The Indian Rupee Crunch..........(3)

For one, Bhutan’s foreign exchange market is characterized by structural imbalances and there exists a severe shortage of Rupee liquidity even while there is an overall balance of payments surplus. This imbalance arises from the fact that our merchandise trade is dominated by trade with India which is in deficit, and Bhutanese residents need Indian Rupees to settle trade with India. At the same time, capital inflows, largely official flows in the form of loans and grants from various governments are substantial and flow into the country in currencies other than the Indian Rupee. In other words, the Indian Rupee reserve level in Bhutan is a good mirror of the convertible currency reserve build up. Therefore, to tide over temporary and periodical shortages in Indian Rupees the RMA borrows Indian Rupees from the State Bank of India at an interest rate of 10% per annum. While this is an extremely costly measure, we are compelled to do so in order to support and safeguard the integrity of the exchange rate peg with India, as the latter remains the cornerstone of national economic policy and strategy.

-- Statement by the Governor, Royal Monetary Authority, Annual Report 2010/11 (January 2012)

From Bhutan most of capital outflow is to India in INR through private sector credits. So, trade balance with India is the key indicator for formulating appropriate fiscal and monetary instruments.  The negative balance of payments (BOP) with India has been increasing from BTN 27.8 million in 2007-08, to BTN 278.6 million (2008-09), BTN 4,933.6 million  (2009-10), and colossal BTN 15,160.0 million in 2010-11.

During the period the banks saw unprecedented growth of bank deposits. The total bank deposits increased from BTN 22.04 billion in 2007 to BTN 43.75 billion by June 2011 with increased private sector share of deposits from 65.7% in 2007 to 72.4% by June 2011. While there were fluctuations in current deposits in percentage terms, there was sizeable yearly growth rates of saving deposits and time deposits from 16.4% (2007) to 44.3% (June 2011) and (-) 14% (2007) to 42% (2010) respectively. When the banks have such deposits, the obvious thing is credit growth. The commercial bank lending in FY2010-11 touched BTN 35 billion.

The World Bank’s summary Doing Business 2012 data for Bhutan showed improvement by 4 ranks from 146 in 2011 to 142 (out of 183 economies). The improvement of 4 points is fully attributed to considerable 44 points improvement in “ease of getting credit” from rank 170 in 2011 to 126, while rest of the indicators fell below 2011 levels.

The writing was on the wall. The RMA seems neither closely monitoring the details of deposits that caused high liquidity, regulating the robust commercial lending necessitated by such deposits, nor closely analyzing BOP with India for appropriate and timely fiscal/monetary interventions. They now continue to take sweeping measures which, in addition to earlier ones,  include the following:

28 March 12

RMA advises all financial institutions not to pay dividends and bonuses fearing impact on their liquidities.

29 March 12

RMA suspends effective today item 2 of its Circular On Foreign Currency dated 8 March 2012 until further notice: “2.  Access to Indian Rupee i)   Cash from the Commercial Banks Release of Indian Rupees (INR) in cash to Bhutanese nationals by commercial banks shall be limited to INR 10,000 (ten thousand) per day with a maximum monthly limit of INR 50,000 (fifty thousand) per person on production of citizenship identity card; OR ii)  Credit Card/Debit Card and Pre-Paid Card Transactions The INR withdrawal shall be permitted up to 10,000 (ten thousand) per instance subject to a maximum limit of INR 50,000 (fifty thousand) per month.”

First, because RMA was not able to anticipate aftermath of the sudden closure of about 3,500 non-resident foreigners’ accounts, it invited on 22 March 2012 Indian businessmen to deposit BTN back in Bhutanese banks. Why Indian traders had to withdraw BTN in so large amounts at the account closure that caused BTN credit squeeze is anybody's guess. Have they deposited all that was withdrawn then? The financial institutions only have the answers. Also, the argument that no country allows non-resident foreigners’ to have bank accounts is far from truth.

Second, RMA has shut the daily accessibility of INR, that was already rationed, completely. The RMA reasons that during INR rationing significant amounts were being drawn to hoard INR, and that INR was being sold across the border at a premium to Indian traders distorting BTN/INR peg parity. What is again surprising is that RMA could not anticipate these obvious repercussions before issuance of 8 March circular.

The complete suspension is extreme even if it is to be interpreted in terms of feverish effort to support BTN near-term. Let us hope that RMA measure to suspend INR accessibility is mainly because it wants to buy time till they receive/borrow INR in new Indian FY2012-13. While it may be good in macro-term, the repercussions of complete suspension is proving severe on two main accounts:

            (i)      It fails to foresee the day-to-day problems of the people including small business people, retailers, travelers, students, patients, and poor residents in border areas. The severe suffers are the poor. What good is the measure when people are not able to get INR 1,000 to save life.

On 2 April 2012, Rigzhung wrote in Kuensel Online Forum titled “Is  RMA Sleeping. Requests Dzongdags to intervene.”

“The INR crunch has hit hard in Samtse town. With no medical shops, people have to go down to India to buy essential medicines.

People usually come to bank for INR but The BOB Manager refuses them by saying RMA has ordered not to pay INR anymore. The doctor prescribes medicines which is not available in the hospital and the people has no other options than to go to India for medicine. The Shopkeepers at India asks INR for medicines. The situation has gone to crisis level. We request higher Authorities like Dzongdags to look into this matter and make BOB pay INR. INR as little as 1000 should be paid to common people to buy medicines in emergency. We look forward for RMA to wake up early before it is too late.”

It is distressing  to read such posts. It is not one of its kind. The Kuensel also had many coverage with head-lines “The majority feels the pinch most, say some economists”, “INR hysteria hits Gelephu”, “Will a border exchange counter solve the problem?”, “The crisis comes home” and so on.

(ii)   When INR is available, it is not clear how RMA is going to release it in the market without disrupting peg parity.  Will RMA devise regulatory framework that will stop hoarding INR and/or people selling INR across the border, given the financial environment created by its measures and the realization that how important a role INR plays in peoples’ daily life?

In addition to working out systematic INR availability for day-to-day use, RMA has to carefully regulate the deposits and credit growth protecting BTN’s exchange rate peg (the cornerstone of national economic policy and strategy) in close coordination with the Ministry of Finance’s action on public expenditure control and tax increase on non-essential imports in line with the JUDGEMENT NO.SC(Hung 11-1)  of the Supreme Court of Bhutan  on 24 February 2011 which states:

“Based on Findings No. 21, the Court hereby rules that:

22.6.1 All taxation measures, be it direct or indirect, intended to  impose new or alter the existing taxes structure must be introduced as a Bill as per Article 13, Section  2 of the

Constitution;

22.6.2 Taxes as revised or imposed thereof must be done only through the procedure of passing of Bills under Article 13 of the Constitution; and

22.6.3 The raising of revenue and introducing taxation measures merely along with the budget violates the constitutional mandate of introducing it as a Bill.”

Till then let us be positive and give individual support!


continuation.....................The Indian Rupee Crunch..........(4)