2. Legal Aspects
According to the RMA Act, the RMA is a body corporate with perpetual succession and a common seal, and has the power "to enter into contracts and issue obligations, to sue and to be sued in its own name, to acquire, hold and dispose of movable and immovable property and to pledge and mortgage the same, and to exercise all powers granted to it by the provisions of the Act. Therefore, the RMA is a special jurisdical person that is separate and distinct from the Government. In other words, unlike government ministries, departments or agencies, the RMA is solely responsible for its actions, and any act on its part cannot be construed as being an act of the government.

3. Capital
Against an authorized capital of Nu.100 million, the paid-up portion of the RMA's capital is presently Nu. 4,400,000, which in accordance with the provisions of the Act, is held exclusively by the Royal Government. The paid-up capital can be increased by such further amounts as may be proposed by the Board of Directors and approved by the Government.

4. Purposes
The RMA's purposes as specified in Part II, Section 6 of the RMA Act are:-
to regulate the availabilty of money and its international exchange; to promote monetary stability;
to supervise and regulate banks and other financial institutions; and
to promote credit and exchange conditions, and a sound financial structure conducive to the balanced growth of the economy.
(a) The function of regulating the availability of money means that the RMA is responsible for exercising control over the amount of banknotes and coins in circulation. Moreover, since the national currency, the Ngultrum, is pegged at parity with the Indian rupee, there is an implicit guarantee by the RMA that it can be exchanged at parity for the rupee for all permissible purposes. For this reason, it is necessary for the RMA to ensure that all currency notes and coins issued by it are backed one hundred percent by its assets in either Indian rupees, or other readily available convertible currencies.

(b) Monetary stability means that the price level as measured by the Consumer Price Index should remain stable, or change very little, over time. This in turn means that the RMA is responsible for controlling money supply growth. Money supply, in its broadest sense, is a measure of total liquidity in the economy and consists not only of currency notes and coins in circulation, but also the deposit liabilities of the banks, in the form of current, savings and term deposits. Even in Bhutan's particular circumstances (one-to-one peg between the Ngultrum and the Indian Rupee) an unduly high rate of growth of money supply might lead to inflation, while a rate of growth below the rate of growth of the economy could possibly be deflationary. Therefore, the RMA's objective must be to ensure that the growth of money supply is generally consistent with the rate of growth of the economy.

(c) Supervision of Banks and other financial institutions involves ensuring that commercial banks and other financial institutions conduct their business on a sound and prudential basis and according to the various laws and regulations in force. It also includes the licensing of financial institutions.

(d) Promotion of Financial Development refers to the establishment of an effective financial system, with the aid of which the financial transactions necessary for the smooth functioning of the economy can be carried out with a minimum amount of cost and time involved. In this connection, the Bank has to be a facilitator of advanced clearing and transfer systems. It also implies that the necessary banking services, as, for example, deposit facilities and loan facilities, are made available. Of importance is also the establishment of a deposit insurance system and the availablity of certain specialised institutions, which could be represented, for example, by an industrial development bank, and microfinance institutions, and the facilitation of a money market, primary and secondary markets in securities, a foreign exchange market, and a capital market.

In order to achieve its purposes, the RMA has been given the responsibility to act as:

(b) As the bankers' bank the RMA has the responsibility to accept deposits from the commercial banks to act as prudential reserves against their deposit liabilities (e.g., cash reserve ratio), to discount commercial and government paper on their behalf, and to act as lender of last resort in case any bank or banks faces short-term liquidity shortages. It also involves the providing clearing facilities for inter-bank transactions.

(c) As banker to the Government the RMA serves as the depository and fiscal agent of government (e.g., sale of securities on behalf of the Government). The RMA may also make temporary advances to the Government, and with the approval of the Government to government institutions, agencies and local government bodies.

(d) As the advisor to the Government, the RMA may advise the Government on monetary and financial matters, and any other matters which in its opinion are likely to affect the achievement of its purposes. It may also be requested by the Government for advice on any matters relating to its purposes.

(e) As the Guardian of the country's external reserves, the RMA is the depository of the official external assets of the country, including gold and foreign currency reserves. This also implies the responsibility for the Exchange Rate Policy and External Reserve Management with a view to the prudential management of the funds, with due regard to safety, liquidity, and profitability.

4. Management and Organization Structure
The functions of the RMA can be roughly divided into (i) policy function, and (ii) its execution. Thus, the organizational structure of the RMA includes a policy making organ, i.e. the Board of Directors, and an executive organ, i.e. the management.

