Many of the steps being taken by the government and the central bank like restricting imports or tightening credit to address the rupee crisis are part of the larger recommendations made in the task force report on the rupee shortage.
The still secret report rupee titled ‘Balance of Payments with India and the Rupee Shortage’ has recommended a series of monetary, tax, government expenditure and trade related measures to deal with the rupee crisis.
The report has become a Bible of sorts for the government in tackling the rupee crisis as some of the recommendations are already being implemented while there are many others which the government may implement in the medium or long term.
The rupee task force comprises members from the Royal Monetary Authority, Ministry of Finance (MoF), Ministry of Economic Affairs, National Statistics Bureau and other relevant agencies supported by staff from the Policy and Planning Division (PPD) of the MoF. This task force was formed on 12th January 2012 and submitted its report on 5th March 2012.
Many of the monetary measures recommended by the report are already being implemented or are in the process of being implemented.
However, some measures that have not yet been made public are also listed. One is that the RMA in collaboration with the MoF and related stakeholders will submit a convertible currency and Rupee reserve management plan to the Government.
The RMA will also review the annual government budget size and provide its opinion to the MoF.
In what could be an important recommendation that can also curb fronting, the RMA, Department of Trade, and Department of Revenue and Customs are to track large rupee flows of industries. This is because export revenue of some big industries has been less than the imports in some years. An earlier 2007 rupee shortage investigation had attributed this to possible fronting whereby rupee was flowing to the actual Indian owners.
The report recommends raising that Cash Reserve Ratio (CRR) or the 10% that a bank has to keep with RMA, and the Statutory Liquidity Ration (SLR) which is the 17% cash on any deposit that has to be kept in the bank and cannot be lent out. The RMA earlier had reduced the CRR from 17% to 10% to help banks to meet their commitments. If the CRR and SLR are raised, credit will be further tightened. The report however acknowledges that CRR and SLR rates in Bhutan are the highest in the SAARC region and past measures have not been adequate.
It has also recommended that RMA have a base rate which means that it come up with a minimum rate below which it will not be viable for financial institutions to lend.
The report says that electronic means of payment are to be encouraged by placing ATMs and credit card machines in retail and commercial outlets to facilitate spending by visitors.
The report recommends ‘ring-fencing’ adequate rupee reserve for rupee debt service like paying hydropower loans. Ring fencing means restricting rupee to only a specific purpose. This is to avoid situations like in January, 2012 when there was no rupee available to pay the Nu 2.8bn loans for Tala and Kurichu.
Apart from the above new measures, the report recommends measures that are already being implemented like enhancement of GoI credit line from 3bn to 6bn, rupee currency swap arrangement with India, discouraging credit to non-productive and exposed sectors like transport loans, streamlining access to rupees, treating rupee as an essential reserve currency and closing bank accounts of Indians.
The report says that though government expenditure has not directly contributed to the rupee shortage except through the multiplier effect, fiscal measures can influence consumption spending.
The Department of Revenue and Customs is recommended to identify and propose new taxes and rationalize existing tax rates including items which are currently not taxed. The DRC has also been asked to look at Capital Gains Tax or tax on the profit gained from selling assets like land, building, cars and so on.
The MoF is to consider shifting the levy of sales tax on vehicles from the point of entry to the point of sale.
The report also recommends a 40% green tax on all imported vehicles, a five percent green tax on vehicle fuel, and taxes on heavy earth-moving equipment.
As an immediate measure, the report recommends that no consideration should be given for salary hikes, enhancement of allowances and service benefits.
It is proposed that the government in collaboration with GoI revise the debt service schedule for GoI loans for hydropower development as most of the loan repayments for Tala and Kurichu falls due in January every year. The MoF has already requested the GoI to revise the existing repayment schedule on a semi-annual or quarterly basis. It is recommended to include such debt servicing schedules in all the future loan agreements on hydropower.
The report proposes that the government review implementation of the ongoing 2011/12 financial year’s budget. The MoF has received budget implementation status of agencies with some agencies indicating their inability to spend and others asking for additional funds. The report says that government agencies should be asked not to initiate new works.
The report also says that greater care should be taken so that non-priority activities including those that have no socio-economic benefits are eliminated in the upcoming 2012-13 budget, especially those activities that will spill over to the 11th FYP.
The report says that for current expenditures, government agencies should maintain 2011-12 levels or reduce their budget in utilities, supplies, operating expenses, advertisement and entertainment. On capital expenditure, no budget is to be allowed for furniture, office equipment, or vehicles irrespective of source of funding.
It is recommended that external borrowings should be strictly for purposes for which there are no grants forthcoming and that these loans shall not be used for training and study visits and purchase of vehicles among others.
The MoF is to issue directives to all government corporations not to hold board/management meetings outside Bhutan and not sponsor sporting events out of corporate funds.
The medium term measure proposed is that the government should maintain a fiscal deficit of 3% of GDP for each plan period. Currently, the policy has been to limit the deficit to an average of five percent of GDP over the 10th plan period.
Another medium term measure is exploring the possibility of issuing Rupee bonds for mega projects in infrastructure development and hydropower that are not financed by GoI under the present arrangements.
The report say that while program grant release is quite regular, project-tied grants and Small Development Project funds are not at all predictable. This is affecting the projects and also local governments. MoF and GNHC are to propose a time schedule for the GoI.
It is also recommended that Bhutan should strengthen its debt management capacity as Bhutan’s debt is projected to be 100% of its GDP in the next few years. The report says that Bhutan should continue to go for low interest loans that give maximum social and economic returns.
Under immediate measures the report says that convertible currency for third country imports paid by retailers is largely met by Indian traders based in China in exchange for rupee. The report recommends that there is a need to review third country import licensing procedures to ensure use of foreign exchange for imports.
Realistic projection of balance of trade particularly with India at the beginning of every financial year by the Department of Trade in coordination with other relevant agencies is also recommended.
The report says that software exports should not be allowed as software export is just documentation to show exports of non-existent software and use the proceeds to import raw materials from third countries duty free. This has already been implemented.
The medium term trade strategy is to build domestic productive capacity to enable more exports.
Here it is recommended that all industries must meet the national value addition criteria of 40%. Further, industries should plan for movement in the value chain. For e.g. Industries based on intermediate products are required to graduate to finished products within a specified time frame.
The report recommends that distribution of goods is streamlined and organized so that Bhutanese traders deal directly with principal companies in India or with the main national and regional wholesale dealers instead of sub-dealers from India.
It is also recommended that Tourism Council of Bhutan and travel agents should focus on getting higher end Indian tourists by focusing on marketing efforts in metropolitan cities in India.
Under long term trade solutions, the report recommends use of local building materials to substitute imported ones. Promotion of sustainable and efficient use of forest resources is also recommended so that forest resources can be used to develop furniture, timber, charcoal and other forest products.
The report also proposes that import substitution must be encouraged by liberalizing policies for manufacturing industries. Currently they face restrictions like environmental laws.
It is recommended that the Ministry of Agriculture and Forests and other stakeholders build simple cold storage based on air cooling systems at high passes to store agricultural goods during the off-season. Farmers can use these products to secure loans from financial institutions.