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)
continuation.....................The Indian Rupee Crunch..........(4)
The increase in standby credit line with State Bank of India from INR 3 billion to INR 6 billion (INR 600 crore) at 10% per annum interest for balance of payments gives butterflies in the stomach, given that the 2010-11 debt service ratio was 51.7% , indifference to writing on the wall and government-centered private sector.
ReplyDeleteAnd, let us hope that the first constitutional case between the Government of Bhutan and the Opposition Party [JUDGEMENT NO.SC(Hung 11-1)] sends a positive signal of the jurisprudence system to the country in a longer-term.
ReplyDelete