With the Bhutanese economy being hit by a severe rupee crunch, people say one of the causes is fronting of businesses, especially in the manufacturing sector.
But the government officials The Bhutanese talked to feel fronting could not be a cause of rupee crisis as much as it is believed to be. They also say that they do not have enough evidence to prove fronting is a culprit of Bhutan’s economic ills.
However, a joint study conducted in 2007 by the Royal Monetary Authority (RMA), ministries of finance and economic affairs reflected fronting as one of the possible causes of rupee shortage in the economy.
The study compared export value of some manufacturing houses with inflow of money in 2006 and January to May of 2007.
For example, ten industries had exported Nu 7.51 billion worth of goods to India. But the inflow was recorded at Nu 3.73 billion. This means that Nu 3.78 billion had gone missing and the money was not recorded as coming back from India.
The ten manufacturing companies were: Jigme Polytex, Mega Pvt. Limited, Yarab Pvt Limited, Singye Vanaspati, Bhutan Metal Pvt. Limited, Kenpa Pvt. Limited, Rangshar Pvt. Limited, Yarkay Pvt. Limited, Choden Wire Pvt .Limited, and RSA Pvt.Limited.
The report outlined that the non remittance of the earnings are possibly due to four reasons like fronting, existence of cross payments made outside the banking system in Bhutan for importing software, overstatement of export values and depositing in Indian banks for higher rate of interests.
What has happened to the report?
Despite the inaction on the report by the authorities concerned, the report itself seems to have gone missing like the money.
The prime minister, Lyonchhen Jigmi Y. Thinley, said he is not aware of the 2007 report. He said the finance ministry would know about it.
The interim prime minister then, Lyonpo Kunzang Dorji, says he remembers the present governor of RMA coming to him with the report.
He said fronting is a serious issue and task forces have been formed to address it. The government has been trying to tackle the issue for a long time now, he said, adding apart from the balance of trade fronting is a major cause of rupee crunch in the country.
The finance secretary, Lam Dorji, said even he is not aware of the 2007 report. “If there has been such incident where export value is more than the import, then something wrong is happening. And that needs to be explained through the review of records,” he said.
However, the report of the task force that studied the ongoing rupee crunch has not looked at fronting as a separate issue as a possible cause of the problem.
The finance secretary said the impact of fronting on rupee shortage needs to be studied.
An industrialist who did not want to be named said fronting needs to be defined properly. He feels as long as the money stays within the economy it should not be much of a problem.
PM on fronting
The prime minister,said the rupee crisis is caused by excessive lending and borrowing for luxurious goods. And it is something that the economy needs to get rid of.
He said the government has always opposed and prevented fronting, but somehow it is difficult and has been happening. “It is sad that somehow we have not been successful,” the prime minister said. Fronting has very little to do with the rupee crisis but it does affect. It is not as significant as it is shown to be.
Economic affairs minister
Lyonpo Khandu Wangchuck said fronting not only abuses the rules but also harms Bhutanese who are genuinely engaged in the trading sector. That is why the government considers fronting illegal and has resorted to taking action against those proven to be involved in in the act, he said.
In the major commercial hubs, the economic affairs ministry has instituted committees involving the government and the private sector to check fronting and to take action against those involved. Recently, actions were taken against traders [involved in fronting] in Gelephu and Phuentsholing.
The minister said fronting not only affects the national economy, but also affects the growth of the Bhutanese entrepreneurship and the private sector. Bhutanese must build up their capacity to undertake commercial activities by running the ventures by themselves,” said the minister.
The governor of RMA, Daw Tenzin, said fronting comes with the issue of license. He said if the fronting had taken place in the manufacturing sector, the money could have been kept outside.
However, he said, there is no concrete evidence and the new circular RMA passed would help detect fronting cases.
The circular states that all export proceeds must be brought in by the exporters through the banking channel within 91 days from the date of export. The custom authority, the commercial banks and the RMA will jointly review and monitor through exchange of information.
If the export proceeds are not received within the time frame the authorities will jointly investigate and take necessary action.
At regional trade offices
There are about 167 unresolved fronting cases at the regional trade offices in the country – the regional trade office of Chukha (100), Samdrup Jongkhar (63), and Gelephu (4).
Though committees have been set to tackle fronting in the dzongkhags, they have not been effective. The regional trade director of Gelephu, Sangay Phuntsho, said: “We are not the investigation agency but we are doing our best.”
The regional trade director of Smadrup Jongkhar, Karma Dukpa, said fronting is quite common among small time business license holders. He said his office will find out the status of business licenses at the time of renewing them, which is scheduled for April till June this year.
In Chukha and Samtse, of the 5,117 business licenses 191 are held by non-nationals, mostly in Phuentsholing (168).
There are 2,500 business license holders in Gelephu, out which 114 are held non-nationals.