The
summary of
the recommendations of the Task Force on Balance of Payments with India and the
Rupee Shortage (and my comments) are presented below:
MONETARY
Immediate measures:
i. Review the reserve requirements for
banks: Royal Monetary Authority (RMA) to review cash reserve
ratio (CRR) and statutory liquidity ratio
(SLR) and introduce other demand management measures to control credit.
(Routine job of RMA. RMA
should be more accountable to fulfil its responsibilities.)
ii.
Enhancement of Government of India (GoI)
line of credit: Government to enhance
GoI line of credit from INR 3 billion to INR10 billion at 5% interest.
(Interest
rate is more attractive than SBI overdraft rates. The credit utilization should be justified
with proper rates of return.)
iii.
Rupee currency SWAP arrangement with India: Government to seek additional support through
bilateral local currency SWAP with India for balance of payment (BoP) deficits,
as an interim measure.
(An interim measure, so we
should not rely heavily on it.)
iv.
Institution of annual Rupee
management plan: RMA to submit convertible
currency (CC) and Rupee reserve management plan to the Government, in
collaboration with the Ministry of Finance and related stakeholders.
(Isn’t it routine job of RMA?
RMA should be more accountable to fulfil its responsibilities.)
v.
Surveillance over the financial
sector and its credit expansion: RMA to exercise its authority
and take measures to discourage excessive lending to non-productive and
highly-exposed sectors through appropriate policy interventions and imposition
of more stringent provisions.
(Should have been routine
job of RMA. RMA should be more accountable to fulfil its responsibilities.)
vi.
Streamlining access to and use of
Indian Rupees: RMA to establish Rupee exchange counters along border towns and
main commercial hubs to monitor the outflow of Rupee and for converting local
currency to Rupee subject to certain limits.
(This
should follow steps of item vii below)
vii.
Exchange restriction:
Indian Rupee to be treated as an essential reserve currency and managed (both on the demand and supply fronts)
in line with regulations and exchange restrictions framed and enforced by RMA.
(INR exchange rate
restriction should be more strategic and step-by-step approach, not to carry out
on an adhoc end-to-end basis.)
viii.
Base rate and policy rate:
RMA to introduce a system of base rate and policy rate for the financial sector
as part of its monetary tool to manage and influence domestic credit growth.
(Aren’t all central banks suppose to do this? It
should be the responsibility of RMA.)
ix.
Enforcement of Bhutan’s foreign
exchange regulations to close bank accounts of non-residents at border towns:
(Recommendation is based on
intuition that bank accounts of non-resident Indian businessmen in Bhutanese
banks contributed to large Rupee outflows.
It lacks in-depth analysis and correlation with practices of business
fronting, tax evasion, illegal authentication, taking
advantage of other loopholes at all levels of economy, and black/grey money
deposits.)
x.
Promote the use of electronic means of payment: Use
electronic payments to allow
efficient monitoring and save costs.
(All efficiency enhancing
measures should be implemented.)
xi.
Ring-fence adequate Rupee reserve for Rupee
debt service.
(Recommendation vague.
Efficiency enhancing measures should be implemented )
xii.
RMA to review the annual Government budget size and provide
opinion to the Ministry of Finance.
(Very close overall coordination
between the Government and RMA is imperative, including for review of annual
budget.)
xiii.
Improving surveillance of Rupee
flows: promote transparency and informed decision making:. Carry
out in coordination with Department of
Trade and Department of Revenue & Customs (DRC) the monitoring of export
proceeds and import payments in BoP with India to track the actual flow of
Rupees.
(RMA
should keep close track of export proceeds and import payments with India.)
FISCAL
Immediate measures - Taxation:
i.
Impose a green tax on vehicle
imports: recommended 40% green
tax on all vehicle imports.
(The blanket tax increase recommendation
looks purely for discouraging indiscriminate vehicle import. Heavy tax on
import of vehicles has mostly negative impact on economy because of high vehicle operation cost through the use of
old vehicles, e.g., Singapore discourages using old vehicles by imposing heavy
tax on old vehicles. Rather than taxing, positive approach of streamlining
import policies and procedures is better option.)
ii.
