Banks and private sector yet to come to consensus over monetary measures

Loan Moratorium – A Promising Approach

Figures from the past show huge import of construction materials, indicating that the moratorium on commercial housing and hotel construction could be an effective measure to contain foreign reserve

A study of import data in the former years show that the moratorium issued by the Royal Monetary Authority (RMA) recently on loans for hotel and commercial housing could save the country a substantial amount of money from going out. While the figures for materials used for the two constructions separately could not be obtained, in total about Nu 86 billion (bn) was spent in the import of construction products, which has consistently been one of the highest imported commodities in Bhutan. According to Bhutan trade statistics, the country imported construction products worth Nu 86.18 billion (bn) in 2022, including mineral products, chemicals, plastic and rubber products, wood, textiles, stones, plaster, cement, base metals, and machinery equipment.

This marks a gradual increase in construction product imports over the past four years, with imports valued at Nu 58.5 bn in 2021, Nu 37.94 bn in 2020, and Nu 43.98 bn in 2019. The highest amount, Nu 86 bn, was spent on construction product imports in 2022.

In 2022, Bhutan’s total imports amounted to Nu 118.79 bn, with construction products accounting for 72.54% (Nu 86 bn) of the total. While the government may not be able to save the entire Nu 86 bn or a figure nearer to it, as the loan moratorium is issued just for housing and hotel constructions, and excludes other infrastructure, the moratorium would definitely have an impact. “There would be government constructions, other constructions like roads, and some people may not take loans. Thus, we cannot say that the savings would be Nu 86 bn, but knowing that commercial housing and hotel construction are at the top, the money saved would indeed be huge,” a financial expert said, adding that many individuals seeking to build or construct houses rely on loans to import materials from third countries.

He added that another rationale for the RMA’s moratorium on commercial housing and hotel construction loans would be the significant portion of credit portfolio constituted by service or tourism and housing loans. As of September last year, service or tourism loans accounted for the majority of the total credit portfolio, reaching Nu 55.59 bn, while housing loans amounted to Nu 51.83 bn. “So we get an indication of the amount of materials imported solely for commercial housing and hotels,” he said. 

Moreover, service or tourism loans also had the highest share of non-performing loans (NPL), totaling Nu 4.88 bn, while housing loans constituted an NPL share of Nu 1.59 bn.

Additionally, due to its reliance on imports, Bhutan faces the issue of depleting its foreign currency reserves as import expenses soar.

According to data provided by the ministry of finance, the country’s import expenditure reached Nu 93.03 bn by September 2022, surpassing the one-year total of Nu 90.23 bn in 2021. As a result, the trade deficit widened to Nu 48.14 bn in September, reflecting an increase of Nu 15.9 bn compared to 2021.

Meanwhile, financial records indicate that by September of the previous year, financial institutions had loaned Nu 191.96 bn, marking a rise of Nu 16.2 bn compared to the same month in the previous year.

Housing loans, constituting over 80 percent of imports, accounted for 27 % of the total loans at Nu 51.83 bn.

Meanwhile, Prime Minister (PM) Dr. Lotay Tshering has consistently emphasized the need to rationalize imports in order to safeguard the country’s foreign reserves. He had said that reducing imports is one of the main strategies aimed at achieving this goal.

In a recent interview with the paper, Prime Minister Dr. Lotay Tshering stated, “Any loans that result in increased imports, such as construction, should be temporarily halted.”

Additionally, during the same interview, the PM mentioned that most of the outflows of foreign currency occur when people travel to foreign countries for vacation and leisure. Previously, the RMA provided up to USD 3,000 in exchange currency to the public for traveling abroad. However, the RMA has reduced the limit to only USD 1,000 per passport or ticket.

The PM had also suggested that, if possible, people should consider reducing their trips in order to preserve the depleting foreign reserves.

The latest loan moratorium is a bid to address concerns regarding the outflow of foreign currency, which the Royal Monetary Authority (RMA) announced, as a temporary measure. It has suspended loans for commercial housing and hotel construction. The RMA’s decision comes as part of a broader strategy implemented by the government, following the moratorium on vehicle imports imposed on August 18th last year. The moratorium on commercial housing and hotel construction loans is seen as a crucial phase in the government’s plan to manage the foreign reserve.

Tshering Pelden from Thimphu