Currency caution: On the Ngultrum’s depreciation

The Bhutanese ngultrum is experiencing its worst slump in four years. Since the start of 2022, the currency has depreciated by more than 7% against the US dollar, weakening past a historic low of 80 to a dollar mark earlier last month.

While the Bhutanese currency is not alone in faring poorly against the US dollar, with even the historically strong euro and the British pound taking a hammering and weakening by more than the rupee and ngultrum has, the fact that other currencies too have appreciably lost value against the dollar can only offer cold comfort to Bhutanese’s economy.

In the country, manufacturers and services providers are now having to cope with not just higher dollar prices for the raw materials, equipment, or other supplies they may need to procure from overseas, in the wake of the supply disruptions caused by the pandemic and the war in Ukraine, but they also face mounting import bills.

This means, Bhutanese importers have to fork out more ngultrum for the same dollar price from even just a few months ago. Some economist divulges that when the exchange rate depreciates, we bear the extra burden economically as we have to pay more for the import of the same basket of goods.

A good example is the fuel price that has gone up drastically and currency depreciation is one of the key reasons.

For an import-driven economy, there is a very little positive impact of Ngultrum depreciation. The debt repayment and debt serving these days have very expensive as we pay more in terms of Ngultrum. 

Export-driven countries and those receiving debt payments from others do have advantages but we neither are export-oriented nor have a debt to be recovered from others at this stage. We are negatively hit by currency depreciation. 

Our currency is pegged with INR. if INR depreciated so did our Nu. The exchange rate is the price of domestic currency in terms of foreign currency. When the import is more than the export the outflow of foreign currency (demand) is more than the supply of foreign currency (that is generated through export). India faces this and we also face it as we have a currency-pegged regime. 

The import-export difference has also been attributed to the current account deficit. The shortfall of foreign currency due to import export differences is met through the reserve. This has resulted in the depletion of the forex reserve.

Now when debt servicing is high, imports are much higher than export, and the reserve depletes more sharply. This is a worrying economic situation.  Our third countries import has become costlier due to a fall in INR and consequently the Nu value. 

Policymakers may have little room or solutions to help maneuver of the Ngultrum depreciation and domestic inefficiencies hurting importers must be reviewed urgently.