Board of Directors
In terms of the RMA Act, all powers of the RMA are vested in its Board of Directors which is responsible for the policy as well as the general administration of the organization. The Board of Directors presently consists of seven members, including the Managing Director. The Finance Minister is the Chairman of the Board, and in his absence, meetings are chaired by one of the senior Directors.

Management
The Managing Director is the chief executive officer of the RMA in charge of, and responsible to the Board of Directors for the implementation of policy, and day-to-day management of the RMA. He is assisted by a Deputy Managing Director. Senior officers are appointed by the Board of Directors, and junior support staff by the Managing Director. Except for the Managing Director and the Deputy Managing Director, who are seconded from the Royal Civil Service, none of the other employees are civil servants, and the terms and conditions of their employment are governed by rules and regulations framed by the Board of Directors.

At present the RMA does not have any branch offices and thus, except for two staff members, who are responsible for looking after the operations of the Clearing House in Phuntsholing, all staff are located at the Head Office in Thimphu. The RMA presently has around 127 employees including contract Personnel and wage workers (as of 2003 PIS record). The Organisation Structure of the RMA consists of eleven divisions as follows:

(a) The Issue Division is responsible for banknote issuance. It arranges for the printing and minting of new banknotes and coins, and distributes and collects banknotes and coins to and from the branches of the commercial banks, the government and the public. Banknotes received from banks, government, and the public are routinely examined and classified as fit or unfit for further circulation, and unfit notes are destroyed by shredding.

(b) The Research & Statistics Division gathers and compiles economic and financial statistics with a view to evaluate monetary and economic conditions and to make an assessment of the prospects for the domestic economy. The principle areas in which statistics are compiled are money and banking, the balance of payments, prices, government finance, and other areas of general economic and financial interest. The Division is also in charge of the Institute for Financial Sector Development.

(c) The Banking Division executes daily transactions with the commercial banks and the government and provides depository services with international Financial Institutions.

(d) The Foreign Exchange and Reserve Management Division is responsible for the formulation, revision and implementation of regulations concerning foreign exchage dealings.

(e) The Financial Institutions Supervision Division frames rules and regulations to be observed by the financial institutions, and supervises them through both off-site examinations and on-site inspections.

(f) The Administration and Finance Division is responsible for providing administrative services and for the recruitment and maintenance of personnel records.

h) The Information Technology Division. This Division is responsible for planning, developing and supporting the computerization of the RMA's operations, development of data processing systems, managing and supporting of the RMA application systems, database, network and the RMA website.

(i) The Internal Audit Division is responsible for carrying out regular inspection of the accounts, business procedures and other matters relating to internal management.

(j) The Human Resource Development Division is vested with the responsiblity to assess and bridge skills, strategies through short-to-long term HRD programmes within and outside Bhutan.

(k) The Hospitality and Protocols Division is responsible for hospitality arrangement, RMA premises maintenance and security arrangements.

(l) Library Division was set up with the objective of establishing a store house of knowledge and reference materials for the officers and staff of the organization and for the employees of other organizations.

For a more detailed description of the responsibilities of the various divisions and units please See details.

5. Important Dates
The following is a chronological list of the important events in the RMA's development and its acts. Over the years, the RMA has been in the process of building the institutional and operational framework for the purpose of assuming an increasingly active Central Banking role. Furthermore, commensurate with its mandate, the RMA was also actively involved in strengthening the Country's Financial Sector. Important steps in that regard are summarised below:-

1983 - the RMA took over responsibility for the issue of the national currency, the management of external reserves, and foreign exchange operations.

1984- the Cash Reserve Ratio was implemented for the purpose of liquidity control and for prudential purposes.

1988- the RMA took over the additional function of Banker to the Government, by holding the bulk of Government deposits and to provide means for financing the Government, whenever necessary.

1992- the Financial Institutions Act was passed by the National Assembly to provide the RMA with the legal framework to issue licences for financial institutions and to regulate, supervise, and inspect their operations.

1993-
(i) The RMA organised the establishment of the Royal Securities Exchange of Bhutan (RSEB) to begin a small capital market for the purpose of facilitating public participation in the holding of securities of public and private companies.
(ii) RMA Discount Bills were introduced as an instrument of Monetary Policy.

