highlights these as essential factors for Bhutan’s future development progress.

“Bhutan has made great progress in improving the living standards of its population over the past 30 years,” said Nicholas J. Krafft, World Bank Country Director for Bhutan. “Today Bhutan faces a new set of challenges as it experiences a rapid transition from a mostly rural, agrarian society to one characterized by increasing levels of education, shifting expectations of the people, and a larger number of young people who are looking for more opportunities. This Country Partnership Strategy aims to address these challenges by working in partnership with the Royal Government, relying on the strong relationship the World Bank Group has built over many years.”

Economic gains in Bhutan have been the result of a broad-based pattern of development progress which benefit from a number of “development assets”, including low levels of corruption, ability to deliver services, peace and stability, and robust institutions. Bhutanese society emphasizes inclusiveness and, in particular, places importance on the equal status of women.

Despite Bhutan’s economic potential and sound development vision, some challenges remain. Factors related to macroeconomic volatility and capacity limitations are of concern. A second set of risks stems from the fact that a number of issues which the CPS addresses and activities to address them are yet to be more fully defined and understood as Bhutan experiences rapid social and economic transition. No major risks, however, are likely to derail the country program, but there are some risks which may affect implementation progress and for which mitigation measures will be in place.

While economic growth is considered important, Bhutan is deeply concerned with preserving its culture, environment, and identity. Bhutan’s development has been guided by its homegrown overarching philosophy based on its concept of Gross National Happiness which promotes a more meaningful purpose for national development than simply the fulfillment of material satisfaction.

“Gross National Happiness aims to achieve broad-based and sustainable development growth,” said Mark F. LaPrairie, World Bank Country Representative for Bhutan. “This includes improving the quality of life, conservation of the natural environment, preservation of culture, and good governance. The themes form the foundation of the Royal Government’s five-year national development plans, and set Bhutan apart, in many ways, from other developing nations.”

In addition, the World Bank today approved a $24.75 million First Development Policy Credit to strengthen institutions in order to help make government more effective. This will be achieved through sound public financial management and procurement and strong public administration. In addition, it will assist in private sector development by improving policies and creating productive employment opportunities. Finally, the project will increase access to infrastructure (roads, urban, ICT) in an environmentally sustainable manner.

The credit is from the International Development Association, the World Bank’s concessionary lending arm and has 20 years to maturity with a 10-year grace period.