A report from the International Monetary Fund (IMF) has identified critical gaps in Bhutan’s monetary policy framework. It said that the Royal Monetary Authority (RMA) currently lacks a functional Domestic Liquidity Management Framework (DLMF) to effectively support the currency peg to the Indian Rupee. Additionally, the RMA does not have monetary policy instruments that can flexibly address changing liquidity conditions and financial stability challenges.
The IMF experts noted that Bhutan’s reliance on administrative controls—such as the Cash Reserve Ratio (CRR), sweeping arrangements, and capital flow management measures—without appropriate pricing incentives, could reinforce Bhutanese residents’ preference for foreign exchange. This, in turn, intensifies pressures on the currency peg and increases the risk of capital control evasions.
The IMF has provided the RMA with a comprehensive framework to implement an Interest Rate Corridor (IRC), aimed at strengthening the country’s monetary policy and enhancing liquidity management. The proposed framework focuses on five key areas.
By enhancing sweeping arrangements, the IMF recommends that the RMA reinstate broad sweeping arrangements for government-related accounts. This measure would facilitate more active liquidity management operations, creating a structural liquidity deficit and aligning short-term money market rates with the RMA’s policy rate.
In order to strengthen liquidity monitoring and forecasting, closer coordination between the RMA and the Treasury is crucial for improving liquidity oversight. Regular bi-weekly meetings and the timely transmission of government cash flow forecasts are expected to refine liquidity management processes.
Under the IMF’s guidance, the RMA is advised to operate with a narrow collateral framework, accepting only government securities for monetary operations. Addressing the high fees charged by the Royal Securities Exchange of Bhutan (RSEB) for Central Securities Depository (CSD) operations is also highlighted as a priority.
The IMF recommends phasing out the fixed rate at which commercial banks trade liquidity among themselves, fostering a more dynamic interbank market. Re-establishing the Money Market Contact Group (MMCG) will further facilitate communication between the RMA and commercial banks, supporting the development of interbank operations.
The IMF outlines a gradual rollout of the IRC, broken down into three stages. During the Preparation Stage, internal and external documents should be finalized while conducting mock operations.
In the First Phase, a one-week main Open Market Operation (OMO) at the Policy Rate should be launched, conducted weekly with full allotment. Automatic access to IRC’s standing facilities (SFs) will be introduced, and the RMA is encouraged to adopt a wider IRC bandwidth than that of the anchor currency to stimulate interbank trading.
At the Later Stage, transition to fixed-quantity, variable-rate OMOs, leveraging liquidity forecasting to calibrate operations should take place. At this stage, the RMA is advised to shift to an averaging system for the Cash Reserve Ratio (CRR).
The IMF’s recommendations provide a roadmap for Bhutan to enhance its monetary policy framework and financial stability. Implementing these reforms will strengthen the RMA’s ability to manage domestic liquidity, improve market efficiency, and reinforce the country’s economic resilience. The successful adoption of these measures will play a crucial role in maintaining Bhutan’s currency peg and fostering long-term financial stability.
The IMF’s guidance marks a pivotal step in refining Bhutan’s monetary policy framework, aiming to foster a more robust and efficient financial system. As the RMA takes steps toward implementing these reforms, the broader financial community will be watching closely to assess the impact on liquidity and market stability.
At the request of the RMA, a delegation from the IMF South Asia Regional Training and Technical Assistance Center (SARTTAC) visited Thimphu from August 20 to 29, 2024. The mission aimed to assist the RMA in setting up an interest rate corridor (IRC) and operationalizing essential monetary policy instruments, liquidity forecasting, and collateral frameworks.
Tashi Namgyal from Thimphu
