Rupee crisis to have long-term impact on Bhutan’s socio-economic development

The government task force report on the rupee shortage has predicted a grave economic future for Bhutan if the rupee crisis  continues unabated, impacting millennium developmental goals, socio-economic development, external debt servicing, dollar reserves and trade balance.

After the Financial Year (FY) 2012-2013, the convertible currency or dollar reserves of Bhutan is anticipated to violate the constitutional requirement of having enough foreign exchange reserve to finance at least 12 months of essential imports, according to the report.

 

Developmental activities and MDG affected

The report says the government’s planned activities may have to be scaled down if appropriate and practical alternatives are not found to address the rupee shortage. Should the government be required to scale down its plans and programs this cut back will affect developmental activities in the country.

It also says that Bhutan will not be able to meet its multilateral commitments like Millennium Developmental Goals (MDGs).

The MDGs are eight international development goals that all 193 United Nations member states  and at least 23 international organizations have agreed to achieve by the year 2015.

The goals are eradicating extreme poverty and hunger, achieving universal primary education, promoting gender equality and empowering women, reducing  child mortality  rates, improving maternal health, combating HIV/AIDS, malaria, and other diseases, ensuring environmental sustainability, and developing a global partnership for development

A joint UN and RGoB task force had forecast in 2008 that Bhutan needs to spend USD 2.5 bn between 2006 and 2015 on priority areas to meet its MDG goals. Bhutan so far was well on track to meet its MDG goals but the rupee crisis could throw Bhutan off track.

 

Declining reserves and constitutional requirement

It is predicted that if there is no major policy intervention in Bhutan’s economic development, the convertible currency reserves will decline from the USD 702 mn in 2012 to USD 268.8 mn by the FY 2017-2018.

This decline will be due to selling and using convertible currency like dollars to finance imports from India and other countries. The report predicts that the constitutional requirements of financing at least 12 months of essential imports will be violated by 2013.

Article 14 section 7 of the Constitution mandates that “a minimum foreign exchange reserve that is adequate to meet the cost of not less than one year’s essential imports must be maintained.”

The report says that this depends on the definition of ‘essential imports’ prepared by Royal Monetary Authority (RMA) and recommends that this definition needs to be reviewed which the government is already doing.

 

Debt servicing

The report says that it may be difficult to service other debts apart from hydropower should the dollar reserves be depleted for imports from India due to shortage of rupee. It says that there is a need to institute mechanisms to maintain sufficient dollar reserves for servicing of foreign currency loans as Bhutan’s convertible currency earning capacity is limited.

Bhutan’s total debt is Nu 57.1 bn in FY 2010-2011 and is expected to increase to Nu 73.5 bn in FY 2011-2012.

Bhutan’s external debt has been growing steadily over the past decade. The report says that Bhutan’s policy related ‘Low Income Countries- Debt Sustainability Assessment’ (LIC-DSA) for external debt have been breached for several debt indicators and is projected to continue as more hydropower projects which require huge investments will be initiated.

By FY  2019-2020, the rupee debt obligation from hydropower will peak around Nu 11.2 bn a year or about 4.4% of GDP. Currently, Bhutan pays around Nu 3.1 bn a year in loan servicing for the 1,020 MW Tala project and 64 MW Kurichu project.  It says that while the hydropower debt is self liquidating by financial design, it may be difficult to service other debts if the dollar reserves are insufficient.

 

Trade balance

Bhutan’s trade deficit is expected to widen from 30.9% of GDP to in FY 2010-2011 to 34.5% by the end of the 1 th FYP. This would mean that the overall current account deficit of Bhutan would widen from 21% of GDP in FY 2010-2011 to 36.5% by FY 2017-2018.

Bhutan’s GDP in FY 2010-2011 was Nu 72.447bn.

While trade deficit means when one is importing more trade items than exporting them, the current account deficit of a country occurs when a country’s total imports of goods, services and transfers is greater than the country’s total export of goods, services and transfers. This situation makes a country a net debtor to the rest of the world.

In 2007, Bhutan had its highest ever positive trade balance of Nu 7.624bn mainly due to the commissioning of Tala project. It declined in 2008 and 2009 as imports increased. In 2010, there was a negative trade balance of Nu 3.337bn which increased to Nu 9.428bn in 2011.

 

Hydropower revenue and grants are insufficient

The report says that while exports are expected to improve with the sale of electricity from Mangdechu and Punatsangchu I and II hydropower projects in the later part of the 11th FYP, these are expected to be offset by the continued expansion in merchandise imports.

Domestic supply will continue to be outpaced by domestic demand worsening the balance of payment with India and the rupee shortfall is expected to get worse throughout the 11th FYP, according to the report.

It says that rupee inflows related to budgetary grants from India, grants for hydropower projects and concessional rupee borrowing from India are unlikely to be sufficient to finance the current account deficit. After completion of the hydro projects, the export revenue is expected to improve the rupee deficit to a surplus of Rs 6bn. But, it says that this should be treated with caution as the reserves could deplete rapidly.

 

Macroeconomic problems

The report says that the implications of the rupee shortage are far reaching because Bhutan not only depends heavily on Indian imports but also since it may pose serious macroeconomic problems. Macroeconomics means the country’s economy as a whole like GDP, unemployment figures, inflation and gross aggregate demand.

 

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7 comments

  1. “After the Financial Year (FY) 2012-2013, the convertible currency or dollar reserves of Bhutan is anticipated to violate the constitutional requirement of having enough foreign exchange reserve to finance at least 12 months of essential imports, according to the report.”

    This is ridiculous! Having to maintain 12 months reserve irrespective of the economic situation of the country is absurd. This is the time to use our reserve, especially our dollar reserve.  

  2. The Govt report seems to indicate that the hydro income is not enough to meet our needs. Infact the more we try to increase our energy generation capacity in a short term the more we will be in financial trouble. Therefore the report seems to indicate we need to slow down our hydro investment till we have a economy that is big enough to absorb the huge financial out flows.

  3. The fear of falling causes somebody to fall, the will to do will pull us tall.
    Investment in hydropower projects has made us weak and now the next think to welcome will be our rich mineral reserves, foreigners have known our inner gist we will have to comply with what they say.
    The figures shown hitherto are just the seen pictures, there are unknown sources that aid in magnification of the issue. We dont have enough wealth to deal with rupee crunch and people assume we dont have other debts which in fact is much more than ruppe debt. I have seen our future and it’s being made of glass.

  4. Droduel Singye

    Very lengthy news. Not tempting to go through.

  5. practise more gnh…..for poor n middle class citizen lyonchen will give class

  6. The government appointed think tank has preditcted that the rupee crisis is going to have a long term impact on our developmental activities, wow, great, the fact however, is that any layman could have also told us the same thing.

  7. Does it mean the way we are investing in hydropower needs a rethinking? Would it be better if we have gone for staggered investment? Did we not foresee this situation before? I personally feel that it calls for developing our own Think Tanks rather than depending too much on external consultants although it could be an expensive affairs.

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