By Ngawang Jamphel
In response to escalating demand for banking credit and economic activities, the Royal Monetary Authority (RMA) has implemented a series of strategic interventions to maintain liquidity in the banking sector. While facing complexities of a pegged exchange rate with the Indian Rupee and Bhutan’s import- driven economy, the RMA remains committed to achieving and sustaining price stability.
As the country experiences a surge in demand for banking credit, the RMA ensures that liquidity levels remain sufficient to support economic growth and meet prudential requirements. The RMA recognizes the challenges posed by Bhutan’s pegged exchange rate with the Indian Rupee, especially given the nation’s reliance on imports.
Recognizing the need for adaptability, the RMA is actively developing a market-based monetary policy and liquidity management framework. This comprehensive approach includes the establishment of a standing window facility for banks and the introduction of Open Market Operations (OMO) to facilitate the trading of securities in the secondary market.
In the pursuit of its primary objective-achieving and maintaining price stability-the RMA leverages the Cash Reserve Ratio (CRR) as a vital monetary policy tool. Despite the constraints imposed by the pegged exchange rate, effective liquidity management emerges as a crucial strategy for the RMA.
The inflow of foreign exchange in the form of grants, aid, exports of goods and services, and inward remittances are the primary drivers of liquidity in Bhutan’s economy. However, the banking sector has experienced a decline in liquidity, standing at Nu 13,832 million as of June 2023, compared to Nu 24,482.4 million in the preceding year. Factors such as reduced foreign exchange inflow, heightened demand for short-term foreign exchange payments, and increased government expenditure have contributed to this decline.
In response to liquidity stress faced by some banks, the RMA introduced short-term measures in phases. In the initial phase, the central bank discontinued the Sweeping of project accounts to alleviate liquidity stress. Additionally, the RMA issued the Domestic Liquidity Management Framework (DLMF), providing banks with a standing facility to access liquidity by pledging eligible securities.
The liquidity condition in the banking sector is significantly influenced by the foreign exchange reserve position. The Net Foreign Assets (NFA), a major liquidity contributor, stood at Nu 66,566.5 million. However, a 22% decline in NFA by June 2023, attributed to external payment obligations such as import bills and debt servicing, raised concerns.
Despite challenges, the banking sector’s total liquidity surplus amounted to Nu 31,139.8 million as of June 2023. The distribution of liquidity among banks revealed that the Bhutanese Bank of Bhutan Limited (BoBL) held the largest share at 48.7%, primarily due to government deposits. Druk PNB and Bhutan Development Bank followed with 21.2% and 15.8%, respectively.
To address short-term liquidity issues, the RMA initiated measures in phases. The discontinuation of sweeping accounts, interbank borrowing and lending, liquidity management operations, and the consideration of revisions to the CRR are among the strategies deployed. The RMA remains cautious, closely monitoring the need for further adjustments based on the status of foreign exchange inflows and their impact on external reserves.
The RMA’s proactive approach and strategic interventions aim to alleviate liquidity stress in the banking sector, ensure stability, and support the sound functioning of Bhutan’s financial system. As uncertainties persist, the central bank stands ready to make informed decisions, fostering resilience in the banking sector and the broader economy.