BCCI study shows that government spending is main cause of rupee crisis


A government appointed taskforce compromising of civil servants said that the Private sector and private consumption are the main causes of the rupee crisis.

This has led to a severe credit crunch especially for the private sector bringing the Bhutanese economy to a virtual halt.

However, a study by the Bhutan Chamber of Commerce and Industry shows that government expenditure and government projects are the main cause behind the rupee shortage.

Government expenditure means more credit

The study done by the BCCI research section in collaboration with a consultancy firm found that as government expenditure increased the credit market expanded on almost an equal footing.

The study also shows that as government expenditure increased there was a corresponding decrease in rupee reserves.

The study tracked both government expenditure and also the growth of the credit market from 1996 to 2011 June. When this information was plotted along a statistical graph (see image) there was a clear co-relation between the two showing more government expenditure meant more credit and more consumption. The graph also showed that as expenditure went up the rupee reserves plummeted.

“Growth in the loans are driven are driven by government activity for example contractors have to buy construction equipments like trucks on credit to implement government construction projects,” said the consultant who did not want to be named.

The graphs also show that as Bhutan’s GDP increased in size the rupee borrowings from other countries went up.

“One one hand the government says that the private sector is too small to make any difference in Bhutan’s economy but now they are blaming the private sector for all the rupee shortage problems,” said a businessman.


Government budget deficit and rupee shortage

One of the main causes of the rupee crisis is that more money than available has been spent. So another major finding is that since 2009 the government has for the first time in Bhutanese history borrowed Nu 8 to Nu 9 bn from the internal domestic market. It was also found that in 2010 and 2011 government deficits had raised quite substantially compared to historical trends.

This fact is borne out by another statistical graph which shows that from 2009 onwards the revenue from domestic sources and grants was not able to match the expenditure.

“We were in a good position until 2009 but from then on our budget was not able to keep up with expenses meaning that the government was living outside its means.”

“3% to 4% deficit is acceptable by international standards but in the case of Bhutan more than 60% of our deficit spending is in India leading to more rupee shortage,” said the consultant. “These figures show that the government has the biggest role to play in rupee shortage,” said a businessman.


Hydro projects and rupee shortage

The BCCI study also found a clear co-relation between Hydro projects like Tala and Punatsangchu I and rupee shortage.

The study tracks the balance of trade from 1997 to 2011 by looking at the export and import figures and comparing it with the construction of hydro projects in the same period.

The study finds that once Tala project construction started in 1998 there was a dramatic increase in imports until 2006 meaning that Bhutan was spending more rupees then we were earning them. From 2006 on with Tala coming on line the positive trade balance was again restored with more exports than imports.

The positive trade balance is maintained till 2010. However, the same Trend with Tala is repeated from 2010 when the intensification of the Punatsangchu I project sees a dramatic increase in imports leading to a negative trade balance and hence more rupee expenditure.

“The rupee that comes in strictly for the projects leaves the country through the Indian contractors but additional rupee is spent as many Bhutanese businessmen have to buy trucks, excavators and material in credit for the project,” said the consultant.

The consultant said that with the government freezing credit this meant that Bhutanese citizens would not be able to take part in hydro projects. “In the long run the excavator will earn more rupees as the owner will use it over a number of years to recover the cost and also make profit,” said the consultant.


Saving dollars to spend rupees

The study also found that the government has been hoarding dollars and spending rupees directly contributing to the rupee shortage.

The study through a graph shows the direct co-relation between increasing dollars reserves and decreasing rupee reserves from 1998 to 2011. The difference is most stark especially between 2008 and 2011.

“A large chunk of the dollars and foreign currency held by RMA is from foreign grants meant for capital works like construction of school, hospitals, roads etc but instead of using that dollar they save it and instead use rupees,” said a businessman.

The rupees used would have to come from the government’s treasury and banks leading to a rupee shortage.

The study in a desk analysis concluded that the current reserves of 700 million US dollars would be sufficient to import around 45 months of imports of basic essentials like fuel, food and raw materials, much more than the constitutional requirement of one year.


