| Abstract | Although Foreign Exchange Risk is the main issue in all transactions involving
currencies other than the local currency, the players in Bhutan seem to be complacent
about the fluctuation of exchange rate against Ngultrum. With the economy almost
totally dependent upon India, this study tries to look at the foreign exchange policy,
the impact of exchange rate fluctuation on the income of the companies and
organizations in Bhutan that are involved in foreign exchange activities, find out the
hedging practices in place and suggest ways to stabilize the income of these players.
Discussions were made with organizations involved in foreign investments and the
companies of the tourism industry, which is the largest foreign exchange earner, to
access the impact of ngultrum fluctuation on their earnings and to find out any
hedging practices in place to offset the impact.
From this study it is clear that although the exchange rate fluctuation has serious
impact on the income of the companies, especially the tourism companies, they do not
have any hedging practices in place and are totally at the mercy of the ngulhum
fluctuation against dollar. However, for the economy as a whole, the one-to-one
ngulhum rupee peg goes a long way in eliminating the impact of exchange rate
fluctuation, especially on the trade of the counhy as almost 90 percent of Bhutan's
h·ade activities are with India. The main reasons for not having any hedging practices
in place are quoted as inactive financial market, lack of hedging instruments due to
unavailability of matching funds or trade, lack of expertise and knowledge, lack of
access to outside markets, etc.
Recommendations for companies include, keeping prov1S1ons for exchange rate
losses, expand domestic investments to diversify po1tfolio, make info1mal
arrangements with importing companies to share the risk, etc. and for the policy
makers, encourage and support the commercial banks to establish forward foreign
exchange risk cover, look out for possibilities for investment in India by the
concerned governing bodies, fixing tourism tariff in ngulhum or in different
currencies to create a basket of currencies, ease and simplify the process of tour
bookings and fund transfers to reduce time, etc. |