Govt and RMA also responsible for rupee crunch

Till now, both the government and the RMA have put the bulk of the blame for the rupee shortage on private consumption, private sector and credit expansion while shirking any blame themselves 

The two main causes cited for the rupee crisis by the government and the Royal Monetary Authority (RMA) are private consumption like car imports and the private sector’s activities that lead to credit expansion from the banks and hence unsustainable rupee imports.

Both, however, were not as vocal or forthcoming on parts of the rupee report that held them or their policies culpable, too.

The Bhutanese has found that apart from other above well known causes the still secret government task force report on the rupee shortage also cites government expenditure and RMA’s convertible currency reserves as other major reasons for the rupee crisis.

 Government Expenditure

The report says that an increase in government spending has an immediate effect on aggregate (total) demand in the economy.

Additional government spending generates new income: new income generates more consumption; increased consumption generates more income; and so on. This is the multiplier effect of fiscal policy, says the report.

Government expenditure increased from Nu 9.8 bn in 2002- 2003 budget to Nu 38 bn in 2011-2012 budget. The report says that 60% of government expenditure directly translates into imports from India. The report under the balance of payments section says that rupee shortage in the country has been due to rising aggregate demand and supply side constraints. It says that aggregate demand is triggered by public expenditure, credit market and other private expenditure on health, education and so on.

It says that although not easy to quantify, it is recognized that fiscal expansion of the government leads to creation of more demand in the economy, which would have impact on the Balance of Payments and thus the Rupee outflows.

Government expenditure like the two salary revisions for public servants, national elections, expansion of government establishments, and the project for accelerated socio-economic development among others are cited as examples of expenditure which have added to the government spending during the 10th Five Year Plan (FYP).

The report points out that fiscal expansion or government expenditure itself increases disposable income, consumption and investment. In another section in the report titled ‘other causes,’ increase in disposable income is blamed as a cause for the rupee crisis saying that it leads to more consumption.

Disposable income grew by 13.5% in the 9th FYP and 12.8% in the 10th FYP. During the 9th FYP, the total consumption was 60% of gross disposable income and rose to about 63% in the next FYP.

The report says that any increase in investment in the economy without corresponding increase in savings will lead to a current account deficit (negative trade balance). It says that as the government accounts for a large part of the aggregate demand, fiscal expansion will translate into movement of balance of trade.

The report acknowledges that the budget also had a direct impact onthe rupee since all the resources that are either grants or domestic revenue did not come in rupees. Firstly the convertible currency portion of resources has to be converted first into Ngultrum and then rupees for imports from India. Secondly, some component of the domestic revenue generated in Ngultrums has to be converted into rupees for imports from India.

While acknowledging the impact of government expenditure on the rupee shortage, the report is also contradictory in places as it tries to show (unconvincingly at times) that government expenditure did not play as significant a role in the rupee shortage as credit expansion.

The report says that government expenditure has been steadily increasing on an average of 10.6% inthe 9th FYP and 14.5% in the 10th FYP. The government says that recurrent expenditure is met fully from domestic revenue, and grants and loans from donors and agencies cover about 95% of the capital expenditure in 9th FYP and 85% in 8th FYP.

Therefore, the report says that the balance of payment problems and resulting rupee shortage would come from the budget deficit. The report then points out that there was budget surplus from 2002 to 2010 budget and there was a budget deficit of Nu 1.63 bn in 2010-2011 budget which it says is only 2.1% of the GDP while the current account of deficit or negative trade balance is 21.1% of GDI in the same period. It concludes that since the budget deficit financing through treasury bills and borrowings was so small, the deficit financing through treasury bills and borrowings was not directly responsible for the overall account deficit and therefore the rupee shortage.

The report, however, fails to mention that in 2011-2012, the budget deficit is a whopping Nu 5.4bn.

In the 2011- 2012 budget, out of Nu 18 bn domestic revenue, only Rs 7.5 bn was in rupees; in 2010-2011 budget of the Nu 17.4 bn in total revenue the rupee revenue was only Nu 6.4bn and in 2009-2010 budget of the 15.6 bn in total revenue, only Nu 6.3 bn was the rupee revenue. These  figures in the report show that nearly all domestic revenue goes into the government’s recurrent expenditure like salaries, stationeries, and fuel.

These figures also show that since the majority of domestic revenue or recurrent expenditure is in Ngultrum it will eventually have to be converted into rupee to import items. Though these figures are available in the report itself, the report fails to point out the obvious in its analysis.

