For the declining foreign currency reserve, the government is rolling its sleeves to address the decline by adopting holistic measures to intervene and replenish the reserve.
In doing so, a team of four experts from the Ministry of Finance (MoF), the Ministry of Economic Affairs (MoEA), Druk Holding and Investments (DHI) and the Central Bank, Royal Monetary Authority (RMA) are working together to bring out the plan.
The latest report with the RMA shows that the foreign exchange reserve fell by 30 per cent making it USD 970.4 Million (M) towards the end of December 1.46 Billion (B) in April 2021.
It is estimated that USD 970.4 M would be adequate to meet more than 14 months of essential imports.
The Finance minister, Lyonpo Namgay Tshering said, “If we continue with the current trend of import and the diversity of the import items, no country in the world will have adequate reserves to meet this sort of demand.”
The finance minister emphasized that it’s early to say that Bhutan is facing an acute shortage of foreign currency reserves. He stated that having foreign currency reserves to last 14 or 15 months is actually an impressive gain compared to some neighbouring countries that don’t even have the reserve to last a few weeks of imports on essentials.
“Saying so, it doesn’t mean that we can be complacent. There’s no room for complacency. The government, in consultation with the technical experts, is still working on the contingency plan to protect the foreign currency,” said Lyonpo.
Local economists suggest the government either impose a ban on the import of non-essential and luxury goods to protect the convertible currency reserve or raise the tax amount on imported goods to discourage imports.
However, Lyonpo said that the government needs to look into the fundamentals of Bhutan’s macro-economic parameters.
Bhutan is a largely import-driven country with more than 90 per cent imports from India compared to third country imports. He said: “Raising the tax on imported goods from the third country will not be as impactful in terms of containing or protecting the reserve foreign currency.”
However, he agreed that there can be something done with the restriction of imports until the economy stabilizes. “But restriction itself will not resolve the problem. We need to rationalize the imports,” Lyonpo added. He said that whatever the government could defer the import of non-essential items at this point in time can be rationalized as people might not opt to import those items.
On the taxation front, Lyonpo said that the government is working on measures to protect the reserve. According to the minister, he said that for the economy to function, the government also needs to strategize and think of how best the government can replenish the foreign currency reserve.
“We have to look from two angles and balance the act,” said Lyonpo.
The government is also exploring the low-hanging fruits and opportunities to leverage Bhutan’s exports. “We need to identify those critical points. We have to look for immediate short-term measures as a matter of concern,” said Lyonpo.
The finance minister withheld from sharing the list of non-essential items that could probably be drawn for temporary import restriction.
“For now, I cannot preempt the measures. But we have contributed some suggestions to the technical expert’s team working on a holistic contingency plan,” said the finance minister.
According to the Finance minister, Bhutan has come a long way in the last five years. Under the noble guidance of His Majesty, many Bhutanese are able to produce both food items and non-food items. A lot of cottage and small industries have grown to their fullest potential. However, the consumers preferring imported goods over locally available goods also contributes to declining foreign currency reserves.
Lyonpo said, “As Bhutanese, we should learn to buy Bhutanese-made products.” The need for consumer behaviour change is critical for larger interests.
Lyonpo claimed that the government is looking into the economy at large. The upcoming contingency plan will provide measures to make Bhutan’s economy resilient. The contingency plan is expected to take effect depending on the duration, short-term, medium-term and long-term.
For now, the experts’ team has collected the recommendation and the team will submit the report to the government in a few days.
Regulating imports from third countries has been entrusted to the MoEA’s department of trade. However, the existing rules and procedures for import from third countries can be revised with inputs from the MoF and RMA.
During the parliamentary question hour session in June, the Prime Minister of Bhutan hinted that there’s a chance that the government might restrict the import of non-essential goods if the country’s economy worsens.
Economists suggest temporarily imposing restrictions on luxury goods as the foreign currency is decreasing due to surging imports against declining inflows from export.
During the parliamentary session, Lyonchhen stated that Bhutan has 12 BINR in reserve, since more than 90 per cent of Bhutan’s business happens with India, he said, “we need to maintain an adequate INR reserve.”
Bhutan generates INR by selling USD, from hydroelectricity and grants from the government of India.
Usually, Bhutan generates USD 359 M to 500 M from the tourism industry. But since the closure of the tourism sector in March 2020. USD generation is almost nil. Moreover, RMA reported that the government has spent USD 600 M in 2021 to procure COVID-19-related materials.
Bhutan spends INR 9B-10B on fuel imports which is unavoidable to keep business and economy afloat and INR 5B on rice alone and INR 2.5 on meat imports.
Economists say that either the government should ban the import of non-essential luxury items or increase the import duty tax to discourage the import of third country goods.
Bhutan’s total external debt rose to USD 3.2 billion from 2.7 Billion before the pandemic. Bhutan owes over 2.2 billion to India, the major trading partner and about 1 billion USD to financial institutions such as World Bank and Asian Development Bank.
Bhutan’s imports rose to Nu 90.23 B in 2021 from Nu 66.64 B in 2020. Whereas, the trade deficit stands at 32.23 billion (USD 404 M).
With the increase in passenger vehicle imports, Bhutan also sees rising fuel imports almost. Fuel import makes almost one-fifth of total imports.
The constitution of the country mandated the central bank to maintain a minimum foreign currency reserve adequate enough to meet the cost of not less than a year of essential imports.
There’s a huge gap, a mismatch between the expenditure and the revenue. FY 2022-2023 projected total expenditure of Nu 74.807 B and revenue of 51.925 B.
The top ten import commodities in 2021 are Diesel, automatic data processing units, coke and semi-coke, wood charcoal, passenger cars, telephones (mobile/cell phones), motor vehicle for transport of goods, semi-milled or wholly milled rice, motor spirit (gasoline) including aviation spirit(petrol) and soya-bean oil.
In 2021, Bhutan’s top ten import countries are India, China, Singapore, Thailand, Bangladesh, South Korea, South Africa, Japan, Switzerland and the US. Bhutan imported almost 79 per cent of its goods from India and 8.33 per cent from China.
“Everyone should play a role in protecting the country’s reserve fund, people should watch out what they consume, whereas traders should also be mindful of what they import,” said the finance minister.