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Is the economy overheating again?

More than four years since the temporary measures on loan and import restrictions were lifted in 2014, the country’s domestic credit has swelled by more than Nu 60B.

Financial institutions in the country lent Nu 124B in the domestic market as of March this year. The economy saw domestic credit increase by almost Nu 20B in a span of 12 months (between March last year and March this year). This is according to the figures from the Royal Monetary Authority (RMA), excluding credit from the National Pension and Provident Fund.

While it is estimated that the financial inclusion initiatives and enhancement of access to finance is expected to fuel domestic credit in the medium term by Nu 50B, credit growth has a direct impact on the current account deficit because Bhutan is highly import-dependent.

This means that a large portion of any credit extended by the financial sector translates into imports and subsequent pressures on the current account.

It was a lending spree, particularly in building and construction that ignited the rupee crisis a few years ago because most of the credit translated into imports, shedding the country’s rupee reserve as well as hurting the current account balance. This was followed by loan and import restrictions on housing, vehicles and furniture.

This move had controlled imports and credit growth, going by the statistical bulletin of the RMA and trade statistics. Consequently, the country rupee reserve also began to improve.

However, if figures are any indication, a similar rupee crunch is emerging. Between December 2014 and March this year, the total domestic credit increased from Nu 68.9B to Nu 124B.

An aggressive growth in building and construction is stark in the RMA’s monthly statistical bulletins. It almost doubled in four years, from Nu 16B in December 2014 to Nu 30B in March this year.

Service and tourism loans, which mainly comprise of hotel construction has more than tripled from close to Nu 9B in 2014 to almost Nu 30B as of March this year.

This means that hotels, building and construction dominate the domestic credit, with half of the total credit concentration. What compounds this situation further is that these sectors have recorded the highest non-performing loan (NPL). Further, service and tourism sector has about Nu 4B worth of bad debts last year.

This could be attributed to a surge in hotel construction over the years and rigorous competition for occupancy.

Transport loan has also nearly quadrupled from Nu 2.3B in 2014 to almost Nu 7B in March this year. This explains the increase in number of vehicles from about 74,000 to 103,814 today. Increase number of vehicle is also associated with surge in fuel import and import of spare parts and accessories, which adds to the import bill.

It could be deduced that credit in the import driven sectors that directly translates into consumption has more than doubled in a span of over four years.

Credit growth in the manufacturing sector, which has the potential to create jobs and augment domestic production, is not encouraging. From about Nu 10.2B in 2014, it has increased to about Nu 14.8B in March this year, up by only Nu 4.6B.

This could best explain the domestic production leading to trade deficit and unemployment status of the economy.

Loan for agriculture, the sector which employs more than half of the country’s work force, has reached Nu 6.1B, up from Nu 2.6B in 2014. Loan towards trade and commerce has increased from Nu 13.5B to Nu 17.6B between the same period.

A banker Kuensel talked to said domestic credit is correlated to economic growth. However, in case of Bhutan, credit growth has been substantial in consumption and import driven sectors.

The direct impact of this, he said, could fall on the rupee reserve.

However, the current government has plans to recoup Nu 10B through tax reforms and bring CSIs at the core of economic diversification. The Prime Minister also said that he is scanning through the polices to bring about reforms in the financial sector.  

Reserve management

Rupee is a foreign currency that must be either earned or borrowed. The Rupee crisis in 2012, according to experts is the result of reserve mismanagement at a time of economic overheating.

When the country was reeling under the rupee crises in 2012, there was a time when the INR reserve fell to Rs 1.5B and the country had to borrow INR at higher interest rates from Indian Banks.

The government then was holding onto convertible currency reserve until it was compelled to sell USD to replenish the INR stock.

A similar economic situation and need for the rupee still persists, except for the construction of three-mega hydropower project in one go. The last government managed the reserve and kept the rupee ship afloat.

Sources at the finance ministry said that INR stock is kept manageable today because about 30 percent of grant and loan coming in the form of USD is exchanged into INR at source.

However, experts caution that this is not a sustainable solution. The country has limited options because whatever rupee was earned from hydropower and export is not even adequate to fund the import. This means that because of the trade deficit, the country’s rupee cashflow is negative.

This situation, according to a source will continue until the trade balance is corrected. To do so, the country has to export more and import less from India. After the Mangdechhu comes on line, the government expects a surplus and that a situation might come when the country does not have to convert CC into INR.

The difference is that the first government sold CC at one go while the second government did so in bits and pieces.

Tshering Dorji

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