Reserve: Perception that misusing the convertible currency reserve to meet the Indian rupee demand is inaccurate and deceptive, said Prime Minister Tshering Tobgay during the Meet-the-Press session yesterday.

The National Council during its deliberation on the annual budget had reported that the government sold USD 197 million (M), equivalent to INR 12.443 billion (B), from April 17, 2014 to May 30 this year. Council members also pointed out that the INR reserve has improved not as a result of the improvement in the economy but from sale of foreign currency.

“It makes no economic sense to hold on to convertible currency (CC) reserve that earns one percent interest and borrow INR at 10 percent to meet the rupee requirement in the country,” the finance minister said, adding that this was what the former government exactly did.

Lyonpo Namgay Dorji described the sale of convertible currency, as and when needed but simultaneously maintaining a sizable amount of both INR and CC reserves as “strategically handling the reserve.” He added: “It is a breakthrough for the government.”

Citing an example, he said the government availed a loan of USD 12M for the urban development project in Thimphu at 1.5 percent interest from the World Bank. Considering that 80 percent of the materials have to be imported from India, he said USD 7.2M was sold and an equivalent amount of rupee (INR 425M)  was released. “Be it grant or loan, spending are in rupees,” he said.

In the past, he said the government did not sell any convertible currencies, particularly the USD, until the whole INR reserve was depleted. And when INR was exhausted, the then government borrowed INR from the commercial banks in India with interest rates as high as 10.5 percent.

Consequently, the Royal Monetary Authority (RMA) had a difficult time servicing the commercial borrowings made. Between the fiscal year 2011-12 to 2013-14, Lyonpo said the RMA could not declare any surplus or profit. This year, he said the Central Bank has declared a profit of Nu 788M because the government serviced INR 21.9B commercial borrowings made to ease the rupee shortage since 2012.

To maintain the stability of the market and gain confidence of Ngultrum in the economy, the government in consultation with the Central Bank has decided to set a threshold rupee reserve of INR 10B and CC reserve of USD 757M for all times. The finance minister said that the government will not borrow to meet rupee driven imports unless this threshold level is reached.

“The government was accused of lying and accused of misusing the CC reserve,” the Prime Minister said. He added that there are only two ways to solve or rather reduce the dependence on rupee, import less or export more. “Ideally it should be both.”

Measures like import and loan restrictions were put in place during the former government’s tenure to control the INR outflow, Lyonchoen said. “Government that time did not know when to convert USD into INR in a timely manner.”

When all INR were depleted, the Central Bank borrowed INR at high interest rates from the commercial banks in India. About USD 200M each in 2011 and 2013 was sold from the CC reserve in one go. Lyonchoen said the current government sold USD 197M as and when required and slowly.

If the CC reserve is seen depleting, he said then the country should be concerned. But the overall reserve, Lyonchoen pointed out has increased from USD 894M in 2013 to more than USD 1.16B toady. In spite of so many vehicle imports, he said the country has managed to maintain a comfortable foreign currency reserve.

The Prime Minister added that the government asked the Central Bank to offload USD as and when required.

He added that the Economic Stimulus Plan (ESP) has been implemented to improve domestic production and reduce imports. Through injection of ESP funds, the government expects a boom in cottage and small industries.

Lyonpo Namgay Dorji said Nu 660M has been additionally allocated, outside the budget, to boost agriculture production. The country spends more than Nu 1B to import dairy products, annually.

In the past, he said because of the INR shortage, people started hoarding rupees and even the Anti-Corruption Commission had found fake imports of essential zero tax commodities to acquire INR. “We have lost billions of rupees,” he said.

Lyoncheon said, today, all the INR needs of the people are met and that they need not deal with circumstances that surfaced in the past. “By that definition, the rupee crisis is over.”

Tshering Dorji