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Are there enough reserves?

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Foreign Currency: The recently published annual report of the central bank, states the country has foreign reserve to meet 20 months of essential imports but this could be misleading as it does not account for other requirements the reserve must be kept for.

This has incited differing views even among officials from the central bank.

The annual report (July 2011- June 2012) puts Bhutan’s foreign currency reserve at USD 770M.

Besides meeting 12 months of essential imports, as mandated by the Constitution, the reserve must also suffice to be pledged against Rupee borrowings from Indian commercial banks, meet repayments for hard currency borrowings, and back up the Ngultrum in circulation.

All these requirements indicate the economy should have a reserve of at least USD 806M.  Which means the present reserve is short by USD 36M.

But the central bank’s annual report only accounts for essential imports expenditure. This means that foreign reserve has neither been kept as back up for Ngultrum in circulation nor pledged against Rupee borrowings of an equivalent amount.

Last year the central bank said it was not possible to sell some of the hard currency reserve because there was not enough dollars to be pledged against the Rupee borrowings from India.

Today, Bhutan has around Nu 7.3B worth of ngultrum in circulation. This means USD 163M must at all times be kept aside as back up for the currency in circulation.

An official from the central bank said this amount of the reserve cannot be touched or used, and must be kept separately to be accounted for in the balance sheet.

In the asset side of the RMA’s balance sheet published along with the annual report, Nu 42B or USD 777M is recorded as balances with banks abroad and term deposits abroad which are the foreign reserves.

And in the liability section, Nu 7.3B is reflected as currency in circulation. If Nu 7.3B is deducted from the total reserve which must be kept aside as back up, the foreign currency reserve will be Nu 34B which is equivalent to USD 630M.

USD 630M is equivalent to 17 months of essential imports. Besides the back up currency, the dollar collaterals for borrowings from India and annual dollar debt repayment work out to USD 226M.

These leaves the foreign currency reserve at USD 404M, which is equivalent to 11 months import expenditure, one month short of constitutional requirement.

An official from the central bank said the back up currency need not be kept as a separate fund.  The reserve that has been kept for constitutional requirement can be used for the back up currency. “The back up currency is just for book keeping sake, we don’t make any payments for it,” he said.

Excluding the rupee borrowings from the government of India line of credit, Bhutan’s borrowings from Indian commercial banks total Nu 11.5B, for which USD 200M is required as collateral.

The central bank official said that it was difficult to be definite, as inflows and outflows cannot be determined and happen anytime.

By Nidup Gyeltshen

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