The report also estimates unrealistically low rupee requirement for the government for imports not covered by external funding at Rs 208 mn in 2010-2011 and Rs 244 mn only in 2011-2012 budget.

 Government and RMA’s management of Convertible Currency reserves

Bhutan’s dollars reserves today stands at USD 702 mn after the sale of USD 200 mn dollars in 2011 to buy 10 bn rupees.

Bhutan’s policy of stashing away convertible currency grants and loans like dollars, Euros and foreign currencies in the RMA is a major cause of the rupee crisis. For example if Japan gives Bhutan USD 10 mn in aid, the convertible currency is kept with the RMA and instead an equivalent amount is released in Ngultrum which again gets converted to rupees. In short the government and RMA are saving dollar reserves by using the rupee reserves in its place greatly impacting the rupee reserves. The report says that RMA receives the convertible currency grants and loans and releases equivalent Ngultrum to the government budget fund account. It says that such treatment of convertible currency grants increases the money supply in the banking system fuelling credit growth.

It says that as the convertible currencies are for financing development programs and projects; more than 60% would ultimately translate into imports from India.

The report says that in 2010-2011 financial year, Bhutan received USD 93.8mn or Nu 4.2bn (using USD 1= Nu 45). The estimated rupee that would be spent on imports here would be about Nu 2.5 bn.

In addition to this the there was off budget convertible currency loansof USD 29.52mn or Nu 1.3 bn taken from Asian Development Bank for the Dagachu Hydroelectric project.

The report says that although the convertible currency reserve would have grown by that extent, the counter value has impacted on the rupee.

The report also says that the policy of directly accumulating convertible currency in the RMA reserves and then using rupees instead for imports has resulted in rapid depletion of rupee reserves on one hand while there has been a steady growth of convertible currency reserves.

It is also clear that the bulk of Bhutan’s dollar reserves come not from income generating activities but from stashing away grants and loans meant for dollars and instead releasing Ngultrum and rupees.

From 2006 to 2010, the dollar reserve grew from USD 299mn to USD 888.8mn. Of this, the contribution of the tourism sector was only USD 98.46mn.

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  1. This is called daylight robbery,, Govt thinks that we public are fool,,, If this situation and guts of govt happens in 2012,, what would have been in 2000’s, 1990’s, 1980’s.. This is corruption, fraud,,, cheating the public,, i think all the politicians, RMA officials and governer should be held responsible,,,,,,,,

    I dont know what can Jigme thinley say we are GNH country,,, firstly,,, govt says all bhutanese have to be educated and at the same time,,, they cheat us by giving us wrong info,, under constitution of bhutan, disseminating of wrong info by the organization is a crime.

    • Jigmey thinley GNH is five star. valleys of land for him in Bumthang to Babesa…….i feel shame to hear GNH from his mouth …thats why i switch off TV when i comes to speak.

    • Yangzom very good research and comments.your very patriot!!

      • Present govt. must solve it before they enter into next election. Y? There r lots of experts working for eg. as minister of finance for 10 yrs n they must know this situation long ago, therefor it’s total corruption of present govt. they r responible. They can’t let innocent villagers n middle class people suffer due to their ignorance. Must reflect their contribution…rather GNH a bullsit. 

  2. Yes the reprt suggested good. Both monkey heads in Govts and RMA are resposible to push people of Bhutan to virtually beggars. Now i hope only god can help us. so called lynpo FM told media few months back media is making hue and cry for no reason. People like so called Gorverner who know nothing abt economy and dy gov. who has some qualification and has not experience of managing country
    are manaiging the show , what can people of bhutan expect more trouble than this.
    The only options for us now is either go away like zimbabae way ….either doing way bhutanese currency and using Indian Rupee or devalueing … Now the Bhutanese ego , proudness need to be put to under carpet and compromise on spending on land cruiser prado. Other problems came also from the people who received katsho thousand acres of land sold among Bhutanese in millions and in order to spend those money got absolutely free of cost went on spending in convertable currency going out side developing western taste….buying thai foods, big sorts leaving to bangkok or US for minor surgery like gall stone removing etc etc. How can country digest that and now mess of burden is being put on to rdinary people in form of inflations cost and restrictions for basic needs .

