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.