After cash crops, Industries and banks are now affected
On the fateful evening of 8th November 2016 Lyonchhen Tshering Tobgay was watching the evening news when the Indian Prime Minister Narendra Modi announced the surprise demonetization move.
Lyonchhen immediately got on the phone with the Royal Monetary Authority (RMA) Governor Dasho Penjore and instructed him to immediately get in touch with his Indian counterparts.
The RMA which was also taken off guard by Modi’s announcement immediately got in touch with the Reserve Bank of India (RBI) on measures to transfer its own INR 800 mn in cash and also the INR held by ordinary Bhutanese.
The initial focus was to collect and transfer out Nu 500 and Nu 1,000 INR notes so that replacement currency could be got for it in addition to the RMA’s INR cash requirements for the Bhutanese economy.
Bhutan had a requirement of INR 250 mn a week to not only replace the old currency but also smoothly operate its economy and make cash payments. This would make the total requirement Nu 1.750 mn in the last seven weeks since demonetization was announced.
However, from the second week itself it became clear that the RBI had not printed enough notes and so Bhutan did not get the new INR notes. In addition RBI is yet to validate the Nu 2.4 bn collected and sent from Bhutan.
After requests for INR 250 mn a week made recently the RBI promised to send INR 100 a week to Bhutan of which Bhutan has received only INR 130 mn so far.
The impact of India’s demonetization is already having a strong impact on the Bhutanese economy.
The RMA Governor Dasho Penjore said that the main problem was that the shortage of the INR had affected the peg of the Ngultrum and INR. He said this in the light of reports from borders areas where Indian traders and transporters are charging up to a 20 percent commission to accept Ngultrum payments.
Dasho said that the RMA had worked hard to restore the peg after the 2012 Rupee crisis and now it has been hit again. The Governor said that it is not good for the Bhutanese economy as it affects both exports and imports.
He pointed out to the problems faced by potato, orange and cardamom exports, both in terms of lack of buyers from India due to demonetization and also transportation issues as Indian truckers demanded cash payments.
INR collected from Nepal and Bhutan are being treated as the same with authorities in India suspecting it was used by some Indians to wash their black money which is why they are yet to be validated and depositors in Bhutan are yet to get back the Ngultrum payments.
A Bhutanese economist on the condition of anonymity said that it is not fair to put Nepal and Bhutan on the same platform when Bhutan has always been very responsible and not allowed either fake Indian currency or other illegal financial operations.
The economist said that Bhutan’s requirements are equivalent to that of a single bank branch office in India and so it is difficult to understand why INR was not being sent to a friendly neighbor like Bhutan.
The RMA Governor said that RBI is trying its best as India itself was facing a rupee shortage.
Meanwhile the INR shortage is starting to bite for the Bhutanese economy. Apart from the issues faced by cash crop farmers and exporters Bhutanese Industries and as a result Financial Institutions are also being affected.
Financial Institutions Association of Bhutan head and BNB MD Kipchu Tshering said that the lack of INR is a big problem for everybody as companies and people cannot use the INR they deposited to pay back loans to the banks and so that meant more Non Performing Loans.
He said that exporters don’t even have cash to pay truckers to send out their exports and this is further pushing up costs. Some of the biggest individual loans at times running into billions are taken by Bhutanese Industries operating in the south.
The Association of Bhutanese Industries (ABI) General Secretary, Jochu Thinley said that the INR cash shortage in Bhutan due to demonetization in India is affecting Bhutan’s industries.
Jochu said that from the INR account that Industries maintain they were earlier allowed to withdraw 10 percent as cash to pay transporters, labourers, toll tax, fuel, ‘goonda tax’, local syndicate payments etc but that is no longer allowed. He said the lack of INR cash is now affecting exports. He said that the Industries should at least be given INR 10,000 to 15,000 per truck consignment for transportation costs.
Another issue he said is that while many industries deposited all their cash INR they could not get equivalent Ngultrums and as a result it was effecting loan payments to the banks. Jochu said it would be helpful if the industries could at least get a letter saying that money will be eventually paid to them.
The ABI is in the process of collecting various views from its members on the exact nature of the INR shortage impact on Bhutan’s industrial sector.
It has been learnt for example that Penden Cement’s sales have suffered due to demonetization.
Karma Feed which supplies feed to farmers across Bhutan is also seeing the affect and says if the situation continues then feed production may be affected in the coming days.
Jochu said that the ABI is planning to meet the RMA Governor in the coming week to address these issues.
However, with only INR 130 mn cash in the RMA kitty and unprecedented INR rationing the ABI may not see much results.
In the meantime Lyonchhen Tshering Tobgay said that given the good relations between the two countries the Indian government is willing to cooperate. The PM said it is not that India is not sending the money but India itself does not have enough INR for itself.
Lyonchhen said the government is monitoring the situation and like in the case of potatoes it can intervene in others cases to help exporters.
He said that Bhutan has more than enough INR reserves at INR 30 bn and so there is no need to worry or hoard INR.
Lyonchhen requested people to postpone their pilgrimages and trips to India unless it was absolutely necessary. He said that the situation would stabilize in the coming weeks.