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IMF Country Report No. 19/114

BHUTAN TECHNICAL ASSISTANCE REPORT—ROYAL MONETARY AUTHORITY—STEPS TOWARDS A LIQUIDITY FORECASTING AND MANAGEMENT FRAMEWORK

May 2019

This Technical Assistance Report paper on Bhutan was prepared by a staff team of the International Monetary Fund. It is based on the information available at the time it was completed on July 2017.

Copies of this report are available to the public from

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International Monetary Fund

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© 2019 International Monetary Fund

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SOUTH ASIA REGIONAL TRAINING AND TECHNICAL ASSISTANCE CENTER (SARTTAC)

BHUTAN

Royal Monetary Authority: Steps Towards a Liquidity Forecasting and Management Framework

Bernard J. Laurens (Consultant, mission chief) Stephane Couderc (Consultant)

July 2017

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The contents of this report constitute technical advice provided by the staff of the International Monetary Fund (IMF) to the authorities of Bhutan (the “TA recipient”) in response to their request for technical assistance. This report (in whole or in part) or summaries thereof may be disclosed by the IMF to IMF Executive Directors and members of their staff, as well as to other agencies or instrumentalities of the TA recipient, and upon their request, to World Bank staff and other technical assistance providers and donors with legitimate interest, unless the TA recipient specifically objects to such disclosure (see Operational Guidelines for the Dissemination of Technical Assistance Information— http://www.imf.org/external/np/pp/eng/2013/061013.pdf). Disclosure of this report (in whole or in part) or summaries thereof to parties outside the IMF other than agencies or instrumentalities of the TA recipient, World Bank staff, other technical assistance providers and donors with legitimate interest shall require the explicit consent of the TA recipient and the IMF Monetary and Capital Markets Department.

Contents

  • List of Acronyms

  • Preface

  • Executive Summary

  • I. Introduction and Background

    • A. Overview of the Monetary Policy Landscape in Bhutan

    • B. Scope of the Mission

    • C. Why a Liquidity Forecasting Framework Under a Peg Regime?

  • II. Lifting Institutional Constraints and Gaps

    • A. Institutional Constraints and Gaps

    • B. Recommendations

  • III. Towards a Liquidity Management Framework

    • A. Drivers of Liquidity Conditions in Bhutan

    • B. Analysis of Liquidity Developments

    • C. RMA’s Internal Organization for Liquidity Management

    • D. Towards Liquidity forecasting

  • IV. Towards a Functioning Money Market

    • A. Assessment of the Current Situation

    • B. Recommendations

  • Tables

  • 1. Key Recommendations

  • 2. Suggested Follow Up Technical Assistance

  • 3. Recommended Liquidity Table for the RMA

  • 4. Composition of the Proposed RMA Liquidity Team

  • 5. Key Stakeholders and Forecasting Methods for the Main Autonomous Factors

  • Figures

  • 1. Representation of a Simplified RMA Balance Sheet

  • 3. Proposed Liquidity Report for Monitoring Liquidity Developments

  • 4. Autonomous Factors’s Contributions to Monthly Changes in Liquidity

  • 5. Distribution of Excess Reserves Across Banks

  • Boxes

  • 1. Monetary Policy Tools of the RMA

  • 2. Government Cash Management: Relationships between Treasury and Central Bank

  • 3. Guidelines for Placing Government Deposits with Commercial Banks Tools

  • Appendixes

  • I. Recent MCM Technical Assistance to the RMA on Central Banking Issues

  • II. KeyFeatures of a Liquidity Forecasting Framework

  • III. Modeling Currency in Circulation – Structural Time Series Approach

  • IV. Simulated Effect of Proposed Option 2 for Hydro-Project Flows

List of Acronyms

APD

Asia and Pacific Department

BAS

Bhutanese Accounting Standards

BOB

Bank of Bhutan

BTN

Bhutanese ngultrum

CCC

Cash Coordination Committee

CIC

Currency in circulation

CPI

Consumer price index

CRR

Cash reserve ratio

DPA

Department of Public Accounts

DPNB

Druk PNB Bank

ER

Exchange rate

FX

Foreign exchange

GDP

Gross domestic product

ICD

Institute for Capacity Development

IFRS

International Financial Reporting Standards

IMF

International Monetary Fund

INR

Indian rupee

MCM

Monetary and Capital Markets Department

MDAs

Ministries, Departments, and Agencies

MOF

Ministry of Finance

MOU

Memorandum of Understanding

MT

Monetary targeting

NDA

Net domestic assets

NFA

Net foreign assets

OMOs

Open market operations

MLR

Minimum lending rate

RAMP

World Bank Reserve Asset Management Program

RBI

Reserve Bank of India

RM

Reserve money

RMA

Royal Monetary Authority of Bhutan

SAA

Strategic asset allocation

SARTTAC

South Asia Regional Training and Technical Assistance Center

SLA

Service Level Agreement

SLR

Statutory liquidity ratio

TA

Technical Assistance

TSA

Treasury Single Account

Preface

A mission from the South Asia Regional Training and Technical Assistance Center (SARTTAC) visited Thimphu (Bhutan), during the period June 2–9, 2017 to assist the Royal Monetary Authority of Bhutan (RMA) in identifying the drivers of systemic liquidity with a view, down the road, to support RMA’s plan to establish a liquidity forecasting and management framework. The mission comprised Bernard J. Laurens (Consultant, mission chief), and Stéphane Couderc (Consultant).

The mission held discussions with RMA Governor Dasho Penjore, RMA Deputy Governor Tshogyel Yangchen, several RMA Directors, a number of RMA staff, as well as the Director from the Department of Public Accounts (DPA), and representative from several commercial banks operating in Bhutan.

The mission expresses its gratitude to Mr. Gopal Giri, Director, Research and Statistics Department and his staff for their kind hospitality and their effective support and cooperation during the stay of the mission in Thimphu.

This report is based on the Aide mémoire presented to RMA Management and staff at the end of the mission. It incorporates comments from the relevant departments at the IMF as well as from the authorities of Bhutan.

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Bhutan: Technical Assistance Report-Royal Monetary Authority-Steps Towards a Liquidity Forecasting and Management Framework
Author:
International Monetary Fund. Monetary and Capital Markets Department