A crash landing for Bhutan’s private sector?

The Bhutanese economy is currently heading into a brick wall and the driver at the seat is using the accelerator instead of the brakes.

This is how many, especially in the private sector are describing the series of panic driven and credit crunching measures taken by the Royal Monetary Authority in the recent months. Measures no doubt were needed to curb the rupee crisis, but not so many extreme ones and all at the same time.

Even the rupee task force report cautions RMA not to take too many severe measures or it can contract the economy. With such harsh measures, the Bhutanese economy may be headed for a hard landing.

The largest employer in Bhutan is the private sector, and by far the main contributor to the domestic revenue that meets the government’s current expenditure and some of capital expenditure as well. The sector today stand on the brink of an abyss as it more than any other sector of the economy, is bearing the brunt of the rupee crisis. Even the financial institutions except for Bhutan Development Bank Limited have stopped giving loans.

The RMA’s earlier directions to not give more than 20% of the loans to any one sector are to an extent sensible. It did much too slow the credit, but the subsequent stringent loan risk weightage and credit deposit ratio norms have put a virtual halt to credit, and thus the Bhutanese economy.

The RMA on its part may be working with the assumption that it is cooling down the economy and avoiding a 2008 kind of financial crisis in USA when banks lent too freely and got too exposed to the housing bubble. Even if this is the case their measures have come all at once when credit is already so tight and there isn’t enough evidence to show that Bhutan is headed the USA way.

All business ventures, big or small require credit loans directly or indirectly. When the banks stop lending then business is badly hit. The danger here is that to solve the rupee crisis one may cause an economic crisis, which in fact is worse.

There are a few dangerous trends emerging in the economy due to the measures put in place by the RMA. Some banks have invested billions to finance some big projects. The projects may require some more millions to start making revenue and earning the rupee, but due to the credit restriction no more money is being given and so entire projects worth billions are at risk. To save a few millions, the banks may have to end up causing billions in losses in the long term.

The Thimphu landscape is dotted with incomplete buildings that are at a standstill as banks are not giving out additional money. Here too, the banks have already invested billions in the housing loan, but the incomplete housing projects cannot generate revenue to pay up their loans. What may happen is that owners of the incomplete buildings may have to forego their buildings and have it auctioned. The banks may also lose money if they cannot recover their original loan amount.

The RMA should at least allow banks to see through such projects which are at the final stages of completion so that both the bank and the clients don’t lose out.

There is now growing outrage among the private sector of being made to bear more than what they feel is their fair share of the rupee crisis.

A BCCI study shows that growth in credit is linked to the government expenditure and that RMA’s saving reserve has also played a big role.

Apart from RMA, questions are also being asked by the private sector of the Finance Ministry’s role in the crisis. Was it really necessary to give a second pay hike? Was it necessary to bloat the capital expenditure? What happened to the recommendation in the rupee report to do away with quota vehicles, etc.?

The Finance Ministry has decided to do the obvious and go for cuts that will hurt them the least. For example, vehicle quotas remain untouched while the advertisement budgets have been slashed so drastically and selectively that most media houses are going in for drastic downsizing.

It is a similar situation across many other private companies and if it continues than very soon thousands working in the private sector may be laid off according to members of the business community.

There are around 30,000 business licenses and even if a conservative estimate is taken the private sector employs around 60,000 people. All of their futures are at stake if the crisis continues any longer and if the corrective measures further hampers their growth.

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  1. I dont know what is RMA and govt trying to do,,,, they are tighting the fist in the name of GNH and yet they want to open their arms to welcome FDI. How is it possible??/ govt and RMA has to remember that, if they want to shit then they cannot shit from mouth,,, there is a place to shit from… so,, remember

  2. well analysed by the author. It forcasts important issues which govt and RMA should think.

  3. Karma in townm

    I would like to suggests for the govt to do away with the car quota since it is a grave misuse BUT the govt should give this quota allowance in the form of cash incentive about one lakh every five years . What do you think. I am also in support of govt raising the car import tax for easing congestion, pollution and to curb expenses. I urge the govt to initiate a good city bus services. The new big buses are ugly and a big joke. Please do better keeping in mind national interest’.

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