Why Bhutan can’t ignore the USA’s debt ceiling troubles

When the 2008 Financial crisis crossed American shores and triggered a Global recession not seen since the Great Depression of 1929 the initial reaction in Bhutan was that it would not impact us.

However, subsequently the crisis did affect us and to this day the depth and long lasting impact of the crisis on Bhutan has not been sufficiently explored or understood.

It is in this context that Bhutan has to pay close attention to the USA’s debt ceiling crisis where the American Congress only agreed to postpone the issue till 7th February 2014.

The issue of interest for Bhutan is that America’s own Financial Institutions and policy makers predict a crisis worse than in 2008 if America defaults on its debts. Though it is not likely that the Republicans will force America to default, nothing can be ruled out with increasing political polarization and a House of Representatives election looming in 2014.

Another long term economic issue is the Sovereign debt issue in the European Union which if it goes out of control can by itself cause a global recession.

Bhutan should be prepared or at the least aware of the implications of another global economic recession on Bhutan’s own economic future. A lot of the future impact of a global recession can be learnt or re-learnt from the impact of the 2008 crisis on Bhutan. All the 2008 impacts are a likely pointer to how our economy will be affected by another crisis.

Impact on steel and other export Industries

In 2008 the global crisis led to a crash in international steel prices badly hitting and nearly bankrupting Bhutan’s 5 major steel factories.

The more important issue of interest was that the factories owed around Nu 1.6 bn to the Bhutanese Financial Market. An outright default by them given Bhutan’s small financials sector would have caused a financial crisis in its own right.

According to a RMA report the overall manufacturing and industry sector due to decrease in international demand had loan repayment problems or high level of non-performing loans in 2008.

This sector experienced the highest non-performing loans for the first time with about 30 percent (USD 12.89 million or Nu 775 mn) share in the total NPLs, surpassing all-time high portfolio at risk, the housing loans.

It was only in 2009/10 when the worst of the crisis passed that demand for industrial products picked up with the recovery of Indian market and once again the Housing sector became the sector with highest non-performing loans.

Another report also from the RMA points out that the total production of major industries in Bhutan declined from Nu. 1,561.2 million in Q2  2008 to Nu. 1,316.9 million in Q3 2009. The export of major industries to COTI fell from Nu. 32.7 million to Nu. 13.6 million, during the same period. The impact was largely felt by the minerals and wood based industries.

Impact on Tourism

After seeing continuous growth for six continuous years the number of dollar or foreign currency paying tourists declined by 4,156 tourists in 2009 compared to a total of 27,608 tourists in 2008. These were the official numbers but several tour operators said the drop was even sharper and the tourists that came did not spend as much. This was visible in the dismal business done by many textile and curio shops in 2008-2009.

The growth rate of tourist arrivals declined substantially from 9% in Q4, 2008 to negative 12.1% in Q2, 2009 and the revenue earning declined from 4.5% to negative 19.3% during the same period.

Impact on Reserve earnings

In 2008/09 Bhutan lost USD 5 mn or Nu 300 mn in interest earning on our foreign reserves as a direct result of the crisis.

This happened as the US Fed in a direct response to the crisis reduced the interest rates from 4.75% in September 2007 to 0.25% in November 2009.

As a result of the consistently falling Rate, the interest income of the RMA dropped from USD 19.7 million in 2007/08 to USD 13.9 million in 2008/09, with the fall of USD 5.8 million.

Impact on the strength of the Dollar-Ngultrum parity

One issue completely overlooked in assessing the impact of the 2008 crisis was the lasting damage caused to the value of the rupee compared to the dollar and as a result the value of the Ngultrum compared to the dollar.

In 2007 before the crisis the value of the 1 USD was Rs 41.5 but by 2009 it had reached 49.40 and subsequently kept on increasing settling in the mid fifties.

The global crisis had caused a constant outflows of capital from the Indian economy which has forced the INR to depreciate so sharply to the dollar.

Even recently the expectations of the US Fed stopping or easing out Quantitative Easing lead to the rupee and along with it the Ngultrum touching a record low of around Nu 68.75 to the dollar.

