Fronting Report vanishes along with Rupee

With the Bhutanese economy being hit by a severe rupee crunch, people say one of the causes is fronting of businesses, especially in the manufacturing sector.

But the government officials The Bhutanese talked to feel fronting could not be a cause of rupee crisis as much as it is believed to be. They also say that they do not have enough evidence to prove fronting is a culprit of Bhutan’s economic ills.

However, a joint study conducted in 2007 by the Royal Monetary Authority (RMA), ministries of finance and economic affairs reflected fronting as one of the possible causes of rupee shortage in the economy.

The study compared export value of some manufacturing houses with inflow of money in 2006 and January to May of 2007.

For example, ten industries had exported Nu 7.51 billion worth of goods to India. But the inflow was recorded at Nu 3.73 billion. This means that Nu 3.78 billion had gone missing and the money was not recorded as coming back from India.

The ten manufacturing companies were: Jigme Polytex, Mega Pvt. Limited, Yarab Pvt Limited, Singye Vanaspati, Bhutan Metal Pvt. Limited, Kenpa Pvt. Limited, Rangshar Pvt. Limited, Yarkay Pvt. Limited, Choden Wire Pvt .Limited, and RSA Pvt.Limited.

The report outlined that the non remittance of the earnings are possibly due to four reasons like fronting, existence of cross payments made outside the banking system in Bhutan for importing software, overstatement of export values and depositing in Indian banks for higher rate of interests.

What has happened to the report?

Despite the inaction on the report by the authorities concerned, the report itself seems to have gone missing like the money.

The prime minister, Lyonchhen Jigmi Y. Thinley, said he is not aware of the 2007 report.  He  said the finance ministry would know about it.

The interim prime minister then, Lyonpo Kunzang Dorji, says he remembers the present governor of RMA coming to him with the report.

He said fronting is a serious issue and task forces have been formed to address it. The government has been trying to tackle the issue for a long time now, he said, adding apart from the balance of trade fronting is a major cause of rupee crunch in the country.

The finance secretary, Lam Dorji, said even he is not aware of the 2007 report. “If there has been such incident where export value is more than the import, then something wrong is happening. And that needs to be explained through the review of records,” he said.

However, the report of the task force that studied the ongoing rupee crunch has not looked at fronting as a separate issue as a possible cause of the problem.

The finance secretary said the impact of fronting on rupee shortage needs to be studied.

An industrialist who did not want to be named said fronting needs to be defined properly. He feels as long as the money stays within the economy it should not be much of a problem.

PM on fronting

The prime minister,said the rupee crisis is caused by excessive lending and borrowing for luxurious goods. And it is something that the economy needs to get rid of.

He said the government has always opposed and prevented fronting, but somehow it is difficult and has been happening. “It is sad that somehow we have not been successful,” the prime minister said. Fronting has very little to do with the rupee crisis but it does affect. It is not as significant as it is shown to be.

Economic affairs minister

Lyonpo Khandu Wangchuck said fronting not only abuses the rules but also harms Bhutanese who are genuinely engaged in the trading sector. That is why the  government considers fronting illegal and has resorted to taking action against those proven to be involved in in the act, he said.

In the major commercial hubs, the economic affairs ministry has instituted committees involving the government and the private sector to check fronting and to take action against those involved. Recently, actions were taken against traders [involved in fronting] in Gelephu and Phuentsholing.

The minister said fronting not only affects the national economy, but also affects the growth of the Bhutanese entrepreneurship and the private sector. Bhutanese must build up their capacity to undertake commercial activities by running the ventures by themselves,” said the minister.

The governor of RMA, Daw Tenzin, said fronting comes with the issue of license. He said if the fronting had taken place in the manufacturing sector, the money could have been kept outside.

However, he said, there is no concrete evidence and the new circular RMA  passed would help detect fronting cases.

The circular states that all export proceeds must be brought in by the exporters through the banking channel within 91 days from the date of export. The custom authority, the commercial banks and the RMA will jointly review and monitor through exchange of information.

If the export proceeds are not received within the time frame the authorities will jointly investigate and take necessary action.

At regional trade offices 

There are about 167 unresolved fronting cases at the regional trade offices in the country – the regional trade office of Chukha (100), Samdrup Jongkhar (63), and Gelephu (4).

Though committees have been set to tackle fronting in the dzongkhags, they have not been effective. The regional trade director of Gelephu, Sangay Phuntsho, said: “We are not the investigation agency but we are doing our best.”

The regional trade director of Smadrup Jongkhar, Karma Dukpa, said fronting is quite common among small time business license holders. He said his office will find out the status of business licenses at the time of renewing them, which is scheduled for April till June this year.

In Chukha and Samtse, of the 5,117 business licenses 191 are held by non-nationals, mostly in Phuentsholing (168).

There are 2,500 business license holders in Gelephu, out which 114 are held non-nationals.

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  1. Bhutanese are heavily depended on Rupees due to very minimal economic activities between our own people. Fronting is one definite cause to it because Indians across borders are well established and have enough power to kill the Bhutanese up-risers in the trade.

  2. If there are so many explanations and theories why is the nation not asking for independent inquiry? I think it’s very important to know how this crisis came about? How did it happened? Who is to blame? Is this crisis still looking for the bottom of the abyss? Has our economy being hijacked by the few rich people for their own benefit? How government was taken by surprise (FM’s statement)? I don’t believe that! Is Pasakha a big hoax? The people has the right to know what Pasakha is all about? How much subsidy do they get and how much do they help in the economic growth? We deserve to know the answers!

  3. Fronting and tax evasion must go hand in hand. This tax paid as rupee could have possibly flown back into our economy. In collusion we could suspect officials in the government who let this pass right under their nose. I guess, our system is only capable of penalizing and punishing this small time traders whose profiteering records could be in thousands as compared to millions by the industrialist. Is something fundamentally flawed here? I think the issue of fronting deserves deeper research and statistics.

    • Why all those involved in fronting could not be prosecuted? If regional trade offices could not as they are not the investigation agency, why MoEA did not forward those cases to Attorney General for prosecution?
      May be because highly influential people are involved or trade offcials are party to them.

  4. If the reports were done in 2007 why weren’t the actions taken. This is very sad. We need to prob into those 10 industrialists and debate on fundamental questions such as: How and why did they get their license? Is there an invisible hand behind? Who owns those businesses and how are they linked to the movers and shakers of Bhutan? Let us all work together to uproot these inequalities and give everyone a chance to rise. I congratulate The Bhutanese in their courage to tread a path nobody dared in the past. Keep informing and public and I am sure they will be behind you when you need them. Thumbs up.

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