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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.
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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.