Money supply estimated to grow by 13.8% in FY 2021-22

The growth in net foreign assets, contributed by the inflow of convertible currency, is expected to grow by 22.3% by the end of this FY

Despite the slowdown in the economy and high inflation, the monetary and credit situation remain favorable, supported by accommodative monetary and expansionary fiscal policies. 

However, the money supply, measured by broad money, is estimated to grow by 13.8% in the FY 2021-22, owing to an increase in total deposits of 13.4% held by the commercial banks, which account for 93.1% of the money supply components.

This is according to the comprehensive macroeconomic performance and outlook of the country’s economy as presented by the Department of Macroeconomic Affairs (DMEA), Ministry of Finance (MoF).

On the asset side, it has been stated that the growth in money supply was mainly driven by the performance of Net Foreign Assets (NFA) and Net Domestic Assets (NDA). NFA is estimated to grow by 8.3%, while NDA will grow by 20.4% in the FY 2021-22. 

The growth in NFA will be contributed by the inflow of convertible currency, which is expected to grow by 22.3% by the end of this Financial Year. The money supply in the FY 2022-23 is projected to grow by 19.4%.

According to the Second Quarter FY 2021-22 of the Macroeconomic Situation report, the banking sector is estimated to have adequate liquidity in 2021, recording a surplus of Nu 41,962.8mn as of December 2021. 

The increase in liquidity is mainly attributed to an increase in NFA inflows in the form of loans, grants, hydropower receipts, and deposits. The liquidity surplus is expected to be adequate to meet the government deficit financing, without crowding out credit to the private sector as economic activities pick up.

The Bank Of Bhutan Limited holds the highest liquid asset amounting to Nu 23,773.3mn with 56.6% due to significant current account deposits held by the bank followed by Bhutan National Bank Limited at Nu 10,396.3mn with 24.7%. 

However, the report states that the excess liquidity if not managed deftly might weaken the monetary policy transmission mechanism and the ability of the monetary authority to influence demand conditions in the economy.

The credit growth is estimated to decline from 13.2% in the FY 2020-21 to 6.5% in the FY 2021-22 impacting private sector investments. It is determined by developments in the real sector and government expenditure slowed from the second half of 2020. 

The fall in private investments and consumption demand followed by delays in the execution of government capital works have disrupted the credit flow.

Meanwhile, with the gradual easing of containment measures and anticipated rebound in economic activities, the credit to the private sector is projected to grow at 10.5% in the FY 2022-23.

Of the total credit to the private sector, the housing sector receives the highest in terms of share of the total loan portfolio with 26.8%, closely followed by the service and tourism sector at 26.5%. 

While the manufacturing sector receives a credit of 13.3%, trade and commerce 12.8%, and the lowest credit is availed by the agriculture sector at 4%.

In the financial sector, the overall asset quality of the financial institutions improved with the decline in Non-Performing Loans (NPL) by 14.5% from Nu 25,462.94mn in September 2020 to Nu 21,769.54mn in September 2021. 

In terms of sectoral NPL, the highest was recorded in the service and tourism sector at 32.4%, followed by manufacturing at 18.4% as these two sectors were severely affected by the pandemic.

The decline in NPL is due to the interest payment relief, loan deferments, and NPL resolution framework, which is in place helping in alleviating the effect of the pandemic on the NPLs to a large extent and allowing for new credit supply in the economy.

Kinley Yonten from Thimphu