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The rupee crunch

Publication Date : 28-05-2012


The rupee crunch, now in its third month, is showing no signs of going away. In fact, indications are that it is perhaps only just beginning.

This week the central bank, having exhausted its rupee borrowing limit of 10 billion rupees (US$181 million) from the State Bank of India, had to borrow 2 billion rupees ($36.2 million) from the Punjab National Bank of India at a higher interest rate to replenish domestic banks that had run dry of rupee to facilitate payment of import from India, Bhutan’s largest trading partner.

The central bank has been negotiating with the government of India to raise the ceiling of its rupee standby credit facility to 10 billion rupees from the existing 3 billion rupees ($54.3 million), which has already been exhausted. This is taking some time but even if this comes through it is only going to buy time, may be several weeks.

The currency swap facility initiated by the government India will also provide some breathing space when things get tight with the rupee but this option is  also temporary relief.

Rising prices of food and essentials has been an immediate impact of the crunch while measures to tighten credit and rein in the outflow of rupee has compelled the private housing and transport sector to slow down.

Now almost 12 weeks since the central bank tightened credit, land prices in Thimphu and other urban centres are showing signs of falling. This is significant because land prices in Thimphu have always been appreciating and accelerated in the last decade.

Just as easy credit helped fuel speculation and pushed land prices to ridiculous levels all these years, the absence of money in the market is having the opposite effect.

With loans no longer easily available landowners are willing to let go off plots here and there to complete a construction or repair one, educate children, buy a car or a truck or machinery required for an ongoing project.

Buying and selling of land as a business has been thriving for years now but without credit only a handful can afford to speculate. They include the few business houses, rinpoches and Bhutanese who are abroad on long-term courses and have made savings to invest in real estate.

Whether people selling land at lower than market prices represent a few desperate cases or is the beginning of a trend remains to be seen. But the fact that sellers are willing to go below is a clear indication that land in Thimphu is way overpriced. Overpriced land has its baggage in terms of unaffordable housing, which rides on an ever -increasing population gathering at urban centres.

Years ago when rent control measures were proposed the banks were the first to object, apart from real estate owners, because they could go bust if hundreds of housing loans clients defaulted in repayments if rents did not catch up.

The crunch just may be a blessing is disguise.


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