COUNTRY BACKGROUND - Gross National Happiness Commission

Fiscal and Monetary Policy
Strategy for the Financial Sector
8.16 Apart from Bhutan's central bank — the Royal Monetary Authority, the country's main financial sector
institutions are:
(a) The Bank of Bhutan, which is the only commercial bank in the country. Apart from its main office in
Phuntsholing, it has 23 branch banks in dzongkhags throughout the country. About 22,000 accounts
are maintained by BOB. In the past it has also managed Government's accounts, but this has been
transferred to the RMA. The majority of BOB's shares are held by the Royal Government, with the
remainder (25%) held by the State Bank of India, with which BOB has an institutional relationship.
(b) The Royal Insurance Corporation of Bhutan (RICB), established in 1975, provides both life and
general insurance. It is an important institutional investor within Bhutan. RGOB holds a majority of
its shares, but there are also private sector shareholders.
(c) The Government Employees Provident Fund (GEPF) is managed on RGOB's behalf by the RICB,
and represents a growing portfolio of investments based on matching contributions by civil servants
and the Government.
(d) The Unit Trust of Bhutan (UTB) was set up by the GEPF and the RICB in 1980 to encourage
investment by Bhutanese within the domestic economy.
(e) The Bhutan Development Finance Corporation (BDFC) was established in 1988 to act as the
development finance institution for small and medium scale industrial and agricultural producers.
The Corporation manages the donor funded agricultural credit programmes. As well as credit, the
organisation provides technical support to entrepreneurs. Its shareholders include the Royal
Government, the RMA, RICB and the Bank of Bhutan.
Development of the Financial Sector during 6FYPDevelopment of the Financial Sector during 6FYP
8.17 Currency and Money Supply. As the economy has close links with the Indian economy, the Ngultrum has
been held at par with the Indian rupee since its introduction in 1974. Although the rupee is freely exchangeable
within Bhutan it is now used mainly for financing imports from India. During the 6FYP, from December 1986 to
December 1990, the money supply grew at an average rate of 21% p.a. The expansion of the domestic money
supply is determined by the rate of growth of domestic GDP, the rate of inflation in India, * the rate of substitution
of the Ngultrum for rupees, change in net foreign assets and the increased monetisation of the economy.
8.18 Savings, Investment and Interest Rates. The policy of the RMA has been to maintain deposit rates
comparable with those in India, but to set lending rates marginally lower than those in India, in order to encourage
investment. Real interest rates on deposits (i.e. the returns on savings when the effects of inflation are taken into
account) have generally been negative. There has been significant excess liquidity in the banking system,
indicating a that a shortage of viable investment projects has been more of a constraint than the cost of borrowing.
Table 8.2 summarises the operations of bank and non-bank financial institutions during the second half of the
1980s.
Borrowing and Debt serviceBorrowing and Debt service
8.19 A brief description of each financial institute's investments are given in what follows. The size of the loans
in million US dollars are cited in parentheses.
8.20 IFAD was the first international development financing institution that the country joined. IFAD has funded
three area development projects : (1) Small Farmers Development and Irrigation Development Project (US$ 7.19
m) in four Western Districts, (1) Tashigang Mongar Area Development Project (US$ 5.87 m) and (3) Punakha
Wangdi Valley Development Project (US$ 2.64 m). During the 7FYP IFAD's investment will be in Zone IV
covering five districts. It will include several sectors though its main focus will be Renewable Natural Resources
sector.
8.21 The World Bank has financed the Bhutan Calcium Carbide Projects (US$ 12.41 m), Forestry Project -
* As long as the two currencies are at par and India remains Bhutan's major source of imports, inflation in
Bhutan will tend to parallel that in India.
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