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International Monetary Fund. Monetary and Capital Markets Department

setting, including by imposing ad hoc adjustments to the base rates to engender a greater uniformity of lending rates across the financial system. A lack of uniformity in the application of the base rate methodology resulted in inefficiencies and poor transparency. B. Scope of the Mission 4. With limited human resources but a strong commitment to monetary policy modernization, in the recent period the RMA has launched a number of reforms with the support of MCM . RMA authorities are appreciative of the support they have received from the IMF. This support has

International Monetary Fund
The staff report for the 2007 Article IV Consultation on Bhutan explains the macroeconomic setting, economic developments, outlooks, risks, and challenges. Bhutan’s economic prospects are bright. Construction of two hydropower projects will help sustain real GDP growth over the medium term. With the exchange rate peg to the Indian rupee, inflation is expected to be in line with price developments in India. Executive Directors commended Bhutan’s prudent macroeconomic policies and political stability, which have yielded robust growth, an appreciable improvement in social indicators, and progress toward meeting the Millennium Development Goals.
International Monetary Fund. Monetary and Capital Markets Department
This Technical Assistance report highlights that setting up a liquidity forecasting framework would go a long way in establishing a key building block allowing the Royal Monetary Authority of Bhutan (RMA) to fulfil its legal mandate to formulate and implement monetary policy in ways better aligned with current central bank practices. The structural liquidity surplus, mainly due to foreign reserves accumulation, has been broadly stable in the absence of RMA intervention. The paper discusses that the volatility of autonomous factors and the fragmentation of the money market justify ambitious steps by the RMA towards setting up a liquidity management framework. The mission identified several constraints and gaps that need to be addressed to support the effectiveness of a liquidity forecasting framework. The mission’s recommendations presented in the report aim at streamlining the processing of the Government’s financial transactions and cash balances. Looking ahead, monetary policy transmission would benefit from developing RMA’s liquidity forecasting and management capacity.
International Monetary Fund. Monetary and Capital Markets Department
International Monetary Fund. Monetary and Capital Markets Department
International Monetary Fund

exchange rate peg. The RMA is maintaining a close watch on the liquidity conditions and is prepared to take appropriate measures to absorb excess liquidity. My RMA authorities concur with staff advice on this issue and are contemplating a stepped up issuance of RMA Bills and an increase of the Cash Reserve Ratio. 11. In 2007-08, with the commissioning of the Tala project, the current account is likely to remain in a surplus of about 10 percent of GDP. Reserves are expected to grow even further beyond the present level of about 9 months of goods and services imports

International Monetary Fund

, especially for the new banks. 22. Financial sector supervision should be strengthened, especially in light of greater competition in the banking sector . While the entry of new banks should improve financial intermediation, it may also increase credit risk and other systemic vulnerabilities stemming from rapid credit growth. The RMA should ensure that major commercial banks and other financial institutions conduct stress tests on a periodic (quarterly) basis and report their findings to the RMA. Authorities’ views 23. While the authorities agreed on the need to

International Monetary Fund
Bhutan’s rapid growth has been underpinned by hydropower sector development with donor support. However, fiscal policy should be tightened to address overheating, and spending and revenue reforms are needed to bolster the fiscal framework. Executive Directors suggested to adopt multiyear rolling budget to ensure debt sustainability. They assessed the need to strengthen the Royal Monetary Authority (RMA's) power to safeguard financial stability. They welcomed the comprehensive strategy embedded in the Economic Development Policy (EDP) that identifies activities that have strong job-generating potential and also promote foreign direct investment and private sector development.