Neigh­bourly Cracks

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

Southasia - - CONTENTS - By Dr. Syed Ali Madni

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.

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