… economic diversification to conserve foreign currency reserve which stands at USD 1157.408 M
Druk Holding and Investments (DHI) is working on two to three major projects according to Lyonchhen Dr Lotay Tshering. He said that the earnings from those projects are expected to generate foreign currency.
The decrease in US Dollar (USD), the main convertible foreign currency reserve in Bhutan, has sparked huge concern regarding the economic stability of the nation.
Lyonchhen mentioned that Bhutan at present does not have big projects worth earning huge foreign currency. On top, the investors are hesitant to invest money in current projects. He said, “We don’t make many profits from the current projects.”
“If the major projects of DHI succeed, we can expect an inflow of foreign currency,” Lyonchhen added.
During the parliamentary question hour session on Tuesday, a member of parliament (MP) Tshering Choden from the Khar-Yurung constituency raised questions pertaining to depleting foreign currency reserves.
The budget report FY 2022-23 reflected that in FY 2021-22, the foreign currency reserve dropped to USD 1328.024 million (M) from USD 1559.250 M in FY 2020-21. Currently, Bhutan has USD 1157.408 M.
According to the constitutional law of the country: “A minimum foreign currency reserve that is adequate to meet the cost of not less than one-year essential import must be maintained.”
Responding to the MP, Lyonchhen said that the central bank, Royal Monetary Authority (RMA), assured the government that it would have adequate foreign currency reserves to import essentials to last at least 18 months.
MP Tshering Choden expressed concerns about the impacts of more imports on one hand and lesser exports on another. She also stated that the decrease in foreign direct investments (FDI) and decrease in the number of grants received from the government of India(GoI) will create havoc on the country’s trade and economy.
“If we borrow foreign currency from external sources, we might put our nation’s sovereignty at risk. It’s likely that Bhutan might invite an economic crisis similar to our neighbouring country, Sri Lanka,” she said.
Thus, asking about the measures being taken by the government to maintain a minimum foreign currency reserve.
The decrease in USD reserve is also attributed to Bhutan’s trade trend. 95 percent of Bhutan’s trade happens with India. Though Indian Rupee (INR) is not a convertible currency, the government sells convertible currency (USD) to buy INR.
Lyonchhen highlighted the importance of maintaining INR reserves. He said, “We need to maintain an adequate INR reserve.” INR reserve is maintained by selling foreign currency reserves, from the export of hydroelectricity and also from the five-year-plan grants from GoI.
Apart from convertible currency depletion over the course of two and half years, Bhutan is also experiencing a decrease in INR reserve.
Indian Rupee which stood at 37.6 billion (B) in October 2020 has decreased to 27 B at the beginning of 2021. At present, Bhutan’s INR reserve stands at 12 B as stated by Lyonchhen.
Including convertible currency and INR, the foreign currency reserve decreased by 12 per cent during the Covid-19 pandemic.
The central bank is mandated to reserve a threshold of 10 B INR and convertible currency of USD 757 M.
Apart from selling USD to buy INR, the government also spent USD 600 M in 2021 for Covid-19-related procurements.
Bhutan’s biggest foreign currency inflow is from the Tourism and hospitality sector. However, the sector being the worst affected by the pandemic, the inflow of USD has been stagnant.
Lyonchhen said that USD generation is almost nil since Covid-19 struck the country in March 2020.
Bhutan used to earn over USD 500 M during favorable tourism years or not less than USD 350 M during poor tourist visits numbers.
“The fact that Bhutan is an import driven country and it’s worrisome,” said the Lyonchhen.
Lyonnchen advised people to consume local products to reduce foreign currency outflow.
Bhutan spends between 9 B rupees to 10 B rupees on essential fuel imports that drive the economy and business of the country.
Bhutan spent almost 5 B rupees on rice alone and 2.5 rupees on meat import.
“It is not just the government’s responsibility to reduce imports, every individual must be mindful of what they consume,” said the Prime Minister. He said that import substitution could be one way to reduce foreign currency depletion.
The government plans to freeze or reduce imports of certain identified lists of non-essential products in case of an economic crisis to conserve foreign currency.
Lyonchhen said that it might not be necessary at the moment as the businesses have resumed and exports have picked up in the last four to five months.
Since Bhutanese currency, Ngultrum (Nu) is not a legal tender outside Bhutan’s border, although pegged equally with INR, it is important that we maintain reserved foreign currency.
Bhutan being an import-driven country, it’s high time that Bhutan broadens the sources of foreign currency inflow and works on economic diversification.
Due to the Covid-19 pandemic, Bhutan’s economy shrank by 10.1 percent in 2020.