1997 -
(i) To enhance competition in the banking sector, the Unit Trust of Bhutan (UTB) was converted into a full-fledged commercial bank, called Bhutan National Bank (BNB). Coinciding with the opening of the second commercial bank in the Kingdom, the RMA established the first clearinghouse to facilitate the clearing and settlement of inter-bank transactions in Thimphu and Phuntsholing.
(ii) Until 1997, interest rates on both deposits and advances were directly administered by the RMA, thereby providing insufficient flexibility to financial institutions for setting their rates on the basis of the actual cost of funds. Since this arrangement was not conducive to the long-term growth of the Financial Sector and the economy, the RMA liberalised interest rates with effect from October 1997, allowing each institution to determine the rates on the basis of the prevailing market conditions.
(iii) In line with the Government's programme of liberalising trade and industrial policies, the RMA Board approved the new Foreign Exchange Regulations 1997, removing various restrictions on foreign exchange transactions.The aim is to eventually move towards current account convertibility.

6. Glossary

Balance of Payments Statistics
It can be broadly described as the record of an economy´s international economic transactions, that is, of the goods and services that an economy has received from and provided to the rest of the world. More specifically, the Balance of Payments is a statistical statement for a given period showing (a) transactions in goods and services and income between an economy and the rest of the world, (b) changes in ownership and other changes in that economy´s monetary gold, special drawing rights (SDR´s) and claims on and liabilites to the rest of the world, and (c) transfers and counterpart entries that are needed to balance in the accounting sense any entries for the foregoing transactions, and changes which are not actually offsetting.

Base Money, Monetary Base, Reserve Money, MO
The Central Bank's liabilities in the form of (1) Currency in Circulation Outside Banks, (2) Bankers' Reserves (deposit money banks' domestic cash in vaults plus their required and free deposits with the Central Bank), and (3) Demand Deposits of the rest of the domestic economy (excluding Deposit Money Banks and Central Government).

Broad Money, M2
Usually, it is equivalent to Narrow Money (M1) plus Time Deposits plus Savings Deposits. In Bhutan, Savings Deposits are included in M1 due to their similarity with Demand Deposits.

Central Bank
The monetary subsector of the financial institutions' sector, whose central function is to achieve and to maintain Price Stability over time and whose subsidiary functions are: a) the Bank of Issue; b) the Bankers' Bank; c) the Government's Bank; d) Advisor to the Government; e) the Guardian of the Country's International Reserves; f) Supervision of Banks and Other Financial Institutions (in quite a few countries not a Central Bank function, but it is most appropriate in Bhutan); and g) Promotion of Financial Development.

Consumer Price Index, CPI
The CPI is a statistical tool designed to measure the changing cost over time of a representative basket of goods and services purchased by consumers in urban and rural areas of the country. For example, the following questions are asked: What is the cost of a certain representative basket of goods and services at certain times, or by how much has the price of the basket changed from period A to period B? In order to calculate the Index, data on expenditure and prices have to be collected with the aid of samples and are subsequently averaged. For interpretation purposes, it is important to keep in mind the average character of the Index. The Index cannot be applied to individuals, but only to all consumers, or certain selected groups of consumers, depending on the degree of averaging desired.

Currency in Circulation Outside Banks
Notes and coin accepted as legal tender in the domestic economy, excluding amounts held by the monetary system, Central Government, and nonresidents.

Demand Deposits
Deposits payable on demand and transferable by cheque, or otherwise usable for making payments.

Deposit Money Banks, Banks, Commercial Banks
Those financial institutions, other than the Central Bank, that have significant liabilities in the form of deposits payable on demand and transferable by cheque, or otherwise usable for making payments. In addition to institutions engaged in ordinary commercial banking activities, this subsector includes any demand deposit liabilities of the treasury or other Government bodies, including the postal checking system.

Gross Domestic Product, GDP
It measures the total value of final output of a country's economy, that is, of all goods produced and services rendered within its territory by residents for a given period.

Gross National Product, GNP
It is the measure of the total domestic and foreign output by residents of a country. The difference between GDP and GNP is that the latter includes net factor income from abroad, that is, income received from abroad by residents as compensation for factor services (labour, investment, and interest) rendered, less payments abroad for factor services rendered by nonresidents.

Inflation
It is a rise in the general level of prices continuing over several periods. A characteristic feature of Inflation relates to price rises, which basically involve all cartegories of goods and services, and an associated general fall in the purchasing power of Money; changes in the prices of individual goods only, on the other hand, do not constitute Inflation. The Consumer Price Index (CPI), as in Bhutan, is usually used for measuring the Rate of Inflation.

