The sudden demonetization move by Indian Prime Minister Narendra Modi sent the economies of many neighbours like Bhutan, Nepal and Sri Lanka into fits. While the Indian economy has itself run into a cul de sac, the neighbours are also looking for ways to
India enjoys significant regional influence across South Asia due to its size, comparative economic power and historical and cultural affinity to the region. India's surprise move to demonetize 500 and 1,000 rupee notes to root out corruption and unearth black money caused quite a stir not only within the country but in the region as well. The worst affected was of course Bhutan followed by Nepal and Bangladesh. The case with Bhutan is different because Indian Rupee is a legal tender and the Bhutanese Ngultrum has been pegged at par to the Indian Rupee since its first issue in 1974. Moreover, this Himalayan kingdom is a major beneficiary of Indian aid amounting to around Rs 5,490 crore annually. Indian rupees account for 30 per cent of the country’s international exchange reserves amounting to about Rs 27 billion ($390 million).
Since Bhutan’s economy is fully dependent on the Indian economy, very much like the Indians, the Bhutanese also woke up on the morning of 8th November 2016, to realize that they had been hit by Prime Minister Narendra Modi’s sudden move. Therefore, the officials from the central bank of Bhutan immediately
rushed to contact their counterparts at the Reserve Bank of India (RBI) to get more details on how to handle the situation which jolted the Bhutan financial market. The Royal Monetary Authority (RMA) which was also taken off guard by Modi’s announcement without delay got in touch with the RBI to discuss the possibility of instant transfer of Rs.800 million in cash to enable the general public to exchange their demonetized notes. To add to the loss, the selling pressure brought down the conversion rates of Indian currency in unofficial money markets as Indians also rushed to Bhutan to exchange the Rupee with Bhutani Ngultrums to wash their black money which created a glut of demonetized Indian rupees in Bhutan.
Commenting on the sudden decision, a Bhutanese economist said that India should have made some alternative arrangements to send in new currency notes to Bhutan which is wholly dependent on India. Bhutan has been taking up the issue of currency ban with India ever since the PM's announcement on demonetization as the kingdom is also facing the crisis of cash crunch. Bhutan’s Central Bank even dispatched officials to the State Bank of India’s branch office on the Indo-Bhutan border to search for lower denomination Indian currency notes to ensure that there was no shortage in cash for exchanging demonetized notes over the counter. Since the country’s central bank offers Indian currency without any hassles, there was no need for hoarding it and as such there was not enough cash to meet the unforeseen developments. As such, the unexpected demonetization caught the Bhutanese unawares, resulting in chaos and confusion. Bhutan had a requirement of Rs.250 million a week to not only replace the old currency but also to smoothly operate its economy and make cash payments.
The shortage of Indian currency in the Bhutan market adversely affected the daily trading activities between the two countries. The Marketing Advisor Bhim Raj Gurung of the Food Corporation of Bhutan said that demonetization of Indian currency has badly affected both the Bhutanese farmers and the Corporation. The price of cardamom hit a record low of 700 Ngultrum per kg, which was between 800 and 900 Ngultrum. Indian traders have informed their Bhutanese counterparts they would be able to import food items only after three months. Some Bhutanese traders have not been able to export any cardamom since November 8. Cardamom export has significantly gone down in Silliguri, which is a major market for Bhutan. Similarly potato exports from Bhutan to India have also slowed down. Some Indian exporters also paid their Bhutanese counterparts in old currencies. Meanwhile, Bhutan's mineral exports to Bangladesh have also been affected. While Letters of Credit (LCs) are being used for payments, transportation has been proving a challenge. India is Bhutan’s largest export and import market and the demonetization has affected the sale of Bhutan’s cash crops, upsetting local farmers.
On the other hand, the Association of Bhutanese Industries (ABI) General Secretary, Jochu Thinley said that the INR cash shortage in Bhutan due to demonetization in India is affecting Bhutan’s industries because from the Indian Rupee account that industries maintain, they were earlier allowed to withdraw 10 percent as cash to pay transporters, labourers, toll tax, fuel, ‘ goonda tax’, local syndicate payments, etc. but that is no longer allowed. He said the lack of rupee cash is now affecting exports. Industries should at least be given Rs. 10,000 to 15,000 per truck consignment for transportation costs, he said.
Financial Institutions Association of Bhutan head and BNB MD Kipchu Tshering said that the non-availability of the Indian Rupee has created quite a problem for everybody as companies and people cannot use the Rupee they deposited to pay back loans to the banks and that meant more Non Performing Loans. He said, “Exporters don’t even have cash to pay truckers to send out their exports and this is further pushing up costs. Some of the biggest individual loans at times running into billions are taken by Bhutanese industries operating in the south.”
Another issue he said was that while many industries deposited all their cash in Indian Rupee, they could not get equivalent Ngultrums and as a result it was affecting loan payments to the banks. Jochu added it would be helpful if the industries could at least get a letter saying that the money would eventually be paid to them.
On the other hand, with a sudden demonetization of old Rs 500 and 1,000 notes in India, black money started pouring into Bhutan, hitting the country’s money market. Even the Indians started buying Bhutani Ngultrums to whiten their black money. The Bhutanese Central Bank, therefore, directed banks to freeze withdrawals of Ngultrums by any individual or companies in exchange for demonetized Indian currency of Rs 1,000 and Rs 500.
During a sudden check in Phuentsholing, a business hub bordering the India-Thimphu National Highway, police stopped a taxi carrying Rs 700,000 in Rs 1,000 notes which were demonetized on November 8. The taxi was travelling from the Bhutan-India border town of Phuentsholing to Thimphu. The money was found hidden in a black plastic bag under the passenger seat.
The RMA Governor Dasho Penjore said that the main problem was that the shortage of the Indian Rupee had affected the peg of the Ngultrum and Rupee. He said this in the light of reports from borders areas where Indian traders and transporters were charging up to a 20 percent commission to accept Ngultrum payments. The RMA had to work hard to restore the peg after the 2012 Rupee crisis and now it has been hit again. The Governor said that it is not good for the Bhutanese economy as it affects both exports and imports.
A Bhutanese economist said that Bhutan’s requirements are equivalent to that of a single bank branch office in India and so it is difficult to understand why the Indian Rupee was not being sent to a friendly neighbour like Bhutan. He was of the view that while taking such decisions, the Indians should at least take those neighbours into confidences that are solely dependent on India.
Though the Bhutanese are gradually coming out of the shock, Modi’s demonetization initiative has caused a sudden breakdown in Bhutan’s commercial network. Trade across all aspects of the economy is disturbed, and cash-centric sectors like agriculture and the massive informal market have virtually shut down, with many businesses and livelihoods destroyed. The economic impact of hundreds of people standing in line for hours to exchange or deposit canceled banknotes rather than working or doing business can well be imagined.
The Indian government has formed a committee to look into the issue of demonetized currency notes held by people in Nepal and Bhutan. Nepal’s central bank has also formed a panel to look into the issue and prepare guidelines on easing the process. The writer follows political and social developments in South Asia.