Jo Stiglitz and UN-DESA say USD reserve management and government deposits in banks exacerbated rupee crisis

The Nobel laureate said that Bhutan’s USD reserves is too high with low yields creating more debt through rupee borrowings and that government deposits in financial institutions fuels credit growth

Noble laureate Professor Joseph Stiglitz pointed out weaknesses in Bhutan’s monetary (banking and financial regulation) and fiscal (government expenditure and taxes) policies that are also major causes of the Rupee crisis. This was further underscored by senior representatives of the United Nations Department for Economic and Social Affairs (UN-DESA), yesterday, present at the same forum on macroeconomic policy here in the capital.

Professor Stiglitz and the UN-DESA representatives made the recommendations amidst an impressive array of luminaries including Prime Minister, Jigme Y Thinley and the cabinet ministers among others.

While speaking on the overall macroeconomic policies and challenges for Bhutan, professor Stiglitz also highlighted the issue of the Indian Rupee (INR) shortage.

Two of the main policy issues suggested are better management of the convertible foreign currency and liquidity management by controlling government cash flow to financial institutions.


High level of USD reserves is not really necessary

Bhutan’s foreign currency reserve maintained by the Royal Monetary Authority (RMA) is unnecessarily large given the population and gross domestic product (GDP), according to the UN-DESA.

One of the most cited economists around the world, Professor Stiglitz, said Bhutan is not benefiting in any way by holding a huge USD reserve.

He said, “By keeping the money in USD reserves you are getting close to zero returns. In fact you are getting negative returns because the long term trend of the dollar relative to emerging markets is going down”.

Stiglitz said it makes little sense when Bhutan borrows INR from the State Bank of India (SBI) at an interest rate of 10% to meet expenses while maintaining the USD reserves yielding zero returns.

“You increase your reserves but you have also increased your debt”, he said.

Bhutan’s dollar reserves today stands at USD 702mn after the sale of USD 200mn dollars in 2011 to buy 10bn rupees which was used for the repayment of hydro power debts and replenishing commercial  banks with INR.

Senior Advisor for macroeconomic policy in the UN-DESA, Dr. Hamid Rashid pointed out that there is still space for the RMA to use the USD reserve which he said is fairly high.

In his presentation, he said countries with similar level of trade dependence maintain a significantly lower level of international reserves.

He pointed out that countries like Maldives and other comparable countries maintain a fairly low level of GDP without facing any balance of payment setback.

“Even if Bhutan has to liquidate about another 30% of its reserve, it will not lead to a negative balance of payment”, he said.

Dr. Hamid also said that it will be wise of Bhutan to divert the 30% of its reserve towards INR for all times to come which can curb INR shortfalls.

“In the previous years, from 2006 to 2009, Bhutan had positive inflows of INR and if there had been an INR reserve, there wouldn’t be a shortfall today”, he added.

Unlike in Bhutan, a provision in the constitution for convertible currency reserve is unheard of in other countries across the world according to the experts.

It was pointed out that Central Banks around the world manage their convertible currency reserves on a day to day basis according to the economy.

Hamid said, the key word in the constitution is ‘essential imports’ and it could be defined properly so that there are some room for flexibility.

He said Bhutan’s macroeconomics policy options are very limited as it is a small and open economy with very limited set of instruments or methods of controlling the economy.

“One instrument is managing the reserves in a prudent way”, he added.

Professor Stiglitz said, “For Bhutan, most imports are in Rupees and that means the currency that ought to be the focus of reserves ought to be INR, from a risk management perspective”.

He also said in a jest that, the USD reserves serves as a ‘foreign aid’ for the USA. “Thank you for the assistance”, he joked.

Hamid said it is ‘no rational economic policy’ to build or maintain reserves by borrowing at 10% interest rate.

Government should minimize deposits to financial institutions

Professor Stiglitz said, “A key responsibility of the monetary authority in conjunction with the government is the management of the magnitude of the credit availability”

Liquidity management was another issue highlighted by professor Stiglitz since credit growth in recent years was largely fuelled by excess liquidity in the banking system.
One instrument he said is the ‘Stabilization Fund’ that will help in holding certain amount of the inflows belonging to the government.

Dr. Hamid recommended that the government should institute a liquidity management system to reduce the mismatches between Rupee inflows and outflows.

The experts said that, currently, the banks in the country have been fed with abundant liquidity, most of which are grants and hydro power revenue received by the government from other countries.

For instance, the government receives an aid of INR 100mn meant for construction of a bridge. It may not be necessary to utilize the entire amount at once, so government resort to depositing it in commercial banks that earn very little or no interest.

However, the banks use the deposits by lending it at high interest rates to various clients who avail the loans for imports.

Therefore, there is a need to minimize the levels of short-term deposits and net government lending to the financial institutions according to the experts.

It was recommended the government may offer new savings instrument to the private sector through issuance of short term Ngultrum denominated bonds which shall reduce liquidity and enhance domestic savings rate.

“Stabilization fund ought to be part of the macroeconomic framework for any country which relies on huge revenues from natural resources”, Stiglitz said.

Dr. Hamid concluded that a prudent management of financial institution liquidity and convertible currency reserves will remain critical in ensuring the macroeconomic stability of Bhutan.

The forum on macroeconomics challenges, opportunities and policy options for Bhutan was organized by the GNH Commission, UN-DESA and the UN country office.

Despite being invited, there were no official representatives from the central bank (RMA) part taking at the forum. RMA officials were unavailable to comment for The Bhutanese despite attempts made by the paper.

According to a reliable source an earlier offer by the Reserve Bank of India to send an expert to study the rupee situation was also rejected by RMA.


