(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:
the bank
of issue;
the banker
to the banks;the banker and advisor to the Government; and
the guardian
of the external reserves.
(a) As the bank of issue, the RMA has been granted the sole right to issue
banknotes and coins in Bhutan, and any other person issuing currency notes,
coins or any other documents or tokens payable to the bearer on demand and
having the appearance of, or purporting to be currency, is punishable under
law.
(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.
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.