A hopeful measure to ensure foreign currency reserve

Bhutan is still grappling with the economic stability. Inflation rate in the country had increased to 5.95 percent in May from 5.79 percent in April in 2022.

The effects of soaring oil and grain prices caused by the Russua-Ukraine war as well as with the continued impact of the pandemic, including a strict Covid protocol that has barred foreign tourists for the past two years impacted the country’s economy.

The country economy is import driven economy with less export. There is more outflow of money. The most transacted currency importing business are either in Indian Rupee or USD. 

Foreign exchange reserves had declined to $970 million at the end of December, 2021, from $1.46 billion in April 2021, according to the Royal Monetary Authority of Bhutan’s (RMA) recent data.

This indicates there is no adequate foreign currency reserve. Bhutan is part of a global economy where trade is made beyond boundaries. A country’s foreign exchange reserves depend on its total imports and exports.

Foreign exchange reserves are important for every nation.  It includes bonds, deposits, banknotes, treasury bills, gold, and other government securities. They can ensure that the government agency has backup funds to support the national currency if it devalues at some point. 

The importance of foreign exchange reserves for developing countries is based on the security of home currency positions, economic growth boost, maintaining liquidity in economic crisis, attracting foreign investments, funding infrastructure projects.

Given the Bhutan’s current status of foreign currency reserve, immediate measure is required to avoid long term impact on economy. Even the Constitution grants rights to the concern authority to come up with measures.

Article 14, Section 7 of the Constitution of the Kingdom of Bhutan states: “A minimum foreign currency reserve that is adequate to meet the cost of not less than one year’s essential import must be maintained.”

Finance minister Namgay Tshering issued a notification on August 18 to suspend the import of select vehicles with immediate effect- August 19 until further notice.

This is to uphold the Constitutional provision and most importantly to address the macroeconomic imbalances that the entire world is going through as an initiative toward protecting the foreign currency reserve.

All the vehicles including two-wheelers except utility vehicles, heavy earthmoving machines, and agricultural machineries. The utility vehicle costs less than Nu 15,00,000 equivalent to USD 20,000 whichever less shall be allowed. Vehicles for the use and promotion of tourism shall be exempted from this moratorium.

This suspension is timely decision by the government. Hopefully, this measure can ensure adequate foreign currency.