Perspective:Having highlighted the importance of selecting the right mixture of broad based development strategy that Bhutan needs to implement to offset the present challenge, the immediate concern is how to mitigate the problem now at a sectorial level. In the following sections an attempt is made to recommend a few approaches to alleviate the Rupee shortages. It is hoped this effort will be taken positively.
The Royal Monetary Authority’s introduction of mandatory payment terms and conditions through the formal sector for trade between Bhutan and India i.e. through the banks is a big step in the right direction.
Nowhere in the world is international trade conducted like it was between Bhutan and India. Even trade between Indian states are not as informal. This is one of the biggest boosts given to the development of the economy and private sector.
On the other hand, RMA’s actions like the rationing of the Rupee in the face of its huge demand has adversely affected the economy even more. Overnight the Ngultrum was devalued, inflation was set loose, economic activities in the country have slowed and a Rupee stampede out of the country was started (in a matter of 3 months, the Rupee borrowing shot up to over 10 billion creating a record of sorts). Continuing on this path can only lead to economic crisis. The RMA and the government should employ the following monetary measures to alleviate the current dilemma:
1. Sell US$ 300 million in the Indian market, a portion of the proceeds to liquidate the overdraft facility of the State Bank of India and Punjab National Bank especially taking advantage of the high value of the US$ to the Rupee. The balance to be kept as a Rupee reserve for imports and other requirements. This step is the only fair and most logical thing to do. After all the convertible foreign exchange of the country has been built up by buying it with the Rupee reserve/loans (one of the reasons for the Rupee shortages). The foreign exchange reserve of country should not be static but dynamic in nature and the sole purpose of the foreign exchange reserve is to be used for such occasions. Moreover the balance after the sale is still well within the provision of the Constitution and meets all the norms required. The present stand of the RMA as quoted in the media of the required foreign exchange reserve for 12 months of essential imports plus reserve for Ngultrum in circulation, plus for international loans and security for the Rupee loans is like saying that the foreign exchange reserve for food is US$ 500 million, the reserve for vegetable is US$ 100 million and reserve for rice is US$ 150 million totalling US$ 750 million. This is nothing but triple counting of the same items. To import, we need foreign exchange, which is bought with Ngultrum i.e. that much Ngultrum is taken out of circulation and therefore there is no need to keep reserve for it.
2. To re-negotiate the repayment terms of the Rupee loans given for Tala and Kurichu Power projects so that the annual repayment amount is reduced in the short term. This will give us more Rupee to meet present demands until the commissioning of the Punatshangchhu Power Projects or until such time when the Rupee spending reduces on account of the austerity measures coming into effect (there will always be some time lag).
3. To formalise payment through banks for commercial imports from third country to plug leakages of Rupee. This will also automatically reduce non-essential imports without having to ban imports. Yes more US$ will flow out of the country but more Rupee than the US$ in value will stay in the country. It will also reflect the actual trade balance and balance of payment situation of the country.
4. To urgently inject required funds into the economy to off set the contraction in the economy brought about by:
i. recent ad hoc decisions.
ii. huge investment in the hydropower sectors that necessitates corresponding investment by the private sector which can be financed through credit from financial institutions.
If need be the fund injection could be availed from concessional loans from bilateral or multi-lateral sources on a short term basis say for five years, by selling government assets and by selling a portion of the foreign exchange reserve. The current practice of taking high interest loans from India should be stopped or minimised.
5. Another way could be to increase liquidity by setting up a methodology where the hydropower project authorities can give advances (since the projects already have the funds) to contractors against bank guarantees issued by Bhutanese banks. This will help in the purchase of trucks, earth moving equipment and undertaking construction works. This way, the project gets its work done, the Bhutanese contractor gets his contract completed and banks make money for issuing the guarantee against the contract value and assets. The advances can be deducted in instalments from the running bills.
6. Increase and direct financial investments in productive avenues such as agriculture, infrastructure, export and small/cottage industries.
7. Encourage competition between the financial institutions for a more efficient financial market thereby entailing cheaper financial cost instead of setting up floor interest rates.
8. To remove bans on construction and transport loans, which are most vital especially with reference to the huge investments being made in the hydropower sector. These loans or liquidity are needed for the Bhutanese people to participate actively in the construction of the hydropower projects. If liquidity is not made available RMA would be doing the biggest dis-service and will ensure that as in the past of the Chukha and Tala Hydropwer projects, the proceeds of the construction of the power projects valued at over Rs. 650 billion will all go out of the country. In the absence of these, the main contractors from India will be more than happy to undertake the tasks at the cost of the Bhutanese people and economy, which is happening already.
9. To stop purchase of convertible currency in the form of Rupee loans at higher interest rate. This means any import of goods from India, which is actually financed by convertible earnings or investment/development assistance, should be made by selling that currency or paying in that foreign currency instead of taking high interest loans from India - (this is permitted as per the agreement signed between the two countries). For example a UNDP funded project import goods worth US$ 100,000 from India. The current trend is that the US$ is kept as foreign reserve and the equivalent in Nu 5.30M is released to the agency undertaking the project. This amount is then converted into rupee to import the goods. Our foreign exchange has increased by US$ 100,000.00 but our Rupee reserve has been reduced by Rs. 5.30 million. Similarly the income from international tourist is in US$/others whereas the food and fuel imported for them from India are in Rupee. The step will also help the country maintain proper and accurate balance of trade and balance of payments accounts with all countries.
10. To make the Ngultrum the only legal tender currency in the country and its acceptance in the country being of paramount importance. This will ensure the demand for the Ngultrum will increase substantially by reducing Rupee transaction within the country. It is only Bhutan that will honour the Ngultrum and therefore we cannot afford to dishonour our own currency by not accepting it.
11. Develop the financial markets in the country.
12. RMA must recognise that Bhutan and India enjoy a unique and a very close relationship that goes beyond the adherence of international norms of national monetary policies. Our dealings with India must be based on pragmatic realism and to maximise the advantages that accrue to Bhutan.
These measures will also give RMA and government time to study and take remedial steps to defang the Rupee shortage without adopting ad hoc decisions which damages more than helps. It will also give time for the austerity measures to take effect. What is required now is structural evolution involving people’s way of life, not a revolution. We are dealing with structural changes, which need time if we want changes without pain. And if changes for the better can be made without pain, why inflict pain unnecessarily.
To be continued
Contributed by
T Gyaltshen, Thimphu
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