Entry of foreign bank is both opportunity and challenge: IMF

February 25, 2010: International Monetary Fund (IMF) has expressed both happiness and caution on the entry of foreign banks in the banking industry of Bhutan. Though it said, the entry would open up markets for competition and improve distribution of money, the IMF said it will also pose challenges on loans and credits.

The international monetary market watchdog has cautioned that increased competition among banks in the small market might increase risk on non performing loans and credits.

The fund has suggested the government to strengthen the supervision of the financial sector.

The board meeting held after Bhutan tour, completed in December, concluded that the main fiscal challenges for Bhutan were to avoid overheating pressures and ensure debt sustainability.

The board meeting further noted, “There could be pressure on the rupee reserve and excess demand could be fueled if there was a sharp deterioration in the budgeted 2009-10 fiscal position combined with rapid growth of the private sector. Bhutan was advised that there is a need for prioritization with a tightening bias in the short term, and an expansion in the revenue base and careful planning of expenditures over the medium term.”

The IMF recommended Bhutan to continue aligning monetary policy and peg with the Indian rupee for economic stability.

They added, to improve monetary transmission Bhutan needs active liquidity management, facilitated by periodic T-bill issuance at market-driven interest rates and advised adjust interest rates with that of India to avoid policy mismatches and unwarranted pressures on rupee reserves, which Bhutan could expand through sale of hydropower to India.