The changing face value of Ngultrum


With global economic winds shifting, Bhutan’s pegged exchange rate faces growing pressure.

The Ngultrum’s (Nu) stability, once a pillar of economic progress, now presents challenges in a world of rising inflation and currency uncertainties. The Royal Monetary Authority (RMA) walks a tightrope, seeking to balance stability with flexibility in an evolving economic landscape.

Since the establishment of the currency note in 1974, according to the annual report 2023 published by the RMA, the peg has served Bhutan very well. It fostered trade predictability and price stability and attracted investments and tourism, particularly from India, the largest trading partner.
The free convertibility of the Indian Rupee (INR) to Nu further streamlined cross-border transactions and reduced costs. Moreover, the peg allowed Bhutan to leverage India’s low inflation, contributing to overall macroeconomic stability.

However, the Ngultrum encountered growing pressure due to a confluence of internal and external factors. On average, the Nu depreciate by 24 percent in 2022. While the long-standing peg to the INR has fostered stability and economic benefits, recent global headwinds and external uncertainties threaten to disrupt this equilibrium.

 The United States (US) Federal Reserve’s tightening measures and geopolitical tensions have triggered a surge in the USD, impacting the INR and, consequently, the Nu. While a depreciating Nu could potentially boost exports as the weaker currency makes imports expensive and exports dearer, its impact on the country’s trade balance is limited due to its heavy reliance on India.

A more significant concern lies in the report on the debt portfolio. The Nu’s depreciation increases the cost of servicing foreign currency-denominated debt, raising worries about long-term debt sustainability. This is particularly crucial considering the challenges the country faces in generating sufficient foreign exchange earnings.

With the exchange rate development in India, considering the fixed one-to-one peg of the Bhutanese currency to the INR has a direct impact on the confidence of the Nu in the international market. Where the performance of the Nu in the international markets is intricately tied up with the INR’s performance on the global stage.

Further, the annual report declared the Nu’s depreciation against the US Dollar, reaching Nu 82.9 per USD in four quarters in 2022, presents a double-edged sword.

While potentially boosting exports, it inflates the cost of essential imports and increases the debt burden, particularly for foreign currency-denominated debt. Notably, the country’s trade balance, heavily reliant on India accounting for 80 percent, mitigates the direct impact on trade costs.

Beyond nominal fluctuations, a deeper analysis reveals nuanced dynamics. The Nu’s nominal effective exchange rate remains stable due to the peg, indicating the cost of a basket of foreign currencies in Nu. However, the Real Effective Exchange Rate which incorporates inflation and trading partner exchange rates, exhibits fluctuations, reflecting external pressures.

The RMA faces a delicate balancing act. Closely monitoring global developments and exploring options like targeted interventions or a wider exchange rate band might be necessary to maintain stability and mitigate risks.

Meanwhile, the country’s exchange rate story goes beyond mere fluctuations. It’s a narrative of navigating global uncertainties, managing debt sustainability, and ensuring long-term economic progress.

The RMA’s policy decisions in the coming months will be crucial in shaping this narrative and safeguarding Bhutan’s economic well-being.

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