Thukten Zangpo
The money multiplier in the country is expected to reach a new high of 5.01 at the end of June this year, indicating that the ngultrum is generating more money than before.
This means that every ngultrum introduced into the banking system will generate about Nu 5.01 worth of money supply in the economy.
For example, with a money multiplier of 5.01, an injection of Nu 1,000 by the Royal Monetary Authority (RMA) could potentially result in Nu 5,100 in total money supply.
What does it mean?
Money multiplier represents the potential increase in the money supply that can result from an initial deposit in the banking system.
According to the finance ministry’s first quarter of the macroeconomic situation report for fiscal year 2024-25, the money multiplier was reported at 4.7 in June last year, down from 4.96 in June 2023 and 3.51 in June 2022.
The RMA uses cash reserve ratio (CRR) as a monetary policy tool to regulate domestic credit growth and manage the money supply.
In Bhutan, the banks are legally required to hold eight percent of the total customer deposits as reserves with the RMA.
It means that for every Nu 100 deposited with a bank, Nu 8 must be kept as reserves with the RMA, limiting the bank’s ability to lend out the remaining Nu 92.
The money supply is defined as the ratio of money supply and monetary base (currency in circulation and banks’ deposits).
The Authority stated that the money multiplier decreased to 4.7 in fiscal year 2023-24 from the previous year because of increase in the monetary base, primarily due to higher CRR holdings by banks and excess reserves.
The monetary base saw a growth of 7.2 percent to Nu 46.87 billion in fiscal year 2023-24, compared to -20.6 percent or Nu 43.72 billion in the previous fiscal year.
At the same time, the banks’ excess reserve grew by 22.3 percent, equivalent to Nu 3.08 billion to Nu 16.91 billion in fiscal year 2023-24.
In the same period, the CRR holdings by the banks increased to Nu 17.96 billion from Nu 17.31 billion, a growth of 3.8 percent because of increase in deposit liabilities of the banks.
The money supply in the economy, known as broad money (M2), also saw an increase of 1.7 percent to Nu 220.41 billion in fiscal year 2023-24 from Nu 216.69 billion, mainly because of time deposits and saving deposits.
M2 includes currency in circulation, transferable deposits, and time deposits that are widely accepted as a medium of exchange.
However, the Authority stated that it is working on developing a market-based monetary policy that utilises interest rates to influence aggregate consumption and investment because of limitations of CRR as a monetary tool.
The RMA is also vigilant regarding banking credit growth, particularly in unproductive sectors, and is implementing macro and macroprudential regulations to prevent undue pressure on foreign exchange reserves and external vulnerabilities.
As of June, last year, the financial institutions’ credit stood at Nu 220.47 billion, driven by expansion in credit to the housing sector, followed by production and manufacturing, and tourism and service sector.
Housing sector loans stood at Nu 66.75 billion, production and manufacturing at Nu 25.09 billion, loans to hotel and tourism industry to Nu 28.8 billion, service sector to Nu 18.98 billion, trade and commerce at Nu 18.08 billion, agriculture sector to Nu 5.63 billion, among others.