Total external reserve in May explain reasons behind moratorium

In the months following May 2023, the government and the Central Bank (Royal Monetary Authority) came up with policies and moratoriums, such as freeze on loans for commercial housing and hotels and increased incentives on inward remittances from 2% to 10%. The loan moratorium came in the background of the fact that the country imported construction materials worth Nu 21.26 billion (bn) in the first quarter of this year. While many knew that the above measures have come in the face of depleting foreign reserves and as a means to improve this, the RMA’s recent report on foreign reserves in May 2023, authenticates the same.

In May, the total reserve of the country hit its lowest point at USD 549.08 million. According to data from the RMA, this is the lowest recorded over the past five years. Bhutan’s Constitution mandate requires that a total foreign reserve sufficient to cover essential imports for at least 12 months is maintained.

Due to the declining reserve, the government revised the total foreign reserve requirement on February 13, 2023. This revision came after the Cabinet approved the changes to the essential import value of 2017 based on the recommendations presented by the independent review committee.

As per the Cabinet’s decision, the updated essential import value for normal periods in 2023 is USD 603 million, and USD 464 million during critical periods. This comes down to monthly requirements of USD 50.25 million during normal periods and USD 38.6 million per month in critical periods.

Thus, the total foreign reserve in the month of May had decreased below the revised value for normal periods, and is USD 53.92 million less than the revised figures required for a normal period. However, it is USD 85 million more from touching the revised figure for the critical period.

RMA’s report further shows that the foreign currency reserve witnessed a decrease of 34.7% in May this year compared to the same period last year. In May 2022, the foreign currency reserve stood at USD 778.38 million, whereas this year, in May, it stands at USD 507.74 million. The foreign currency reserve includes convertible currencies, such as the Indian Rupee (INR), and monetary gold.

Meanwhile, the special drawing rights (SDR) holdings have increased from USD 34.16 million in May 2022 to USD 34.52 million in the same month this year. SDR refers to an interest-bearing international reserve asset created by the International Monetary Fund (IMF) in 1969 to supplement other reserve assets of member countries.

Additionally, the reserve tranche position witnessed a slight increase by 0.7% in May this year amounting to USD 6.83 million. In May 2022, it was USD 6.78 million.

Reserve Tranche Position is accounted among a country’s foreign-exchange reserves. Part of the quota can be withdrawn from the IMF without any interest during critical situations of a country such as Balance of Payment (BOP) crises. This part of the money which can be withdrawn without any interest is the RTP.

While the latest position of the reserve for the months of June and July is not available, economists believe that the reserve for those months would rise, considering the measures that have been taken.

Inward remittances are expected to rise directly contributing to the increase in the total foreign reserve of the country.As one of the major imports was construction materials, suspension of loans are expected to have an impact. Moratorium on the import of selected vehicles still stand. Experts opine that even if the figure is not high, the aforementioned measures will contribute in increasing foreign reserves.

In an earlier interview, the Prime Minister (PM) had mentioned that vehicle moratorium would enable the country to save around Nu 5 bn a year.

Further, data from the RMA show that inward remittance for the first two months of this year witnessed a substantial increase compared to the same period last year, amounting to Nu 1,201.19 mn. This marks the second-highest remittance received in the country for the same period in the last five years, indicating that the measures adopted by the RMA to increase the cash incentive from 1% to 2% had started to yield results. With the incentives taken to 10%, remittances are expected to have risen further.

Tshering Pelden from Thimphu