The Indian rupee conundrum has already taken the Bhutanese economy for a ride. The central bank is coming up with various measures to ensure that there is minimum outflow of the rupee. It has already imposed several new limitations and restrictions on commercial banks and is putting caps on several transactions.
In the past few weeks, the demand for the rupee has soared to new heights. Indian towns across the border which mainly depend on Bhutanese customers for business are in a fix. While some have stopped accepting the ngultrum, others, including smalltime business retailers, have started charging different prices for all products with a premium charged for all transaction in ngultrum.
The closing of bank accounts of Indian traders in commercial banks have drained more than Nu 3.5bn from the Bhutanese banks which will force the banks to take recourse to maintain their liquidity. Right now, banks are wishing there is no huge institutional withdrawals which will further deplete their liquidity. This also means that banks will be looking up to the central bank to revisit the cash reserve ratio and the statutory liquidity ratio which totals up to a high of 37% which the banks have always described as being too high.
While the measures taken by the central bank is yielding some positive results, it is important to note that such results will not be sustainable in the long run. The central bank measures can only be a short term remedial monetary intervention to pause the issue. It cannot completely solve the issue.
For the long run, the government has to take major decisions including fiscal interventions. During the meet-the-press session on March 1, the finance minister blamed the media for blowing up the rupee issue out of proportion. Later, a task force was formed to study the issue and it has already submitted a report based on which the government has taken few measures like suspension of import license for non-essential goods apart from the central bank’s measures.
At a press conference on March 9, the finance minister said that he had already requested the finance minister of India to increase the standby credit line from Rs 3bn to Rs 6bn. Bhutan is also expecting to ease the crunch from the development grant of Nu 34bn from India. Here, it has to be noted that the above measures will only be able to ease the rupee crunch and not solve it and after the government exhausts the credit line and the development grant, we will find ourselves again in the same position.
The finance minister said fiscal measures would be taken but he also said that the measures have to be approved in the upcoming session of the parliament. In the meantime, the situation is getting from bad to worse. It is time the government takes the issue more seriously. The government has all the reasons at hand to describe the current situation as an economic emergency and act on it. And rather than waiting for the upcoming parliament session, it should call for an emergency session if it is necessary. As of now, this government is not doing enough to deal with perhaps the biggest economic crisis this country has experienced so far. Had this happened in any other country, heads would have rolled and people would be protesting on the streets.
Apart from fiscal measures, the long term measures to address the rupee issue are diversification of the economy, reducing consumption pattern by making the import of luxury goods expensive, promoting local manufacturing base by prioritizing small and medium businesses, and streamlining government expenditure among others. But all these measures are time intensive.
However, the government can take a short cut here – this paper has suggested it several times in the past that legalizing the Bhutan lottery business in India can solve the rupee crisis overnight. The scope of the lottery business in India is much more than what Bhutan could ever earn by exporting hydropower. But the DPT government has taken a big gamble by banning the lottery business in August last year. The implication of this decision is huge. The DPT government’s decision may become the reason to trigger an economic crisis for Bhutan. It is still not late to revisit the decision. Hard times call for hard decisions.