Levy Customs Duty and Sales Tax on
the import of heavy earth moving equipment: recommended to be brought under
the tax bracket.
(This will act as disincentive to
construction industry and not in line with developing domestic contractors. The
system may be strengthened rather than levying tax.)
iii.
Impose a green tax on fuel imports: recommended
that a green tax of 5%, equivalent to the current sales tax on fuel imports be
levied.
(The strategy should be saving fuel
through vehicle operation cost reduction, rather than raising tax on fuel. The
fuel cost is already very high. Further fuel cost raise will increase the
transport costs of goods and services.)
iv.
DRC to identify and propose new taxes (including capital gains tax) and rationalize existing rates including
the zero rated items; and
(Careful identification without heavy
impact on longer term strategic goals may be beneficial to the country.)
v.
Ministry of Finance to consider shifting the levy of sales tax
on vehicles from Point of Entry to Point
of Sale.
(This will further increase
the cost of vehicles in addition to the taxes proposed above. This will be
counter-productive to the economy for the reason mentioned above.)
GOVERNMENT EXPENDITURE
Immediate measures:
i.
Review implementation of FY 2011/12 budget. Government agencies
not to initiate new works that are yet to be initiated in this FY;
(Adjustments on FY 2011-12 budget not possible at this stage,
if not already done. )
ii.
To minimize the Rupee pressure, non-priority activities
including those that have no socio-economic benefits to be eliminated in the FY
2012-13 budget.
(Budget preparation and review
procedures to be strengthen. Why should non-priority items that do not
contribute to strategic goals be included in the budget?)
iii.
Revise debt service schedule for GoI loans for hydropower
development as most of the loan repayments (maximum 2.8 billion) falls due in every January and to include
such debt servicing schedules in all future loan agreements.
(Pros & cons of rescheduling debt
may be analyzed first.)
iv.
External borrowings
should be strictly for investment purposes.
(This should be strictly followed.)
v.
No agency should propose
and no consideration should be given for enhancement
of allowances and service benefits.
(Indefinitely? Time period for such
freeze needs to be indicated.)
vi.
Ministry of Finance (MoF)
to issue directives to government
corporations not to hold board/management meetings outside Bhutan and not
sponsor sporting events out of corporate funds.
(Indefinitely? Time period for such
freeze needs to be indicated.)
Medium term measures:
i.
Deficit if any to be met through domestic borrowings in the form
of ways and means account or issuance of T-Bills and to maintain fiscal deficit
at not more than an average of 3% of GDP during each FYP period.
(Domestic borrowing to meet fiscal
deficit can ease INR pressure. More innovative the means better it is.)
ii.
Currently, debt policy and strategy is to ensure that loans are
availed at the lowest cost with maximum social and economic returns and to
maintain debt at internationally
accepted thresholds. This is important to be continued and
constantly monitored.
(Debt
policy and strategy need to be diversified and strengthened. International
Monetary Fund (IMF) pointed out that indicative debt thresholds are often
breached. Specific attention has to be given not to breach the debt
indicators.)
iii.
Strengthen debt management capacity
(Debt management capacity
seems weak. Mobilize strong staff team and acquire debt management tools to give
better and timely analysis on debt and debt issues.)
iv.
Time schedule for GoI fund (grant)
releases: Timely release of GoI project-tied grants and SDP
funds will help financial planning and project scheduling.
(MoF and GNHC should work on
a time schedule and agree with GoI.)
v.
Explore the possibility of issuing Indian Rupee bonds for mega
projects.
(Issuance of bonds for
selected projects to attract private investment from India is a good idea. It
may be difficult to attract private funds without improving corporate
governance.)
TRADE
Immediate measures:
i.
Third country imports: MoF, Ministry of Economic
Affairs (MoEA) and RMA should coordinate and put in place an effective import
license system, to take care of proper hard currency transactions.)
(We
should take more liberal approach to third
country imports as long as the imports are within affordable limits.)
ii.
Software exports
(Department
of Trade has stopped issuing certificate of origin. So it is non-issue.)
iii.
