The liquidity in the banking sector is currently comfortable, although it is lower than during the pandemic. The Central Bank stated that the average liquidity surplus held by banks with the Royal Monetary Authority (RMA) is estimated at Nu 9.6 billion (B) for the fiscal year (FY) 2023-2024.
In addition, the RMA projected an increased liquidity to Nu 14.5B in FY 2024-2025, meaning, the banking sector will have enough liquidity to support the government’s financing needs for its fiscal deficit through domestic borrowings, while still maintaining adequate credit supply to the private sector.
For instance, the RMA is mindful of the potential buildup of excess banking liquidity where the RMA will maintain vigilance over credit growth and use appropriate monetary tools to ensure that any additional credit creation does not lead to unintended pressure on inflation and external reserves.
However, the central bank stated that the country’s journey towards achieving high income status requires strong economic transformation, policy reforms that reduce reliance on foreign grants and improve competitiveness in the hydro and non-hydropower sector.
To support these objectives, the RMA stated that the central bank’s monetary policy stance will remain accommodative in the medium term and will continue to rely on the reserve requirement as the main monetary policy instrument for regulating credit growth and money supply.
However, the central bank highlighted the risks which remain from both the external and domestic fronts on regard to the unforeseen delay in hydropower project commissioning, the materialization of contingent liabilities in the financial sector, amongst others.
The RMA also highlighted on high current account deficit being a visible domestic vulnerability which will potentially derail economic growth and cause financial instability.
Retrieving on the external risks, the central bank stated that with the global commodity prices, rising geopolitical tensions, trade fragmentation, and climate change are likely to cause higher domestic inflationary pressure, hinder recovery in the tourism sector, and adverse impact on export performance.
Additionally, extended periods of monetary policy tightening and abrupt withdrawal of fiscal support are expected to increase the risk of debt sustainability in the least developed and developing countries.
Addressing these challenges, the central bank stated that the country requires strong coordination between fiscal and monetary policy, combined with structural policy measures including improving the payment system, promoting digitalization, and fostering innovative finance for climate change, amongst others.
Meanwhile, the credit to the private sector which constitutes 80.5% of the total money supply, recorded a significant growth of 19.3% from the initial projection of negative 9.2% for FY 2022-2023.
A significant deviation from the initial projection was mainly driven by increased loans to the education sector amounting to Nu 13,802.9M, followed by the tourism and services sector amounting to Nu 35,796.3M, and the transport sector amounting to Nu 7,435.2M, according to the central bank.
In addition, the money supply stood at Nu 248.9 billion (B) during FY 2022-2023 and is estimated to increase to Nu 244.5B in FY 2023-2024, with further growth expected at 19.8% in the medium term.
According to the RMA, this growth will be facilitated by increases in both net foreign assets and net domestic assets. Credit to the private sector, which accounts for 76.8% of the total money supply, is projected to grow by 22.6% to Nu 204B in FY 2023-2024, up from Nu 166.4B in the previous fiscal year.
Meanwhile, sectors such as hotel and tourism, trade and commerce, agriculture and livestock, and production and manufacturing are expected to grow in the medium term due to anticipated increases in credit supply to these sectors.
By Sherab Dorji, Thimphu
