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In accordance with the RMA Act, 1982, the
RMA’s Core Functions, i.e., the Central Function and the Subsidiary
Functions, can be summarised as follows:
a)
Achievement and Maintenance of Price Stability in the Medium and Longer
Term is the Central Function
In view of the close economic and financial ties between Bhutan and India,
an Exchange Rate Target was chosen, i.e., the one-to-one Peg between the
BTN and the INR. Monetary Policy, which is aimed at achieving Price Stability,
is confined to the support of the Peg, which involves making available
sufficient INR on demand, providing at least 100% reserve backing for
all BTN issued, the avoidance of a large BTN liquidity build-up, together
with additional confidence-building measures for the BTN, implying, for
example, credible RMA and Government policies. All the other Subsidiary
Functions, which are also very important, and which complement the Central
Function, are outlined below [b) through h)].
b)
The Bank of Issue
The RMA has the sole right to issue notes and coins for the purpose of
directly influencing the amount of currency in circulation outside banks,
thereby providing the economy with sufficient, but if possible, non-inflationary
liquidity.
c)
The Bankers' Bank
This function includes the acceptance of deposits as prudential reserves
for banks (e.g., Minimum Reserves), the willingness to Discount commercial
and Government paper, and the
commitment to act as “lender of last resort” to banks in the
case of short-term liquidity shortages. It also involves the provision
of central clearance facilities for interbank transactions.
d)
The Government's Bank
The RMA is the banker and the fiscal agent for the Government, and may
be the depository of the Government. The Central Bank may also make temporary
advances to the Government.
e)
The Advisor to the Government
The RMA may advise the Government on any matter relating to its functions,
powers, and duties. The RMA may also be requested to advise the Government
on any matter related to its functions, powers, and duties, the credit
conditions in the country, or any proposal, measures, and transactions
relating thereto.
f)
The Guardian of the Countrie's External Reserves
The RMA is the depository of the official external assets of the country,
including gold and foreign currency reserves. Guarding international reserves
usually implies also the responsibility for the Exchange Rate Policy (in
Bhutan the external value of the BTN is declared by the Government on
recommendation of the RMA’s Board, while the RMA has to implement
and support it), Reserve Management (with a view to the prudential management
of the funds, with due regard to liquidity, safety, and profitability,
in that order), and External Debt Management on behalf of the Ministry
of Finance. In Bhutan, as in various other developing countries (e.g.,
in India), Reserve Management also includes the formulation, implementation,
monitoring, and enforcement of Foreign Exchange Regulations.
g) Promotion of Financial Sector Development
This refers to the establishment of an effective financial system, with
the aid of which 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 RMA 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 availability of certain specialised institutions, which
could be represented, for example, by an industrial development bank,
an agricultural development bank, and microfinance institutions, and the
facilitation of a money market, primary and secondary markets for securities,
a foreign exchange market, and a capital market. In other words, the RMA
should be heavily involved in Financial Sector Development, which already
is the case.
3.
MONETARY POLICY FRAMEWORK
The RMA’s Monetary
Policy Framework is implicit. According to the RMA Act, Section 6 b),
one of the purposes of the RMA is “to promote monetary stability”,
which can be interpreted as the promotion of “Price Stability”.
In some Central Bank Acts, Price Stability is quantified, e.g., in the
case of the European Central Bank; Price Stability is equivalent to a
year-to-year rate of change of the Consumer Price Index below, but close
to, 2 percent, to be maintained over the medium term. The Intermediate
Target for achieving and maintaining Price Stability in Bhutan is the
one-to-one peg between the INR and the BTN. In other words, an Independent
Monetary Policy in Bhutan is, more or less, precluded. As a consequence,
Monetary Policy is confined to the support of the peg, including the following
basic measures (for a schematic overview, please see Attachment II):
a) Ensuring the sustainability
of the exchange rate arrangement, i.e., always making available sufficient
INR on demand for exchange with the BTN for payments in India and provision
of at least 100 percent reserve backing for all BTN issued (elements of
a Currency Board). b) Confidence-building measures for the BTN (e.g.,
credible RMA and Government policies).
c) Sterilising any persistent
growth in liquidity to forestall a possible build-up of inflationary pressures,
a weakening of the balance of payments, and a contingent effect on the
financial market.
The following are the main
supporting factors for the present system:
a) Close economic and financial relationships exist between India and
Bhutan.
b) There is a dual currency system, with the BTN and the INR circulating
freely side by side in Bhutan. This system can be described as an informal
monetary (currency) union with India.
c) Inflation and interest
rates in the two countries are closely related.
d) The arrangement maintains
confidence and ties Bhutan to the relatively stable monetary conditions
in India.
e) The peg has also clear
benefits for trade with India, since there is no uncertainty about exchange
rate developments between the two trading partners.
On the basis of the above
factors, the Monetary Policy Decisions made in Bhutan are generally viewed
as prudent and appropriate (e.g., by the International Monetary Fund).
While ensuring the sustainability
of the exchange rate arrangement, the Monetary Authority is also required
to play an important role in Monetary and Credit Management, largely owing
to the build-up of excess liquidity in recent years. With the elimination
of Quantitative Credit Controls, it has developed and increasingly relied
upon more Indirect Instruments of Monetary Management. In particular,
for the purpose of liquidity management in the banking system, the RMA
has resorted to variations in Reserve Requirements, the sale of Central
Bank Bills, and the sale of Foreign Exchange to banks. Through the sale
of the short-term Central Bank Bills, the RMA also aims to establish a
modest money market and to set a frame of reference for interest rates.
According to the Act, the
RMA has also at its disposal various Liquidity Support Facilities (e.g.,
discount of bills and secured loans), which, however, are not being used
at present due to the relatively large surplus liquidity of commercial
banks. |
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