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

Profits dip by Nu 44 million: Bhutan National Bank

Foreign exchange movement, not performance, led to a slump in Bhutan National bank’s profits, the first time in eight years, say bank officials.

“If you exclude the foreign exchange (forex) component for 2008 and 2009, we’ve actually grown by more than 23 percent,” said BNB’s chief executive officer, Kipchu Tshering.

In 2008, the bank had a windfall of Nu 84 mn through forex and last year it suffered a loss of Nu 19 mn. BNB, like most banks, is required to maintain at least USD 10 mn in foreign exchange to facilitate third country transactions.

According to the bank’s profit and loss account, which was not obtained from bank officials, BNB’s profits fell by about Nu 44 mn in 2009, with profit after tax slipping to Nu 266.2 mn from Nu 310.3 mn in 2008.

While income from interest on loans grew to Nu 1.14 bn from Nu 917 mn, interest paid on fixed deposits shot up to Nu 588.9 mn from Nu 329 mn in 2008.

The bank’s management said that the raise in corporate fixed deposit rates last year to attract more funds had increased the cost of funds. “Our lending was growing but not our deposits, so we raised the fixed deposit rates to avoid a cash crunch,” said Kipchu Tshering.

While this increased deposits to Nu 21.65 bn from Nu 14.60 bn and loans also grew to Nu 11 bn, shareholders pointed out, during the bank’s annual general meeting in Thimphu on March 23, that the huge interest payments on fixed deposits had significantly eaten into the profits.

“The bank has made money, but it could have made much more had it not taken so much deposits,” said a shareholder. “It’s a lapse on the management for not being able to track investment as well as fund flow.”

The bank did the same in 2002 and its profits fell for the first time after it was formed in 1997, said another shareholder. “It’s a repeat of 2002, they took in just too much money.” He also said that the bank could be stuck with paying high interest rates for some time, particularly for long term fixed deposits.

For the Bank of Bhutan, the cost of funds were much cheaper, because most government agencies, for whatever reasons, had their current accounts with them, on which the bank incurred no cost but charged for services rendered.

BNB today has an excess liquidity of about Nu 4 bn, but its officials expect large borrowers only after some hydropower projects are completed. “Domestic power consumption has reached its peak and no new industries can come up without power,” said Kipchu Tshering. There was no land either to set up new industries, although the government has made announcements to develop several industrial estates.

Kipchu Tshering said that there were no investment avenues within the country to utilise the surplus money. “Elsewhere, you have mutual funds, the stock market and government bonds. Here even the issue of government bonds isn’t consistent.”

The bank is waiting to invest several hundred million ngultrums as consortium financing to the Dungsam cement project, which announced earlier this year that it would borrow about Nu 2 bn domestically.

Despite the drip in profits, the bank declared a dividend of Nu 28.50 a share, the same as the previous year. It will paying Nu 101 mn as dividend, Nu 79 mn will go into reserves. As in 2008, Nu 50 mn has been set aside as reserve to build an office complex.

Source: Kuenselonline