The critical shortage and rationing of the Indian rupees is making newspaper headlines and engaging people in serious debate. The good point is that both the government and people have woken up for the first time to this looming crisis. The bad point is that there is no immediate and durable solution to the problem. It will continue in various degrees. Waiting for the new hydropower projects to start exporting additional electricity to India will not solve the problem. At best, that will merely ease the burden given the growing need to import from India. The government and central bank must be able to manage the movement of the rupee more effectively.
The current problem, or a ‘crisis’ for the alarmists, reinforces the interdependence of the Bhutanese and Indian economies, particularly in trade and financial ties. It sends signals on the need for regular dialogue between the two countries on economic and financial policies and their management – the central point being the need for a steady inflow of rupees into Bhutan from the sale of electricity, and transfer of Indian grants and loans. It also calls for bilateral measures to ensure that the common people are not adversely affected on either side of the border, and any existing distortions in the system and financial irregularities are corrected once and for all. It is a lesson for us that Bhutan must monitor imports regularly and buy more Bhutanese products where substitutes are available. It is also an opportunity for our people to produce more within the country, both for internal consumption and export. Above all, it is a reminder to us that the Indian rupee is perhaps more valuable than any freely convertible currency for our daily needs.
The two questions that immediately come to our mind are the lopsided nature of our merchandize trade with India and the parity of the two currencies.
Merchandize trade has always remained in the deficit because of our limited export products and low export volumes. It is only with the inclusion of the sale of hydro-electricity that the trade gap becomes smaller or remains in surplus. In trying to earn more convertible currencies, we have perhaps ignored the dire importance of earning more rupees by establishing industries and services targeted to the Indian market.
For instance, we have no clear strategy to attract Indian tourists to Bhutan even though the Indian middle class is estimated to be more than 300 million, and a growing proportion of them take holidays during the summer and festive seasons. If an Indian tourist group can afford to spend Nu. 3 million on a birthday celebration in Tashi Taj, Thimphu, the general capacity of similar Indian visitors to spend is very high provided we can offer quality goods and services. It was only since 2010 that the high-end Indian tourists were included in the total number of tourists visiting Bhutan. Apart from the short-sighted measure to set up tax-shelter industries in the recent past, that had to be ultimately closed down, neither the government nor the private sector has succeeded in establishing export processing industries. Time has now come for us to explore this strategy and attract Indian investment and entrepreneurship to produce and sell goods and services to India in order to supplement earnings from the sale of hydro-electricity.
The prudent spending of foreign aid has resulted in continued surplus in our balance of payments with foreign exchange reserves hovering between $700 and $900 million at a time. The IMF has been lauding our financial management practices during their regular Article 4 consultations, the latest one being in May 2011. They had also foreseen the unsustainable nature of rupee spending and advised the government along the following lines:
In the near term, fiscal policy should be tightened to address overheating (i.e., credit growth and over-spending);
The Government could consider introducing a nominal ceiling on current spending (excluding interest);
Monetary conditions need to be tightened to lower excess liquidity and credit growth;
Rapid credit growth also warrants close monitoring and financial sector supervision should be strengthened; and
The large number of hydropower projects in the pipeline and volatile hydropower exports to India will likely contribute to volatility in rupee reserves, requiring a more active reserve management.
According to this report, their recommendations were largely accepted by the government authorities (read Royal Monetary Authority & Finance Ministry). The IMF had also shared similar views in its former report on the shortage of Indian rupees against which the RMA had already been borrowing from India.
I am not deliberately trying to point a finger at someone. Yet, I cannot but ask as to why our authorities didn’t take serious note of the above advice and take precautionary measures in time? Was the IMF advice ignored or forgotten the moment the mission left Bhutan? Is this another case of our authorities remaining complacent, going by the ‘business as usual mentality,’ and failing to be proactive? After all, the problem was foreseen. If gradual and systematic measures had been taken in time to avert the problem from becoming so serious, the impact of the ‘rupee shock’ on the common people could have been reduced considerably. And the government image would not have been tarnished so badly.
The parity of the ngultrum and rupee has definitely benefitted the Bhutanese people even though our export sector is not strong enough to sustain this one-to-one relationship. Because of our small export basket, devaluation of the ngultrum against the rupee will not benefit Bhutan in the foreseeable future. Moreover, such an action will have wide-ranging implications for the Bhutanese economy and erode the confidence of our people in governance. But RMA must act to sustain the parity as the ngultrum is understandably being traded in informal markets at 1.20 to 1.30 for a rupee. Such a large depreciation must not be allowed to persist if peoples’ confidence has to be restored in our currency. As rupee is also a foreign currency for Bhutan as reiterated by the RMA, the government must immediately open exchange counters at the border and other strategic locations to ease the pressure on the banks and meet the genuine needs of our people.
The options for the government under the situation is borrowing from India in the short-run, managing rupee more prudently, expediting the construction of hydropower projects and establishing and improving export-oriented industries and services targeted for the Indian market. Devaluation is not a panacea for the problem.
(The writer Achyut Bhandari is a consultant)