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Ngultrum- rupee peg prudent, RMA

21 December 2009

Royal Monetary Authority of Bhutan (RMA) says the existing peg exchange rate arrangement with India is prudent for Bhutan’s economy.

According to Managing Director of RMA, Daw Tenzin, because of the close economic ties with India and low level of integration with the international financial market, the RMA’s choice on peg arrangement is appropriate. In addition, with gaining popularity and stability of Indian economy worldwide, it is prudent for Bhutan to continue with such peg arrangement, he said.

The arrangement has served to anchor inflationary expectations in Bhutan because of stable monetary conditions in India. With over 80 percent of Bhutan’s import originating in India, the ngultrum- rupee peg has led to a closely related inflation in the two countries. By eliminating exchange rate uncertainty, the peg has facilitated the growth of trade between Bhutan and India, economists say.

Daw Tenzin said the concept of “impossible trinity” is a great challenge to peg the exchange rate as well as control the quality of money in a small, open economy.

Under the current peg arrangement, RMA as a central bank stands ready to make available any amount of Indian rupees on demand. Therefore, the ultimate objective of monetary policy is to maintain the peg and achieve price stability conducive for economic growth.

While ensuring the sustainability of the exchange rate arrangement, a major aspect of Bhutan’s monetary policy framework is the management of overall banking sector liquidity.

Bhutanese economists say liquidity management is aimed at smoothing out sharp and undesirable liquidity fluctuations in the financial system. A large increase in deposits with the banks without matching lending and investment opportunities could result in less prudent lending policies and consequent problems of non-performing assets.

Furthermore, being an import-dependent economy, expansion of credit for consumption in Bhutan could entail an added outflow of foreign exchange reserves, resulting in a further deterioration of the country’s external sector position.

A three-day high-level national workshop on the implementation of monetary, fiscal, and external debt policies was held in Thimphu last week. The workshop organised by the Economic and Social Commission for Asia and the Pacific (ESCAP) and the United Nations Development Programme (UNDP) and hosted by RMA was part of ESCAP’s programme to assist member states to ‘build their capacity to make appropriate policy responses that mitigate the impact of the economic crisis, restore growth and avoid future global shocks’.

Monetary policy issues of interest to Bhutan document presented during the workshop said that, in order to achieve and maintain price stability, an intermediate target of a one-to-one peg between the ngultrum and the Indian rupee has been chosen.

The ngultrum, since its introduction in 1974, has been pegged at par with the Indian rupee. The Indian rupee circulates freely in Bhutan and serves as legal tender.

This dual currency system has been beneficial for Bhutan, given its extensive trade and economic relations with India.

By Rabi C Dahal

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Posted by Bhutan Observer · Filed Under Economy, News 

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