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.