Till now, both the government and the RMA have put the bulk of the blame for the rupee shortage on private consumption, private sector and credit expansion while shirking any blame themselves
The two main causes cited for the rupee crisis by the government and the Royal Monetary Authority (RMA) are private consumption like car imports and the private sector’s activities that lead to credit expansion from the banks and hence unsustainable rupee imports.
Both, however, were not as vocal or forthcoming on parts of the rupee report that held them or their policies culpable, too.
The Bhutanese has found that apart from other above well known causes the still secret government task force report on the rupee shortage also cites government expenditure and RMA’s convertible currency reserves as other major reasons for the rupee crisis.
The report says that an increase in government spending has an immediate effect on aggregate (total) demand in the economy.
Additional government spending generates new income: new income generates more consumption; increased consumption generates more income; and so on. This is the multiplier effect of fiscal policy, says the report.
Government expenditure increased from Nu 9.8 bn in 2002- 2003 budget to Nu 38 bn in 2011-2012 budget. The report says that 60% of government expenditure directly translates into imports from India. The report under the balance of payments section says that rupee shortage in the country has been due to rising aggregate demand and supply side constraints. It says that aggregate demand is triggered by public expenditure, credit market and other private expenditure on health, education and so on.
It says that although not easy to quantify, it is recognized that fiscal expansion of the government leads to creation of more demand in the economy, which would have impact on the Balance of Payments and thus the Rupee outflows.
Government expenditure like the two salary revisions for public servants, national elections, expansion of government establishments, and the project for accelerated socio-economic development among others are cited as examples of expenditure which have added to the government spending during the 10th Five Year Plan (FYP).
The report points out that fiscal expansion or government expenditure itself increases disposable income, consumption and investment. In another section in the report titled ‘other causes,’ increase in disposable income is blamed as a cause for the rupee crisis saying that it leads to more consumption.
Disposable income grew by 13.5% in the 9th FYP and 12.8% in the 10th FYP. During the 9th FYP, the total consumption was 60% of gross disposable income and rose to about 63% in the next FYP.
The report says that any increase in investment in the economy without corresponding increase in savings will lead to a current account deficit (negative trade balance). It says that as the government accounts for a large part of the aggregate demand, fiscal expansion will translate into movement of balance of trade.
The report acknowledges that the budget also had a direct impact onthe rupee since all the resources that are either grants or domestic revenue did not come in rupees. Firstly the convertible currency portion of resources has to be converted first into Ngultrum and then rupees for imports from India. Secondly, some component of the domestic revenue generated in Ngultrums has to be converted into rupees for imports from India.
While acknowledging the impact of government expenditure on the rupee shortage, the report is also contradictory in places as it tries to show (unconvincingly at times) that government expenditure did not play as significant a role in the rupee shortage as credit expansion.
The report says that government expenditure has been steadily increasing on an average of 10.6% inthe 9th FYP and 14.5% in the 10th FYP. The government says that recurrent expenditure is met fully from domestic revenue, and grants and loans from donors and agencies cover about 95% of the capital expenditure in 9th FYP and 85% in 8th FYP.
Therefore, the report says that the balance of payment problems and resulting rupee shortage would come from the budget deficit. The report then points out that there was budget surplus from 2002 to 2010 budget and there was a budget deficit of Nu 1.63 bn in 2010-2011 budget which it says is only 2.1% of the GDP while the current account of deficit or negative trade balance is 21.1% of GDI in the same period. It concludes that since the budget deficit financing through treasury bills and borrowings was so small, the deficit financing through treasury bills and borrowings was not directly responsible for the overall account deficit and therefore the rupee shortage.
The report, however, fails to mention that in 2011-2012, the budget deficit is a whopping Nu 5.4bn.
In the 2011- 2012 budget, out of Nu 18 bn domestic revenue, only Rs 7.5 bn was in rupees; in 2010-2011 budget of the Nu 17.4 bn in total revenue the rupee revenue was only Nu 6.4bn and in 2009-2010 budget of the 15.6 bn in total revenue, only Nu 6.3 bn was the rupee revenue. These figures in the report show that nearly all domestic revenue goes into the government’s recurrent expenditure like salaries, stationeries, and fuel.
These figures also show that since the majority of domestic revenue or recurrent expenditure is in Ngultrum it will eventually have to be converted into rupee to import items. Though these figures are available in the report itself, the report fails to point out the obvious in its analysis.
The report also estimates unrealistically low rupee requirement for the government for imports not covered by external funding at Rs 208 mn in 2010-2011 and Rs 244 mn only in 2011-2012 budget.
Government and RMA’s management of Convertible Currency reserves
Bhutan’s dollars reserves today stands at USD 702 mn after the sale of USD 200 mn dollars in 2011 to buy 10 bn rupees.
Bhutan’s policy of stashing away convertible currency grants and loans like dollars, Euros and foreign currencies in the RMA is a major cause of the rupee crisis. For example if Japan gives Bhutan USD 10 mn in aid, the convertible currency is kept with the RMA and instead an equivalent amount is released in Ngultrum which again gets converted to rupees. In short the government and RMA are saving dollar reserves by using the rupee reserves in its place greatly impacting the rupee reserves. The report says that RMA receives the convertible currency grants and loans and releases equivalent Ngultrum to the government budget fund account. It says that such treatment of convertible currency grants increases the money supply in the banking system fuelling credit growth.
It says that as the convertible currencies are for financing development programs and projects; more than 60% would ultimately translate into imports from India.
The report says that in 2010-2011 financial year, Bhutan received USD 93.8mn or Nu 4.2bn (using USD 1= Nu 45). The estimated rupee that would be spent on imports here would be about Nu 2.5 bn.
In addition to this the there was off budget convertible currency loansof USD 29.52mn or Nu 1.3 bn taken from Asian Development Bank for the Dagachu Hydroelectric project.
The report says that although the convertible currency reserve would have grown by that extent, the counter value has impacted on the rupee.
The report also says that the policy of directly accumulating convertible currency in the RMA reserves and then using rupees instead for imports has resulted in rapid depletion of rupee reserves on one hand while there has been a steady growth of convertible currency reserves.
It is also clear that the bulk of Bhutan’s dollar reserves come not from income generating activities but from stashing away grants and loans meant for dollars and instead releasing Ngultrum and rupees.
From 2006 to 2010, the dollar reserve grew from USD 299mn to USD 888.8mn. Of this, the contribution of the tourism sector was only USD 98.46mn.