Thukten Zangpo   

The value of the Ngultrum has been depreciating against the US dollar since early this year. It weakened by over 8 percent since the beginning of this year.

A person or a firm buying US dollar from banks will have to pay Nu 80.85 for one US dollar as of yesterday.

In January this year, the Ngultrum depreciated to 74.45. It was Nu 73.33 against US  dollar last year and Nu 53.44 in 2012, the central bank’s statistics show.

Since Ngultrum is pegged with the Indian Rupee (INR), any movement of INR against the US dollar has a direct impact on Ngultrum.

The value of Ngultrum or INR against the greenback works on a demand and supply basis. When there is a higher demand for the dollar, the value of INR or Ngultrum decreases and vice-versa. If India or Bhutan imports more than it export, the demand for the dollar will be higher than the supply and its domestic currency will depreciate against the dollar.

According to media reports, INR has been on a decline since early this year, particularly because of supply chains being hit by the Russia-Ukraine war, global economic challenges exacerbated by the Covid-19 pandemic, inflation, and high crude oil prices.

India depends on dollar-denominated imports for over 80 percent of its crude oil requirements and imports more than its exports.

A rise in global crude oil prices will shoot up India’s import bill when the dollar strengthens. It directly affects the value of Ngultrum since Bhutan imports 100 percent of its fuel requirement from India.

Media reports say that pullout of foreign institutional investors (FIIs) from India worsened the situation because this further increased the domestic demand for dollars. FIIs have sold shares worth over USD 30 billion (B) this year because of the stronger dollar overseas.

Because Bhutan is an import-dependent economy with a pegged exchange rate, any depreciation of the INR against the US dollar raises the cost of imports. However, the pegged exchange arrangement is in favour of Bhutan as more than 80 percent of its trade is with India.

As economic activities pick up, imports from India surged to Nu 71.2B in 2021 compared to Nu 51.4B in 2020.

Imports from third countries also saw a surge. Bhutan imported goods worth Nu 18.9B in 2021. It was Nu 15.3B in 2020.

However, the country’s export was little more than half the import value at Nu 58.3B in 2021. Import was worth Nu 90.3B.

A weaker Ngultrum against the dollar tends to inflate Bhutan’s import bill and widen export-import deficit.

Many essential commodities and intermediate goods that Bhutan imports also get costlier, thus pushing domestic inflation.

However, it is a boon for exporters as they receive more Ngultrum in exchange for USD because overall export competitiveness improves an economy.

The current account deficit was projected to widen from Nu 21.8B or 12.7 percent of gross domestic product (GDP) in the fiscal year 2020-21 to 23.6 percent of GDP (Nu 44.4B) in the fiscal year 2021-22, according to the finance ministry.

Trade deficit is estimated to widen from Nu 12.4B or 7.1 percent of GDP in the fiscal year 2020-21 to Nu 33.5B or 17.8 percent of GDP in the fiscal year 2021-22.

A depreciating value in Ngultrum would also mean that we have to pay more for the convertible currency (CC) concessional loans from multilateral institutions and bilateral partners.

With the pegging arrangement, a major portion of external debt denominated in INR has cushioned the impact of exchange rate risks. However, the CC debt amounting to USD 884.2 million equivalent to Nu 67.2B as of March this year is subject to exchange rate risk.

However, Bhutanese who remit money in dollars to support relatives will need to shell out more. The central bank’s statistics show that Bhutan’s remittance inflow decreased by 2.5 percent to Nu 8.1B in 2021 from Nu 8.3B in 2020.

It is expected that the Ngultrum or INR will further depreciate against US dollar with the Russia-Ukraine conflict going on and oil prices still rising.