Rupee Crisis more severe than reported

The study also analyzed that the rupee shortage is more severe than reported as all the official information on rupee shortage comes only through formal channels like banking data and government expenditure not accounting for the informal rupee exchange.


The study found that government data on education, health and pilgrimage reflects only a fraction of the actual rupee exchange. For example under these three categories the government data on rupee expenditure is Nu 1.3 to Nu 1.7 bn but the study says that actual estimates based on a desk study would be around double.

These figures if reflected on informal trade and others would mean that Bhutan’s rupee shortage crisis is more severe than official figures of rupee shortage.


No steps taken to save rupees

It was also found that though rupee shortage was a well known problem since 1993 there was no attempt by the RMA and the government to save rupees. “To be fair RMA took over rupee management only in 2005 from Bank of Bhutan but even then after that there was no strategic management of this currency,” said the consultant.


Short Term and Long Term solutions

One of the main aims of the study apart from pointing out the governments overwhelming role in rupee shortage is also to offer solutions both short term and long term.

“We will need some more time to come out with concrete solutions as each different association will be sending us their ideas but as of now we have a few suggestions,” said the consultant.

The short term solutions are imports and exports through formal channels, better management of currency reserves and streamline payment schedule of hydro project expenses.

The long term solutions listed out are import substitution, export promotion, policy changes, access to dollars for businesses that earn rupees, encourage remittances by non-resident Bhutanese.

The final report will be compiled with additional feedback by mid May 2012, after which it will be presented to the Ministry of Economic Affairs and the Royal Monetary Authority.

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  1. ha ha ha, it’s high time this report came out. When the rupee crisis was first announced, the RMA and the Finance Minister made it absolutely clear that it was not government spending that was to be blamed, but the consumeristic behavior of the citizens.

    We all knew something was funny about that considering how much money was going into the hydropower repayments alone.

  2. Truth speaks. Our politicians and CEOs always misguide us and transfer the blame. I was wondering how individual income of Nu 10 to 20 thousand cause Rs crisis. Face the truth.

  3. The BCCI research team and the consultant missed out one thing that has led to rupee crunch. I think closing of Bhutan Lottery by the Government was one factor that has contributed to rupee crunch. The Bhutan Lottery used to contribute lot to Government exchequer. Without studying the implication the present government had close the Bhutan Lottery.

    • Bhutan Lottery should be allowed. This was how money was made to build monasteries in Bhutan. Now, as there are no lottery, some monasteries are facing problem for repair and maintenance. Even if no results were declared by these monasteries for some lotteries, but the money went to good cause.

  4. I see a number of technical flaws (endogeneity, causality…) in the methodology adopted in deriving the conclusions. The relationship identified is spurious…Did the BCCI actually hire a consultant for this…

  5. I think this news paper has too much of bad things to talk about with no solutions. It is not about pointing out wrongs in other that helps. I am not sure if what this paper reports has truth in any way because there is no basis of who says or where the information are brought from. If it has truth, by merely pointing out flaws in other simply makes the society worse because this implants distrust and hate in people. I think the media has a responsibility of helping the society more than reporting whatever makes big news. It is not about always money by bringing controversial stories. You gotta see if that is going to help the society. If you have no solution to provide, then better not open the can of worms. Because that simply brings in chaos in the country. 

    • It is not the news paper that would come up with the solution, but the other concern is to come up with the solution. Newspaper just brings the issues to the light/

      • newspapers will report, bring out issues to public notice. It’s the job of the government offices to seek solutions…and find their remedies. (What? a newspaper which reports on a corruption case, do you expect the newspaper to prosecute and send the corrupt official to jail also?)

  6. oh boy, are you equating the hydropower expenses with the lottery? if that were the case we should be investing in lotteries not hydropower!

    • We cannot compare the revenue generated from hydropower with lottery but do you know how much government used to receive revenue from lottery. It used to be in billion and not in 5 or 6 figures.

  7. Finally the truth is coming out and it is based on facts. The government always picks on the weakest group and the pvt sector has always been the whipping boy for everything that is wrong with our nation. But the fact is the Government is the biggest player in our economy (as it has always restricted the pvt sector to grow to its full potential). Therefore it is only logical that now that we have the Rs crises it is not possible that the govt had nothing to do with this crisis.

