Is Bhutan going Sri Lanka's way?

New Delhi: The purchasing power of the locals in Bhutan has decreased due to the increase in prices of essential commodities. Markets are thinly attended, and hotels are partially closed as there are no tourists. The rate of returns has also declined, as people would pay more for the same amount of goods. According to leading economists of Bhutan and the ministry of Bhutan, the financial health of the country is worrisome and if corrective measures are not taken in time, then it can go Sri Lanka's way.

If the Bhutan reserves further depreciate, the shadow of the crisis can affect India - Bhutan diplomatic relations. China and other foreign institutions will try to take advantage of such a situation. Being India’s neighbour and dependent on India’s financial and business support, India needs to go the extra mile in supporting Bhutan.

Bhutan Finance ministry officials say that the reserves of foreign currency are drying in Bhutan. The pandemic and no tourism for the last two years has enormously affected the Himalayan Kingdom having less than a million population. According to the Bhutan ministry, the foreign currency reserve US dollars (USD) and Indian rupee (INR) combined had dropped to USD 970.4 Million in December 2021 from USD 1.2746 Billion in July 2021.

Kuensel, the main Bhutan newspaper quoting the finance minister said that the country had foreign reserves enough to meet the import of essentials for 14 months. The Constitution requires the country to maintain foreign currency reserves enough to meet 12 months' imports. The existing scenario may lead to restrictions on the import of non-essential goods to control the widening trade deficit and protect the depleting foreign currency reserve.

The Kuensel newspaper further quoting the finance minister, Lyonpo Namgay Tshering informed that the government was not in favour of banning imports but that it would solicit the cooperation of citizens and organisations to help protect foreign reserves.

Asked if he saw threats of an economic crisis, the finance minister said, “I can’t say there is no threat of an economic crisis. I cannot say we are not in a crisis. At the same time, I cannot say we are comfortable.” He said that the country needed to be prepared for the “worst-case scenario” given the possibility of a recession in the world economy. The economy, the finance minister added, was going through an unprecedented situation and headed towards an “uncharted destination”.

The finance minister said that although it was not possible to balance the imports with exports immediately, the government would promote the use of local products to reduce imports as much as possible. He added that it will also put in place a mechanism to control the prices.

Explanations for the downfall of Bhutan's economy

Bhutan’s economy has been severely affected by COVID-19. It led to border closure to contain a domestic outbreak of the pandemic. In this context, economic growth is estimated to have slowed from 3.8 per cent in 2018-19 to 1.5 per cent in 2019-20.

The value of imports amounted to Bhutan’s currency, Ngultrum (Nu) 90.22 billion in 2021 from Nu 66.63 billion in the previous year. Accordingly, the trade deficit increased to more than Nu 32 billion from more than Nu 18 billion during the corresponding period.

The Indian rupee, with which ngultrum is pegged, depreciated to more than 80 against the US dollar last week in Bhutan locals prefer to have Indian Rupee to Nguitrum. There are around 60 thousand Indian working in Bhutan and several Indian banks have branches in Bhutan, however many of them returned to India in the Covid period.

Another reason is the appreciation of USD against Ngultrum, a major concern for the economy, as it fuels inflation and increases the cost of debt servicing. The finance minister also said that the sustenance of the current economic situation would lead to macroeconomic instability, which means the economy could face high inflation and frequent financial issues among other problems.

The exports and imports were massively affected. Domestic business went at a snail's pace and construction work was nearly halted for two years. Several Bhutanese lost their job.

Bhutan’s gross national savings last year fell for the fifth consecutive year to Nu 26.4 billion, below the 2019 level of Nu 40.1 billion. In 2021, it saw a drop by Nu 2.4 billion from Nu 28.8 billion the year earlier. This, according to the National Statistics Bureau’s (NSB) 2022 report, is down by 6.14 per cent.

National Savings by Private and Govt. (in millions)

Remittances from Bhutanese living abroad have seen a declining trend

Remittance decreased. Remittance helps improve the foreign exchange reserves and reduces the deficit in the current account by improving the country’s balance of payments. Statistics from the Royal Monetary Authority (RMA) show that Bhutan’s remittance inflow decreased by 2.5 per cent to Nu 8.062 billion in 2021 from Nu 8.27 billion in 2020.

Comparing January’s remittance to the same month last year, it fell by over 50 per cent. This is mainly because of a decrease in the Australian dollar remittance. The RMA’s statistics recorded a remittance of Nu 286.1 million, equivalent to USD 3.24 million, in January this year. One-third of remittances were from Australia—Nu 101.76M, equivalent to Australian dollar 1.9 million.

Green shoots of the economy as it shows some recovery in the first half of 2022

Finance Minister Namgay Tshering has said the value of imports during the first six months of 2022 had exceeded that of the total imports of 2021. “Imports increased due to the normalisation of covid-19 protocols,” The country, he said, “really” needed to address the issue of trade deficit to fix the basic macroeconomic parameters. “If we continue to experience the widening trade deficit, then it is certain that we will experience current account deficit and run out of our foreign currency reserve,” the finance minister said.

