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Showing posts with label dollars. Show all posts
Showing posts with label dollars. Show all posts

Oct 6, 2012

Foreign Exchange Reserve

While Bhutan already faces a deficit rupee reserve, compelling the central bank to borrow rupees from banks in India to meet import payments, its convertible currency reserve is also already more than utilised.
Constitutional requirements state that the economy’s convertible currency reserve must cover 12 months of essential import expenditure.
But there are other requirements the convertible currency is used for.  Apart from debt servicing on convertible currency borrowings, a certain portion is pledged against the Rupee borrowings made from Indian commercial banks.  It is also used as a back-up currency for the ngultrum printed and issued by the central bank.
Adding up these requirements, Bhutan’s total foreign currency reserve today is short by USD 20M (Nu 1B accounting in today’s exchange rate).
The requirements add up to USD 762M, while Bhutan’s total foreign currency reserve, according to the central bank’s latest publication, is USD 742M.
The task force, formed to tackle the rupee shortage in April this year, redefined what constitutes essential imports, and recommended that Bhutan maintain a minimum foreign currency reserve of USD 500M to meet essential imports expenditure.
Bhutan pledges USD 100M for the Rs 5B borrowings it has from Indian commercial banks.  Borrowings from the government of India line of credit do not require any collateral.  Its payments on concessional borrowings made from institutions, such as the World Bank and Asian Development Bank, today stand at USD 22M.
About USD 140M is used as a back-up currency for the Nu 7.3B that has been printed and issued by the central bank and is in circulation in the economy today.
Economies throughout the world set aside a certain amount of their foreign currency reserves, or maintain gold bullion, to back up currency in circulation, in case public loses confidence in the currency.
A local economist said that printing and issuing currency more than the value of the foreign currency means the government is doing business on risk.
While there are no explicit legal provisions requiring central bank to ration a certain percentage of the reserve for the currency in circulation, it is accounted for in the central bank’s balance sheet.
Given this scenario, the central bank today, if the reserve continues to remain the same, cannot print any more ngultrums, nor borrow any more rupees from commercial banks in India.
In April this year, when the task force redefined essential imports, Bhutan’s total foreign reserve was USD 716M.  The collateral for the Rs 10B borrowings from India was USD 200M.  While figures for convertible currency debt repayment were not available for that time, the currency in circulation was Nu 6B, for which USD 109M would have to be kept as back-up currency.
Even after discounting for currency held by banks, and the repayment on convertible currency debt, the foreign reserve was short by USD 93M (Nu 4.8B).
The central bank, which is responsible for managing the economy’s foreign reserve, said that reserves must now be used cautiously.
Deputy governor Pushpalal Chhetri said figures kept changing and with rupee inflows, the collateral for the rupee borrowings would decrease, which would ease the deficit.

Source: Kunselonline