Balance of payment with India continued to remain unfavourable as more than 80% of trade is with India, dominated by imports
The trade deficit with India stood at about Nu 28.7bn during the Fiscal Year (FY) 2021-2022, comprising around 63.6% of the overall trade deficit, according to the Royal Monetary Authority (RMA) annual report, 2022.
The report states that the deficit grew by about Nu 19.6bn from the previous year mainly due to a significant increase in imports by 42.7% from about Nu 55.9bn in the previous year. The growth in the trade deficit is driven by imports of machineries like processing units and storage units for special projects.
Although the total exports recorded a marginal increase of 9.2% of Nu 51.1bn, the hydro export dwindled by 9.4% with Nu 23.7bn, owing to the shutting down of Tala and Chukha hydropower plants for a few months to carry out repair and maintenance work and unfavourable hydrological flows also brought down overall electricity generation.
However, the balance of payment with India continued to remain unfavourable as more than 80% of import trade is with India, which, in the recent years the imports from India increased significantly by 42.7%.
“Unfavorable hydrological flows also brought down overall electricity generation,” the report states.
On the non-hydro exports, base metals export, especially iron and metal export, increased by Nu 18.7bn with 45.3%. With an increase in imports against marginal growth in exports, the current account deficit with India has further widened to Nu 45.6bn from Nu 22.1bn in FY 2020/21.
The net primary income payments with India increased to Nu 12.1bn in FY 2021-2022 from Nu 11.2bn of previous year, attributing to an increased interest payment on the hydropower loans, particularly the Mangdechhu hydropower project.
The report states that the continued restriction on labour import and the suspension of the import of foreign workers during the pandemic has resulted to drop in compensation payments to the short-term and cross-border Indian labour force.
However, the net secondary income receipts of FY 2021-2022 remarkably dropped by 97.3% from Nu 2.3bn of FY 2020-2021 mainly on account of a decrease in budgetary grant inflows by 52.8% from Nu 3.5bn from the previous year.
Further, the increased outward remittance by Nu 1.4bn with 91.5% and 59% drop in non-life insurance premium receipts to Nu 64.57mn have reduced the net secondary income receipts from India.
Meanwhile, in the capital account, a notable increase in grants has been received for both hydropower and non-hydropower development. Non-hydro grants which are primarily spent on public infrastructure development increased by Nu 8.3bn and hydropower development by Nu 15bn during the review year.
According to the RMA’s report, with the developments, the overall balance with India stood at negative Nu 11.4bn during the FY 2021-2022 leading to a decrease in Indian Rupee Reserves to Nu 96bn from Nu 21.2bn of the previous year.
The balance of payment with Country Other Than India (COTI) remained favourable with a positive current account balance. However, in the review year, due to increased imports from COTI, the trade exposure with COTI also increased substantially from 14.5% to 23.2% of total imports in FY 2021-2022, leading to a current account deficit.
In addition, the trade deficit with COTI has also widened to Nu 164bn from Nu 3.3bn in FY 2020-2021. The exponential widening in trade deficit is mainly due to a spike in imports by almost three times of previous year’s imports.
The import during the FY 2021-2022 amounted to Nu 24.2bn, while the export witnessed an increase of 24.1% from Nu 6.2bn of the previous year.
Further, a substantial increase in net service payments to Nu 9.4bn from Nu 4.3bn in the FY 2020-2021 has dragged the current account deficit to Nu 17.7bn, that is, 9.2% of GDP in FY 2021-2022 from a surplus of Nu 0.78bn of FY 2020-2021.
This is driven by an 87.6% increase in returns on investment to Nu 1.1bn, the net primary income receipt accounted for Nu 0.62bn against a net payment of Nu 0.12mn in the FY 2020-2021. The net secondary receipts dropped by 10.1% from Nu 8.4bn of the previous year.
Meanwhile, the non-investment budgetary grants inflow declined by 48.2% from Nu 2.1bn in FY 2020-2021. In addition, net remittances outflow is recorded at 10.8% which contributed to lower net secondary income receipts.
The inward remittance in the form of the Australian dollar which is a major inbound remittance currency fell by 16.4% to Nu 3.2bn and other currency remittances witnessed a marginal increase except for the Japanese Yen (JPY) which declined to Nu 67.6mn, that is JPY 103.4mn from Nu 0.15bn, that is JPY 216.2mn in the previous year.
The net inflows in the capital account were recorded at Nu 765.2mn in FY 2021-2022 against Nu 0.34bn in the previous year driven solely by grants inflow related to investment.
And the net financial inflows in the financial account have increased to Nu 8.09bn during the review year from Nu 4.1bn of the previous year mainly due to an increase in concessional borrowings by the government.
Meanwhile, the report states that the overall balance with COTI stands at negative Nu 20.98bn, which indicates drawing down the external reserves.
Sherab Dorji from Thimphu
