The house also recommended a series of measures to tide over the crisis
The National Council (NC) held the Ministry of Finance (MoF) and the Royal Monetary Authority (RMA) accountable for the current economic situation and the Indian Rupee (INR) shortfall in particular. This is following an intensive review by the NC’s economic affairs committee that was presented to the house during its session, earlier this week.
Among other recommendations, members also resolved that appropriate action must be taken against the two responsible institutions.
Chairperson of the house’s Economic Affairs Committee (EAC) and MP of Lhuentse Dzongkhag, Rinzin Rinzin said “rather than accepting responsibility of the INR shortfall, the government and related economic policy institutions such as the finance ministry and RMA, engaged in a blame game once the problem became public.”
He cited various incidents of the government and central bank being at loggerheads since July 2009 to May 2012.
NC Rinzin Rinzin also mentioned that Noble laureate Professor Joseph Stiglitz pointed out that poor reserve management by RMA aggravated the INR crisis. This was further underscored by senior representatives of the United Nations Department for Economic and Social Affairs (UN-DESA), in May 2012 at the forum on macroeconomic policy.
The review report also stated lack of willingness to share information and absence of cooperation from key agencies like the Central Bank despite the strong legal basis for the house to conduct the review, owing to which the report couldn’t be compiled and presented during the ninth parliamentary session last summer.
A formal summon was issued to the RMA governor at the ninth parliamentary session and the authority was ordered to share vital information with the house.
“Due to inability to get comprehensive information on the minutes of the board meetings and executive committee meetings of RMA, the report may have some shortcomings,” NC Rinzin Rinzin said.
The house has focused its review on policy matters, governance and institutional causes of the shortfall since the BCCI and especially the government’s task force report has limited its study on causes of the problem to structural economic challenges.
“It will be equally vital to understand the policy and institutional causes of the INR shortage so that reforms and measures are in place to ensure that the problem does not repeat in future,” the EAC chairperson said.
Role of key institutions and policies leading to the INR crisis
Lack of attention and awareness of the looming INR shortfall, bias for foreign currency, emergence of fronting industry and distortion of balance of payment, failure to detect high credit disbursement trends and poor coordination of economic policies were found to be the key causes of the INR shortfall.
A review of the minutes of RMA board meetings by the EAC from April 30, 2000 onwards at least up to 2010 showed that the INR issue was discussed as peripheral issue under “any other business” and not as a main agenda item despite the fact that the central bank management submits it as a serious concern.
For instance, during the 40th and 51st board meetings held on April and June 2007, the RMA managing director apprised the board of the “critical rupee position.”However, the limited information available in the minutes of the meeting shows that the board approves sale of USD to meet requirements and asks RMA to do a study,” the report stated.
The reports also states, in various minutes of the RMA board meetings it was found that the central bank suggested to the board to consider strengthening INR management, formulate a strategic INR management system, and seek the government’s views on likely deterioration of INR balances among others.
However, the EAC reported that it is difficult to be convinced that the RMA board actually understood the link between the INR shortfall and the overall dynamics that the economy was experiencing. It also noted that the lines of accountability between the RMA and Finance Ministry are unclear as the Finance Minister was the Chairperson and the Finance Secretary the Vice Chairman of RMA. “Hence it is not clear how seriously the MoF took the recommendations of the RMA as the authority ultimately lay in the same person,” the report stated.
Among other instances, referring to the 2002 foreign direct investment (FDI) policy that permitted FDI only in convertible currency, the EAC report stated that the possibility to earn INR was taken for granted or thought to be much easier. Various economic incentives granted by the government also encouraged businesses that earned convertible currency.
The EAC after analyzing government documents and policies also found that there was lack of coordination among key economic institutions in the country despite a clear signal that the INR situation was indeed serious.
The NC provided eight key institutional and policy recommendations which it states must be implemented to curb the current issue and avoid similar problems in future.
One key recommendation by the house is the need to fix accountability on the RMA board members for lack of seriousness in addressing the problem. “The same also goes for the concerned government officials who failed to heed the consistent cautions of the RMA on the problem.”
The EAC also recommended the establishment of a robust coordination mechanism among different institutions to help abate the shortfall. It says the Prime Minister’s Office should take the lead role to establish a high level coordination committee comprising of members from different institutions with the objective of analyzing economic policies and submitting periodic reports to the Cabinet on vital macroeconomic issues and its consequences.
NC Rinzin Rinzin said, “The government needs to review number of members and qualifications required for boards and ascertain the number of boards a civil servant can be a member of. The Royal Audit Authority may also conduct performance audit on various boards.”
During the session, NC Rinzin Rinzin said the Cabinet Secretariat will have to submit a report in the next parliament stating what actions were taken. “If the secretariat does not take any action then the NC should resolve that actions be taken against the secretariat,” he said.
Since excess credit by banks has been attributed as one of the core reasons for growth of import leading to the INR shortfall, the EAC recommends that “RMA fix accountability on the responsible department or division for the failure.” The report also stated that the RMA governor during an EAC hearing admitted that the central bank failed to take necessary action to curtail credit growth.
The house also recommended that it must be ensured that people in key positions have adequate industry knowledge and experience. The next elected parliament should therefore review the RMA Act to make a provision for one of the central bank deputy governors to be appointed based on financial expertise.
The EAC also suggested that housing loans should be given selectively based on need and preference given to those areas which require minimum or no imported materials.
Another recommendation is that the finance ministry prepare a comprehensive fiscal policy response to complement other economic tools to reduce demand of INR in the country. “The last tax revisions were not enough as the finance ministry failed to convince the National Assembly let alone the National Council while proposing the tax revision,” NC Rinzin Rinzin said.
The NC found that ad hoc measures in the past months such as bans on loans, imports and the likes have not been successful at all in curbing the shortfall which is evident in the current INR deficit exceeding INR 17bn.
The council also called the need for an effective monitoring mechanism from Ministry of Economic Affairs (MoEA). MoEA is expected to initiate appropriate deterrence measures to confront the reported fronting activities along the border towns.
NC Rinzin Rinzin said “another recommendation by the house was the government to ensure that all public institutions and agencies share all information required by parliament as per the existing laws.”
The council also resolved that the foreign exchange reserves in excess of that required by the constitutional requirement of twelve months essential imports may be utilized to address INR needs since it is not practical to hold reserves at nominal interest rates while borrowing INR at higher rates of five to 10.5 percent per annum.