The Royal Monetary Authority of Bhutan (RMA)
was established under the Royal Monetary Authority
of Bhutan Act, passed by the 56th session of
the National Assembly of Bhutan in 1982. Since
then, certain provisions of the Act have been
partially amended by the Financial Institutions
Act of Bhutan 1992.
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.
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.
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
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
(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
(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,
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.
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
(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
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
1983 - the RMA took over responsibility for
the issue of the national currency, the management
of external reserves, and foreign exchange
1984- the Cash Reserve Ratio was implemented
for the purpose of liquidity control and for
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
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.
(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
(ii) RMA Discount Bills were introduced as
an instrument of Monetary Policy.
(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
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
Base Money, Monetary Base, Reserve
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.
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
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,
Deposits payable on demand and transferable
by cheque, or otherwise usable for making
Deposit Money Banks, Banks, Commercial
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
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
International Reserves, External
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
Minimum Reserve Requirement, Cash
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.
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
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.
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 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).
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
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.
Interest-bearing deposits with financial institutions
that can be withdrawn only after a specified
period of time.