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  1. Good. But wondering if DPT is behind all this drama, just when the rupee crisis is proving to be a potential “disaster” for them pre-2013

  2. Till now the RMA and the government had put the blame to public for creating a Rupee crunch. See the suggestions provided by the economic experts. It is totally RMA’s fault for the Rupee crisis.

    I also do not understand why there was no representative from RMA despite being invited to attend the forum. When PM and other cabinet ministers could find time and attend the forum, why can’t the Governor and the Assistant Governor of RMA attend the forum. Are they too busy trying to solve the Rupee crisis themselves? How many people in RMA have studied economics? We need people with brain in RMA so that we don’t land up with similar crisis in the future.

    • I agree with you,we need people strong economic background in RMA. It looks fishy on the part of RMA officials not attending the such meetings when our honourable ministers have time to  attend such important meeting.

  3. I hope now our govt will believe that RMA and they are the major cause of Rs crisis. Not us individuals in any way. These experts never mentioned of private consumptions as the sole cause of Rs crisis. They blamed on us for living a basic life and even consuming vegetables. However still this thick headed guys will not accept the facts. The only action we can take is to bring in new government and real peoples’ government in next election.

  4. Ploy by DPT to woe the voters. What a pathetic drama indeed!

  5. Whether it is ploy by DPT or RMA, the people are suffering. I am sure no matter what DPT do to solve this problem, the people who have suffered badly will not support DPT in 2013. Without doing proper research and the implications it will bring to the general public, the government has imposed so many restrictions, making life miserable for the general public. And the RMA and government had blamed the individuals for causing rupee crisis.

  6. Pathetic posts…none worthy of this forum that was graced by such intellectuals…It would have been very honourable if the writer could stop being selective with what the experts said. Professor Stiglitz did say that there was excess liquidity in the financial system and that reserve management was flawed but he also highlighted that it was excessive private spending that led to the crunch…Poor reserve management originated from a motivation to abide by the best practices of democracy and fiscal prudence whereby we accorded the RMA too much policy and operational independence. We are still a young democracy demarcating the roles and authority of institutions. A bit of analysis would be appreciated on the part of writers. Is everyone suffering from intellectual and moral deprivation…

    • hope dis DPT govt and their allies RMA accept their mistake soon!..IT DOESN’T MATTER MUCH bcoz general public no more want the DPT as next govt ..DPT just create crisis n to cover up their problems they need experts 2 solve their own pathetic??..who wants such govt???

    • Professor Stiglitz said, “A key responsibility of the monetary authority in conjunction with the government is the management of the magnitude of the credit availability”

      Read this one carefully and you will understand that private consumption is not to be blamed even if we have consumed tons of vegetables. We will do whatever with the money we have but it is the responsibility of the management to regulate that by assessing the financial health of the country. That is what he meant by management of the credit availability.

  7. I second u freakonomist

  8. oh! God RMA boss just panicked the citizens by saying bank has no money. I was wondering what happened after DPT as the govt.

  9. The RMA’s refusal to attend the meet is like an ostrich burying its head in the sand and the Government’s total lack of leadership in seeing through this has fostered a situation from a current account deficit which we have always had. Proper treasury management is the solution and poor treasury management has been the reason why we experienced the INR crunch but this has been exacerbated by RMA’s ill timed solutions. We all know who the culprit is and there is a need for accountability for future policy decisions that has created a confidence crisisl 

  10. Of late it has been found that majority of the media coverage without a doubt centered only on a one aspect story- that of the rupee crunch. Going by this, other than the infighting stories between the RMA and the banks, there is hardly any news worth reading. Almost three months now in a row after this infamous rupee crunch struck us, the RMA has still not been successful to lift this all category credit ban imposed by the banks in exercise of their discretionary power vested with their board of directors. This clause has been invoked by the banks as a retaliatory move against the RMA’s ruling so that through public pressure they could even the score with the RMA. In invoking this notorious move, the banks have only displayed their other inconsiderate sides which otherwise showed the true behaviors of our big masters and their working cultures in today’s Bhutanese banks. Again, recently over the bonus matter, somewhere it was mentioned by the BNB CEO that he will be taking up this bonus matter in their June’s AGM meeting.
    The message one gets from this statement is that behind the support of their powerful shareholders, the BNB is going to fight back at the RMA and with this, it also signals of yet another uncertainty in when this closed credit door will open for public. The banks no doubt have been calling the shot today at their whims and as a result taking the nation hostage. When this is the situation, what rather intrigues me is in knowing why the RMA’s authority and powers finding less applicability here?
    Does it mean that howsoever loud the RMA shouts, the banks are going to dictate the terms of the game at their own convenience? If so, this is not good news. May be it is now time that all the FI CEOs are reshuffled with some bigger overhauls in the RMA too – in a bid to restoring the public’s confidence in our corporate governance.

  11. One guy who clearly had no clue as to what was going on was the Finance Secretary, he says something like, grants received from donor agencies were kept in dollars as it was likely that in the future we would have even fewer donors. No wonder we are facing this rupee crunch and a mini collapse of our economy.

    • Hahahaha…..our country is still run by dzongkha lopons… doubt we will face Rs crunch…..and certainly real economic crisis is not far off too….

  12. Rupee Rupee Rupee Rupee Rupee Rupee…Why people only talk about Indian Rupee…Why not about our Ngultrum? What happened to it? Is it not our currency? Why we need to worry about somebody’s currency..when we have our own currency? Is it Rupee-Ngultrum Identity Crisis?

    • Ngultrum? hahahaha…It is a paper my friend, without a value. If India withholds its support for Bhutan and denounces the equality of rupee and ngultrum, we would all go hungry and poverty would shoot up like hell, off-course except for DTP guys who have already made enough within this 5 years.

  13. Charlatans

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