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

Total Foreign Reserves in March Stand at USD 698 Million

The total reserve of March is a decrease of almost 26.4 % compared to the same period last year

The Royal Monetary Authority (RMA) has recently released its monthly statistics bulletin report, revealing that Bhutan’s foreign reserve has reached USD 698 million as of March 2023. While this figure may appear substantial at first glance, it signals a decline from previous months and raises concerns about the country’s economic stability.

According to the report, the foreign reserve has been fluctuating between USD 628 million and USD 698 million during the first quarter of 2023.  According to the report of the month of March, this year, the total reserve in the march has decreased by almost 26.4 % compared to the same period last year.

Additionally, in February, the reserve plummeted to USD 628 million, dangerously close to the threshold required to cover essential imports for 12.5 months, which is a decreased by 25.4% compared to the same period of last year.

 This represented one of the lowest reserves recorded in Bhutan over the past three years. The total reserve in the month of March has decreased by almost 26.4 % compared to the same period of last year.

Meanwhile, Foreign exchange reserves are assets denominated in a foreign currency that are held by a nation’s central bank. These may include foreign currencies, bonds, treasury bills, and other government securities. The main reason for the declining in the foreign reserve of the country is due to Soaring import bills and appreciating USD against the Ngultrum.

Additionally, as of September last year, country’s import expenditure was recorded at approximately INR 233 and USD 1.35 million on a daily basis, which is equivalent to Nu 105.23 mn.

To address this alarming trend, the government has revised the essential import value, which is the amount needed to meet 12 months of essential goods imports. The Cabinet endorsed the revision on February 13, 2023, based on recommendations from an independent review committee. The revised essential import value for 2023 during normal periods is set at USD 603 million, with a reduced amount of USD 464 million during critical periods.

These adjustments aim to align with the constitutional mandate that dictates the necessity of maintaining foreign reserves adequate enough to cover 12 months of essential imports.

Meanwhile, as per rough calculations, Bhutan has to spend more than USD 50 million to import commodities monthly, during the normal periods when the 12 months of essential is worth of USD 603 million.

Subsequently, the decline in foreign reserves has prompted the RMA to closely monitor the situation. The RMA is required to notify the government of any potential reserve shortfall three months in advance, should the projected reserves fail to meet constitutional requirements.

The government in collaboration with the RMA has implemented several measures to mitigate the situation. One of the ways to increase the foreign reserve is the inward remittances inflow in the country, for which the RMA recently increased the cash incentive from 2% to 10% on June 14th 2023.

Additionally, a ban on vehicle imports was put in place on August 19, 2022, to ensure adequate foreign currency reserves and maintain macroeconomic stability. This moratorium has been extended for an additional six months as part of the government’s phased plan to bolster reserves.

Secondly, in a recent announcement, the RMA informed all financial institution CEOs of a moratorium on new commercial housing, hotel, and construction loans from June 2023 to December 2023. This move is expected to further support efforts to strengthen foreign reserves.

In an earlier interview, the Prime Minister, Dr. Lotay Tshering implied at the possibility of a third phase, should the reserves approach critical levels. This phase would involve imposing moratoriums on specific commodities. The details of this proposal remain undisclosed.

The widening current account deficit is another concern for Bhutan’s economy. According to a report from the Asian Development Bank (ADB), the deficit increased from 21.9% of GDP in 2021 to an estimated 34.3%. This was primarily attributed to a 35.2% rise in imports, driven by increased fuel and steel prices, as well as a surge in information technology equipment imports. In contrast, exports only saw a modest 2.4% increase. The deficit was financed through a significant net financial account inflow, including errors and omissions, as well as a drawdown of USD 215.0 million from gross foreign exchange reserves.

Moreover, Bhutan experienced a decline in its foreign exchange reserves due to a surge in import bills, considering that over 80 percent of goods are imported into the country. According to figures from the finance ministry, the country’s import bill reached Nu 93.03 billion as of September last year, surpassing the import value of Nu 90.23 billion in 2021. As a result, the country’s trade deficit widened to Nu 48.14 billion in September last year, reflecting an increase of Nu 15.9 bn compared to 2021.

Tshering Pelden from Thimphu