    Well done BCCI. This is the kind of organisation we have been looking for. I hope this is not a one off effort. 

    We hope the government will now become responsible and correct this problem and not go on a finger pointing spree as it always does.

    We also hope that the government pays as much attention to the economy as it does to the GNH. i am not against GNH but there is a limit to everything and we must follow the middle path, and not become an GNH extremist.


  8. if is not fair for govt to blame public for consumption. Govt must be blamed for failure to forsee the rupee crisis.

  9. I totally agree with the BCCI’s report that the rupee crisis is largely because of RGOB’s reckless expenditures. However, I feel that fronting and the “software business” has added fuel to the fire. Therefore, the report would have been even more credible it had highlighted the fronting issue. By closely monitoring the fronting practices and strictly controlling illegal flow of INR out of Bhutan, large portion of the rupee problem would come under control. Implementing strategic strategies towards import substitution and export promotion, I do not see any threat of rupee shortage for Bhutan in the long run.

  10. Both the study could have possibly incorporated similar dimensions and variables, but why completely different results?  
    Even studies could prove blame game!!

  11. this news site  has nothing good to offer than to open the can of worms and implant distrust and hate in people. There is a thing called responsibility apart from mere making money with controversial stories. I am just an ordinary citizen and actually I feel this news site is simply bringing down the whole country. 

    • Then you should not read this newspaper. Read Kuensel then.

      • well put!

      • BCCI has done the study…what more proff do you want.  It is good that this news paper reports the truth otherwise everything will be hidden for us. Like this report, i tried looking  into every newspaper but no other newspaper is reporting this news. 

    • We must not be scared of the truth otherwise we will only make bigger mistakes and eventually we will all be hurt.

  12. I guess, there is no need to do research mena when the things can be clearly spelled out. Its obvious. Bhutan’s economic activity is driven by Government ventures, i think 80%.  

  13. I understand that BCCI is trying to defer and counter-attack the blame put on by Government, regarding the rupee crisis to excess private consumption. The expenditures incurred on the hydro-power projects may be one of the causes, but I also see some major flaws in this report as well. Whoever is the consultant, the consultant has taken one-sided way to study the causes of the rupee crisis. He/She has looked only at Government expenditures to see the trade balance and deficits. From my opinion, the private construction boom is also main cause of rupee crisis. All the construction materials, machinery and labourers come from Inida, where rupee is involved in any transaction. So if the consultants really want to come up with credible report and findings, they need to adopt appropriate methodology to look into both government and private expenditures. Try to follow un-biased approach to draw conclusions. In any research works, if one is already inclined towards something, the result will be biased toward that thing as well….

  14. Our economy is so small but we need to nurture our private sector. In such a situation private sector must be boosted up with economy packages designed by the Government. We can’t afford to depend on Hydro project alone where players are mostly Indians. Our private sector should be encouraged to be proactive and come out with model in cresis management and do not expect mackinzey to come up with crazy ideas undermining our own people, They will only tried to find out symtomes where we will be made to fix them when it is broken. We should learn to fix it ourselves. With the amount of revenues generated from Tala Hydro, we should be by now economically comfortable with given size of our population. I share with the findings of BCCI about government over spending and from now any new government elected must be judicious in expenditure. The CDF is overlapping with sectoral plans and program which should be completely discontinued.

  15. both the govt as well as private sectors are responsible for the rupee crunch in the country..we all now have full knowledge of sources of rupee crunch. & we know that this Rupee crunch is being taking as one of the biggest issue of the country and is playing an active role to prevent  by the govt as well as by the BCCI..Therefore..all my fellas out here..stop pointing & blaming..its high time we all should cope up with the BCCI and the government and come over all the issues of the country..

  16. WoW is a a complete game, I’m one of those 10 million players lol!!, Blizzard showed an example that a game is seed, and is develop with the attention to quality they have, it becomes what Wow has, oh the game needs to be fun and this game is, thats what games are only for.

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