Bhutan’s Economy Not in a Worst Case Scenario

Bhutan's foreign currency reserves - 2012
The country’s foreign currency reserve position which, according to one estimate, is short by around USD 20M, has elicited differing views, with some saying the economy is stuck in a rut, and others contending there is still room to use it.

The requirements that the foreign currency reserve must meet include 12 months of essential import, convertible currency debt repayment, as collaterals for Rupee borrowings from India, and as back up currency for Ngultrum in circulation.

“The reserve estimate presented is in case of a worst-case scenario,” works and human settlement minister Yeshey Zimba said. “And we aren’t in a worst case scenario.”

The minister said that there is no need for the economy to reserve foreign currency as back up for the Ngultrum in circulation. “Our back up currency is the strength of our economy, which is being built up today,” he said, meaning the hydropower projects, which are expected to earn huge returns, once most of them are commissioned by 2020.

According to the minister, the reserves as of now were adequate enough. “We’ve rationed our reserves to be able to meet 12 months of import expenditure. Nowhere in the world does an economy reserve their currency for such a long duration,” he pointed out.

In most other countries, constitutional requirements range from a few weeks to less than six months.

Indian law mandates that a minimum of foreign currency reserve adequate enough to meet one month import of crude oil be reserved as contingencies for emergencies and war. This was because India imports around 80 percent of its oil needs from outside.

A local economist said that the reason why Bhutan had a 12-month requirement was because the economy had limited exports and essentially imported everything. “A developed economy is rather interested in the flow than the stock,” he said. This meant that such an economy could always make adjustments. They would have many other measures to raise money, even if their reserves are used up in a short time.

These economies had investments in many places and, if their reserves are depleted, there is always an option to pull back their money from these investments.

“But in Bhutan, we need to secure ourselves, we need at least a year to make appropriate adjustments if something seriously goes wrong in the economy,” the economist said.

Besides having no huge investments, the economy’s dollar earning capacity is very low, except for the tourism sector.

Another economist, who wished not to be named, said the economy had reached such a situation, where its foreign currency reserve cannot be used, nor it can borrow rupees from Indian commercial banks.

If the economy borrowed from India, the reserves would not be enough to be pledged against the borrowings.

If the dollar, which is being pledged today, is sold in the Indian market, the borrowings from the banks in India can be liquidated. However, if the demand for rupee increases again, there would be no more reserves to pledge.

KUENSEL
This story from KUENSEL

KUENSEL is Bhutan's national newspaper. Founded in 1967, KUENSEL is Bhutan's oldest newspaper.

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  1. Who made LYZ the finance / economy minister?

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