Mistaken government

The Government has used our foreign currency reserves to address a severe rupee crunch in the kingdom. Last week they sold US$ 200 million from our reserves to pay off the Rs 8 billion outstanding debt on an overdraft account with the State Bank of India.

The Royal Monetary Authority borrows rupees from a special credit line with the Government of India and an overdraft facility maintained with the State Bank of India. The special arrangement with the Government of India permits our government to borrow rupees up to a maximum of Rs 3 billion, and the overdraft facility allows borrowings up to Rs 8 billion.

The RMA had exhausted both lines of credit before it recently cleared the Rs 8 billion loan.

The government has been remarkably quiet on the issue. So here are some questions, questions I will take up officially with them.

What caused the rupee crisis?

We import more goods and services from India than we export. So our trade balance with India is negative. And that causes a rupee deficit. But that has always been so. And that – the trade balance and the resulting rupee deficit – has always been easily resolved by the large amounts of rupees that the Indian government pumps into our economy in the form of generous aid to our government.

So why did we face such a big rupee crisis recently? Why did we have to borrow as much as Rs 11 billion to finance the rupee deficit? Rs 8 billion of that was borrowed in the past year alone, and that, in spite of increased Indian grant aid and huge inflows of rupees for the construction of mega projects.

The government has had to sell US$ 200 million to address the rupee deficit. Otherwise, RMA would not have been able to maintain the ngultrum’s exchange peg with the rupee. And we wouldn’t have been able to continue buying goods and services from India.

In other words, our economy was in serious trouble.

And the government had to bail it out by injecting US$ 200 million into it. US$ 200 million works out to Nu 10.3 billion at the current exchange rate. That works out to 14% of the GDP. And that is a huge bailout by any measure.

So why was our economy in such big trouble? What caused the rupee crisis?

What must be done to prevent another crisis?

Our foreign exchange reserves are not reserves in the strict sense – they are actually savings accrued carefully over several decades. The government has used US$ 200 million of it, in one go, to bail out our economy.

It’s obvious that if we don’t do anything different, if we don’t learn from our mistake, we will face another big rupee deficit by this time next year. Should that happen, the Constitution, which requires that foreign currency reserves must meet at least one year’s essential imports, will prevent the government from selling our foreign reserves for Indian currency. This simply means that the government will not be able to bail out the economy as easily as it has done this time.

So the question is, what must we do to prevent a similar crisis next year? How will the government prevent another rupee deficit from developing? What are the government’s plans?

How will the foreign exchange reserves be rebuilt?

The government has announced that the current reserves, equivalent to US$ 702 million, can finance 13 months of essential import. So even though the government has used up more than 20% of our reserves, what remains is still within the minimum limit set by Constitution according to which, “A minimum foreign currency reserve that is adequate to meet the cost of not less than one year’s essential import must be maintained.”

US$ 702 million at today’s exchange rate of Nu 51.5 for every US$ is about Nu 36.1 billion. And RMA has calculated that this amount – US$ 702 or Nu 36.1 billion – finances 13 months of essential imports. By dividing Nu 36.1 billion by 13 and multiplying it by 12 we now know that Nu 33.4 billion would be required to finance one year’s essential imports. The Constitution requires that the government set aside a minimum of this amount in the foreign exchange reserve.

But by this time next year, if the current trend continues, the volume of essential imports would have increased. That, plus inflation, would mean that the government would need set aside that that much more money in foreign currency to meet the minimum requirements set out in the Constitution.

But since the reserves must be maintained in foreign currency, there’s something else the government must think about: exchange rates.

Today the exchange rate has fallen to an all-time low. What when it strengthens? What if, by this time next year or the following year, the exchange rate rises to 2008 levels of Nu 40.4 per US$? That would mean that US$ 827 million would be required to finance one year’s essential imports at today’s quantity and today’s prices.

That would mean that the government would need to increase the foreign currency reserves by at least US$ 125 million. And that is without even factoring in increased consumption of essential imports and price increases for the essential imports.

The government has spent US$ 200 million. And the government has stated that the US$ 702 million remaining as foreign currency reserves is enough to meet the Constitutional requirements.

What we now need to know is how the government will replenish the foreign currency reserves to ensure that the reserves remain well within the minimum limits set by the Constitution. How will the government rebuild our foreign currency reserves?

Our economy was in serious trouble – that’s why the government used our foreign currency reserves. But that is only a stopgap measure, one that does not address the real issues and one that can be used only this once.

So the government must get serious. The government must identify its mistakes. The government must accept those mistakes. And the government must rectify those mistakes.

Otherwise, our economy, tiny as it is, will collapse.

Conflicting news

How is it that one week the government calls McKinsey’s Accelerating Bhutan’s Socioeconomic Development project “A success story”, and the next week the government has used our foreign currency reserves to “rescue Bhutan from rupee crisis”?

