It has been around eight to nine months since the government and the central bank introduced a slew of measures aimed at cooling down the economy and decreasing rupee imports.
These include austerity measures by the government and limited access to rupee and credit by the central bank. The credit crunch has taken on a life of its own as banks have realized that they still have low levels of liquidity even if the central bank restrictions are not in place.
Though these measures were taken in the face of rupee shortages and unsustainable rupee loans the sum total of all these measures has not only cooled the economy, which was the original intent, but it is now also in the process of freezing it.
Ordinarily if the government curbed its spending drastically the negative economic impact would be limited if credit was available or vice versa. It would also achieve the aim of cooling the economy but not freezing or immobilizing it.
While cooling the economy is understandable in light of the huge rupee loans, freezing the economy will create both short term and long term problems in the economy.
At the level of a basic business, cooling will make it reduce its imports and also tighten its belt but a freeze in the economy will lead to mass layoffs of staff, drastic reduction in business and the very real possibility of the business shutting down. In this example , the government may have reduced its imports but the damage is that unemployment will increase and the government will forever forego tax revenues that could have been generated by the business.
The freeze in Bhutanese economy is very visible for many with many big and small business firms going through extraordinarily lean times. While the government’s austerity measures have directly or indirectly impacted their income the credit crunch has limited their capital to do business, further affecting their income.
While it must be acknowledged that the government is going to provide easier access for domestic and foreign credit for rupee or foreign currency earning businesses, the move apart from benefitting a few big business houses will not necessarily benefit the economy as a whole.
In the international context countries like the United Kingdom, Greece and Spain have all shown that excessive austerity measures does not help in reducing external debt but also leads to a freeze in the economy which is actually supposed to generate revenues to pay off the debt. All the above countries have shown worsening debt positions combined with a contracting economy.
In the UK, the economy was actually recovering up to 2010 under the Labour government which had introduced some stimulus spending programs but once the Conservative government took over stringent austerity measures have made matters worse.
In Bhutan’s case since the role of the government in the economy is even more central, it should be fully aware of the implications of its austerity measures.
While Austerity measures in reducing wasteful public expenses like entertainment, excessive DSA collection, unnecessary projects, foreign trips etc is always welcome, the government should be careful to insure that its measures and policies should not restrict private sector growth.
The government should also look at the long term payoffs and implications of its moves against its short term aims.
It is acknowledged that one of the causes of the rupee crisis is a rush by Bhutanese contractors and citizens to buy heavy vehicles for the 10,000 MW.
While in the short term it may cause excessive credit and rupee loans the long term implications are positive as the same vehicles would be ensuring that rupee does not leave the country.
With some Bhutanese construction companies planning to put together a domestic hydropower construction company such imports will actually enhance the national capacity to take on big projects to earn mega project construction revenue which is in the billions.
Another example is that while cutting the advertisement budget drastically may save some money, it has implications on employment (as media houses are comparatively large employers) and more so on free press, free and fair election coverage, and Bhutanese democracy. (It is another matter that the remaining advertisement budget is denied to critical papers. )
While there is no doubt that the government has to tackle the rupee shortage problem it should do so in a way in which our economic productive capacities are not limited. Everyone accepts that the Goose that lays the golden eggs needs to go on a diet but not to the extent of not being able to lay anymore eggs.
“Deficits must be cut, yes, but the rush to austerity risks undermining the fragile global recovery.”