  3. I think PMs speech has been striped…Fie on thee.

  4. I think PMs speech on INR crunch has been striped. Well done…Bravo.

  5. Our Pm should have vision beyond horizontal not just trying to raise taxes, banning vegetables which is daily needs.This issuance our PM should have forethought before he become PM of the nation. Although its good idea to make Indigenous production but within month its not a tangible idea we needed further master plan for the service of nation Building. I consider our PM as an intellectual giant of Bhutan and being first PM and worked different capacities. Therefore, I urge you, not do different things but do things differently in wee hours of rupee crisis. Leader needed vision not for the self centered but for the service of nation building to take Bhutan into closing to 21st and dawning to 22nd century technological world. Our PM should make Bhutan Paradigm shift ” Tradition to Modernity”. Which I meant! In the past people believed one man’s decision todayness world beliefs in synergical decision. Visionary leaders are the builders of a new dawn, working with imagination, insight, and boldness. They present a challenge that calls forth the best in people and brings them together around a shared sense of purpose. They work with the power of intentionality and alignment with a higher purpose. Their eyes are on the horizon, not just on the near at hand. They are social innovators and change agents, seeing the big picture and thinking strategically.
    There is a profound interconnectedness between the leader and the whole, and true visionary leaders serve the good of the whole. They recognize that there is some truth on both sides of most polarized issues in our society today. They search for solutions that transcend the usual adversarial approaches and address the causal level of problems. They find a higher synthesis of the best of both sides of an issue and address the systemic root causes of problems to create real breakthroughs.with these citation its Institutive enough needed new vision for the modern Bhutan

  6. I think if governer, and respective heads like ministers take promotion, medals during national day then they should also take demotion and punishment…. this is the only way to make an efficient govt… becoz of this stupid rma and govt normal people like us has to suffer….. 

  7. Yangzom,
    Whether you like or not, don’t call Jigme Thinley. He is our PM and learn to  respect senior citizen.If you can’t respect him as PM, respect him as your elder.
    We know govt made a mistake, but at the same time, it is real lesson for us and must have happened for good otherwise worst might happen in future.

    • Ala by name ur Muslim..where ur principle n philo is our of truth…we respect him but how he PM, spoils nation…?

      • where is gyelpozhing report????/ All the business are handled by either minister’s children or relatives,,, please open ur eyes and ears and u will see what is happening in the country…. looks like u r his relative

    • Ala,
      If he rape your mother will you still respect him as your elder.

  8. This headline made me think the media especially ” the Bhutanese ” is making the right studies on the issue of rupee crisis while Kuensel and BBS had been the puppets of burecrates. DPT is gonna lose a good number of voters especially the poor victims of southern belt. I wish short term solutions be placed as early as possible before making the coffer empty and proudly declaring ” we are broke”. Indian counterparts should not be blamed. If we were in there shoes we would do same. The gratest mistake was made in dreaming to make Bhutan like Sudzerland in one day by giving a green signal for the construction of all hidro projects at a time. But sad thing government hasnt yet admitted its lack of vision rather blamed on Public.
    Hope govt will take the earliest steps to solve the solution. I am an innocent citizen of Sibsoo who had to sell my mobile for rupee on the way to conduct the dead funeral of my grandfather. I really hated the situation i had to go through.

  9. Government and RMA should have foreseen that with development activities going on all over the country there would be outflow of rupee. As we know except for the land we purchase everything for infrastructure development. This may sound ridiculous but we have no other choice. We should have gone slow with some  developmental activities. Hydropower projects could have been deferred for a decade or so. 

    We better monitor our hard currency reserve too 

    • Dema T, you got wrong. Hydropower projects has no direct impact on rupee crunch. Infact, we get rupee from Hydropower projects. For example, Puna I Project. The project is financed as 70 % loan and 30% grant from the government of India. All hydropower projects funded by government of India have this financing arrangement. So, we earn rupee.

  10. Contn…
    We better monitor our hard currency reserve too before dwindle. Government shoud not issue Dollars to each and everyone traveling abroad for medical treatment or holiday. May be once in five years or so. 

    • USD will be finished after 5 or 6 years because they are going to send RGOB scholarship students which normally is sent to india are going to sent to third countries wehre college fees and stipands are paid in USD. So after that we will have dollar crisis.

