Money supply grew modestly in the economy

Money supply in the Bhutanese economy grew by 9.8% during the last Fiscal Year (FY), largely attributed to the increase in fixed and current deposits. Concurrently, credit growth in sectors like housing and education contributed to the expansion of domestic credit during the review period.

The monetary base (MO) is a monetary instrument used by the central bank to regulate the liquidity and money supply in the banking sector. The MO represents the total amount of an economy’s physical currency in circulation and the commercial banks’ reserves (Cash Reserve Ratio and Excess Reserves) held at the central bank.

At the Royal Monetary Authority (RMA), the CRR is the only monetary policy tool used to regulate the money supply in the economy. During FY 2022/23, the MO growth further declined by 20.6% (Nu 11,351.7 million), taking the MO to Nu 43,717.7M, compared to negative 11.6% in the previous FY. A significant decrease in MO was largely a result of decline in excess reserves by 51.3% (Nu 13,832.3M) maintained at the RMA at the end of business day in the form of current account.

The liquidity in the banking sector has been on a declining trend in the recent years, primarily due to lower foreign exchange inflows related to the grants and aid. Moreover, the increasing demand for the liquidity to meet short-term payment obligations and financing needs for the government expenditure have also put a huge liquidity stress on the commercial banks.

Additionally, a moderate dip in the growth of Currency in Circulation (CiC) by 7% (Nu 942.1M) also contributed to declining MO. In FY 2022/23, the CiC was recorded at Nu 12,577.9M compared to Nu 13,520M the previous FY. The growing popularity of the digital payment platforms especially the evolution of digital payment such as mobile application and internet banking resulted to a fall in the demand for cash holdings in the economy.

On the other hand, the CRR holdings during the FY 2022/23 rose to Nu 17,307.5M, compared to Nu 13,741.7M in the previous year. Along with the surge in the deposits base and revision in CRR by 1 percentage point from 7% to 8% on the deposit’s liabilities with effect from October 31, 2022, it directly translated to increase in the CRR holding.

In the last five years, the average composition of CiC, CRR and excess reserve stood at 29.9%, 28.5% and 41.6% respectively. However, there was a significant shift in the share contribution of components to the monetary base. Notably, the share of the CRR has increased to 39.6% during the period, while excess reserve declined from 51.6% to 31.6% in the review period.

Meanwhile, Bhutan has continued to remain a debtor to the Rest of the World (RoW), the net International Investment Position (IIP), stood at a negative USD 3,954.8M in the FY 2022/23. The country’s external financial claims have decreased by 28.2% to USD 706.4M in consequences of a drop in the reserve assets from USD 803.8M to USD 553.8M.

Trade credit and other assets also recorded a notable dip leading to further drop in total external financial claims.

The external financial liabilities increased by 4.2% from USD 4,661.1M owing to an increase in external debt liabilities related to FDI. Given the current uncertainties in the global economic environment, the Bhutanese economy is anticipated to remain highly vulnerable to external shocks. The primary challenges revolve around trade imbalances, inflationary pressures and the depreciation of the Ngultrum against the USD.

By Tashi Namgyal, Thimphu