All in Order for the Ngultrum?

I was recently asked by a Member of Parliament in Bhutan what immediate actions I would take to control what is locally known as the “rupee crisis”. For the uninitiated, Bhutan is in the midst of a currency problem stemming from a huge trade imbalance with India, the country’s largest trading partner. This imbalance is complicated by the fact that the Bhutanese Ngultrum is pegged to the Indian Rupee, as it has been since its introduction in 1974.

Let me preface this post with some humility, for I am by no means an economist. As an engineer with an MBA and nearly two decades of work on energy and environment, economic and fiscal policy is not my strength. I do, however, have significant experience with thinking in systems, whether they are related to the business environment or the natural environment. When examining the rupee crisis, it is very important to consider the implications on dependent parts of the system (resources, labour, skills, and broader society) rather than just taking a narrow view on banks and foreign exchange. What follows are some of my thoughts and observations.

1) Primum Non Nocere: As with the Hippocratic Oath that guides medical professionals to “Do no harm”, it is critical is to not punish the citizens of Bhutan for the macroeconomic and monetary policy decisions made over the past decade. While there is a need to act and to act quickly, it is important that the government does not make rash and impulsive decisions that will cause more hardship over the coming years. Short term actions need to be backed up by medium and long term plans that will enable Bhutan to deliver the domestic supplies, goods, and skills it needs to deliver domestic supply of material and human resources. Examples include increasing vocational training.

Transparency of policy development can be implemented almost immediately, and feedback from across government ministries will result in more robust policymaking. As the recent foreign Exchange Policy demonstrates, new policies can be opened for review with realistic comment periods of weeks rather than days, and open across all ministries to encourage careful scrutiny for knock-on effects and possible systems imbalances.

2) Stricter credit: The financial sector will fare much better if people are actually paying back their loans on a timely basis. I recently saw an ad placed by a bank in the local paper politely requesting that clients pay back their loans. Those clients who are able and willing to pay off their loans are the ones who are making valuable contributions to the economy, and they should be rewarded with more credit and lower rates. Having better background checks and increased transparency across the credit system will allow banks to have interest rates that actually match the client’s likelihood to repay – those with good credit should be rewarded, and those with bad credit should have to pay more. Stricter credit is very different than no credit. Those with no credit history can be covered by Bhutan Development Bank Limited and transparent micro-finance institutions.

Private sector credit policies can take effect as soon as new guidelines can be drawn up, certainly within a matter of months. To my knowledge there is no microfinance in the country, and in light of recent negative press, this should be embraced with caution.

3) Monetary policy: A quick scan of RMA’s draft regulations on foreign exchange (helpfully open for comment) raises come eyebrows. There are some good suggested measures of transparency in the draft policy, but restricting Bhutanese citizens from removing more than NU5,000 ($100) per trip is too strong, especially for the home of GNH. Overly restrictive policies such as these are only patches to cover up for other deficiencies of the financial system. The real issue to solve is how to create en domestic environment in which Bhutanese businesses and individuals want to keep their money in Bhutan. Ultimately, only an attractive domestic investment environment will be the only thing that can keep ngultrums in Bhutan. In terms of timing, there are certainly immediate changes that can be made to the current draft, but I do not have the expertise to provide that input.

4) Leading by example: It is sometimes said that implementing austerity squeezes the lower and middle classes while those with higher incomes and in government remain untouched. According to several interviews I have conducted, part of the rupee crisis can be attributed to the significant pay rises in government following the commissioning of the Tala Hydro project. Salaries within the Government rose over 50% in less than 2 years. In addition to being a mild abuse of democratic power, these salary increases actively drove the current construction boom, especially in Thimphu. These factors led to a rush on imported materials and middle class goods, as well as inflation on basic goods and food stuffs. While it is too late to stem the salaries of government employees, (and also an election year), there can be an exploration of prominent austerity measures within the government to satisfy public outcry. Downgrades of vehicles, etc. might be options.

5) Government procurement: In line with leading by example, Government can take the lead in purchasing works, products and services that keep ngultrums in the country while providing local jobs and greater economic benefit. Public procurement accounts for 60-70% of RGoB’s budget, and much of this could be used for preferential purchasing domestically. This is already underway at the Ministry of Works and Human Settlement, which is working until June to make recommendations for amendment to government procurement policy set by the Public Procurement Policy Division (PPPD) of the Ministry of Finance. This would allow for preferential tender of local construction materials. This is currently in process at MoWHS with a new policy to be implemented over the summer. The standards are projected to expand across PPPD in 2014, with continued training and capacity building over coming years. In addition, IISD, a Swiss institute is in the process of seeking European Union funds to implement local and sustainable procurement amendments to PPPD’s policies across all sectors, covering works, goods and services. If this is approved, the project will roll out in 2014.

6) Differentiated Import Tariffs: While there is currently a total ban on the import of automobiles into Bhutan, this is not a long term solution to the rupee crisis. Of greater interest to Bhutan would be to have a set of differentiated tariffs on different imported products. In this way, there can be more exacting control to raise tariffs on imports which are damaging to the local economy (bricks, timber, cement), or are harmful to the environment (fossil fuels, motor vehicles, alcohol, etc.). Other tariffs such as certain food items not grown in Bhutan can be lowered to allow for freer trade of these critical nutritional goods. A simple rating matrix could evaluate imports based on local competition and negative social, health and environmental impacts.

7) Fossil Fuel Security: According to recent headlines, Bhutan’s spending on fossil fuel imports is rising many times faster than its revenues from sales of hydroelectricity to India. At these rates, it is only a matter of time until those imports outstrip exports. Antonia’s research conducted for a recent conference on sustainable development reveals that, “Between 2001 and 2011, the value of fossil fuel imports to Bhutan increased 14 fold, and amounted to 0.2 Billion USD in 2011. The value of fossil fuel imports is projected to see a further 50% increase over the next five years (IMF, 2011).” Longer term measures such as biogas and turpentine fuel development are under way, but need to be part of a master plan. The critical missing piece is demand side management. Options to reduce fuel use, including energy efficiency and fuel switching, need to be explored more thoroughly, as do options such as vehicle fleet electrification, appliance efficiency and building insulation. Even heating, which is largely electrical, is currency outflow as electricity ends up being imported (at a penalty rate) during winter months. The Department of Renewable Energy has a Renewable Energy Policy in Draft, but this needs to be stronger and coordinated with Ministry of Economic Affairs, the Ministry of Finance and Royal Monetary Authority. More on that in Antonia’s recent post here.

The other side of the issue

Unfortunately, this is not a list of silver bullets. Instead it recognizes the complexity of the situation. The overall fix that is required is better coordination across government entities . There is also a strong need to bring the private sector into this conversation. The Bhutan Chamber of Commerce and Industry (BCCI) does not yet have the resources to provide such expertise, though it is getting stronger through the recent development of the Private Sector Development Committee.