A government appointed taskforce compromising of civil servants said that the Private sector and private consumption are the main causes of the rupee crisis.
This has led to a severe credit crunch especially for the private sector bringing the Bhutanese economy to a virtual halt.
However, a study by the Bhutan Chamber of Commerce and Industry shows that government expenditure and government projects are the main cause behind the rupee shortage.
Government expenditure means more credit
The study done by the BCCI research section in collaboration with a consultancy firm found that as government expenditure increased the credit market expanded on almost an equal footing.
The study also shows that as government expenditure increased there was a corresponding decrease in rupee reserves.
The study tracked both government expenditure and also the growth of the credit market from 1996 to 2011 June. When this information was plotted along a statistical graph (see image) there was a clear co-relation between the two showing more government expenditure meant more credit and more consumption. The graph also showed that as expenditure went up the rupee reserves plummeted.
“Growth in the loans are driven are driven by government activity for example contractors have to buy construction equipments like trucks on credit to implement government construction projects,” said the consultant who did not want to be named.
The graphs also show that as Bhutan’s GDP increased in size the rupee borrowings from other countries went up.
“One one hand the government says that the private sector is too small to make any difference in Bhutan’s economy but now they are blaming the private sector for all the rupee shortage problems,” said a businessman.
Government budget deficit and rupee shortage
One of the main causes of the rupee crisis is that more money than available has been spent. So another major finding is that since 2009 the government has for the first time in Bhutanese history borrowed Nu 8 to Nu 9 bn from the internal domestic market. It was also found that in 2010 and 2011 government deficits had raised quite substantially compared to historical trends.
This fact is borne out by another statistical graph which shows that from 2009 onwards the revenue from domestic sources and grants was not able to match the expenditure.
“We were in a good position until 2009 but from then on our budget was not able to keep up with expenses meaning that the government was living outside its means.”
“3% to 4% deficit is acceptable by international standards but in the case of Bhutan more than 60% of our deficit spending is in India leading to more rupee shortage,” said the consultant. “These figures show that the government has the biggest role to play in rupee shortage,” said a businessman.
Hydro projects and rupee shortage
The BCCI study also found a clear co-relation between Hydro projects like Tala and Punatsangchu I and rupee shortage.
The study tracks the balance of trade from 1997 to 2011 by looking at the export and import figures and comparing it with the construction of hydro projects in the same period.
The study finds that once Tala project construction started in 1998 there was a dramatic increase in imports until 2006 meaning that Bhutan was spending more rupees then we were earning them. From 2006 on with Tala coming on line the positive trade balance was again restored with more exports than imports.
The positive trade balance is maintained till 2010. However, the same Trend with Tala is repeated from 2010 when the intensification of the Punatsangchu I project sees a dramatic increase in imports leading to a negative trade balance and hence more rupee expenditure.
“The rupee that comes in strictly for the projects leaves the country through the Indian contractors but additional rupee is spent as many Bhutanese businessmen have to buy trucks, excavators and material in credit for the project,” said the consultant.
The consultant said that with the government freezing credit this meant that Bhutanese citizens would not be able to take part in hydro projects. “In the long run the excavator will earn more rupees as the owner will use it over a number of years to recover the cost and also make profit,” said the consultant.
Saving dollars to spend rupees
The study also found that the government has been hoarding dollars and spending rupees directly contributing to the rupee shortage.
The study through a graph shows the direct co-relation between increasing dollars reserves and decreasing rupee reserves from 1998 to 2011. The difference is most stark especially between 2008 and 2011.
“A large chunk of the dollars and foreign currency held by RMA is from foreign grants meant for capital works like construction of school, hospitals, roads etc but instead of using that dollar they save it and instead use rupees,” said a businessman.
The rupees used would have to come from the government’s treasury and banks leading to a rupee shortage.
The study in a desk analysis concluded that the current reserves of 700 million US dollars would be sufficient to import around 45 months of imports of basic essentials like fuel, food and raw materials, much more than the constitutional requirement of one year.
Rupee Crisis more severe than reported
The study also analyzed that the rupee shortage is more severe than reported as all the official information on rupee shortage comes only through formal channels like banking data and government expenditure not accounting for the informal rupee exchange.
The study found that government data on education, health and pilgrimage reflects only a fraction of the actual rupee exchange. For example under these three categories the government data on rupee expenditure is Nu 1.3 to Nu 1.7 bn but the study says that actual estimates based on a desk study would be around double.
These figures if reflected on informal trade and others would mean that Bhutan’s rupee shortage crisis is more severe than official figures of rupee shortage.
No steps taken to save rupees
It was also found that though rupee shortage was a well known problem since 1993 there was no attempt by the RMA and the government to save rupees. “To be fair RMA took over rupee management only in 2005 from Bank of Bhutan but even then after that there was no strategic management of this currency,” said the consultant.
Short Term and Long Term solutions
One of the main aims of the study apart from pointing out the governments overwhelming role in rupee shortage is also to offer solutions both short term and long term.
“We will need some more time to come out with concrete solutions as each different association will be sending us their ideas but as of now we have a few suggestions,” said the consultant.
The short term solutions are imports and exports through formal channels, better management of currency reserves and streamline payment schedule of hydro project expenses.
The long term solutions listed out are import substitution, export promotion, policy changes, access to dollars for businesses that earn rupees, encourage remittances by non-resident Bhutanese.
The final report will be compiled with additional feedback by mid May 2012, after which it will be presented to the Ministry of Economic Affairs and the Royal Monetary Authority.