Though the government has said that the rupee situation would improve in the near future especially with the commissioning of the mega hydro projects in 2017-2018, the Bhutan Chambers of Commerce and Industry (BCCI) does not agree.
In fact the BCCI has said that with the present rate of development, not only would the rupee situation get considerably worse but it would also threaten all other major economic sectors in Bhutan.
The BCCI which is working on a presentation for the government highlighted the government’s own figures saying that with imports worth Nu. 54 billion outweighing exports of Nu 30 billion, Bhutan’s overall balance of trade in June 2012 was at a deficit of Nu. 24 billion. The deficit is expected to widen to Nu. 42 billion by June 2015.
BCCI says that the Ministry of Finance itself recognizes that the balance of payments with India will worsen in FY 2014/15 “mainly due to an expansion in merchandise imports on account of the construction of hydro-power projects.”
According to BCCI and its advisor the QED consulting group, a major cause of the current and future rupee crisis are the effects of 10,000 MW projects all being implemented at once.
QED’s Jamyang Tashi said, “On the whole nobody disagrees that it is a profitable sector and national resources have to be used to our advantage, but if things keep going at this rate the rest of the economy will take lasting damage from which it may never recover or a take a very long time to recover.”
A BCCI businessman said that the huge scope and size of the projects and the auxiliary demands it made was taking out all the resources from financial institutions and other places leaving little or nothing for the other sectors of the economy. “In some ways hydropower is taking the air out of the room for the other sectors of the economy,” said the businessman.
He said the by the time 2017-2018 came the revenue from the projects would not be enough to meet the rupee shortfalls.
Another BCCI member who also did not want to be named said that one small example would be that due to the huge loans taken on account for construction equipment for hydro projects there was little financing left for the housing and construction sector.
The BCCI presentation says between now and 2020, 10 hydropower projects are expected to be executed, meaning persistent and growing trade deficits for the next seven years.
“As of March 2013, the Royal Government has borrowed about Rs. 20 billion from the GoI and other Indian commercial banks to manage the shortfall in Indian Rupees owing to huge imports from India,” the presentation pointed out.
The presentation questioned, “If with only 3 ongoing hydropower projects, we are seeing short term Rupee borrowings of this scale, how much more will be needed in the next 4 years before the first of the hydro projects starts earning revenue?”
QED pointed out that international reserves may not be enough to convert into Indian Rupees to pay back the short-term loans and also meet constitutional requirements for essential imports and pledges against loans from foreign banks.
The Indian Rupee Task Force report of 2012 estimates that about $450 million of reserves must be set aside to meet the constitutional requirement of having enough reserves to pay for 12 months’ worth of essential imports. A further $316 million is pledged against overdraft facilities at the State Bank of India and Punjab National Bank. As of now, this leaves only $122 million or Rs. 6 billion for the central bank to maneuver.
The BCCI feels that the solution is either in scaling back the 10,000 MW projects over a longer period of time or that the government promotes the growth of other sectors of the economy through various policies and measures that would make it easier to do business.
BCCI officials said that the next five years will be crucial in determining the long term health of the Bhutanese economy. They said Bhutan cannot wait for revenues of hydropower projects if the rest of the economy fails to keep up.
“With an almost complete freeze in all lending by banks and businesses finding it harder to avoid defaulting on loans, the private sector could experience a drastic step backward in its growth over the next five years,” said a BCCI official.
BCCI officials said that an economy 10 years from now in which hydropower could comprise 60% to 70% of GDP is vulnerable to any number of shocks like climate change and natural disasters.
QED said that the government must promote the development of other industries along with hydropower in order to ensure alternative sources of export earnings in the interim period between hydro projects’ development and commissioning.
It said measures like reforming licensing policy, revising FDI policy to attract foreign investments, and changing the excise duty system to make Bhutanese industries more competitive are all ways to improve the balance of trade and reduce the economy’s over reliance on one single sector.