As the economy sees increased demands for bank loans to fuel economic growth, maintaining adequate liquidity in the banking system is crucial.
The Royal Monetary Authority (RMA), the country’s Central Bank, has been implementing strategies to manage liquidity effectively while upholding financial stability.
As per the RMA report, the main goal outlined in the RMA Act 2010, is to ensure price stability through monetary policy. However, the country’s fixed exchange rate with the Indian Rupee (INR) and its import-oriented economy poses challenges to this objective.
To regulate liquidity, the RMA mainly employs the Cash Reserve Ratio (CRR) as a monetary policy tool. It’s also developing a market-based framework for liquidity management, including facilities for banks and Open Market Operations (OMO).
The new Finance Minister, Lekey Dorji, emphasized, “As our economy recovers from the aftermath of the pandemic, my foremost priority is to strengthen the fundamentals of our economy. On the fiscal front, internal resource mobilization needs to be enhanced while ensuring prudent public investments. I would personally monitor sources of funds and sinks for them. Fiscal discipline would be religiously followed.”
The Minister emphasized the adoption of sustainable fiscal and financing policies in line with Article 14(5) of the Constitution. He highlighted the importance of strengthening public financial management to deliver financial services efficiently and effectively. He pledged to collaborate closely with the Central Bank to align monetary and fiscal policies to achieve national goals. He also outlined initiatives to improve liquidity and ensure easy access to credit for all productive sectors of the economy.
Factors such as foreign exchange inflows, exports, and remittances drive liquidity in Bhutan’s banking sector.
As of June 2023, banking sector liquidity stood at Nu 13,832 million compared to Nu 24,482.4 million during the previous year. However, recent trends show a decline in liquidity due to reduced foreign exchange inflows and increased government spending.
In terms of distribution of liquidity amongst the bank, the BoBL holds 48.7 percent of the total liquidity. The higher share of BoBL was mainly on account of government deposits maintained with the BoBL. This was followed by DPNBL with 21.2 percent, BDBL with 15.8 percent and then BNBL with 9.7 percent.
RMA has introduced short-term measures to address liquidity issues, such as discontinuing certain banking practices temporarily and issuing liquidity management frameworks.
Despite challenges, financial institutions (FIs) maintain comfortable liquidity positions. The Statutory Liquidity Ratio (SLR) for both banks and non-banks remains higher than required, indicating stability.