The declining value of the dollar, which continued to slide against all other major currencies in 2007, was not a major concern for Bhutan, say officials of the Royal Monetary Authority, the country’s central bank. “It doesn’t matter too much for us,” said the central bank’s managing director, Daw Tenzin.

Daw Tenzin said that Bhutan was not an export-driven economy, earning dollars through trade, and its dollar reserves had been drummed up through inflows of loans and grants. “We’re import-driven, importing from India in Rupees, so we should be more concerned about our Rupee reserves,” said the managing director.

The repercussions of a sliding dollar has been felt the world over. China, Europe and India are lamenting thinner profit margins from export and Middle East currencies, which are pegged to the USD, are also sliding in the face of rising inflation. Meanwhile, most Asian countries saw their currencies appreciate against the dollar.

Like most developing and emerging economies, Bhutan holds a large portion of its foreign currency reserves in US dollars, the preferred global trading currency. But the drop in 2007 was sharp with the US economy burdened by a huge current account deficit, a rising trade deficit, that was further aggravated by the sub-prime mortgage crisis in September.

But there has been some impact on the reserves. For example, if the Royal Monetary Authority withdraws its entire US dollar reserve in US banks and converts it to Ngultrums, it would be short by Nu 2,000 million than it was a year ago. Such a loss, though, is called a ‘notional loss’ because it is only a book value, there is no real cash loss. According to the RMA Act, exchange losses and gains do not figure in RMA accounts but are reflected in the Revaluation Reserve Account. If the account shows negative, the government issues non-negotiable, non-interest bearing securities, promissory notes, to the extent of the deficiency to maintain the value of the reserve.

At the same time, the deposits continue to earn interest income, which is 5.5 percent for dollar holdings in US banks.

Commercial banks must, however, reflect the valuation or notional loss in their accounts which, therefore, has a direct impact on their profitability. The Bhutan National Bank had a valuation loss of about Nu 77 million at the end of 2007, while the interest income from its dollar deposits was about Nu 60 million. In 2006, BNB lost Nu 6.03 million in dollar exchange fluctuation. Bank officials said that in 2000 it made a net income of Nu 49 million in foreign exchange, excluding the interest income on deposits.

But BNB officials say the valuation losses will not significantly impact on their overall performance. “We’ll still do well as we’ve seen growth in core banking areas,” said BNB’s managing director, Kipchu Tshering.

Kipchu Tshering said that it was essential for the bank to hold some amount of hard currency and maintain it with banks abroad to aid international transactions. “If you don’t have some holdings, foreign banks don’t want to have anything to do with you,” he said.

RMA regulations limit commercial bank holdings of foreign currency to not more than US $ 20 million. Eighty percent of the holdings are in US dollars and the rest in Euro,Yen and Pound. Dollar holdings still earn the highest interest income at 5.5 percent, according to bank officials. The Euro recently raised its interest to three percent.

The RMA’s managing director said that most of its reserves were in US dollars because all third country export and import had to be done in the same. Even debt repayments were designated in US dollars.

He also pointed out that diversifying the foreign reserve basket, as suggested by several people, to include major currencies would incur more cost because of the re-conversion costs. “We can go in for hedging to blank out the effects of exchange fluctuation but, at this point of time, it doesn’t seem necessary,” said Daw Tenzin.

Economists point out that with the Ngultrum pegged to the Indian Rupee, the Indian economy would determine what the US exchange rates are in Bhutan. The Indian economy is presently flooded with the greenback because of exports booming and a surge of foreign investors.

The 2008 forecasts by the World Bank and UN say that the US economy could go into a recession that could spill over to the rest of the world.
Source: Kuenselonline