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.

Crunch time

A severe rupee shortage threatens to cause an economic crisis. But the government is in denial. As recently as last week, the finance minister blamed the media for blowing up the issue.

On the other hand, the RMA governor has declared that, “we have no money.” And he has already stopped issuing rupees to commercial banks. He has also warned that we can no longer sell our foreign reserves to buy rupees.

The RMA has had to borrow rupees to allow for the import fuel and other essential items. But traders are already complaining that they cannot do business. And industrialists worry that they won’t be able to import raw material.

Ordinary people are also being affected by the rupee crunch. Mr Vinod Kumar, for example, sent me this self-explanatory email, which I’m reproducing here with his permission.


I am a teacher working in Rangjung HSS. I am an Indian working in this kingdom for the last 7 years. I am sending this mail to draw your kind attention to a serious issue that we are facing. This month when we (expatriate teachers) went to the BOB Trashigang to send money to India, BOB officials told us that sending money to India is not as easy as before. They told us that the RMA has put some restrictions to send money to India. They told us that we need to register first and after 7 days if it is approved by RMA, then we can send money. We are here leaving our family behind to support this country and make a good future for us. If we are not able to send our hard earned money to our beloved ones, it is a disheartening thing. On them other hand, BNB so far did not get this type of circular from RMA. So please look in to the matter and if sir could make the money transfer of the civil servant as before we will be grateful to you sir.

Thanking you

Nu confidence

Bhutan airlines?

The government recently approved airfares for our two airlines. This is how the fares were reported in Kuensel:

Druk Air is charging USD 170 (single) and USD 340 (return) for Paro-Bumthang, while Bhutan Air will charge USD 250 (single) and USD 400 (return).

For Paro-Trashigang, Druk Air is charging USD 215 (single) and USD 430 (return). Bhutan Air is charging USD 350 (single) and USD 600 (return).

From Bumthang to Trashigang, Druk Air will cost USD 110 (single) and USD 220 (return), while Bhutan Air costs USD 150 (single) and USD 250 (return).

When I read the fares, two questions immediately came to my mind: why so expensive? And why USD?

The answer to the first is straightforward. The fares are expensive because operating costs are high. And unless domestic air travel becomes unexpectedly popular, both the airlines may incur losses, in spite of the government’s generous subsidies.

The answer to the second question is not so straightforward. Why, indeed, are domestic fares denominated in US dollars?

All goods and services in Bhutan should be priced in ngultrum. Unless, that is, we lack confidence in our own currency. And that shouldn’t be the case. Firstly, the ngultrum is pegged to the Indian rupee. And secondly, if air tickets were priced in ngultrum, foreigners would, anyway, have to pay US dollars to buy the ngultrums to purchase their air tickets.

Hard currency would come into the country in any case. So it may seem that there’s no difference whether foreigners pay for their air tickets in US dollars or ngultrums. Actually, there is a difference. If the tickets were priced in ngultrums, banks – and the Royal Monetary Authority – would automatically be more involved in the US dollar transactions and, as such, would also be better able to regulate the movement of foreign currencies.

But more importantly, we would demonstrate to foreigners, and ourselves, that we have confidence in our own currency. And that confidence is crucial for economic growth.

Photo credit: Kuensel

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.

Financial services … for who?

A joint sitting of the Parliament passed the Financial Services Bill. 66 members voted for the Bill. Only one member voted against it. That solitary member was me.

I voted against the Bill because it is discriminatory – it favors foreign investors over our own people.

Section 50 of the Bill specifies that a Bhutanese individual cannot own more than 20% of a financial institution’s shares; and that a Bhutanese company cannot own more than 30% of a financial institution’s shares.

But the Bill does not specify the amount of shares a foreign company can own in a financial institution. That has been left up to the Foreign Direct Investment policy. And the present FDI policy allows foreign companies to own as much as 51% of a financial institution.

So basically, the maximum amount of shares Bhutanese individuals and companies can own in a financial institution are clearly defined by law. But the amount of shares that foreign companies can own is not defined by law – instead, it’s left up to a government policy. Today’s policy allows foreign companies to own a lot more shares in a financial institution than what our own companies can own. And tomorrow’s policy could allow foreign companies to own even more shares.

It’s important to specify – clearly specify – the maximum amount of shares that a Bhutanese individual or a company can own in a financial institution. And it’s even more important to clearly specify the maximum amount of shares that a foreign company can own.

Our laws should favour Bhutanese companies over foreign ones. But if, for whatever reason, that’s not possible, both of them – Bhutanese and foreign companies – should be treated equally. Foreign companies should never receive preferential treatment over our own companies.

But that’s exactly what the Financial Services Bill allows.

Foreign investors already have more money, have more expertise, and have more experience. Now with more ownership of our banks, they will, in time, dominate and control our financial sector. That cannot bode well for the security of our economy.

Here’s Section 50 of the Financial Services Bill:

No person shall hold more than the following percentage of interest in shares of a financial institution:

(a)     in case of a Bhutanese individual, 20 percent,

(b)     in case of a Bhutanese company not being a financial institution, 30 percent.

