Kuensel’s reporter Tshering Dorji caught up with new governor of the central bank, Dasho Penjore. An excerpt from the interview.

Q&A: What is your first order of business?

One man can’t do everything on his own, so i have to depend on members of the institution.

I would like to do a survey on fundamentals in the institution and then we should be able to come up with some reforms to bring to a level where I would be able to exercise personal or official delegations. We may decide to do a quick and effective organization development (OD) exercise and restructuring.

Definitely we have to set up very strong legal capacity because we are dealing with major laws and rules in the country and we are regulating the financial institutions. To apply laws in the most articulate manner, we need to have a very strong legal setup.

My priority is to set up a very strong legal council that will guide me as well as the institution in supervising and regulating the financial institutions while facilitating our intervention in the economy. We may have to come up with strong legal department to facilitate new changes.

Even the central bank has to have very strong corporate governance on its own because it has to govern the banks. It is to see whether the existing corporate governance is strong enough.

The role of financial institutions in the economy?

Economy today is largely monetized, unlike in the 70s or 60s where most of the pockets of the Bhutanese economy were not monetized. Now everything translates into money, whether you are paying wages, taxes, buying goods and services. So deepening of financial institution and monetization of economy has developed to a large extent.

Then there is the question of whether there are enough institutions to take deposits? What is the interest rate you pay for the deposits? Is the interest rate reasonable enough to attract the deposits so that people will not be enticed to consume all they earn?

Whatever deposits people make should translate into investments and the banks have important role to play here. But what form of investments? (Productive, unproductive, consumerism) So there is a whole space of the investments being created.

Now efficiency of the banks to take the deposit at very attractive rate and to make investment into right perspective at right cost also makes the economy grow.

But the strength of financial institutions depends largely on the strength of central bank. RMA has two roles.

First is to strengthen the financial sector so that there is efficiency and there is a smooth flow of transactions through the banks across the country. Second is the supervision. The trust and confidence of banks rest on the prudential norms, regulatory framework and how the RMA is able to supervise the banks to remain very sound, efficient and trust worthy.

Right now we are enjoying a pace where banks are enjoying the confidence of the public and confidence of the public depends to a large extent on how the banks are regulated and kept within the perspective of laws with transparency.

How important is financial literacy in the society and economy?

Again, when we say that monetization has reached all pockets of the country, it doesn’t mean that financial literacy has extended all over. Financial literacy means how prudent you are to manage your money. There, RMA and banks has to play a major role. People should be able to think deposits as one of the alternatives of savings. Savings could be in form of shares, bonds, etc. So, literacy will drive people to know different forms of savings.  They have to inculcate and strategize their savings, so that they have the capacity to know the scopes of savings. That’s very important.

Even as a lender or borrower, you should have the capacity to know the kinds of lending norms, lending cost, requirement of collaterals and prudent that they need to be mindful of.  The central bank has to continue to strengthen the financial literacy for larger interest.

The issue of rupee shortage seems to be challenging. How would you tackle the issue if the same problem recurs in future?

It was an incidence that took place a couple of years ago. Largely, I would blame the mismatch in inflow and outflow. I wouldn’t suspect any major macroeconomic problems.

Inflows have always maintained the same pace and it comes through official grant, aid and exports. Maybe official grant and aid remained the same while exports slowed down but then inflows must have increased substantially largely due to housing boom. There was huge construction taking place in the country. There was a huge demand for rupees, unmatched by the inflow.

But as of now, we are in a scenario where we are very confortable. I think RMA has build sufficient reserves.

But we should not be complacent because inflow vary from day to day. It all depends on how imports are taking place and how the official aid and grants are flowing at official level.

On the rupee, we should be loudly saying that our balances are very comfortable. The RMA is not expecting any kind of shocks in the short term. But it is very fundamental issue.

What are your views on the reserve management? Especially, in light to holding more convertible currency reserve when more than 80 percent of the country’s trade is with India.

It is true that large part of reserve is still held in convertible currency or USD.

Convertible currency is currency in which we do not face exchange risk and that is why central banks across the globe build their reserves in convertible currency. That builds confidence of economy at par with any other countries. When you measure the sovereignty risk of a country, it measures the level of convertible currency reserve.

For example, Singapore maintains huge reserve so that their economy becomes very strong.  To illustrate the strength of the country in economic terms, convertible currency reserve is a very important instrument.

Nevertheless, because of our usage of rupee, there is flexibility in the RMA and even the reserve management framework allows it. When it comes to rupee use there is no distinction between dollar and rupee. As long as you have dollars you can convert it to rupee. After maintaining the constitutional requirement of reserve, then we have flexibility to sell dollar and buy rupee or otherwise. So, I think the concern should be more on overall reserves that you have in form of dollars not in form of rupees.

Maintaining a big convertible currency reserve is also good enough to match the amount of convertible currency debt that we owe.

INR is pegged at par with Ngultrum. But there is unofficial exchange taking place across the border devaluing Ngultrum. What sort of interventions are you planning to make? 

Exchange rate pegging is purely for economic reasons, nothing political.

80 percent or more of our transaction is in Indian rupee, so it is good to facilitate the exchange rate one to one.

Officially there is no devaluation but the incidence along the border should not be blown out of proportion because most of the transaction that is taking place in larger scale is all done electronically. So there is no need to actually buy rupees to make big payments. What is taking place in Jaigoan is in retail like buying groceries and incidences are very small. Because of shortage of rupee at that level, people are actually facing this kind of devaluation. Otherwise I don’t see huge problem of devaluation taking place.

It shouldn’t deteriorate confidence of our ngultrum against rupee because this is more of small retail transactions.

However, it is a concern and important issue that we have to handle. But this can be corrected by making rupee available to people in the bordering towns for retial purpose and even to the pilgrims.

We would be establishing more exchange counters or ask the banks to open the counters so that people who wish to convert ngultrum into rupee to go across the border would be facilitated. When people don’t have to sell ngultrum in Jaigoan for lower rates, it will bring back the confidence in ngultrum.

RMA should accept that shortcoming is occurring because we were not able to make rupee available at any point of time. That would be sort of corrective measures where I may be contemplating on how to make this facility more open and available at border towns.

When you are holding reserves in billions, you should be able to provide couple of millions for small retail transactions. This issue is an incident but not a threat.