Everyone’s responsibility to protect foreign exchange reserve: Minister of Finance

MB Subba

The government is exercising the “utmost caution” in managing the convertible currency (CC) reserve as economic activities are expected to resume.

Although the country has been largely successful in maintaining the foreign exchange reserve over the past two years of the pandemic, reserves (CC and INR combined) have declined by 12% from USD 1.6382 billion (B) in November to 1.4372 billion USD last December. year.

Normalization of Covid protocols is expected to boost imports, which will lead to increased pressure on the CC reserve. High inflation rates, especially for fuel, and the depreciation of the ngultrum against the US dollar are also a problem.

The government appears to be in a comfortable position when it comes to meeting the constitutional requirement of having a minimum foreign exchange reserve sufficient to cover the cost of at least 12 months of essential imports.

The foreign exchange reserve in December was sufficient to cover the cost of imports for 19.8 months, down from 22.5 months in November 2021. This is the lowest total reserve recorded in 2021.

Finance Minister Namgay Tshering said the country was “comfortable” at the moment with the currency reserve.

However, he added that the government had been careful not to invite the economic crisis that some countries in the region were facing. “The government and the central bank have exercised utmost caution in managing the CC reserve.”

Every Bhutanese, the finance minister said, should take responsibility for protecting the CC reserve by reducing the import of non-essential luxuries. He said builders could also help by reducing the import of non-essential building materials and purchasing locally available materials.

However, no such notification was issued.

Many wonder if the country could face economic situations similar to that of Sri Lanka, which recently defaulted on its external debts for the first time since its independence as its foreign exchange reserve ran out.

Another South Asian country, Nepal, also tightened its imports of cars, gold and cosmetics due to a decline in its foreign exchange reserves.

Some of the cushions that the Bhutanese economy enjoys are that the ngultrum is pegged to parity with the INR and that 70% of the total public debt is self-liquidating, as it is tied to hydro projects financed by the Indian government.

However, many of the problems facing the Bhutanese economy, observers say, are similar to those in Sri Lanka and Nepal. The drastic drop in tourist receipts is common to the three countries.

The Bhutanese economy has also struggled with high inflation rates, large fiscal and trade deficits, and limited exports.

Although the quarantine period for incoming international travelers has been reduced to five days, tourism has yet to resume. Observers say expanding sources of foreign exchange is important for an import-driven country.

The Minister of Finance said that exports would be favored by the development of craft enterprises and small industries. Promoting Foreign Direct Investments (FDI) could also be one of the ways to earn foreign currency.

The government plans to use concessional loans and grants from development partners to strengthen the CC reserve.

The CC is also required to repay external debts, which are expected to have increased to 138.8% of GDP.

Total public debt as of December 31, 2021 stood at Nu239,792B, according to the Ministry of Finance.

The country still benefits from the grace period on some of the external borrowings, which means that the CC reserve would come under additional pressure once repayment begins.

The RMA report reveals that the CC reserve in INR decreased by 59% from Rs 26,326B in November to Rs 10,666B in December last year. During the same period, the CC reserve increased from 1.2876 billion USD to 1.2957 billion USD.

However, officials say a drop in the INR reserve could put pressure on CC’s reserve, as CC is required to purchase INR if the country faces its shortages.

One of the problems has been the sharp decline in domestic revenue, not only because of the pandemic, but also because of the government’s fiscal policies. Last year, the government reduced customs duties to 10% on most goods, from 50%.

An official said now was not the right time to cut tax rates in this way.

Sri Lanka and Nepal reported a decline in remittances. However, unlike most countries, Bhutan has seen a drastic increase in remittances.