Domestic Liquidity Management Framework
2nd November 2020
As experienced by the global economy, the COVID-19 pandemic has created unprecedented disruption in the Bhutanese economy— experiencing negative growth and causing huge concerns on unemployment, job displacements and loss of income. In Bhutan, guided by His Majesty The Druk Gyalpo’s benevolent leadership, several counter measures have been implemented by the Government to prevent the spread of the virus and to support the affected sectors.
The impacts of the pandemic are felt in the financial sector in the form of rising non-performing loans, stress on liquidity and weakening of capital adequacy. Towards these risks, timely monetary measures such as deferment of loans, support in interest payment and access to soft working capital and bridging loans have contained the risks impacting the soundness of the financial sector.
Going forward, the RMA has adopted two immediate policy initiatives: (a) immediate review of NPLs and consideration of cleaning/restructuring/foreclosing of over-due NPLs through appropriate policies and institutional arrangements; and (b) providing uninterrupted liquidity flow in the market for the benefit of the businesses and the economy.
Effective and timely management of financial liquidity in the economy is one of the fundamental aspects of RMA’s monetary policy operations. Given the increased uncertainty from the COVID-19 pandemic, it has become additionally crucial to provide confidence in the market by ensuring availability of adequate liquid funds to support the need of the depositors as well as for loan disbursements. Therefore, implementing an effective liquidity planning, analysis and monitoring mechanism is essential.
As part of the Phase I and II monetary measures, the RMA is implementing a forward-looking web-based domestic liquidity management system (DLMS) with the following objectives:
i. to provide undisrupted liquidity flow in the banking system;
ii. to encourage financial institutions to prudently carry out their liquidity management function; and
iii. to support business continuity and credit creation in the economy.
Furthermore, the implementation of DLMF will also help to develop a benchmark reference interest rate for the development of a formal money market. The RMA will be conducting the domestic liquidity management operations at three different levels:
i. Overnight Liquidity Management Operations
ii. Weekly Liquidity Management Operations
iii. Long-term Liquidity Management Operations.