International Reserves, External Reserves
They comprise the sum of the functionally defined Central Banks' holdings of gold, SDR's, and foreign exchange, and their reserve position in the Fund. The Central Banks' foreign exchange holdings are defined as claims on foreigners (in the form of bank deposits, treasury bills, and short-term and long-term marketable securities) and other claims usable for financing external payments imbalances, or for managing these imbalances by intervening in financial markets to influence fluctuations of exchange rates of the national currenies (including marketable claims arising from Inter-Central Bank and intergovernmental arrangements for Balance of Payments support), regardless of whether the claim is denominated in the currency of the debtor, the creditor, or a third country. Foreign exchange holdings do not, however, include the Central Banks' undrawn foreign credit lines.

Minimum Reserve Requirement, Cash Reserve Requirement
Deposit Money Banks may be required to hold a specified percentage of their liabilities (Minimum Reserve Ratio, Cash Reserve Ratio) arising from demand deposits, savings deposits, time deposits, and foreign currency deposits, as well as from short-and medium-term borrowing, as balances on current accounts with the Central Bank. The Central Bank may or may not pay interest on these reserves. At present, in Bhutan the Cash Reserve Ratio (CRR) is 10% of all deposit liabilities of commercial banks, while the remuneration is 2%. Bhutan's CRR is basically used for prudential purposes.

Monetary Survey
A consolidation of the accounts of the Central Bank and Deposit Money Banks that shows the financial relationship between the monetary institutions' sub-sector, whose liabilities include the economy's Money Supply (M) - and other sectors of the economy.

Money and Banking Statistics
It can be broadly described as the record of an economy's financial system's accounts, which are the reflection of financial transactions between the financial system and the nonfinancial sector (resident and nonresident), and intrasystem transfers. More specifically, Money and Banking Statistics is a statement for a given period of time (end of period), showing accounts of the Central Bank and Deposit Money Banks, which are combined to produce the Monetary Survey.

Money Supply, M
The sum of Currency in Circulation Outside Banks and Deposits held with Central Banks by the rest of the domestic economy, other than Central Government. Commensurate with international practice, the RMA has defined various concepts of Money Supply in the narrower and the broader sense, i.e., Narrow Money (M1) and Broad Money (M2).

<>Narrow Money, M1
It usually consist of Currency in Circulation Outside Banks and Demand Deposits. In Bhutan, Savings Deposits are also included in M1, because they are very close to Demand Deposits.

Other Financial Institutions
They comprise financial institutions other than the Central Bank and Deposit Money Banks, e.g., mortgage banks, finance companies, development banks, insurance companies, pension and provident funds, and the stock exchange.

Price Stability
This implies that the Rate of Inflation has to be kept as low as possible, optimally within a longer-term average range of 1-3%. For example, the European Central Bank has defined Price Stability as a year-to-year increase in Consumer Prices of below 2%.

Rate of Inflation
It is measured by the year-to-year rate of change of the Consumer Price Index (CPI), which sometimes is called Headline Inflation. In some countries, the Rate of Inflation is also measured by excluding Food and, possibly, Energy, which are rather volatile items, from the CPI, for the purpose of measuring Core Inflation (at times also called Underlying Inflation). The measurement of the latter has the advantage that the distorting influence of exogenous (non-monetary factors), such as droughts and floods, can be excluded.

RMA Bills
RMA Bills are a Monetary Policy Instrument, by the use of which the liquidity of commercial banks can be influenced, i.e., the sale of RMA Bills to banks reduces their liquidity (they can extend less loans), while the purchase of RMA Bills from banks increases their liquidity (they can extend more loans).

Savings Deposits
Usually they refer to interest-earning nontransferable deposits in Savings and Passbook accounts. In Bhutan they are very similar to Demand Deposits, since they are transferable by cheque, are payable on demand, and there are basically no withdrawal limitations; therefore, they are included in M1.

Supervision of Banks and Other Financial Institutions
This refers to the monitoring the busines activities of financial institutions by public authorities. Its underlying rationale is the central position of financial institutions in the circular flow of money in the economy. From a microeconomic point of view, it is necessary to ensure the safety of the assets entrusted to the institutions. From a macoeconomic point of view, care has to be taken that there will be no banking crisis, which would affect the proper functioning of the economy as a whole. Supervision includes the licensing of financial institutions. In quite a few countries, the Supervision of Financial Institutions has been assigned to the Central Bank, as in the case of Bhutan, where the RMA according to its Act has the responsibility for supervising all financial institutions.

Time Deposits
Interest-bearing deposits with financial institutions that can be withdrawn only after a specified period of time.