After Modi’s nod Bhutan can get additional interest free INR 7 bn swap for six months

The Royal Monetary Authority (RMA) is delighted with the Indian Prime Minister Narendra Modi approving an additional USD 100 mn under the Standby Swap Arrangement.

Bhutan already had a USD 100 mn under the SAARC Currency Swap Framework agreement since 2013 which essentially meant that Bhutan in return for an equivalent amount of Ngultrums could take INR up to USD 100 mn for a period of six months with no loan interest rate.

Modi on the request of the RMA through the government has agreed to double this to USD 200 mn under the Standby Currency Swap Arrangement.

Given the current value of the INR to the USD this means that Bhutan now has flexibility to take up to INR 14 bn in total.

A RMA official explained that the first six months is interest free and it can be extended for two more terms or another 12 months but for this additional time the interest rate will be the RBI repo rate currently around 5.40 percent minus 2 percent which is a 3.40 percent annual interest rate.

Bhutan since 2013 has used this swap arrangement a few times but it had always paid it back before the six months and so avoided paying any interest rates.

The official said that USD 200 mn swap arrangement will make Bhutan’s INR position more comfortable when Bhutan has to make large INR payments for loan servicing, essential imports like fuel and food and also in running the government’s key activities.

He said this arrangement is useful for those parts of the year when Bhutan has to pay a lot of INR payments but the INR from other sources have not yet arrived.

The official, however, clarified that the swap arrangement is not like a bank account where one can just withdraw money.

He said the swap should be used as a last line of defense and a proposal should be put to the Reserve Bank of India who will then approve it based on the needs.

The official also explained that the RMA will never use the swap money for consumer driven imports but mainly on account of debt servicing like hydro loans and on essential imports like fuel and foods items.

He said that in one way the increase to USD 200 mn was due and financially sound as the 100 mn had been calculated in 2013 based on the 2010 reserves level and what was required then to finance imports for two months.

Bhutan’s reserves since then have almost doubled and it makes sense to double the swap amount too.

The SAARC Swap facility was offered by the RBI pursuant to the decision of SAARC Finance Ministers at the SAARC Ministerial Meeting on Global Financial Crisis held on 28 February, 2009, which noted that “A major cause of current concern in the region is the drying up of credit and the contraction of financial markets. Mechanisms must, therefore, be developed aimed at creating bilateral arrangements in the region to address short-term liquidity difficulties and to supplement international financing arrangements.”

In May 2012, RBI had announced it would offer swap facilities aggregating US$ 2bn, both in foreign currency and Indian Rupee, to SAARC member countries which include Afghanistan, Bangladesh, Bhutan, Maldives, Nepal, Pakistan and Sri Lanka.

RMA entered the agreement in early 2013.

It was expected that this swap facility would further economic cooperation within the SAARC region, pave the way for increased intra-regional trade, and contribute to enhancing our collective welfare.

For availing of the facility, the central banks of requesting countries entered bilateral swap agreements, which needed final approval from the Government of India. The Reserve Bank’s proposal to offer swap facility to SAARC member countries had been approved by the Indian Union Cabinet in 2012.

The joint statement says, “Prime Minister Shri Modi assured Prime Minister Dr. Tshering of positive consideration of Bhutan’s request for enhancement of the currency swap limit under the SAARC Currency Swap Framework. As an interim measure, Prime Minister Shri Modi offered an additional USD 100 million of currency swap under the Standby Swap Arrangement.”

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