Part 3- The Rupee Crunch: Reconciling theory with reality

Did you ever realize that there are more incentives for consumption than saving and producing in Bhutan? Business conglomerates in the country have concocted their own definition and demarcation of private consumption- the primary contributing factor to the crunch.

When government studies have pointed at private consumption and credit expansion to the private domain as being major factors, these conglomerates have defensively attempted to absolve themselves from the blame which was never squarely placed on their shoulders.

Private consumption and lending as any discerning person should know constitutes the spending and lending of every individual in the economy, even civil servants, ministers and the prime minister, not simply that of corporate entities.We need to remember that the government is simply an entity. It is not a person. Civil servants are not the government. They work for the government but their consumption is private. Private consumption encompasses a much broader range of groups than simply business entities.

Lastly, a comparison between the highly evolved US economy and the maturing Bhutanese economy yields several useful insights. The de facto acceptance of the US dollar as a reserve currency has led to massive printing of the dollar which is actually losing its intrinsic value since productive capacity in the US has been stagnating but consumption has been skyrocketing.

In Bhutan an explicit legal clause stipulating Rupee as legal tender in Bhutan and the de facto acceptance of Ngultrum as legal tender in the border areas has led to a gross mismanagement of rupee reserves and excessive consumption sourced from India. This de facto acceptance of the Ngultrum has to be assessed in the context of the overvalued exchange rate of the Ngultrum as compared to its low intrinsic value relative to the Rupee. This can be attributed to the disparity in value addition of our exports to India versus imports from India with the latter increasing far more rapidly than the former. Such foreign exchange distortions have also played their part in this crunch.

Amid all the chaos we must discern the silver lining that this episode has presented us with an ideal platform to initiate much needed changes that at other times would have been controversial and politically resisted. The Asian Financial Crisis exposed a range of underlying weaknesses that had to be addressed to revive and sustain the Asian miracle to propel the economies to the next stage of development.

The US crisis exposed a range of unsustainable financial innovations and credit market imperfections that were destabilizing the economy and led to the consensus that previously resisted regulations needed to be imposed.

In Bhutan we have been shaken to the bone. We have realized how vulnerable and dependent we are. We were of the impression that we were insulated from turbulences emanating in the marketplace and that the dynamics of the markets were not entirely applicable in our context. But we have realized that we are vulnerable to exogenous shocks and that we have matured and integrated with other economies as has been manifested through our sensitivity to fuel price shocks, plummeting steel and tourism demand during the financial crisis and most recently a balance of payments crisis. We should not get caught in a blame game but leverage this episode to sustain a range of necessary reforms.

(Norbu)