A response to “The Rupee Crunch: Reconciling theory with reality”

An op-ed published in your paper entitled “The Rupee Crunch: Reconciling theory with reality”  by one Mr. Norbu has been making its rounds since May. It appeared in the May 19th issue of Kuensel under a pseudonym and again in the Bhutan Observer on May 25, identifying the author as Nyingtob Pema Norbu.

While Mr. Norbu’s piece is highly articulate and a welcome contribution to the discussion on Bhutan’s current Rupee problem, we must take issue with one specific paragraph:

To wit: “A recent study by the BCCI attempted to plot government spending against private credit. Any amateur economist would be able to identify the technical flaws of deriving relationships from such simplistic methods. One of the deficiencies is the issue of omitted variable bias. With private credit being determined by many other variables the simple filtering of government spending as being the major contributing factor amounts to intellectual dishonesty. Even if government spending did genuinely lead to credit expansion, due to the private sector attempting to capitalize on government construction activities, laying the blame on the government is dishonorable. ……..Laying the blame on the government for inducing the private sector to take on credit is like a rapist blaming the victim for being physically appealing. In an attempt to vindicate themselves, even Wall Street bankers used similar shades of arguments.

As the authors behind the BCCI report, we feel that it is important to clarify some points.

First, there was no “recent study” at the time that Mr. Norbu first penned his article. He was referring to a story in the Bhutanese that in turn quoted us as pointing out similar trends in government spending and domestic credit. Though at the time we were insistent that it not present these observations as research findings, the story’s tone may have articulated exactly that, for which we share some of the blame. Then again, it was hardly the most offensive crime to point out that domestic credit mirrors government spending. After all, the government’s spending on infrastructure development and procurement of goods and services is exactly what creates opportunities for private businesses. This was a fact later borne out in our report, which used publicly available data from the Royal Monetary Authority, Ministry of Finance, and National Statistics Bureau.

The BCCI report on Bhutan’s balance-of-payments problem was officially submitted to the government at the Private Sector Deveopment Committee meeting on May 31st, 2012, and has since been made publicly available. It is unfortunate that Mr. Norbu did not read the report since first publishing his piece, as we were hoping that he would reconsider his decision to label our work as intellectually dishonest. The report does not presume to be any kind of final word on the issue. Our findings do not imply that the government is to blame, but rather that it plays a central role in setting the economic agenda for the country, precisely because it is the biggest player in the economy. At the same time, we have highlighted the need for greater communication between the government, the central bank, and the public because we appreciate the importance of consultative planning and clear communication between all stakeholders.

This is an issue of national importance that affects us all. We certainly have no other agenda than to help find a common solution, and we believe that the best ideas emerge from active discussions and debate. Accusations of intellectual dishonesty and equating other people’s opinions to that of rapists and fraudulent Wall Street bankers is counterproductive to that process, to say the least.

QED Consulting Group 

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  1. In this day and age where the media plays a pivotal role in framing opinion especially public opinion, it is good to have diverse opinions that question one another especially if we are to come out of this situation stronger.
    Although I do agree that clarification is always a better recourse to discussion rather than criticism which leads to unproductive mudslinging which leads us no where.
    In the end we Bhutanese have grown accustomed to buying more than we can afford and expecting the government to foot the bill (what is it? A few hundred million each day?).
    A lot of experts have suggested devaluing the Nu to the INR to solve the current rupee crises. It seems other countries use this to address balance of trade. However in Bhutan we seem to close the door shut on this without even discussing the implications. Just presuming that it would be bad for Bhutan. But will it?
    As far as I can see the only implications are that we Bhutanese will naturally buy more locally produced goods which will become affordable overnight. Some may say Industries that are dependent on raw material from India will be affected, but I say as long as Industries earn their own rupee they should be given access to it to buy their raw material. As is the case with all foreign currencies in Bhutan. Industries that don’t earn their own rupee shouldn’t survive since they are being propped up due to the 1 to 1 pegging.
    We talk about unemployment as a central problem in the country, people don’t have jobs because the jobs that exist are taken up by cheaper Indian laborers who are in fact subsidized by us and our future generation because of the pegging. Overnight our own people will become more affordable than the subsidized Indian laborers.
    Yes we will always be dependent on Imports, we just can’t produce enough. But if the devaluing of the Nu happens our local produces will become much more affordable encouraging growth of our local Industries and producers to increasingly meet our local demands.
    There is a lot of talks about Bhutan coming out of the LDC category but is it really true that Bhutan has reached DC levels? The Nu is pegged 1 to 1 to the rupee meaning that it is the strength of the Indian economy that give us this value. If for arguments sake we were to devalue the Nu to the INR say 1INR to 1.5Nu our GDP per capita also drops doesn’t it?

