3.

1 Political Situation Bhutan is a hereditary monarchy ruled by King Jigme Singye Wangchuck with the assistance of a Government and a National Assembly. establish an even more decentralised political/administrational structure, with central authorities being mainly managers and co-ordinators of the development process while district and sub-district bodies will assume development planning and implementation powers. The governments objective of increasing transparency and accountability will be further enhanced by strengthening the judiciary system. An important element is the creation of the Office of Legal Affairs as an autonomous agency responsible for prosecution and legal services. This Office may eventually evolve into a fully fledged Ministry of Law and set up a Human Rights Unit in charge of promotion of human rights as well as interaction with external agencies. Bhutan has diplomatic relations with eighteen countries and with the European Union. She is a member of several major international and regional organisations such as the United Nations and its specialised agencies, the South Asian Association for Regional Co-operation, IBRD, IMF, Asian Development Bank and SAARC. Bhutan has six diplomatic missions abroad located in New Delhi, New York, Geneva, Bangkok, Dhaka and Kuwait. Bhutan maintains close and friendly relations with India, its single largest trading and development partner. Bhutan does not have diplomatic relations with China although relations are friendly and official level visits are exchanged on an annual basis to demarcate their border. Economic The main imports are petroleum products, vehicles, spare parts, electrical equipment, construction materials whereas the main exports are electricity, wood products (except raw timber), agricultural and horticultural commodities, cement and calcium carbide. In 2000 the current account deficit stood at USD 127 million and was almost entirely covered by foreign grants. Despite the possibility of narrowing the deficit through an increase in electricity exports to India, the deficit will remain at the same level due to capital imports for power projects. Bhutan has a history of relative isolation from the outside world, but because of present constraints on export development, its excessive dependence on India as the main trading partner and the relative vulnerability of its economy to steadily increasing inflows of foreign goods, there is a political will to deepen the countrys integration into the system of international commercial relations. In order to facilitate its integration into the global economy, Bhutan has submitted an application for full membership of the WTO and has requested EC support on this matter. Social In the absence of systematic household or income surveys it is difficult to provide a detailed assessment of poverty and social conditions in Bhutan. Nevertheless, extreme poverty is relatively rare and few suffer from hunger or homelessness. Due to landreforms in the early 1970s, income distribution is thought to be relatively even. Subsistence agriculture is still widespread while rural incomes and agricultural productivity remain low. The social indicators available (see Annex 1) have improved steadily since the 1960s.

Life expectancy has risen from 37 years in 1960 to 66 years in 1997, while over the same period the population with access to safe water has risen from 31% to 63% (1999). The gross primary school enrolment rate was estimated to be 72% in 1999, while the number of primary schools has increased from 11 in 1959 to 243 primary and community schools in 1999. The adult literacy rate is estimated to have risen from 23% in 1980 to 54% in 1994. Access to basic health has also improved considerably whereas in 1961 Bhutan had only 4 hospitals and 11 dispensaries, by 1998 the health system consisted of 28 hospitals and 145 basic health units. However, the rural population still has only limited access to secondary social services and some extremely remote areas still lack basic facilities. Another factor that raises concern is the high population growth rate of 2.5%. Considering that 79% of the Bhutanese population live in rural areas, the present rate will have a considerable impact on social sector expenditure. Technical