More essential stuff

In my previous post I had proposed that, “the government is getting ready to sell even more foreign currency from our reserves.”

What if I am correct? What if the government is, indeed, preparing to sell foreign currency to alleviate the rupee crunch? If so, what is the procedure?

Last year, four months ago, the government sold US$ 200 million of our foreign currency reserves. At that time, US$ 200 million worked out to Nu 10.3 billion, which in turn worked out to 14% of our GDP. That was, and is, a lot of money. But no one questioned the process. All that was reported on the process was: The government on Thursday night struck a deal to sell USD 200M to address the country’s dire Indian rupee (INR) position…”

We will be required to dip into our foreign currency reserves occasionally. So we should think about the process. Who, by law, for example, can approve the use of our foreign currency reserves?

According to Article 14 Section 3 of the Constitution, “Public money shall not be drawn from the Consolidated Fund except through appropriation in accordance with the law.” In other words, the government cannot spend money unless that expenditure has been approved by the parliament.

But the Constitution is silent about the procedure for spending money from the foreign currency reserves. Instead, Section 115 of the Royal Monetary Act says that, “The Authority may purchase, sell or deal in– foreign exchange …”

Does ‘foreign exchange’ here include foreign exchange from our reserves? If so, should RMA have the complete authority to sell our foreign exchange? If not, what should be the procedure?

The government’s annual budget is debated and approved in the National Assembly. It is then submitted to the National Council for review. After that, it is submitted to His Majesty the King for Royal Assent.

The government’s budget for 2011-12 is about Nu 38 billion. That is not even four times the amount of foreign currency reserves that was sold last year (US$ 200 million fetched Rs 10.3 billion). The process to approve the government’s budget is vigorous. And rightfully so. But the process to approve use of our foreign currency reserves seems to be nonexistent. At best it is vague.

It is essential that the government and the parliament consider this matter urgently. Otherwise, we could end up recklessly depleting our foreign currency reserves.

Essential stuff

Article 14 Section 7 of the Constitution requires that, “A minimum foreign currency reserve that is adequate to meet the cost of not less than one year’s essential import must be maintained.”

But what constitutes essential import? Salt, shoes, sicnidizole – surely they are “essential”. But what about construction material, like, say, CGI? And raw material for industries? Are they essential? And how about arms and ammunition? I think they are essential, very essential.

It’s important to have a proper definition of what, in our context, constitutes essential import. It’s important because that definition will determine the “minimum foreign currency reserve” that must be maintained by the government at any time.

We don’t have a clear definition. But last year, when the government sold US$ 200 million from our foreign currency reserves, they told us that we still had US$ 702 million in our reserves, and that that would finance 13 months of essential import.

Divide US$ 702 million by 13 and multiply that by 12 and we quickly get US$ 648 million, the amount that, by the government’s own reckoning, is required to finance one year’s essential import.

That was in December last year. But yesterday, just four months later, the prime minister announced, on BBS TV, that our foreign currency reserves stand at US$ 716 million, and that that can finance 36 months – that’s three years – of essential import. So basically, the prime minister is now telling us that US$ 239 million is enough to finance one year’s worth of essential import.

Between 648 million and 239 million lies huge difference. And that difference points to two conclusions. One, the government is getting ready to sell even more foreign currency from our reserves. And two we need a clear definition of “essential import”.

The prime minister has proven that the government – this government, and others in the future – cannot be trusted to provide an honest and consistent definition of what constitutes “essential import”.  Governments will define, and redefine it, to yield to immediate temptations of selling off our foreign currency reserves.

We need a better way of defining “essential import” and, by extension, of calculating the “minimum foreign currency reserve” that governments must maintain. One way would be to form an independent authority whose duty it would be to decide, without bias and from time to time, what constitutes “essential import”. But for that to work, the authority must have broad-based representation including members from the government, RMA, judiciary, private sector, and His Majesty the King’s secretariat.

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?