Balance of trade projections
(Preparation and projection
of balance of trade with India should be given priority and regular job of the
Department of Trade.)
Medium-term measures:
i.
Enforce value addition criteria: All
industries must meet the national value addition criteria of 40%.
(Review value addition
percentage properly and once established, enforce it stringently.)
ii.
Streamlining distribution of goods
and services: The distribution
of goods and services to be streamlined and organized so that Bhutanese traders
deal directly with principle companies in India and other countries or deal
with the main national or regional dealers.
(Streamline government
regulations, policies and procedures; and strengthen supply-chain, inventory
management and control systems for import of goods and services from India and
abroad.)
iii.
Attracting Indian tourists: develop strategies to attract
high-end and middle income Indian tourists to the country.
(Attract Indian tourists by competing
with other hill stations, Darjeeling, Simla, Ooty, Kathmandu and others.)
Long-term measures:
Encourage industries that can
substitute imports as well as has the potential to promote growth in exports as
follows:
(Isn’t it asking for too
much? If we have strong exports, we should not be too concern about import
substitution.)
i.
Promote the use of local building
materials: substitution by local
materials.
(Easier
said than done. We should not depend too much on it.)
ii.
Promote sustainable and efficient use
of forest resources:
(Isn’t
this being done already?)
iii.
Import substitution must be
encouraged through the liberalization of policies for manufacturing industries.
(An in-ward looking approach! More
emphasis should be given on export earning industries than import substitution
enterprises.)
iv.
Ministry of Agriculture
and Forests and related stakeholders should consider building simple cold
storage based on air-cooling systems on high passes to store agricultural goods
for sale during the off-season.
(Is it feasible and cost
effective solution? I have my doubt.)
OTHER RECOMMENDATIONS
Corporations
to maintain separate CC and Rupee accounts.
(Corporations may keep
separate accounts but monitoring of INR and other foreign exchange transactions
should be the responsibility of RMA.)
Debt
swap for Dungsum Cement (DCCL) : MoF and Druk Holding and
Investments (DHI) should study the prospect of converting INR 2 billion loan from State Bank of India
Capital into Rupee bonds, given the huge cost of borrowing under the present
arrangement.
(Isn’t
this the responsibility of DHI to mobilize most cost-effective financial
resources for DCCL? DHI should be made more accountable. )
Consider
abolishing tax-free vehicle quota system.
(Quota system has been
counter-productive. Introduce more effective incentive to government staff.)
Government Vehicles:
(The proper management of
government pool vehicles is always an issue in most countries. An efficient
system can be devised if sincere efforts are made.)
Private
education:
There is an urgent need for the
Ministry of Education (MoE) to facilitate the development of private tertiary
colleges in Bhutan. Work on starting at
least 2-3 such colleges should be started immediately.
(The establishment of
private colleges are governed by the demand for such colleges. People should
have the options for quality education both within and outside the country. )
Statistics:
On BoP and related matters,
there is a need for National Statistics Bureau (NSB) to have data updated and
published on a regular basis.
(A recommendation for an
agency not doing its job? NSB should be made more accountable.)
Medium-term
fiscal framework:
The MoF had established a high
level macro-economic framework coordination committee (MFCC) and later this
requirement was also prescribed in the Public Finance Act 2007. It has members
from the key agencies like RMA, MoEA, GNHC, MoF, NSB and a few others. In view
of the recent developments, the need for representation at the highest levels
from these agencies in the MFCC through a reconstitution of the Committee is
important. MoF should also seek the support of the International Monetary Fund
(IMF) in getting a resident expert to assist in further improvement of the
framework.
(The recommendation is
dubious. MoF should seek IMF support in
preparing medium-term fiscal framework.)
First, we should
learn from the experience that import-driven internal consumption-based growth
model is not very conducive to a small land-locked country like Bhutan. Economists
should be able to analyze better! The sound strategy for us should be to
strongly support production base for export of goods and services, and improve
balance of payment. Since the economic growth model determine the
investment/expenditure pattern, a slow shift towards export-led growth model
(from current import driven economy, characterized by high credit growth
and internal and external imbalances) is highly desirable. So the
medium/longer-term measures should take full cognisance of such strategy. No
such depth is reflected in above recommendations.
