Foreign currency reserves in the country declined by around USD 31 million between June and July, falling to USD 1.19 billion, as rising import costs and higher fuel prices continued to exert pressure on the nation’s external finances.
Despite the month-on-month decline, Finance Minister Lekey Dorji said the country’s reserve position remains comfortable and well above the critical reserve threshold of USD 464 million.
The finance minister said the latest reserve position provides Bhutan with a substantial buffer to meet essential import requirements and maintain external stability.
The decline in reserves comes amid continued pressure on Bhutan’s foreign exchange position, particularly from the rising cost of imports. Fuel remains one of the largest components of the country’s import bill, accounting for nearly 20 percent of total imports.
“When we import fuel and pay for it, the price is much higher. As we all know, the price of fuel one time went up to almost Nu 200 per litre. The government then stepped in and supported the price by trying to keep it below 100,” the finance minister said.
The government has so far spent more than Nu 1.8 billion on fuel subsidies as global energy prices remained elevated. The minister attributed the increase in fuel prices to the global energy crisis and geopolitical tensions, including the war in the Middle East.
Higher fuel prices have direct implications for Bhutan’s foreign exchange position because the country relies heavily on imports to meet its domestic fuel requirements. As import payments rise, greater amounts of foreign currency are required, placing additional pressure on the country’s reserves.
The depreciation of the ngultrum has further increased the cost of imports, according to the finance minister. A weaker domestic currency means importers require more ngultrum to purchase the same amount of foreign currency, raising the domestic cost of imported goods and services.
The minister also pointed to revisions in estimates of informal trade along Bhutan’s border towns as another factor affecting the country’s external accounts.
Informal trade remains an important component of Bhutan’s cross-border economic activity. In the last fiscal year, informal trade was estimated at Nu 1.33 billion in imports and Nu 3.04 billion in exports.
While informal exports generate foreign exchange earnings, higher estimates of informal imports also indicate additional foreign currency outflows that need to be considered when assessing the country’s external position.
Despite these pressures, the government maintains that Bhutan’s foreign reserve position remains sufficiently strong.
At USD 1.19 billion, the current reserve level is more than twice the critical threshold of USD 464 million. The buffer provides room for the country to continue financing essential imports while managing short-term volatility in global commodity prices and exchange rates.
Foreign reserves are a key indicator of Bhutan’s external financial stability, particularly given the country’s dependence on imports. Adequate reserves enable the country to meet international payment obligations, finance essential goods and provide a cushion against external economic shocks.
The recent decline, however, highlights the continued vulnerability of Bhutan’s external position to global developments, particularly movements in fuel prices and exchange rates.
Fuel prices have a significant impact beyond the direct import bill. Higher fuel costs can increase transportation and production expenses across the domestic economy, potentially raising the cost of other imported goods and services as well.
The government’s decision to subsidize fuel prices has helped cushion consumers and businesses from the full impact of higher international prices. However, the Nu 1.8 billion-plus fiscal cost also represents a significant public expenditure at a time when the government is managing competing development and social spending priorities.
The finance minister’s comments come as Bhutan continues to balance economic recovery and domestic demand with the need to preserve foreign exchange reserves.
The country’s reserve position has also gained importance amid efforts to expand imports of capital goods, machinery and other inputs required for industrial development and infrastructure projects.
While the July decline is not considered a critical deterioration, sustained pressure on reserves could become a concern if import growth continues to outpace foreign exchange earnings over an extended period.
For now, however, the finance minister has emphasized that Bhutan retains a comfortable reserve cushion. With reserves at USD 1.19 billion against the critical requirement of USD 464 million, Bhutan continues to maintain a substantial buffer to absorb external pressures.
Tashi Namgyal, Thimphu
