Given the huge volume of import from India, opinions differ on the merit of hoarding so many dollars

Currency: Bhutan is rich in hard currency reserve, but poor when it comes to rupee, begging the question why hold on to hard currency when the volume of the country’s trade is the maximum with India?

As of March, the central bank had a rupee reserve of Rs 10.9B (about USD 173M) compared to USD 834.9M, equivalent to around Rs 52B secured as convertible currency reserve.  This is almost five times more than the much needed rupee reserve.

Imports from countries other than India between January to March, this year were estimated at only Nu 2.6B, and imports from India was about Nu 12.6B, indicating that imports in rupee was also five times more than imports in convertible currency.

Economist have suggested since 2012, when the country was faced with an acute shortage of rupee, that reserves should be held disproportionately in the currency in which the goods were imported.

During an economic forum, in 2012, on ensuring a sound macroeconomic policy, American economist and Nobel laureate professor Joseph Stiglitz had said reserves were kept to manage any short-term economic volatility.  He had said that since most imports were in rupee, Bhutan’s focus of reserves ought to be in rupee from a risk management perspective, and putting excessive amount in dollars wasn’t the best way of creating reserves.

A Bhutanese economist, on condition of anonymity, said that Bhutan’s dollar reserve was kept at an American bank, earning just one percent interest, while the 80 percent of its imports from India was continuously exerting pressure on its rupee reserve.

Besides electricity export, which earns about Rs 11B a year, other sectors do not have substantial rupee earnings. On the other hand, convertible currency earning from tourism is growing every year, and exports to third countries are also gradually picking up.

From USD 32M earning from tourism in 2009, it increased by about USD 10M every year, recording an all time high of USD 73M last year.  Thus local economists are of the view that Bhutan can easily shed some convertible currency reserve to broaden the rupee reserve without breaching the Constitution.

The Constitution requires a minimum foreign currency reserve that is adequate to meet the cost of not less than one year’s essential import must be maintained.

As of March, the Royal Monetary Authority’s (RMA) bulletin reported that total international reserves were sufficient to finance 13.7 months of merchandise import.  The INR reserve was enough to pay for only 2.8 months of merchandise import in rupee, while USD reserve is expected to cover 80.5 months or seven years of import in convertible currency.

This, another economist said, could be balanced by shedding some USD to either earn or purchase INR.

However, it is not that straightforward, according to central bank officials.  RMA’s director for foreign exchange and reserve management department, Karma Rinzin, said INR is not a convertible currency, which is accepted everywhere.

Besides meeting 12 months of essential imports as mandated by the Constitution, he said the reserve must meet repayments for hard currency borrowings, and back up the ngultrum in circulation.

Should any commercial borrowings from India take place, the convertible currency has to be pledged against the rupee loan, like a mortgage, as was the case in the past.

He said the country’s outstanding convertible currency debt is about USD 600M and after all the settlements, the country hardly has about USD 100M in reserve, which is just enough to cover the essential imports.

By Tshering Dorji