We are too used to taking
unidirectional solution to the economic problems without even looking into
diversified options. So, how do you know what the trend is? For instance, while
China is starting to lose its attractiveness
in ready-made
garments (RMG) markets (also because of their focus on internal consumption to
boost economic growth), Bangladesh is expected to be the
next hot spot for RMG. With about $15 billion in exports in 2010, RMG is the
Bangladesh’s most important industrial
sector (representing 13 percent of GDP
and more than 75 percent of total exports). The forecast is to export-value
growth of 7 to 9 percent annually within the next ten years, so the market will
double by 2015 and nearly triple by 2020. Bangladesh does not even produce RMG raw
materials. They outsource from India and China. That’s called creating your own
niche! (see http://sangpatamang4.blogspot.com/2012/03/bangladesh-next-hot-spot-in-apparel.html) To compete with outside world, the country has to have
‘levelled playing field’. Has our thought process for last 30 years gone beyond
hydropower projects and traditional in-ward attitude bogged down with display
of superficial skills with no/little substance? The outcomes speak for itself !
Second, in
trying to find solution to INR crunch, the Task Force has essentially focused
on immediate measures in financial sectors, and included no substantive
recommendations on longer-term scale that reflect future development perspective
and foresight. For instance, investment in road infrastructure is one of the
best approaches to saving costs. Both China and India have been investing
heavily on road infrastructure to cut down their vehicle operation costs. Most
of road infrastructure in Bhutan is breaking to the levels which are beyond
routine/periodic maintenance norms. Should the road infrastructure be improved to
appropriate level of road roughness index and other technical standards, the
annual saving in vehicle operation costs (fuel, repair and maintenance costs)
will amount to billions of rupees, without accounting time savings and other
efficiency gain. This requires obviously sector foresight and strong
organizational capacity. Similar sector-specific cost savings approaches will
have significant contribution to the economy.
Third, the above recommendations have highlighted
the fact that the department/Authority/Agency concerned are not fulfilling their direct
responsibilities effectively and there are gross imbalances in terms POWER, AUTHORITY,
RESPONSIBILITY and ACCOUNTABILITY in these organizations. Looking at the above
recommendations, I wonder if the RMA is fulfilling its primary and secondary
objectives as stipulated in Royal Monetary Authority Act of Bhutan 2010 [see The
Indian Rupee Crunch..........(2) for RMA’s objectives.]
Fourth, in early April 2012 it was reported that the Government
borrowed INR 9.7 billion [GoI standby
credit of INR 3 billion at 5% per annum interest and from State
Bank of India (SBI) overdraft (OD) facility INR 6.7 billion (against the limit of INR 10
billion) at 10% per annum]. In addition
on 13 April 2011, Bhutan received INR 1.62 billion Indian grant for development
projects under 10th plan.
Now it is reported that RMA has borrowed INR 2 billion from
Punjab National Bank (PNB) at 10.5% interest because overdraft
facility extended by SBI reached its limit of INR 10 billion last week (18 May
2012). The credit from PNB will replenish domestic banks with INR. It only
means that in about slightly more than a month, an amount of INR 14.62
(3+10+1.62) billion has been used. The INR 14.62 billion is more than 20% of
GDP and may not have been used for any plausible purpose except to clear old
liabilities. Is this an effort to support BTN in the face of a financial
overextension that is driven by past (in)actions including investment in real
estate? Time will tell us.
The RMA
borrowing INR 2 billion from PNB is an issue, but more than this, the biggest
issue that is of concern is INR inflow into the system and debt sustainability.
As I said earlier debt can make a country effectively bankrupt.
The Task Force seems to have not done detailed review of the country’s debt
situation, an issue I consider the most critical in the current situation.
And finally, will
implementation of above measures strengthen both public and private sectors and
lead the country to the path of easing INR balance of payments in mid/longer-term? How comfortable are you as regards these? Be
your own judge!
continuation under June.....................The Indian Rupee Crunch..........(7)