      I feel like laughing at myself hohoho

  11. Individuals (private consumption) cannot be blamed for Rs crisis. I am not responsible for Rs crisis because whatever i did, i did within the financial and economic rules of the the country set and monitored by RMA and the govt. If the policies failure causes Rs shortage, how can i be responsible just because i imported vegetables to sustain my life. There is no way an individual or private entity can be responsible for such crisis. Why? The Rs is delivered directly by the RMA to the banks. What will bank do if they have more money? They will try to make proifits by providing credit to the borrowers? What will i do if i have enough money in my bank account? urely, i will spend to live a confortable life. On the other hand, RMA and govt knew that the national coffer didnot have enough Rs, but what they did. They continued borrowing from SBI and GOI at 10 and 5% interest rates respectively. Who is responsible? Me, banks, private sectors….!!!!!! The solution to this problem is not by banning imports like vegetables. You cannot completely stop construction of buildings in Thimphu because it will have enormous pressure on housing.
    Short term solution: Sell 200 million dollars. This will give us some time to think and plan for mid term and long term solutions.
    Mid-term solution: Such as growing vegetables on our own. This will definitely take years. Gradually ban some imports of non-essential stuff, which can be done.
    Long term solution: Harness human potential. This is the only way out. If we cannot build our own homes, grow our own vegetables and make our own clothes then there is certainly some structural problems in our system which need to be revamped with new strategies.

  12. So we need new younger leaders because current Cabinet is not capable to run even this small country. DPT must go. They are not even bold enough to accept the crisis instead blames us for eating vegetables on a live TV. What a pathetic excuse. Both the govt and RMA downplayed the gravity of this crisis because the people at the higher echelons of our society are not feeling the pressures of Rs crisis since Rs is available to them by any means. So they started banning everything. I can only mock at such decisions. Who in the world will ban vegetables? This govt under the leadership of JYT. This is not visionary. I thought our honourable PM is better than making such short-cuts.

  13. I am now getting confused with this rupee crisis issues. Wow!!!! if I have the resource and capacity, I would like to carryout my own study again as third independent party (If god permits).

     One thing, I missed out in both the report is what is Grants amount from the donors countries during the period. Is it that increase in reserve by 491.34 billion(Less Tourism revenue) for the period 2006-2010 resulted due to Grants?. What about the dollar payment made by the government during the period? In the form of ;
    1. scholarships and studies in third countries
    2. DSA and travel expenses
    3. Imports payments
    4. Missions and Embassies expenses
    5. etc…. list could goes on.

    I wouldn’t  be surprised, in actual we may have dollar crises if the grants and aid that we receive from the donors is to be converted in rupee. If we start matching one to one odd could come out clearly.

    From my limited wild thoughts on the matter.

  14. The RMA and Government know only to blame people for the rupee crunch.

  15. We are trying to hold the current government accountable for all cumulative problems that started before the democratic Bhutan. People with authority prior to 2008 put our country in a mess and for that we are seeking immediate and tangible measures from the current government, though I believe this government has been trying their best but is it fair for us to heavily criticize and lambaste the PM left and right? I am sure he must have lot of assets but remember there are people in Bhutan who grabbed hectares of land. There is nothing you and I can do about it, not now, not in near future, maybe never. While it is our responsibility to provide feedback and criticisms, it is equally important to appreciate and understand the reality. Both history, current affairs and future directions. At least the PM stated that government also made some mistakes.  

  16. It is time for Bhutanese to wake up. We can live without luxury goods but onion and food is basic.

  17. If individuals and private agencies are to be blamed for availing credit facilities, government too should be included in the group as it has availed loans for development activities. We better take a note of government loan from the World Bank, IMF, ADB and GoI etc…(Some hard currencies that we talk of in the reserve could be loan money from international sources).  If public are to be blamed for spending/investing before earning, than what about government spending before earning??? Will it have a different impact on the overall economy…. I am not saying it is bad. Offcourse, it is how the country economy move forward… 

  18. The rupee problem is not a crisis. There is a very simple solution to the problem. It is just that the dollar reserves are not converted into rupees yet. When the dollar reserve is converted into rupees, the problem would be solved. We will only face a crisis if we run short of convertible reserves.

  19. Well this opened our eyes as to what has caused the INR crisis but why is other medias silent? They should also find out the truth and inform the general public rather then writing what the Govt wants them to write. So what does the RMA Govener think of this report? Does he still think that private consumption is the root cause of INR crisis? BBS should call him again for panel discussion and ask him live on national TV.

