|
Financial
Stability
Monetary
Policies
Supervision
Economic
Advice
Future
Plan
Financial Stability
In general, this activity, which in quite a
few countries is carried out by a separate institution,
involves insuring that deposit money banks and
other financial institutions conduct their business
on a sound prudential basis and according to
the various rules and regulations in force.
It also includes the licensing of financial
institutions.
In the “Small Economy Case” and/or
countries at a relatively early stage of economic
and institutional development (e.g., in Bhutan
and on the Maldives) there is a very good case
for making the Central Bank also responsible
for Financial Institutions’ Supervision
(including all Financial Institutions) on account
of economies of scale and the Central Bank’s
Financial sector expertise. In larger developing
countries, one might think at a later stage
of development of creating a separate institution
for Financial Institutions’ Supervision,
or even several separate institutions.
Monetary Policies
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:
1. Close economic and financial relationships
exist between India and Bhutan.
2. 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.
3. Inflation and interest rates in the two
countries are closely related.
4. The arrangement maintains confidence and
ties Bhutan to the relatively stable monetary
conditions in India.
5. 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.
Supervision
In general, this activity, which in quite a
few countries is carried out by a separate institution,
involves insuring that deposit money banks and
other financial institutions conduct their business
on a sound prudential basis and according to
the various rules and regulations in force.
It also includes the licensing of financial
institutions.
In the “Small Economy Case” and/or
countries at a relatively early stage of economic
and institutional development (e.g., in Bhutan
and on the Maldives) there is a very good case
for making the Central Bank also responsible
for Financial Institutions’ Supervision
(including all Financial Institutions) on account
of economies of scale and the Central Bank’s
Financial sector expertise. In larger developing
countries, one might think at a later stage
of development of creating a separate institution
for Financial Institutions’ Supervision,
or even several separate institutions.
Economic Advice
In general, this activity, which in
quite a few countries is carried out by a separate
institution, involves insuring that deposit
money banks and other financial institutions
conduct their business on a sound prudential
basis and according to the various rules and
regulations in force. It also includes the licensing
of financial institutions.
In the “Small Economy Case” and/or
countries at a relatively early stage of economic
and institutional development (e.g., in Bhutan
and on the Maldives) there is a very good case
for making the Central Bank also responsible
for Financial Institutions’ Supervision
(including all Financial Institutions) on account
of economies of scale and the Central Bank’s
Financial sector expertise. In larger developing
countries, one might think at a later stage
of development of creating a separate institution
for Financial Institutions’ Supervision,
or even several separate institutions.
Future Plan
The role and functions of the RMA have
been evolving, from playing a very limited role
in the beginning, when it was first set up,
to more or less assuming the complete role of
a central bank. In light of these developments,
as well as the changes that have been taking
place in central bank thinking and central bank
experiences the world over, the RMA Act, the
Financial Services Act, and Foreign Exchange
Regulations are in the process of being up-dated.
Further notable projects are as follows:
a) Further development of the RMA’s monetary
policy framework and the strengthening of the
monetary policy tools (at present basically
applicable to the support of the one-to-one
peg between the BTN and the INR).
b) Further streamlining of the organisation
structure and management procedures, e.g., creation
of a Legal Division in support of top management
and the Board, while introducing promotion by
merit, functional job descriptions for all organisation
units and staff members (in the process of implementation),
and clear lines of responsibility.
c) Further strengthening of the RMA’s
management and staff capability through capacity
building, e.g., provision of training for management,
further development of the capability for the
FISD to supervise all of Bhutan’s financial
institutions, and enhancement of the capability
of the Internal Audit Division to better enable
it to audit the RMA. A considerable effort is
required for strengthening Internal Audit, part
of which implies the drafting of an Internal
Audit Charter, an Audit Committee Charter, and
an Internal Audit Manual. The Internal Audit
Charter has already been approved by the Board,
an Audit Committee Charter has been drafted,
while an Internal Audit Manual is still under
preparation. On the basis of the Audit Committee
Charter, which follows “international
best practices”, an Audit Committee needs
to be established within the RMA´s Board
to oversee the activities of the Internal Audit
Division. This requires approval by the RMA´s
Board and the National Assembly within the framework
of the revised RMA Act.
d) Further improvement of the computer system:
Development of an overall information technology
plan, together with a data-flow system; Establishment
of a computerised time series database for economic
time series. Efforts in this regard are undertaken
with the development of the Integrated Central
Banking System (ICBS), the purpose of which
is the computerisation of all the RMA´s
operations in an integrated manner. The Nu.
9.7 million ICBS project is being executed on-site
by Sunrise Technologies, Kolkata and their local
counterpart Digital Shangri-La. The contract
agreement was signed on February 16, 2005, and
the project was launched on March 3, 2005. The
project is currently running into its 9th month
and is scheduled to be completed by March 2007.
The software requirement specification (SRS)
for six modules has already been completed,
along with the design for the other four modules.
e) Further enhancement of financial sector
development, e.g., improvement of payment systems,
increased competition, improvement of the professional
expertise of the staff and management of financial
institutions, and further strengthening of financial
markets. In that connection, the RMA, in collaboration
with the local commercial banks, is initiating
to re-engineer the system for clearing and settling
cheques in the country with the assistance from
the Asian Development Bank. The new system will
be a complete shift from a manual to an electronic
system, known as cheque truncation system. This
project also includes the establishment of five
regional offices to cater for all bank branches
in the country. The regional offices will be
established in Thimphu, Phuentsholing, Mongar,
Gelephu, and Samdrupjongkhar. Further, by having
switched from TELEX to SWIFT in the beginning
of 2005, the RMA has improved its payment system
substantially.
f) Further streamlining of external communications:
The RMA already actively uses various communication
channels (e.g., publications, information materials,
the website, conferences, meetings, television,
and the Kuensel) to inform the general public
and the government what it is doing and why,
for the purpose of enhancing its accountability
and to further improve its corporate image.
Further communication channels are under consideration,
as, for example, working papers, the GDDS of
the IMF, and press releases.
g) Establishment of a Credit Information Bureau
(CIB): A task force has been set up during the
second half of 2004 with members from the RMA
and the five financial institutions (BNB, BOB,
BDFC, RICB, and NPPF). A CIB Secretariat was
informally set up under the FISD in the RMA
for the smooth facilitation of the project.
Thereafter, a series of preliminary meetings
was conducted to discuss and deliberate on various
issues relating to CIB. An MOU has been signed
by the five financial institutions on November
1, 2005, and the project is due to commence
shortly.
|
