Too Much, Too Soon
Exposed to the global community only recently, Bhutan is already facing a severe trade imbalance and a looming currency crisis.
The tiny landlocked country of Bhutan, placed between two giant neighbors, has remarkably managed to keep its unique cultural and religious identity alive. However, the infiltration of mass media in 1999 led to many drastic changes in the world’s happiest place. The Bhutanese people, experiencing a late interaction with the rest of the world, began enjoying the luxuries, equipments, ideas and fashion that they had deprived themselves of over the years. This led to an immediate rise in their consumption pattern, increasing the amount of various kinds of imports, at an accelerated pace. The locals now possess numerous gadgets, equipment, accessories and luxury items as their counterparts from developed countries. A superficial observation of their extravagant lifestyle may mislead many into listing Bhutan amongst one of the developed countries of the world. In reality however, the country is dependent upon 40-50% of foreign aid for survival.
The recent rupee crisis has been tightening its grip upon the economy of Bhutan. Since Bhutan hardly
produces any of the luxury materials mentioned above, the country is heavily dependent upon foreign countries, mainly India, for such supplies. This has severely drained their rupee stock. As Bhutan does not have enough money to import products from India, they rely for the same on the grants and loans received from India. Even though the debt keeps on increasing, the Bhutanese government has assured its people that the hydropower projects, which are expected to produce 10,000 MW of electricity by 2020, would generate enough revenue to clear the Indian debt. However, according to a recent study conducted by the Department of Energy, Bhutan may be able to produce only 6664 MW of electricity by 2020.
Before the rupee crisis, citizens were spending ostentatiously and buying expensive products. The interest rate of loans to acquire cars ranged from 10-12%. This has resulted in the influx of imported cars including SUVs even in places where everything is available within walking distance. Amidst extravagant spending with low rates of interest, when it comes to providing loans for the production of agricultural products, the interest rates either soar up or are largely unavailable.
A BCCI study reveals that the government also accumulated dollars received in the form of grants, and instead used rupees, which consequently contributed towards bringing Bhutan’s economy almost to a halt.
Considering the severity of the rupee crisis and its potential repercussions, the Bhutanese Government must take immediate measures to formulate long term plans on a macroscopic level.
An instant check on the trade bal- ance is needed, as it is currently tipped heavily towards imports. The government needs to ensure that the country makes more profit through exporting, by cutting down its expenditures on luxury items. N.K. Arora, CEO, Druk Punjab National Bank, stressed on the urgent need to establish import substitution industries, minimize Bhutan’s import dependency, and create export incentives, which will stimulate the production and export of local products.
Bhutan has recently been toying with globalization of which industrialization is a predictable by-product. However, it would be unwise for the government to ignore 69% of its farming population, since Bhutan is primarily an agricultural society. By subsidizing farmers and encouraging them to grow rice and dairy products, Bhutan may be able to save on agricultural imports. For example, the local production of milk in Tashigang can replace processed and packaged milk, ‘Tazaa’ currently imported from India.
Bhutan is known for its breathtaking views that can rapidly rejuvenate its tourist industry. It offers a kaleidoscope of captivating myths, rituals and traditions. Realizing the level to which it can boost the economy, the government is already working towards strengthening its tourism sector. The Bhutanese government is targeting a ‘high value’, yet a low volume of tourists. On an average, the government charges each tourist $250 per day, which includes guides, rooms, boards and transportation. By carefully curbing the influx of tourist, the Bhutanese governments has simultaneously ensured not only high value travelers but also limited individuals, who consequently are less likely to contaminate their well-preserved cultural heritage. According to the annual report of the Tourism Council in Bhutan (TCB) (2011), Bhutan is anticipating the arrival of a total of 100,000 tourists in 2012.
In order to tackle the rupee crunch, Indian Ambassador, Pravan K Varma, guaranteed absolute support to Bhutan. The Indian Finance Minister even allotted INR 26bn in his budget proposal, to be offered as aid to Bhutan. Moreover, the government also requested the Indian government to increase their loan limit from Nu 3 billion to Nu 6 billion, which would lower the interest rate from 10% to 5%. On the other hand, many experts are suggesting that it is rather unreasonable for the government to keep on accepting more loans and aids, when one of the core problems of the rupee crunch lies in the fact that they already owe huge amounts of debts.
The government must set hard currency reserves, as it is much more stable and reliable. Those can be exchanged with the Indian rupee when the Indian rupee depreciates. Additionally, the government must promote the inflow of remittances by non-resident Bhutanese, preferably through the use of attractive exchange rates.
It is not considered obligatory to meet the target set by the Millennium Development Goals by 2015. However, since it has become a global measure of a country’s progress, it therefore has the potential to either make or break a nation’s reputation internationally. Failure to achieve its targets would give Bhutan the reputation of an incompetent country.