Why would our economy need to be bailed out by using our hard earned foreign exchange reserves if the McKinsey project really was “…an initiative that created 14,000 new jobs in two years, helped tourist arrival cross the magical 50,000 figure, and will save the government Nu 360mn within its tenure, among numerous other benefits” ?

Bhutan builders

Jai Prakash and Gammon have been selected to construct the 1000MW Punatsangchhu – II hydropower project.

Gammon, Hindustan Construction, and Larsen and Turbo are building the 1200MW Punatsangchhu – I hydropower project.

Hindustan Construction, Larsen and Turbo, and Jai Prakash built the 1020 MW Tala Hydropower Project.

A select group of contractors, characterized by the complete absence of Bhutanese contractors, public or private, even after decades of experience in hydropower construction in our country.

Viva la Shoe Vival!

Enterprising role model

I like business startups. These places have an air of excitement about them. They show confidence, enthusiasm and courage. And they give off infectious optimism.

But I like new businesses for another reason: they are critical for our economy. They create employment. They help reduce poverty and distribute income. And they contribute to improving and strengthening our economic conditions.

That’s why I try not to miss invitations to visit business startups or attend their opening ceremonies. And over the years I’ve had the opportunity to visit a wide range of new businesses ventures from restaurants and bakeries to workshops and factories.

Yesterday, I got to visit another startup. Shoe Vival. This small enterprise, located in lower Norzin Lam, offers a unique service – they launder and refurbish footwear.

Shoe Vival was officially launched yesterday. But they’ve already been in business for a few successful months. If you visit their Facebook profile you’ll see some of the work they’ve been doing.

And if you visit their workshop in Norzin Lam, you’ll see why I’m so excited about their work. Here are the top five reasons that make Shoe Vival my favorite start up:

5.     Dawa Dakpa, the owner of Shoe Vival. He dropped out of college, and spent several jobless years drinking too much. But he didn’t give up. Instead he looked for a business idea, learnt about that business, established it, and is now running it successfully. Today this self-employed entrepreneur is a role model for out-of-school youth.

4.     The Loden Foundation helped Dawa Dakpa start Shoe Vival. That’s the kind of work I like to see our NGOs do – helping us help ourselves.

3.     I can now get my shoes repaired – and repaired well – by a fellow Bhutanese. I no longer have to take them to a foreign cobbler.

2.     Shoe Vival will clean and refurbish my old favorite shoes, making them good enough to wear or give away. I no longer have to throw them away or store them indefinitely.

1.     I’ve finally figured out a way of cleaning my traditional boots, especially the white brocade, without damaging them – viva la Shoe Vival!

Discriminating industries

Excised steel

Today’s steel prices:

A ton of 10 mm TMT bar manufactured in Bhutan (by Karma Steel, for example) costs Nu 39,000 in Phuentsholing.

A ton of similar grade (Fe415) 10 mm TMT bar manufactured in India (by SRMB, for example) costs Nu 42,900 in Jaigon, outside Phuentsholing.

    If you were a contractor, which steel would you buy? Bhutanese steel, right? All else being the same, TMT bars manufactured in Bhutan would be cheaper by Nu 3,900 per ton.

    But Punatsangchu Hydropower Project Authority contractors prefer Indian steel. Why? Because for PHPA, the government refunds the excise duty levied on Indian steel (collected in India by the Indian government, then transferred to the Bhutanese government). The excise rate for steel is 10.3%. And that seems to be enough to make PHPA contractors prefer TMT bars manufactured in India over those produced in Bhutan.

    PHPA’s demand for steel is huge. And that demand will get even bigger – much bigger – as construction on the other hydropower projects also begin.

    This massive surge in demand for steel should come as good news for our industries. It doesn’t. Instead, our steel manufacturers are disappointed.

    I am disappointed too. And I am confused.

    Ideally, our government should favour our own industries over foreign ones. That, in fact, is what every country tries to do. But if, for whatever reason, that isn’t possible, our government should at least not discriminate between goods produced in our country and those that are imported.

    And under no condition – no matter what – should our government discriminate against national companies by favouring foreign products. But that, unfortunately, seems to be what’s happening at PHPA.

    Our government refunds the excise duty paid on Indian steel. But it does not refund the excise duty paid on Bhutanese steel. (Bhutanese manufacturers pay excise duty in India when buying raw material.) So Indian steel becomes much more competitive. And our own manufacturers lose out.

    If our government must refund the excise duty levied on steel manufactured in India, it should also refund the excise duty levied on the raw material that is purchased by domestic steel manufacturers. Only then will the playing field be level. Otherwise, our manufacturers don’t stand a chance. And they may eventually go out of business.

