Ensuring Rupee-Ngultrum parity

The Royal Monetary Authority (RMA) in tandem with the Ministry of Finance (MoF) has been carrying out some much required reforms in reducing Rupee scarcity and, more importantly, restoring the Rupee-Ngultrum parity.

An important first step was opening rupee counters in Thimphu and Phuentsholing in January 2016 to address the domestic rupee demand. The counters have a Rs 50,000 limit per person per day. In addition to providing rupee to people who really need it this move has had an important psychological impact.

From next month onwards the RMA rupee counters will also provide rupee to Indian traders which will play an important role in resolving the Ngultrum-Rupee parity issue caused by an unofficial devaluation of the ngultrum against the rupee.

The RMA, on its part, could carry out the rupee measures for mainly four reasons.

The first is that it had built up a strong rupee war chest which is big enough for now to meet the demands of such exchange counters.

The second reason is fiscal, with the government of the day cutting back on unnecessary expenditure which has reduced the government’s rupee expenditure. One example is the delayed construction of several government ministries and agencies as such construction leads to rupee outflow. Unknown to many, the government is in a very strong financial position with all these savings. Another move on the fiscal front has been the increased taxes on vehicle imports and on telecom services which was deliberately done in the first year itself.

The third reason is that after the rupee crisis, the rupee is now acknowledged to be an important component of the RMA reserve which was previously more focused on convertible currency reserves. There is therefore better rupee management.

The fourth reason is to do with an improvement in the flow of rupees from India for both the 11th plan and also hydropower projects. Towards the end of the 10th plan there were serious issues over delayed grants and rupee payments for both the plan and hydropower projects.

The situation reached such a level that the former government had to take a loan from an international financial institution to tide over some of the shortages towards the end of the 10th plan. It may not be a matter of simple coincidence that such delayed payments also coincided with diplomatic tensions between the two governments.

The earlier rupee cap of Rs 10,000 and that too after showing flight or bus tickets along with ID cards was inadequate at best. This particularly affected Bhutanese visiting India for trade, meetings, education, tourism, pilgrimage, trainings etc.

The RMA between late 2011 and 2012 had come out with a series of aggressive monetary measures to address the huge rupee loans it was paying. A lot of action had to be taken by the RMA on account of the economic situation and lack of adequate fiscal measures from the government.

However, in all the measures a big mistake committed by the RMA was in suddenly asking Indian traders to close their Bhutanese bank accounts and as a result Bhutan suddenly lost billions of rupees in paying these traders in rupee.

All of this led to an automatic slump in the Ngultrum by around 10 percent against the rupee. Since both currencies are supposed to be on parity, and since India is our largest trade partner the unofficial devaluation meant that overnight, around 10 percent of the monetary national wealth was wiped out.

Meanwhile, an illegal trade in rupee thrived in the borders towns with some mainly Indian business outlets, based in Phuntsholing, making billions worth of ghost imports to claim rupee from RMA. This rupee was then sold for a commission across the border.

The Rupee restriction, therefore, led to a thriving underground Rupee trade whereby billions of rupees were actually lost to ghost imports.

The unofficial devaluation brought about a lot of practical problems for Bhutanese doing shopping in India as they were overcharged to cover the difference.

While all of the above rupee liberalization measures are welcome, both the RMA and the MoF must keep an eye out on potential risks from rapid hydropower construction projects and other government expenditure. Importantly, ordinary citizens must also be more frugal in their rupee usage.

However, the only long term solution for solving the rupee issue and along with it reducing unemployment is in strengthening Bhutan’s weak private sector and boosting exports.

By Tenzing Lamsang



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