A once a year affair

RMA Annual Meeting 22 November, 2009 - Bhutan has paid an estimated Nu 110 million as interest so far this year on rupees (Rs) five billion borrowed from India to meet the economy’s rupee requirements.

It could touch Nu 140m by year-end according to a presentation made by officials of the royal monetary authority (RMA) at its annual meeting with the financial institutions held yesterday in Thimphu.

More than 80 percent of Bhutan’s imports, from essentials to luxury items, are from India with which it shares a free trade agreement.

As of September, the rupee reserve stood at 2,358.76m. This does not include the Rs 3 billion liability, which was given as standby credit by the government of India at an annual interest rate of five percent. It was received at the end March.

Since this was not sufficient, Bhutan took an additional Rs 2b overdraft from the state bank of India (SBI) at an interest rate of 9.2 percent. This overdraft was fully liquidated in September this year from the earnings of hydropower projects, which peak during the monsoon.

Bhutan has been facing a rupee crunch since 2007 after the construction of the Nu 40b 1020 MW Tala hydropower project was completed. Since 2008, Bhutan has also been paying around Rs 2.8b as debt repayment to India for loans taken to build Tala and the Kurichhu project in Mongar.

RMA officials said that rupee inflows to the Bhutanese economy, mainly on grants from the government of India, earnings from hydropower and from exports to India. Outflows were in the form of debt servicing, growing imports for industry and manufacturing and from rising private consumption and remittances by thousand of Indian constructions workers engaged in infrastructure building in Bhutan.

To manage rupee liquidity in Bhutan, RMA has two sources; one is the standby credit of Rs 3b from the government of India, which has already been used for now, and a Rs 4b overdraft facility from SBI against convertible currency deposits.

Meanwhile, the convertible currency reserves have continued to rise and reached USD 699 million. Inflows for convertible currency reserves are loans and grants, tourism, exports and interest earnings on deposits.