Ngultrum Depreciation: Economic Implications for Bhutan

Ngultrum Depreciation: Economic Implications for Bhutan

The exchange rate of the Ngultrum (BTN) against the US Dollar (USD) serves as a crucial economic indicator for Bhutan, reflecting the country’s economic health and its interactions with global markets. According to data from the Royal Monetary Authority (RMA), Bhutan’s central bank, the value of Ngultrum has experienced significant fluctuations over the years, underscoring a range of underlying economic factors.

Exchange Rate Trends (2015–2024)

An analysis of exchange rate data from January 2015 to December 2024 reveals a concerning trend of gradual depreciation. In 2015, the exchange rate averaged 64.14 BTN/USD, showcasing relative stability at the time. However, by 2024, projections indicate an average exchange rate of 83.66 BTN/USD, a sharp depreciation of nearly 30% over the decade.

The central bank reported that in January 2015, the exchange rate stood at approximately 62.14 BTN/USD. Minor fluctuations followed, culminating in an annual average of 64.14 BTN/USD by year-end. The period from 2016 to 2019 saw a steady rise, with the exchange rate reaching 70.75 BTN/USD by January 2019.

The depreciation accelerated during the COVID-19 pandemic in 2020, as the global economic downturn impacted Bhutan’s economy. The exchange rate began the year at 71.33 BTN/USD, climbing to an annual average of 74.11 BTN/USD. This trend persisted post-pandemic, with the exchange rate averaging 78.60 BTN/USD in 2022. Projections for 2023 and 2024 indicate further increases, reaching 82.60 BTN/USD in 2023 and 83.66 BTN/USD in 2024.

Factors Contributing to Depreciation

A financial expert identified several interconnected factors contributing to the depreciation of the Ngultrum:

  1. Inflationary Pressures: Bhutan’s inflation rate, driven by domestic and global factors, has reduced the purchasing power of the Ngultrum over time.
  2. High Import Dependence: Bhutan imports a significant portion of its goods, leading to a continuous outflow of Ngultrum. This trade imbalance exacerbates currency depreciation.
  3. COVID-19 Pandemic: The global economic slowdown caused by the pandemic disrupted trade, tourism, and remittances, further weakening the Ngultrum.
  4. Global Economic Trends: Fluctuations in the value of the USD and broader international economic dynamics have also influenced the exchange rate.

Economic Implications

The depreciation of the Ngultrum presents a multifaceted set of challenges for Bhutan:

  • Impact on Businesses:

Businesses reliant on imported raw materials face rising costs, which squeeze profit margins. Many companies are forced to either absorb the additional costs or pass them on to consumers, affecting pricing strategies and competitiveness.

  • Rising Consumer Costs:

Consumers bear the brunt of higher prices for imported goods, leading to increased living costs. This can result in dissatisfaction and negatively impact overall consumer sentiment.

  • Policy Challenges:

Policymakers must address the broader economic implications of currency depreciation, including its impact on trade, inflation, and foreign debt servicing.

Recommendations for Mitigating the Impact

The expert highlighted several strategies for mitigating the economic effects of Ngultrum depreciation:

  1. Economic Diversification:

Reducing dependence on imports by promoting domestic production in sectors such as agriculture and manufacturing is vital. This could help address trade imbalances and stabilize the currency.

  1. Boosting Exports:

Strengthening key industries like agriculture and hydropower can enhance Bhutan’s export competitiveness in global markets.

  1. Reviving Tourism:

A vibrant tourism industry can generate substantial foreign currency inflows while creating employment opportunities for local communities.

  1. Exchange Rate Monitoring:

Continuous monitoring of exchange rate dynamics and economic indicators is essential for timely interventions by policymakers.

The ongoing depreciation of the Ngultrum against the USD raises critical concerns for Bhutan’s economy. Businesses, consumers, and policymakers must navigate these challenges carefully to minimize their impact. Strengthening domestic industries, promoting exports, and fostering economic resilience are vital steps to safeguard Bhutan’s economic future amidst evolving global conditions.

Sherab Dorji from Thimphu