10 % incentive may devalue the Ngultrum and curtail access to dollars

The Royal Monetary Authority (RMA) has increased its incentives on remittances from 2 percent to 10 percent, to increase the inward flow of remittances, to encourage Bhutanese residing overseas to send money back home from a period of June to December. However, this increase brings in the question of whether we are unwittingly devaluing our currency against other convertible currencies.

The incentive happened after the Cabinet recommended to the Central Bank to increase the 2 percent incentive to the maximum feasible level. The cabinet said this proposal aims to address and mitigate the presence of the informal money market.

After the increase of the incentive, the Finance Minister shared during a session in the National Assembly that the country received almost USD 5 million in 10 days.

Despite the increase, there are some who point out the negative consequences of the high incentive.

A former senior public figure said the 10 percent incentive on remittances is devaluing our currency.

He said, “Many Bhutanese students and others who have gone to Australia are buying dollars from Bhutanese in Australia since they don’t get sufficient foreign currency from the government. Even most Bhutanese business people buy it from them since they can’t get dollars from the bank. And now the government paying incentives on dollars will only make it worse for students and others to obtain foreign currency.”

“The irony is that those who are in dire need will have to pay more than the RMA rate. Ultimately, it’s only the Bhutanese people who suffer, and it leads to devaluation of our currency. Our policies are always one directional,” he added.

Similar views were also shared by others.

A senior public official said, “This is the official devaluing of the Ngultrum which has now become cheaper. The Dollar and the Rupee parity has not changed but the Ngultrum is giving a 10 percent discount.”

“What it also means is that you have indirectly devalued the Ngultrum vis-a-vis the Rupee as you have accepted the face value is 10 percent lower,” he added.

The senior public servant also asked what would happen if people in India say that since we have devalued Ngultrum by 10 percent against foreign currencies, then the same should also be done with the Rupee. He said there will be uncomfortable questions.

He added that this leads down to an uncomfortable path that Bhutan has never gone down before, and it could strengthen the black market in currency trading against the Ngultrum.

The public official also pointed out that another major impact of such devaluing of the Ngultrum by 10 percent would lead to higher inflation, especially for goods being imported from third countries where convertible currency is to be used. He said it is like adding 10 percent to inflation.

However, local economist, Professor Sanjeev Mehta, shared a completely different view.

He said, “Greater incentives on inwards remittances does not have any effect on the spot exchange rate. Higher remittances induced by incentives will only strengthen the external value of domestic currency.”

He also added that higher remittance helps to ease the pressure on balance of payment, increase investment and improve household’s welfare, and also helps to reduce poverty.

Similar views were shared by the President of the Bhutan Chamber for Commerce and Industry, Tandy Wangchuk. “Incentives on remittance is very good for the economy, as we will have more hard currency in the country. This will also help in curbing the black market in which dollars are sold. Before, people used to misuse the dollar quota, which was USD 3,000 annually, selling the dollars in the informal market after spending about USD 500. Therefore, the current measure will curb these misuses also.”

Obtaining dollar is hard in the informal market, as the dollar selling has already decreased with many only looking into buying dollars.

A popular unofficial money exchanger in Thimphu said that these days, there are no dollars available to buy and then sell to the clients.

Another business outlet that also used to buy and sell dollars said that the first major impact was the low number of tourists, which meant less USD and INR entering the country. A secondary impact is now the 10 percent incentive and people are sending it to RMA instead.

For Bhutanese traveling out the USD 3,000 per year limit would not be enough for medicals or travel and shopping and so they would buy dollars from the informal market. This is now not possible and may ironically still put pressure on the reserves as they tap into the USD 3,000 and also more by presenting medical bills etc through the cumbersome formal route.

According to Nidup, a Bhutanese resident in Australia, the Australian Dollar (AUD) will become more expensive among the Bhutanese community. “Before, when we came from Bhutan, what we used to do was exchange dollars among ourselves. We have a huge Bhutanese community in Australia, and everybody is in need AUD when we are new. So, we would exchange dollars with Ngultrum following the exchange rate set by the RMA, a small difference at around Nu 1 or Nu 2. We would buy the AUD from Bhutanese and send money to their loved ones using money MPay or MBoB back home. Now with the 10 percent incentive, the dollar exchange at Australia will become 10 percent more expensive.”

The Bhutanese community would arrange the exchange and when a Bhutanese initially arrived in Australia, they required dollars to buy vehicles and other miscellaneous items as they could not get AUD. Nidup said that it was more practical to swap dollars for Ngultrum because Bhutanese would already have money in their banks at home.

This practice is very popular, pointing out that, everybody would always need Bhutanese currency. With the remitting, he added, when one sends money home, it takes about 2-3 working days. With this practice, it was more convenient.

He also added that with the incentives, there is a form to fill in sharing that it is inconvenient, as before, the money and the incentive was directly credited to their bank accounts.

Over the years, the remittances decreased sharply, as it seems one of the factors could be the facilitation of dollars among Bhutanese living abroad.

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