The rupee crunch explained

The recent issue of rupee crunch that made several hard-hitting headlines in the media was raised by Opposition Leader Tshering Tobgay during the question hour this week.

He said that although US$ 200 million from the foreign reserves were recently sold to liquidate the Rs 8 billion debt with the State Bank of India (SBI), the government has now availed another Rs 4 billion credit from the SBI.

He asked what caused such a huge rupee imbalance in such a short period of 18 months, and what measures the government had in mind to address the issue.

The finance minister, Lyonpo Wangdi Norbu, said the problem did not occur in the last 18 months and that it has been there since long although it wasn’t as serious before. He explained how, about two months after the new government came to power, the RMA approached the government to seek a rupee credit line facility for Rs 4 billion from the government of India.

This, he said, was as the result of a deteriorating rupee situation in the country in 2007, whereby RMA, during the time of the interim government, had to sell US$ 25 million of the reserves for conversion into rupee. He also informed the house that the country had gone through a similar problem in 1993.

Citing reasons as to why the government had to resort to selling of US dollars to serve the debts, the finance minister said that Bhutan imports more than 75 percent of its requirements from India and to compromise rupee reserves in this context would be compromising some of the basic necessities.

“In managing the reserves, it is the total reserves that mainly count and not only the individual components,” said the finance minister, adding that Gross International Reserves include several currencies, mostly convertible currencies, such as US dollar, Yen, and the Euro.

Lyonpo Wangdi Norbu added that reserves are built up precisely to be used in times of shortages in one or the other currencies, hence the government’s decision to sell US dollars. “In fact, it happened at a very good time when the US dollar was appreciating and the RMA made a profit of Rs 1.2 billion on the transaction,” he said.

As of June 2011, rupee reserves had fallen to Rs 775 million, insufficient even to finance a months’ worth of imports from India. Difficulties forced the RMA to borrow Rs 8 billion at an interest rate of 10 percent per annum from SBI through an overdraft facility in addition to the Rs 3 billion availed through the government of India credit line at 5 percent per annum.

Explaining the reasons that led to the rupee deficit, the finance minister said that it was due to a higher Gross Domestic Product resulting in higher per capita income and thereby leading to higher demand for goods and services.

He said that imports had increased by 47 percent over the previous year against an export of Rs 26 billion in 2010, leaving a trade deficit of Rs 3.347 billion. He also mentioned higher cost of imports with inflation, especially in fuel and petroleum products.

Regarding the opposition leader’s queries on whether any government policy could be directly attributed to the problem, the finance minister said that one factor leading to the rupee deficit is the convertible currency (CC) assistance received.

He said that almost 80 percent of the government’s capital expenditure funded by external assistance is in CC. “CC gets converted into ngultrum at one go and the ngultrum in circulation goes towards imports from India while CC reserves grow,” he explained.

Some of the immediate measures the government proposes to take to address the issue are rationalizing expenditure, minimizing pre-financing donor-supported projects, prioritizing imports, and curtailing credit expansion.

The government, according to the finance minister, will also be enhancing credit from the government of India from Rs 3 billion to Rs 6 billion. The finance minister informed the house that the Indian government has agreed to do so in April.

The government will also be submitting for loan repayments to the government of India to be made in half-yearly installments so as to smooth rupee outflows. It will also take up with the government of India for timely disbursement of aid funds (for 2011-2012 FY) which amounts to Nu 10.294 billion excluding those for mega projects.

Meanwhile, under the SAARC finance initiative, SAARC is working on introducing currency swap arrangements which is expected to provide an additional line of defense to address rupee shortfalls.

The finance minister said that with all the measures implemented, the situation would be far better when the hydropower projects are completed. He, however, added that the rupee imbalance will continue as India is Bhutan’s largest trading partner.

“As long as the balance of trade with India is in deficit, the demand for rupee is only going to increase,” said Lyonpo Wangdi Norbu.

Opposition leader Tshering Tobgay strongly refuted the finance minister’s response that the rupee deficit did not occur in the last 18 months and that it has been building up over the years.

He said that according to the balance sheet of the RMA, the overdraft account from the SBI went from being nil in 31 October 2010 to Rs 7.527 billion in 31 October 2011. This amount, he said, was not used for any development activity but to finance the rupee deficit.

By Pushkar Chhetri

One Response to “The rupee crunch explained”

1. Anup says:

   March 6, 2012 at 3:54 pm

   This is a problem of huge infrastructure spending in the Bhutan. Excessive imports of capital goods to rebuild infrastructure has not resulted in additional productivity. Further to complicate the issue excessive loans by Banks in terms for Housing and Vehicles have only aggravated the situation from bad to worse.
   Scrutinize loans and stop unproductive imports will be the step in right direction.

   Reply