    That won’t be good for the promoters – they’d lose money.

    That won’t be good for the employees – they’d lose their jobs.

    That won’t be good for the banks – they’d lose their investments.

    That won’t be good for the government – they’d lose revenue from business and personal income taxes.

    And that won’t be good for our economy.

    But that precisely is what’s happening. Bhutan Concast is almost bankrupt. They’ve shut their factories. They’ve let go of most of their workers.  And they may be forced to default on their loans.

    I’m disappointed. And I am confused.

    Inflating prices

    The effects of inflation on the prices of essentials …



    May June July
    Stone Free Rice (ST Rice)




    Nestle Every Day Milk Powder




    Red Label Tea Leave  (500 gms)




    Natural  Gold Refined Oil (1Kg)




    Maida (1Kg)




    Salt (1Kg)




    Sugar (1 Kg)




    Amul Butter




    Amul Cheese




    River potential

    alternate hydro power

    National Geographic has rated rafting on the Drangme Chhu – from the Trashigang Bridge to the Royal Manas Park – as one of the 25 Best New Trips for 2010.

    But it’s not just the Drangme Chhu. Every one of our major river systems provides some of the world’s best rafting experiences. Dave Allardice of Ultimate Descents says that our rivers are:

    A gigantic staircase rising from the Indian border to the high Himalayas of Tibet, the soaring peaks of Bhutan are an untapped treasure house of whitewater. The rivers are powerful and challenging.

    And the National Geographic calls them:

    A spillway for Himalayan snow and ice that roils into turquoise Class IV and V rapids through sheer granite walls.

    So impressed were the editors of National Geographic Traveler magazine that they also included the Drangme Chhu decent as one of the world’s top 50 Tours of a Lifetime.

    All this is good news.

    But the good news will not last long. In fact, it will barely last two years. By 2012, construction on the 1800 MW Kuri-Gongri hydropower project will begin at the confluence of the Kuri Chhu and the Drangme Chhu. And further upstream, on the Kholong Chuu, construction on a 486 MW project will also commence in 2012.

    So if you want to experience what the National Geographic is raving about, head to the Drangme Chhu … before 2012.

    Photo credit: Bio Bio Expeditions

    Mining our business

    Most of the work at the Punatsangchu hydropower project, estimated to cost more than Nu 36 billion, is being contracted out to large Indian companies. And rightfully so. After all, we still don’t have enough in-house capacity to dig tunnels, erect dams and build powerhouses.

    But mining? For stone? Now that, I’m sure we can all agree, is something we are good at!

    Then why is the government allowing Indian companies – L&T, HCC and Gammon – to operate stone quarries for the Punatsangchu hydropower project?

    And how will L&T, HCC and Gammon operate their mines when the Mines and Minerals Management Regulations 2002 clearly defines the eligibility to obtain a mining lease as:

    Any Bhutanese individual, licensed firm or a company shall be eligible to obtain a mining lease.

    To be doubly sure that only Bhutanese companies operate our mines, the Mines and Minerals Management Regulations goes on to define “company” as:

    Any organization registered under the Companies Act of the Kingdom of Bhutan, 2000.

    I’ve reported the matter to the Anticorruption Commission.

    Public policies

    Several multinational companies, like Tata, Airtel, Lafarge, and Infinity, have shown interest in investing in Bhutan. And others, like Mountain Hazelnut Venture, have already started doing business in our country. So it’s time the government finalized its foreign direct investment policy.

    But before finalizing the policy, the government should hold thorough consultations with all stakeholders, particularly the private sector, to ensure that they understand the policy and, more importantly, that they commit to supporting it.

    And once the FDI policy is finalized, it should be made public.

    Incidentally, the cabinet approved the Economic Development Policy last year. But it is still not available to the public. Instead, just last month the prime minster informed a potential investor that:

    Bhutan was finalizing the Economic Development Policy which would spell out the kind of environment in which they can operate.

    Transparency is important. And it is especially important where there’s money to be made.

    Mineral development policy

    According to the DGM director general the draft mineral development policy “… is for the development of the mining sector in a equitable, safe, more value added and environment friendly way.” Good.

    The draft mineral development policy proposes to allow only “one mining lease to an individual or to a company”. Very good. I’m all for a healthy reduction in the number of mines in our country.

    But wait a second, what about the Punatshangchu Hydropower Project Authority? Didn’t they recently apply for “three large quarries”? And what about Penden Cement? Surely they operate more than one mine. And Dungsum Cement? They’ll surely need more than one mine!

    Incidentally, it seems that PHPA will not operate the quarries themselves. Instead they may just transfer their mining lease to the big three Indian Contractors – L&T, HCC and Gammon.

    Which leads me to an important question: are foreign companies allowed to operate our mines?