Borders will be open from September 2022 for tourism. There is a new tourism levy act, which introduces US dollars 200 per night for international tourists and Rs 1,200 per night for regional and Indian tourists with the hope that more foreign currency from tourism were expected to increase.

India supports Bhutan

India has committed assistance of Rs 4500 crore for the implementation of development projects and Rs 400 crore for the transitional trade support facility during Bhutan's 12th Five Year Plan. According to officials 77 large and intermediate projects and 524 Small Development Projects (SDPs)/ High Impact Community Development Projects (HICDPs) are at various stages of implementation under the 12th Five Year Plan of Bhutan.

India extended the settlement period of the two existing Standby Credit Facilities provided by the Government of India to Bhutan for Rs. 300 crores and Rs. 400 crores by 60 months with a reduced interest rate of 2.5% with effect from 01 July 2022. The two Standby Credit Facilities currently extended at an interest rate of 5% are due to expire on 30 June 2022.

India has been extending the fullest cooperation and support to Bhutan to ensure smooth movement of commodities during Covid19 and disruption of the global chain supply period.

India has made special trade concessions on the export of wheat and sugar to the country, Indian Embassy in Bhutan said. "Responding to requests received from the Royal Government of Bhutan, the Government of India has made additional trade concessions for Bhutan. India has authorised the export of wheat and sugar to Bhutan, as per Bhutan's requirements, i.e. 5,000 MT of wheat and 10,000 MT of sugar, to be imported by the Food Corporation of Bhutan Limited and other leading industries in Bhutan," the Embassy said.

Earlier this year, due to sudden changes in the global market affecting the price and availability of wheat and sugar, the Government of India restricted the export of these two commodities to strengthen India's food security.

India lifted the restriction on the import of potatoes from Bhutan, allowing the import of fresh wholly produced ginger from Bhutan, supplying Nano Urea / Nano Nitrogen Fertilizer (Liquid) to Bhutan at a special concessional rate, and supplying coal to Bhutan.

India-Bhutan Trade Relations

The India-Bhutan Agreement on Trade, Commerce and Transit – which was first signed in 1972 and revised most recently for the fifth time in 2016 – establishes a free trade regime between the two countries. The Agreement also provides for duty-free transit of Bhutanese exports to third countries.

India’s four States, Arunachal Pradesh, Assam, Sikkim, and West Bengal – share around 700 Km-long boundaries with Bhutan. India is Bhutan's largest trading partner - both as a source and a market for its goods. As a landlocked country, most of Bhutan's third-country exports also transit through Indian ports. Similarly, Bhutan was one of the first nations to recognize the independence of India in 1947. Bhutan has around 700 Km long border with China, strategically, important for India. China wants to increase the trade with Bhutan that will directly affect the Indian business in Bhutan.

India is the leading source of investments in Bhutan, comprising 50% of the country’s total FDI. There are about 30 Indian companies in Bhutan operating in various sectors – banking, manufacturing, electricity generation, Agri/food processing, ITES, pharmaceuticals, hospitality, and education – such as Punjab National Bank, State Bank of India, Tata Power Company Ltd., General Insurance Corporation, Apollo Educational Infrastructure Services, Azista Industries, Meghalaya Oxygen, etc.

India is Bhutan’s top trade partner both as an import source and as an export destination. Since 2014, India’s trade with Bhutan has tripled from USD 484 million in 2014-15 to USD 1422 million in 2021-22, accounting for about 80% of Bhutan’s overall trade. India’s top exports to Bhutan are petrol & diesel, passenger cars, rice, wood charcoal, cell phones, Coke and semi-coke, soya-bean oil, excavators, electric generators & motors, parts for turbines, transport vehicles, and bitumen.

India’s top imports from Bhutan are electricity (Rs. 2443 crore in 2021), Ferro-silicon, Ferro-silico-manganese, Portland pozzolana cement, Dolomite chips, Ordinary portland cement, Silicon Carbide, Cardamoms, betel nut, oranges, semi-finished products of iron or nonalloy steel, boulders, etc.

Bilateral trade is conducted in Indian Rupees which are fully convertible to Ngultrum at par.

Bilateral Trade (excluding electricity)

Way Forward

India has already taken some steps by extending by lifting the restriction on the import of potatoes, allowing the import of fresh ginger from Bhutan, and supplying Nano Urea / Nano Nitrogen Fertilizer, and coal to Bhutan, however, India needs to further enhance the support where Bhutan population, especially youth understand and are aware of India’s efforts. India needs to step up efforts to publicise the benefits that the Bhutan public is gaining with the support of India.

In addition to the continuing cooperation between India and Bhutan in cultural and educational partnership, India needs to employ more local youth in their respective projects/businesses in Bhutan as well as increase its footprint in enhancing the education system by opening extension campus of India’s couple of best universities and professional and skill colleges in Bhutan.

More air and road connections are needed to allow Bhutan people to gain people-to-people contact as well as take advantage of religious Buddhist worshipping places in India.

India continuously needs to explore new areas of cooperation with Bhutan. The ISRO station will help Bhutan in providing weather-related messages to its far-flung areas.

With the advance of new technologies and the IT industry, India needs to support Bhutan in advancing their system in digital and cyber-friendly projects, It needs more dissemination in the IT industry.