  20. What a sad news when it come to the Rupee shortage in the country but actually its not a rupee shortage instead our government is unable to bring in enough Rupee due to insufficent fund. Insufficent funds are caused due to the following reasons;-

    1. Govt. huge or double increase in MP & NC salaries
    in which they have to increase the salaries for the other civil servants as well.
    2. Their Quota befor they(member of parlimanent) are entitled for 7 Lakhs care Quotal,they raised the Tax and changed their ideas and refunded previous Quota and claimed for Prado Quato which quotal it self amounts to Nu. 9 lakhs. But they dont use quota for themselves instead they sell it to Rich peoples and make money out of it.
    3. Again now they are going to raise the tax and indirectly they are beggers and depending on peoples who pay tax and they enjoys it.

  21. Whatsoever may be this rupee shortage game plan,common people are deeply suffering with now all the banks having stopped loans. If this problem gets dragged on without RMA doing anything into solving them, I am afraid, people’s patience is running out. If so, this may not bode well for the government as well and before things get out of hand, this loan ban by the banks should be lifted immediately. In a country, in the name of rupee crises, if all banking doors for the common people are closed and their lives made very hard with cost of commodities getting increasingly higher with each passing day, I would not term such reforms as people centric good policies. Something needs to be done urgently!

  22. right_thoughts

    This is sheer foolishness on the part of the Govt. Just happy keeping USD reserves and making citizens beggars by making them running from one ATM to another in Jaigaon. It is people’s money, why stop the loan and deprive them when they can buy luxuries for themselves. If bank’s don’t help citizens then where will they go. Whole situation has been handled badly and a crisis has been created out of nothing. This has made common citizen nothing less than beggars.

  23. May be it is time now that the public should demand the resignation of the RMA Governor for the RMA’s failure in putting things right into normal conditions. Common people’s anger seems mounting with the present state of banking affairs.

  24. Why is it that we have to suffer when those who are responsible seems to be pretty cool and with smiles on their faces whenever in public. I even misunderstand them for being in festive mood when we lower and middle income group is suffering from growing anxieties and uncertainties.

    One thing I don’t understand again is Ban on vegetable imports but FCB can import. Are we not encouraging monopoly again?. killing many small business vendors out of their business. How import of vegetable by FCB will solve INR shortage??? My worries is mounting day by day. ” KENCHO SUM KHEN NO” in the Land of Happiness.

  25. Well, this is what happens when wthe GOvernment doesn’t realize how important is Governer of Central Bank’s position. Someone without proper qualification and experience can’t handle this role. I guess we can’t blame him alone, Government is equally responsible for the mess for entrusting him with the responsibilities which he is not capable of handling. 

  26. I think both the RMA of the past and present have failed in their duties.
    Their failures and incompetence traits is seen touching the sky like stupidity with only BANs and stubbornness induced decisions as the only outcome or solution emanating from the RMA in the wake of today’s rupee crises.
    With the way how things are handled, one facet that needs reckoning is in knowing this basic truth surrounding the RMA – that of understanding better this truth about RMA being still in a half awakened state of affairs.
    This shows that all these times leading up to this dead end, the RMA have conveniently chosen this hidden den as a resting place and as such remained largely unreachable to the woes of the common people at ground zero level.
    Their present actions further give me the impression that the gaps between the RMA and public state of affairs have still remained far distanced.
    They literally do not have any faintest ideas of how this blanket banking loan shutting business has hit the public mainly people at the lower stratum of our society.
    The rumors’ doing the round has it that those people in the privileged class are having their easy way into the bank loans as usual.
    If this rumor holds any water, then, the RMA’s Rupee Crunch episode would now go down in history as having succeeded in creating two levels of society along the haves and have-nots lines.
    There are people who somehow sustain their family and educate their children through smaller bank loan schemes like consumer, GE loans and other loans etc.
    But, now, under this RMA’s blanket loans ban decision, all such banking facilities have been closed for them.
    Such hardhearted policy decision, who knows, in time, may present better recipes for resentment in the society if not corrected timely.

    In view of this, I strongly believe that if the present RMA team cannot come out with some common people friendly solutions, then, on moral grounds, the RMA Governor must tender his resignation and let some better candidate take the reins of the RMA governance.

  27. It is high time, bhutan need to stand wth our own, otherwise rupee shortage will affect the life generation in the country and ya both government, private individual and NGO should work with joint 2 solve the shortage……..instead cursing each other…..

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