RMA and Govt. strategize speedy return to new economic normal

Foreign Reserves in November 2024 stood at USD 660M

The total reserves in November was an increase of almost Nu 93.78M compared to the same month in the previous year

Bhutan’s foreign reserves stood at US Dollar (USD) 659.92 million (M) as of November 2024, according to the Royal Monetary Authority’s (RMA) monthly statistical bulletin for January 2025. This level of reserves signifies a critical economic indicator, reflecting the country’s ability to support its external obligations, maintain exchange rate stability, and ensure liquidity in the face of economic shocks.

According to the central bank, Bhutan’s foreign reserves exhibited fluctuations from January to August 2024, reflecting the dynamic nature of the country’s external financial position. During this period, reserves rose and fell due to various economic factors, including,.;’/’/’  import expenditures, export earnings, and foreign remittances.

However, from September to December 2024, the foreign reserves experienced a consistent upward trend, standing at approximately USD 606M in September, USD 653M in October, and USD 660M by November. This steady increase suggests an improvement in the balance of payments (BoP) during the latter months of the year.

For instance, in January, February and March month last year, the foreign reserve stood at about USD 562M, USD 581M and USD 659M respectively.

In April and May 2024, Bhutan’s foreign reserves experienced a further decline, standing at approximately USD 600M in April and USD 556M in May, marking a continuation of the downward trend observed earlier in the year. However, a modest recovery was noted in June and July 2024, with reserves increasing to about USD 583M and USD 588M, respectively. This brief rebound suggested a temporary improvement in the country’s balance of payments (BoP), potentially influenced by seasonal economic activities or improved foreign inflows.

By August 2024, foreign reserves once again declined, reaching approximately USD 547M, as per data reported by the Royal Monetary Authority (RMA). This sharp drop underscored the persistent challenges faced by Bhutan in maintaining reserve adequacy, largely due to rising import bills and external payment obligations, coupled with limited export diversification.

Recognizing the critical need to stabilize and bolster the country’s foreign reserves, the Bhutanese government has implemented several measures under the 13th Five-Year Plan (FYP). One key initiative involves promoting investment in green bonds, an innovative financial instrument designed to attract foreign remittances and investments.

Green bonds, backed by the sovereign guarantee of the Bhutanese government, are structured as secure, interest-yielding instruments to encourage Bhutanese living abroad to remit funds while simultaneously contributing to environmentally sustainable projects within the country. This initiative not only supports Bhutan’s foreign reserve position but also aligns with the nation’s commitment to green growth and climate resilience.

These measures reflect a strategic approach by the government to address the structural issues underlying the country’s foreign exchange challenges. By leveraging instruments like green bonds, Bhutan aims to diversify its sources of foreign exchange inflows, reduce reliance on traditional sectors, and support long-term reserve accumulation. However, sustained improvements will require complementary efforts, including boosting exports, enhancing remittance channels, and implementing policies to reduce non-essential imports.

The Bhutanese government has allocated a budget of Nu 5.59 billion (B) under the General Reserve (GR) for the Fiscal Year (FY) 2024–2025. However, transfers from this allocation for implementation will only be made upon the fulfillment of specific criteria and formalities as outlined in the Guidelines for General Reserve 2022. This ensures prudent fiscal management and adherence to well-defined processes before disbursing funds for intended purposes.

As part of the annual budgetary framework, the government maintains a general reserve fund to address unforeseen, unavoidable, and ad-hoc priorities that cannot be precisely anticipated during the budget formulation process. These funds act as a contingency measure to meet emergent needs without disrupting the planned budgetary allocations.

Among the ten identified activities for unforeseen and ad-hoc priorities, the largest allocation has been made for national contingency at approximately Nu 2.2B. This reflects the government’s emphasis on maintaining a robust safety net for emergencies, such as natural disasters or economic shocks. The next highest allocation is for ad-hoc works, with Nu 1.5B earmarked for unplanned but essential infrastructure or development needs. Additionally:

  • Nu 715M is allocated for critical unforeseen recruitment or establishment expenses.
  • Nu 585M is reserved for leave encashment and disaster contingency.

