Too good

Yesterday’s economic forum was scripted and implemented to perfection.

  • The forum, which was organised by GNHC and supported by the UNDP, was called “Macroeconomic Challenges, Opportunities and Policy Options for Bhutna” and held at the National Convention Centre.
  • The forum was attended by the prime minister, cabinet ministers, senior civil servants and
  • The forum was NOT attended by the governor of the Royal Monetary Authority and his two deputies. The CEOs of the financial institutions could not attend as they were summoned, by the RMA governor, for a separate meeting.
  • The experts at the forum included Professor Joeseph Stiglitz of Columbia University, and Dr Rob Vos and Dr Hamidur Rashid from UN’s department of economic and social affairs.
  • The experts concluded that our banks had lent too much money too easily, that private consumption was too high, that are foreign currency reserves were very high, that we should use our foreign currency reserves, and that the rupee crunch was caused by our inability to properly manage our foreign currency reserves.
  • Professor Stiglitz, a Nobel laureate and leading economist, certified that the rupee crunch is not a crisis.
  • Lyonpo Yeshey Zimba reiterated the findings of the expert group, and counted the economic successes of the government.
  • And the media – print, TV and radio – informed our people that experts, led by a Professor Stiglitz, had found that our economic situation was not in trouble, and that the rupee crunch could easily be dealt with by proper management of our foreign currency reserves.

If all this sound too good to be true, it probably is.

Consider this: Just 6 months ago, in December last year, the RMA’s rupee borrowings had peaked at Rs 11 billion, and the government had sold US$ 200 million for Rs 10.3 billion to clear Rs 8 billion. So at that time we were left with Rs 3 billion in credit, and Rs 2.3 billion in cash.

Today, the RMA’s rupee borrowings have reportedly already hit Rs 15 billion. And we have already spent the Rs 2.3 billion we had in cash. So that means that in the last six months we have accumulated a rupee deficit of 14.3 billion (Rs 15 billion – Rs 3 billion + Rs 2.3 billion = Rs 14.3 billion).

We owe Rs 15 billion. And we have US$ 720 million in reserves. US$ 720 million equals more than Rs 41 billion at today’s exchange rates. That’s an excess of Rs 26 billion. And that’s why the international experts have us convinced that the rupee crunch is a foreign currency reserve management issue; not an economic crisis.

Now consider this: we accumulated a rupee deficit of 14.3 billion in less than 6 months. If we use our foreign currency reserves to clear this debt, we’ll be left with the equivalent of Rs 26 billion in foreign currency reserves. But at this rate, we will have run up a deficit in excess of Rs 26 billion in less than one year. And we can again use our foreign currency reserves to clear this deficit too.

But then we’ll be left with nothing in our foreign currency reserves. Forget about the Constitutional requirement of maintaining foreign currency reserves not less than one year’s essential imports – our foreign currency reserves will have dropped all the way to zero; it will have been completely depleted. In other words, if, as the experts suggest, we “manage” our foreign currency reserves, we will have spent our entire reserves in less than a year, and we’ll be forced to accept, belatedly, that we are dealing with a major economic crisis.

So don’t blame the mismanagement of our foreign currency reserves for the ongoing rupee crunch. And, please, don’t think of misusing our reserves.

Instead, look at where the real problem lies. Look, for example, at government expenditure. And ask our experts if an increase in government expenditure from 21 billion per year (in 2008-09) to 38 billion per year (budgeted for 2011-12) could have caused the rupee crunch; ask them if excessive and uncontrolled government expenditure is what could have caused the economic crisis.