  2. If we do allow our currency to be floated on the open market or if one fine day big brother India suddenly decides not to allow us to peg our Nu to their INR, that will be the day when we will be, for want of a better term, in thick shit. It would not be possible for our Reserve bank to just devalue our currency as per their whims, rather it would be market forces that would then dictate as to how much value our currency loses. In a scenario where our currency is devalued by only 50%, as suggested by you, life would be tough, but still bearable, however, the reality is, that, given the huge trade deficit we have with India, the value of our currency will most probably be lost by as much as 300/400/500 percent, which would then make our lives unbearable.

    Right now, we are better served keeping our currency pegged to the INR on a one to one basis, so lets not rock the boat.

    I am certainly not an economist, so maybe I could be wrong, however, common sense tells me that devaluing our currency at this moment in time is not the way forward.

  3. Tshomo’s proposal does not make sense to me. Let me ask you, what are we actually producing? We can’t even produce tooth paste, for god’s sake. So you want to devalue Nu to the extent that our people cannot even afford to buy a tooth paste. Your proposal is dangerous. I don’t agree with you at all. It is better to let Nu=Rs. Our economic strength is hydroelectricity and tourism so let us try in those sectors first. We are only 700000 people, i am sure we can take care of the needs of our people if we do not misuse what we earn. At the moment our per capita income is quite high compare to other south asian countries but we are not able to manage our wealth transparently and equitably. That is the problem.

  4. Devaluing of a currency to another is not something impossible. Albeit it must be complicated but are we making decisions based on fear or on rational thought? I do not suggest free floating of the Nu. Considering that Bhutan’s economy is a speck in the water compared to India I don’t think it would be of any concern to them if we devalue it and peg it at 1 is to 1.5 as suggested. The Chinese have pegged the yuan to the dollar at around 6 to 1. 
    Sonam I would suggest that you actually contribute something to the discussion rather than making statements that do not have any supporting facts. I mentioned in my statement that we will still need to import things and the devaluing of the Nu to the INR does not decrease our ability to import goods from India. Our export earnings will still be in USD and INR which will still remain the same. At an individual level people will have to think more carefully about what to buy but isn’t that being prudent?

    • Tshomo, in our case, the RMA pegging the Nu to the INR as they see fit ie1INR = 1.5NU is not going to work, simply because we don’t have the means to protect our own currency. China’s case is completely different, in that, they will in a few years time take over the USA as the largest economy in the world and hence can protect the Yuan from any wild fluctuations in the currency market. Right now, they have managed to keep their USD/Yuan rate to 1USD = 6Yuan which is greatly undervalued just so as to boost exports, but sooner or later, they will come under increasing pressure to let the Yuan float in the open market. In our situation, since we really do not export anything substantially, devaluing the Nu would only have adverse effects on our economy as the purchasing power of our currency would go down.

      In regard to the value of the Nu, if we do at some time decide to unpeg it from the INR, than the Nus value will go into a free fall, at least thats what I think would eventually happen if we went down that route.

  5. what????????????

  6. Until all our Hydro power plants are fully constructed let us not distort our Ngultrum value. Govt. can not afford to propose another pay revision because there is already double digit inflationary situation in the country. Our big sister had helped us, is helping us and will help us.

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