Nu Faces Depreciation Challenges, Impacting Trade and Debt Dynamics
Since the third quarter of 2022, the Bhutanese Ngultrum (Nu) has been consistently trading around the USD 80 mark, reflecting a stable but evolving currency scenario for the country. According to the RMA’s annual report, the Nu saw its highest point in the fourth quarter of 2022, reaching an exchange rate of 82.9 Nu per US dollar. However, as Bhutan entered the second quarter of 2023, the Nu experienced a depreciation of 3.9% compared to the same period in the previous year.
Examining the average exchange rate over the four quarters in 2022, the Nu depreciated by an average of 2.4% against the US Dollar. These fluctuations in the Nu, particularly against the Indian Rupee (INR), highlight the shifting dynamics of Bhutan’s currency in relation to the US Dollar over the given period.
The depreciation of the Nu against the US Dollar has implications for Bhutan’s trade balance. While a weaker currency can make imports more expensive and exports more competitive, Bhutan’s unique trade situation with India, accounting for approximately 80% of the country’s total trade, including hydropower exports, mitigates the direct impact on the cost of trade.
The intricacies of Bhutan’s economic ties with India mean that a depreciating Nu doesn’t necessarily lead to a more favorable balance of trade. The strong economic connection with India influences the trade dynamics, making the impact of currency depreciation on trade costs relatively limited for Bhutan.
The depreciation of the Nu also carries significant implications for the economy’s debt portfolio, especially when debts are denominated in hard currencies such as USD. While debts denominated in Indian Rupees benefit from currency volatility, those in hard currencies are exposed to exchange rate risk. The substantial depreciation of the Nu this year has led to an increase in the debt service and overall debt stock in nominal currency.
As the Nu experienced a slight appreciation in the second quarter of 2023 relative to the first quarter, there was a noticeable decline in the debt impact with the Currency of Trade Index (COTI). The depreciation of the Nu not only amplifies the debt burden, requiring a larger allocation of Nu for debt service obligations by the Royal Government of Bhutan (RGoB), but also raises concerns about long-term debt sustainability. This concern is particularly heightened when the economy faces challenges in generating sufficient foreign exchange earnings.
The economic landscape calls for careful monitoring and strategic measures to navigate the complexities associated with currency depreciation, trade dynamics, and the impact on the debt profile. however, the Royal Government of Bhutan remains vigilant in ensuring the resilience and sustainability of the country’s economic framework in the face of these evolving challenges.
By Kinley Yonten