This impact of the international and Indian economy on our dollar parity has huge implications in terms of more expensive third country imports for the government and the private sector.


A RMA report says that real GDP growth declined very sharply from 19% in 2007 to 5% in 2008. The factors contributed for such decline was not only attributed to Tala but also due to slackness in the external sector performance in the economy. This included manufacturing in major industries as discussed above.

Role in External Borrowing

As a result of the crisis there was around Nu 300 mn shortfall expected from RMA’s interest earnings and overall profit transfer and also a drop in revenue from tourists. Some major industries were also in trouble.

This combined with other factors like increased wage bills and social security contributions lead the government to borrow to meet the resource gap. Government had to resort to external borrowing to the extent of Nu. 304.9 million, mainly from the WB and ADB and internal borrowing to the extent of Nu. 4,501 million through domestic resource mobilization in 2009/10 budget.

Price Changes

A RMA report shows that based on the data that in Bhutan, the Consumer Price Index recorded the highest in 2008 at 9.3% in Q3, 2008. The high inflation was mainly due to higher growth in the prices of both food and non food commodities which are mainly driven by world food prices in particular. The CPI plunged to less than 3 percent in Q3 2009 from 9.3 during the same Quarter in 2008, due to global recession.

Foreign Aid

One visible impact of the 2008 crisis and the international recession thereafter was the reduction and reprioritization of international aid by many developed economies.

Due to a combination of improving socio-economic indicators and reduced and reprioritized aid Bhutan had to make a strong and visible effort to keep many donors interested. So far given our comparatively good track record on aid utilization we have managed to keep donors interested but there are those who would like to drawdown or withdraw and focus on areas like Africa.

Though India has acted as a major cushion aid and soft loans from other partners also play and important part in Bhutan’s development.

Of the Nu 92 bn capital budget for the 11th plan only Nu 58.6 bn will come as grants from all of Bhutan’s donors while we will have to meet the rest from our borrowings and internal revenue. This will still leave a shortfall of Nu 15.5 bn.

Foreign Direct Investment

One strong impact in the immediate aftermath of the 2008 crisis seen in neighboring India was a strong reduction in FDI’s including existing FDIs also withdrawing or drawing down operations.

While FDI was being withdrawn or not being invested in much stronger economies Bhutan started its Economic Development Policy and the Foreign Direct Investment moves around early 2010. The FDI policy was far more liberal than its earlier counterpart.

Many of its key big projects like IT-Park, Education City, Industrial Parks and others could find no FDI takers because in addition to domestic issues the global environment was not suited for investments. Even some major companies who showed initial interest pulled out.

Impact on hydropower financing

However, more than all of the above the biggest financial impact of the 2008 crisis was the financing and funding modality of Bhutan’s hydro projects.

The 2008 crisis affected all major emerging economies like India, China, Russia, Brazil and etc all of whom had to go in for massive domestic spending programs to protect their economy.

In the case of India the UPA party fresh from a re-election victory in 2009 had already announced huge multi-billion dollar subsidies and social programs for its poor in some ways as a thank you for being re-elected.

Meanwhile to protect its Industry and economy from the crisis the Indian government went in for huge and unprecedented multi-billion dollar spending programs, tax breaks and other fiscal measures.

The combination of the two and particularly the latter soon left the Indian government in a tight budgetary corner in 2009.

It was at this time that the then power Secretary H.S Brahma in a meeting of various stakeholders pointed to the budgetary implications of power projects with Bhutan and among others proposed changing the structure of the projects.

The RGoB and in particular the Ministry of Economic Affairs wanted to preserve the 60 loan and 40 grant formula agreed to with P-1. But after negotiations that focused on the huge budgetary implications of the projects Bhutan and India agreed to have a middle ground compromise of 70 loan and 30 grant formula for all future inter-governmental projects.

With the 10,000 MW projects expected to exceed even Nu 750 bn the increase in the loan component will have long term budgetary and loan repayment implications.

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