Govt looks at restricting non-food imports as reserve hits new low

With the country’s foreign reserves getting lower by the month the government is looking at ‘rationalizing imports,’ whereby the imports of certain non-food and non-essential commodities may be restricted.

Lyonpo Namgay Tshering of the Ministry of Finance (MoF) said that Bhutan currently has USD 845 million (mn) of foreign currency reserves in total (USD and INR) which is enough for importing around 14 months of essential items.

This is down from USD 984.8 mn in March 2022.

This is just two months short of breaching the Constitutional requirement to have ‘A minimum foreign currency reserve that is adequate to meet the cost of not less than one year’s essential imports,’ under Article 14 section 7.

The minister said that they are studying on rationalizing imports. He said this should not be equated to the blanket conventional import restrictions of the past.

He said that under rationalization of imports all needed essential items that are needed can be imported. He said some items which are in the non essential list can also deemed to be essential after a review.

Lyonpo said that at the same time there is a need to recognize the capacity of locally produced items, but ,at the same time, their prices should be reasonable, they should not overcharge and the prices should be moderated.

The Minister for Economic Affairs (MoEA) Lyonpo Loknath Sharma said, “There are some some non-food commodities which could be restricted for some time. We don’t require everything that we import, but we cannot restrict imports that are required by the industries and that are required by the businesses to continue running.”

“It is very sad that during the pandemic time we did not have to do this, but now it seems we have try to restrict some,” he added.

The MoEA minister said, “It is sad that the economy is regaining and we have to place these restrictions, but nevertheless there doesn’t seem to be much options on our hand. We will be very cautious and careful not to disturb the economy and at the same time act on the advice of the MoF and the RMA (Royal Monetary Authority) when it comes to reserves.”

He said they have discussed the restrictions but not yet decided which are specific the items they will be restricting.

Lyonpo said the restrictions are expected to happen in three phases depending on the situation.

“The first phase is if we are little comfortable but just want to safeguard. In the second phase when we are really seeing the possibility that the reserve will go further down then what should be the import restriction. The third phase is when we really enter the critical phase,” said Lyonpo. 

Lyonpo Loknath Sharma said they are discussing in this line and with advice from MoF and RMA the MoEA will act as the foreign reserve is equally important. 

During the Rupee Crisis in 2012 the first elected government from March 2012 banned the import of all vehicles for private and commercial use, foreign alcohol, foreign furniture etc.

Lyonpo Namgay Tshering said that the reserves have taken a hit due to the surge in imports over the last six months, but at the same time exports during this time has also gone up compared to 2020 and 2021.

Lyonpo Loknath said the imports have increased due to a boom in economic activities.

Lyonpo Namgay said their job is to not only protect the existing reserves but also look at replenishing it and so they have devised numerous interventions.

One is in terms of encouraging foreign remittance into Bhutan which the MoF said the RMA is working on.

On the government side the aim is to collect the committed grants and look at low hanging fruits like promoting exports like boulders and also approving and facilitating Ferro Silicone plants

If the government is looking at restricting non-food imports, then the next obvious question is if this will not hurt the economic growth that the government was looking for.

Lyonpo said Bhutan is in is a very unique situation. He said during the 2008 financial crisis, the 1929 Great Depression and others the international governments at the time directed their policy towards economic growth and spending, but Bhutan is challenged on both sides.

He said Sri Lanka in 2020 had a negative GDP of -3.6% when Bhutan had -10% and then in 2021 Sri Lanka jumped to positive 3.6% growth and with more growth in 2022.

However, Lyonpo said the major change that impacted Sri Lanka was that it did not focus on its macro economic fundamentals and parameters like reserves and current account deficit.

Lyonpo said that Bhutan cannot be complacent as though the economic growth reached 4.10% in 2021 there is a widening trade gap which leads to a current account deficit and balance of payment issues.

Lyonpo said Bhutan must focus on narrowing the trade deficit and the current account deficit.

Meanwhile, the 2022-23 budget report hard forecast a total reserve of USD 1.298 billion (bn) enough for 17 months of essential imports but the reality is now USD 845 mn of reserves enough for only 14 months.

This means the reserves have come down sharper than the budget projection.

The last time the reserve position was this shaky was in July 2013 just in the aftermath of the Rupee Crisis when Bhutan had USD 838.5 mn. 

In the financial year 2011-2012 that saw the Rupee Crisis Bhutan’s total reserves had dipped to USD 674.3 mn.

The finance minister said the reserve projection in the budget must have been made based on grant commitments, concessional borrowing and inflows. 

An official in the RMA said that what impacts the reserves the most is the fiscal deficit of the government or the gap between revenue and expenditure.

The government has been breaking all fiscal deficit records since the last four financial years. It was a record 6.18% in 2019-20, 7.36% in 2020-21, 8.39% in 2021-22 and 11.25% in 2022-23.

The logic being that in the Bhutanese economy the largest spender or mover is the government and when the government is spending more than its revenue inflow then it will impact the reserves.

Prior to this the highest ever deficit was in the 2012-13 budget under the first government at 4.02%.

The Finance Minister said that the government will scientifically monitor the reserve position and a team is also coming up with a formula to determine measures.

Lyonpo said that while the Constitution mandates reserves for 12 months of essential imports, it is also important to understand that Bhutan is going through an unprecedented time and certain things can change during such times.

He said that the 12 months depends on what is being defined as essential items.

Lyonpo Loknath also said how the list of imports are listed as essentials is another area.

He said the Constitution also provides a provision to safeguard for these kinds of difficult times when an unforeseen or unimagined, critical thing happens.

“While breaching the Constitution would not be in any political party of government’s mind but sometimes we will also have to be practical that do we really need to have foreign reserves of 12 months,” said Lyonpo Loknath.