Bhutanese importers feel the heat as Nu depreciates by over 7%

The value of one USD has hit an all-time high of Nu 81.20 today

Bhutanese importers of commodities, chemicals, electrical machinery, and vehicles from third countries have been hit hard following a sharp depreciation of the Ngultrum (Nu) against the US dollar this year.

This is because the Nu and the Indian rupee today hit a record low for a fourth straight session as the US dollar continued its relentless rise against other major currencies.

The value of one USD has hit an all-time high of Nu 81.20 today. Nu has depreciated around by Nu 5 compared to last month, which was Nu 77.31 against one USD.

The Nu fell to a new low of Nu 81.20, breaching last week’s low of Nu 80.85 and Nu 77.31 last month. The domestic currency depreciated to close at a record low of Nu 5 against the US currency on Wednesday compared to last month.

Similarly, the rupee in India has depreciated by over 7% against the dollar, and the value of the rupee weakened to Rs 81.20 per dollar, which is a record low for the fourth successive session.

However, this has entailed several speculations in the local market since the Nu is pegged at par with the Indian rupee.

Economic Affairs Minister Loknath Sharma said the depreciation of the local currency will increase the cost of imports in the country and further contribute to increasing inflation.

“We are already experiencing the increasing cost of third country raw materials for our industries, of consumer goods and capital goods. Industries dependent on imported raw materials will face difficulties competing in the market if costs cannot be passed on,” Lyonpo said.

Lyonpo said that imports from India such as oil that India imports from the world are becoming expensive for Bhutanese too.

“It’s not just direct third country imports but also imports from India that have imported material contents are becoming expensive for us.”

According to an economist, Dr. Damber S Kharka, the value of the Indian rupee has dropped against the dollar, and since the Nu is pegged at parity with the rupee, the Bhutanese economy is closely integrated with that of India.

“The impact of the exchange rate fluctuation could be felt in the Bhutanese economy,” he said, adding that since Chinese goods have now become cheaper, more countries preferred to buy from China resulting in reduced exports from other countries including India.

He said the direct result of the depreciation would be felt in terms of price rise as India imports almost 80% of its fuel requirement from abroad.

“The immediate impact of the depreciating Nu is on the Bhutanese importers. Importers need to spend more Nu per dollar to make their payments.”

“With the rupee reaching 80 against the dollar, it would mean that Indian importers would have to pay more. The increased prices could be transferred ultimately to the consumers in India and Bhutan,” he said.

However, like most Asian currencies, the partially convertible Indian rupee and Bhutanese Nu fell in recent months as risk aversion rose on expectations of the U.S. Federal Reserve raising rates to curb inflation, prompting investors to flee riskier assets.

Meanwhile, the fears of widening current and trade account deficits have further hit the Nu.

According to the annual trade statistics 2021, around Nu 351.8mn worth of goods has been imported from the US alone, while the import and export from countries other than India accounted for about 21% in 2021.

Almost Nu 6.8bn worth of goods has been imported in the trade with countries other than India in the first quarter of this financial year.

This means that the overall trade deficit is expected to widen in this fiscal year, which is expected to cross Nu 22.7bn in the second quarter driven by global crude oil prices, and other imports of goods from third countries.

If buying a piece of gold has become costlier for millions of Indians due to currency depreciation and a recent hike in the value of the US dollar, the gold jewelry for the Bhutanese will also increase compared to last year.

Lyonpo Loknath Sharma said that with the depreciation of the currency, a weak Nu will dent businesses’ profits, particularly for the industries and companies that import raw materials from third countries, and make them less competitive as the cost of production will rise.

“Further, a weak Nu also makes it expensive for Bhutanese to go abroad for education, and medical treatments among others as they will have to utilize more Nu to purchase foreign currency,” Lyonpo said, adding that consumers will be worst affected as the costs of imported goods increase.

Hundreds of imported household items including edible oil, medicines, cosmetics, garments, electric appliances, mobiles, and kitchenware have already become costlier.

Meanwhile, the Indian rupee is still being traded at a premium in the border town of Jaigaon, India. Shopkeepers in Jaigaon charge a premium ranging from six to 10% on Bhutanese Nu.

Lyonpo Loknath Sharma said, “With a currency that is depreciating, our export competitiveness should enhance with our exports being cheaper than the dollar.”

“However, our main export market in India and with our industries production value chain largely within the region, and with trade in Indian rupees dominant, the depreciating Nu pegged to the Indian rupee may not have a significant impact on our exports to other countries,” the minister said.

According to the minister, exports to third countries will increase but Bhutan does not anticipate large increases as other factors affect competitiveness and these are the cost of logistics, infrastructure, labor productivity, cost of capital, and distance to markets.

One of the importers said that Nu’s fall has increased input costs for manufacturers including auto companies, telecom, engineering goods, consumer electronics, and food processing.

“As India is a major importer of industrial chemicals, steel, rubber, wooden, glassware, and other machinery, if the price of these items increases, I am sure that the products that we import will also be increased,” he said.

Similarly, automobile companies that used to procure vehicles from third countries have also felt the impact. They said that the high dollar rate has increased the cost of the car and discouraged people from buying.

“There is an increase of almost Nu 5,000 to Nu 10,000 in every fluctuation of US dollar rate. But the Nu’s depreciation against the dollar in recent months will have a negative impact on our business,” they mentioned.

Kinley Yonten from Thimphu