(c)     in case of a Bhutanese company being a financial institution, as per the limit provided under section 53 below, and

(d)     in case of a foreign financial institution, as per the RMA regulations in line with the Foreign Direct Investment Policy.

Favouring foreigners over locals

The National Assembly passed the Financial Services Bill last week. I voted against it. I did so because the Bill seems to favour foreign investors over our own people and companies.

Section 50, on restrictions on ownership of financial institution and investments by financial institutions, reads:

No person shall hold more than the following percentage of interest in shares of a financial institution:

(a) in case of an individual, 10 percent,

(b) in the case of a company not being a financial institution, 20 percent

(c) in the case of a company being a financial institution, as per the limit provided under section 53 below, and

(d) in case of a foreign financial institution, as per the RMA regulations in line with the foreign direct investment policy

According to Section 53:

No financial institution can have ownership in another financial institution exceeding 5 percent of the other financial institutions’ paid up capital.

And RMA regulations currently allow foreign financial institutions to own 51 percent of a financial institution’s paid up capital.

So, here’s what I took exception to:

Our people cannot own more than 10%, and our companies cannot own more than 20% of a financial institution. But a foreign company can own 51%.

Our financial institutions cannot own more than 5% of another financial institution. But a foreign financial institution can own 51%.

The Bill favours foreign companies over our own companies. And how did the government respond when they realized this bias? They protected government owned companies by inserting a new subsection under Section 50, one that reads:

(e)   in the case of Ministry of Finance, RGoB, 75%.

Unanimous support

Banking on RMA

Support for the Royal Monetary Authority Bill was unanimous. Every one of the 66 MPs present in the Parliament today endorsed the Bill.

But if the Bill is so popular, why hadn’t the two Houses each passed it on its own? Why was a joint sitting needed?

In fact, there were differences. And the most critical one concerned the chairperson of the RMA Board.

The RMA Board comprises of seven members – the governor, two deputy governors, and four other members. The governor is appointed by His Majesty the King at the recommendation of the prime minister. The two deputy governors are full-time staff from the RMA secretariat. And the four other members are appointed by the government.

Most MPs, especially those in the National Council and the two in the opposition, expected that the governor would automatically become the chairperson of the Board. This was also the recommendation of the Joint Committee that had been established to iron out the differences between the two Houses.

The government, however, argued that the Chairperson should be from among the four other members it appoints, and not the governor.

A debate looked promising. But there wasn’t to be one. Instead, a couple of MPs explained why the governor should be the chairperson of the Board. Then, three ministers in quick succession justified why the governor should not be made the chairperson. And then, the speaker decided, quite suddenly, that the recommendation of the Joint Committee would prevail. No one challenged the speaker. And just like that, the otherwise most contentious issue was resolved.

After that, there were hardly any disagreements. The Joint Committee’s recommendations were mostly accepted; the government’s positions in some other areas were incorporated; and, despite my earlier misgivings, the RMA Bill sailed through unanimously.

Monetary authority?

Keep that gate secure

Beware of trespassers

The National Assembly passed the Royal Monetary Authority Bill yesterday. I did not support the bill. My objections were based on a simple principle: that the proposed legislation gave the government too much influence over the RMA.

True, it’s important for the RMA and the government to work together to achieve our common national objectives. Yes, I expect the RMA’s monetary policies to compliment the government’s fiscal policies as we, collectively, build an economy that we can call robust and vibrant. And yes, the RMA should be accountable to the government.

But, our central bank must also have sufficient autonomy – primarily from undue government influence – to fulfill its overall objective of achieving and maintaining price stability, which is necessary for sustainable economic growth.

The RMA Bill does, in fact, give the central bank autonomy. Section 4 of the Bill says that:

In exercising the powers vested in it by this Act, the Authority shall be an autonomous body. The Authority shall support the general economic policy of the Royal Government as far as it is possible without endangering the ability of the Authority to achieve its tasks and purposes pursuant to this act.

But this autonomy is threatened in other parts of the Bill. To begin with, the Governor of the RMA (who is appointed by the Druk Gyalpo on the recommendation of the Prime Minister) is not the Chairperson of the RMA Board. Instead, the Chairperson is selected from four other members of the Board, all of who are appointed by the Government.

The Board has seven members, including the Governor and two Deputy Governors. Five of these seven members are directly (the four members) or indirectly (the Governor) are appointed by the Government, already creating a natural government bias in the Board.

For good measure, the National Assembly added two new sections to the Bill. Both of them, but especially the second, would give the Government sweeping powers over the RMA.

The new section added under External Reserves and Foreign Exchange Operations reads:

The Authority may, from time to time, prescribe the terms and conditions associated with lending activities of financial institutions towards priority sectors as may be determined by the government from time to time.

And the new section under Relations with the Royal Government reads:

The Royal Government may, from time to time, issue such directives to the Authority as may be necessary after consultation with the Governor, in the public interest. Any directives issued under this Section shall be reported to the Parliament