Smaller allocations include Nu 15M for hospitality and entertainment activities, Nu 20M for bye-elections, and Nu 35M for third-country travel.

Other notable allocations under the GR include:

  • Nu 150M for retirement benefits.
  • Nu 70M for rehabilitation programs.
  • Nu 300M for activities related to national exams.

The concept of foreign exchange reserves pertains to assets held by the central bank in foreign currencies, which may include cash, government bonds, treasury bills, and other liquid foreign-denominated instruments. These reserves are critical for maintaining the country’s balance of payments (BoP), stabilizing the exchange rate, and ensuring the ability to meet external debt obligations.

In Bhutan, the decline in foreign reserves is primarily attributed to two key factors:

  1. Rising import bills driven by increased demand for foreign goods and services.
  2. The appreciation of the USD against the Bhutanese Ngultrum, which makes imports more expensive and adds pressure on reserves.

Bhutan’s economy is heavily reliant on imports, with monthly import expenditures exceeding USD 50M. This amounts to an annual import requirement of approximately USD 603M solely for essential commodities, such as fuel, food, construction materials, and pharmaceuticals. These figures highlight Bhutan’s high import dependency, which places significant pressure on its balance of payments (BoP) and foreign exchange reserves.

Economic Implications of High Import Dependency

  1. Pressure on Foreign Exchange Reserves:

Bhutan’s foreign exchange reserves are finite and primarily composed of convertible currencies like the US Dollar. Sustained high import bills reduce the reserve levels, limiting the country’s ability to fund external obligations, stabilize the Ngultrum, and respond to external shocks.

  1. Trade Imbalance:

The substantial import volume, coupled with a narrow export base that primarily consists of electricity and limited agricultural products, results in a persistent trade deficit. This imbalance weakens Bhutan’s external sector and heightens its vulnerability to global economic fluctuations, such as exchange rate volatility and rising commodity prices.

  1. Vulnerability to Currency Depreciation:

With imports heavily denominated in foreign currencies, particularly the USD, any depreciation of the Bhutanese Ngultrum increases the cost of imports. This, in turn, affects domestic inflation, raising the prices of essential goods and services and impacting household purchasing power.

  1. Structural Economic Challenges:

Bhutan’s reliance on imports is indicative of broader structural issues, including limited domestic production capacity, low industrial diversification, and inadequate self-sufficiency in critical sectors like agriculture and manufacturing. This reliance increases economic vulnerability and reduces fiscal space for long-term development.

Addressing Import Dependency

To reduce import dependency and strengthen economic resilience, Bhutan must adopt a multi-pronged strategy:

  • Promoting Domestic Production: Enhancing the agricultural and manufacturing sectors can substitute imports with locally produced goods, reducing outflows of foreign currency.
  • Diversifying Exports: Expanding the export base beyond hydropower to include high-value products, such as organic agricultural goods, handicrafts, and tourism services, can generate additional foreign exchange earnings.
  • Investing in Renewable Energy and Green Initiatives: Developing renewable energy projects and innovative financial instruments, like green bonds, can attract foreign investments and reduce energy import dependence.
  • Encouraging Sustainable Consumption: Policies aimed at curbing unnecessary imports and promoting sustainable consumption can help reduce the pressure on foreign reserves.
  • Strengthening Trade Agreements: Negotiating favorable trade agreements with neighboring countries like India and regional economic bodies can improve market access for Bhutanese exports.

Path Forward

The current dependency on imports reflects the need for structural economic transformation to enhance Bhutan’s self-reliance and resilience. Efforts under the 13th Five-Year Plan, such as green bond initiatives and investments in domestic production capacity, are steps in the right direction. However, achieving a sustainable balance between imports and exports will require long-term policy focus, investment in infrastructure, capacity building, and the engagement of the private sector. This will ensure that Bhutan builds an economy that is both inclusive and less reliant on external resources.

Sherab Dorji from Thimphu