…to better manage the INR reserve

Reserve: The Royal Monetary Authority (RMA) is exploring avenues for investment in Government of India securities to maintain a stable exchange rate parity and better manage the INR reserve.

A government security is a bond or other type of debt obligation like Treasury bills (T-bills) that is issued by a government with guaranteed repayment upon maturity. The interest rate would be determined upon competitive bidding by the investors.

This means that when the Indian government issues a bond or T-bill, the RMA could bid and invest the INR reserve. Upon maturity the RMA would get back the invested amount with interest in INR. This would help the country bring in more INR.

However sources said that negotiation with the Reserve Bank of India (RBI) is currently in advanced stage.

Within a year the central bank will implement appropriate regulation, infrastructure and incentives to encourage inward remittances by Bhutanese living and working abroad. This move, according to the central bank officials, is also geared towards enhancing the foreign currency reserve.

Currently, the country’s convertible currency reserve is backed by grant, aid and tourism earnings.

The RMA is also reviewing the performance of foreign exchange earners such as exporters and FDI companies.

“Assessments of whether exporters and FDI companies have net benefit on the economy as foreign exchange earners and through inflow of net export proceeds have not been carried out,” states the central bank’s recently published monetary policy statement.

This is expected to provide a fair basis on which policy to review and where to dispense more incentives and exemptions.

Until now industries have been crying foul on limited issuance of foreign currency for import of raw materials.

The foreign exchange regulation 2013, states that Bhutanese manufacturing industries earning convertible currencies may maintain a foreign currency account for import of raw materials. This means that industries earning INR are not allowed to purchase convertible currency even though they may have to import raw materials from third countries.

One of the biggest INR draining factors is consumption sourced from credit. While this has direct impact on the current account deficit, the RMA has adopted a new approach to determine the interest rate which may contain credit towards the unproductive sector.

For instance, the initial projection of current account deficit was 26.3 percent of GDP. By the end of the fiscal year, this was revised to 28.8 percent of GDP because of larger than expected import proceeds.

Consequently, the international reserves also fell from the initial projection of USD 1.1 billion to USD 958 million in the same fiscal year. This was pushed by the widened current account deficit as the reserves had to be used to finance the deficit.

“Excessive credit growth to finance consumption will cause the deficit to deteriorate, resulting in potential crisis situation,” the report stated.

As monetary policy largely depends on its influence on the aggregate demand within the economy, fiscal policy, which is under the purview of the government, has a direct impact on supply side.

So, the way forward, according to the RMA’s policy statement is to coordinate monetary and fiscal policy, meaning deeper integration between the central bank and the government, to achieve national growth.

The report also stated that the measures adopted by the RMA must be complimented by appropriate fiscal policy interventions and other cross-cutting reforms. “The government must ensure support for investment and productive sector expenditure as well as taxes on consumption,” the RMA suggested in its report.

Meanwhile, during the last Meet-the-Press session the finance minister said once the revised economic development policy is approved, the fiscal incentive policy will also undergo a thorough revision.

Tshering Dorji