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Bhutan's hydro projects and the rupee deficit

Publication Date : 12-06-2012

 

Economists, both local and international, and the Bhutan government have differing views on what is significantly contributing to the rupee shortfall plaguing the Bhutanese economy. While some have pointed out hydropower-related imports to be causing the deficit, the government and others beg to differ.

Economic affairs minister Khandu Wangchuk, during a press conference last week, said hydropower projects as such did not and will not affect the country’s rupee reserve.

"The money to build hydropower projects comes from India in the form of rupees and, although major works are carried out by the Indian contractors taking the rupee back to India, the reserves are not touched at all,” the minister said.

During the forum on Bhutan’s macroeconomic policy earlier this month, senior advisor of the United Nation’s economic and social affairs department Hamid Rashid said in the 2010-11 fiscal year, the surge in hydropower-related imports contributed to the rupee deficit. 

The increase in private sector imports, such as automobiles, fuels and services, contributed only 30 per cent to the deficit.

Vice president of the chamber of commerce and industry, Palden Thinley, said hydropower development did not directly contribute to the shortfall, but auxiliary activities related to the projects had led to increased rupee spending.

The projects, he said, created huge demand for machinery, trucks and fuel, which are not financed by the Indian government in Rupee.

"The machines are bought by Bhutanese from India, paying rupees and, in recent times, with projects being built simultaneously, it created huge demand for machinery and fuel to run them,” he said.

The hydropower sector’s demand for machinery is expected to increase further in the future, with huge projects, such as the Sankosh, Kholongchu and the four joint venture projects, being scheduled to be built in the next few years.

Palden Thinley said the timing to build these projects should have been spread out, because the same machinery could have been used in more than one project. “With different projects starting off at the same time, the demand is only going to increase,” he said.

Another economist said the major reason for the rupee shortfall was not hydropower, but increase in demand for consumer goods. “While Bhutan receives rupee to build the hydropower projects, almost 30 percent of the raw material is sourced from the domestic market, therefore it was not true that the hydropower sector caused the rupee shortfall,” he explained. “Given that we should have been able to save rupee instead. ”

While rupee will be in surplus once the projects are completed, Palden Thinley said it was rather the question of whether the economy would be able to absorb the shock, with the rupee shortfall increasing with more hydropower projects.

He said Bhutan was building projects worth 450 billion ngultrum (US$47 million)  within a very short time, while the size of the economy is just  72 billion ngultrum ($7.6 million).  This meant, the economy was expanding more that its size, which was not economically healthy. “Our economy hasn’t increased to the size to be able to absorb it,” he said.

 

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