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Assignment On Monetary Policy in Bangladesh
Assignment On Monetary Policy in Bangladesh
INTRODUCTION:
Monetary Policy the policy adopted by the central bank for control of the supply of money as an
instrument for achieving the objectives of general economic policy.With the shifts of the policy
stance of the government in various phases, necessary a d j u s t m e n t s w e r e m a d e i n t h e
c o u n t r y ' s m o n e t a r y p o l i c y. T h e
Department
o f Research in the
B a n g l a d e s h B a n k p l a ys a n i m p o r t a n t r o l e i n t h e f o r m u l a t i o n o f economic
policies of the country.The principal function of the Department is to help the bank in
the formulation of monetary and credit policies and also to assist it in discharging its duty as
adviser tothe Government on economic and financial matters. To this end, the
departmentkeeps the top executives of the bank fully informed of latest economic
developmentboth at home and abroad, in a regular and systematic manner. For this
purpose theDepartment keeps a close watch on trends in the domestic economy as
well as oninternational economic developments with particular reference to
monetary, fiscaland trade problems and policies.Domestic and international economic
developments are brought within the compasso f c o m p r e h e n s i v e r e p o r t s a n d r e v i e w s
w h i c h a r e s u b m i t t e d f o r p e r u s a l o f t h e Governor, Deputy Governor, and Senior
Executives of the bank, as also the banksBoard of Directors.
Monetary policy is the process by which the monetary authority of a country controls the
supply of money, often targeting a rate of interest for the purpose of promoting economic
growth and stability. The official goals usually include relatively stable prices and low
unemployment. . Monetary theory provides insight into how to craft optimal monetary policy.
Monetary policy is the process by which the government, central bank, or monetary authority
of a country controls
a) the supply of money,
b) availability of money, and
c) Cost of money or rate of interest to attain a set of objectives oriented towards the
growth and stability of the economy.
d) Monetary theory provides insight into how to craft optimal monetary policy.
Price Stability
Full Employment
Neutrality of Money
Major instruments of monetary control available with Bangladesh Bank are the bank rate,
open market operations, rediscount policy, and statutory reserve requirement.
The methods of credit control can be classified as follows:
Quantitative/ General Methods Qualitative/ General Methods
01. Bank rate policy 01. Rationing of credit
02. Open market policy 02. Direct action
03. Variation of reserve ratio 03. Regulation of consumers credit
04. Moral persuasion
05. Publicity
competitiveness which in the long run can only worsen the balance of payments situation as
imports increase to fulfill the needs of a growing population.
8. BB should coordinate with the government on policy matters. As I have mentioned earlier the
policy goals of BB and GOB need to be aligned, otherwise it can cause financial devastation.
9. The BB governor keeps stressing the need to reduce credit flow towards non-productive
sectors. In free market such distinctions are unwarranted. The role of state and government
should be that of a facilitator. BB is trying to modulate the consumption of citizens which it
should not do. It is only encouraging the government in the process of increasing welfare
payments, hence rising deficit.
10. In light of the above and the continued global economic crisis, BB may soften its stance on
credit supply. It can seek to ensure financial sector strength, by asking the banks to further
recapitalize themselves. For that again Banks will need to go for the right offers, which are best
induced by a stable gradually rising capital market.
11. BB and the present government must get over old 'socialist' ghosts from deciding the crux of
economic policy. Real welfare cannot be ensured by policy alone. For instance, in spite of the
continuous supply of agri-credit by BB, farmers remain underfed, underemployed, under
rewarded, although retail prices of their produce go higher! This is a direct result of market
distortion in which both BB and the Government of Bangladesh have a role to play.
12. The Government should allow citizens new ways to seek capital and also with discretion
invest abroad, just like numerous foreign companies are repatriating huge amounts of dividend in
local investments every year. Such international expansion of local companies will result in
ensuring future capital inflows into Bangladesh.
13. Excessive controls on capital flow from outside the country have resulted in distortion of
currency markets and given primacy to the role of informal money transfers and dealings. BB
and the Government of Bangladesh should set up a prudential strategy to encourage more foreign
currency inflow. Tax breaks to multi-national companies which operate in Bangladesh should be
conditional on reinvestments of capital locally. Capital repatriation out of the country should be
discouraged through policy and counselling.
14. Presently the Cushion Against Risk of Bangladeshi banks is only 9% against an average of
14% for India, Pakistan and Sri Lanka. High cost of credit will further deteoriate the asset quality
of banks, leading to higher defaults and even trigger a banking crisis. The depository insurance
policy of BB is inadequate to protect the depositors interest. For instance., recently the Iranian
currency depreciated by as much as 40% against the US dollar as a result of sanctions. In such
volatile economic times, we have to do everything to save and encourage domestic industry.
Industry cannot flourish and sustain with lending rates of banks/non-bank financial institutions
reaching 16-21 per cent.
15. Presently the real estate sector in Bangladesh is still drawing a lot of investment. NRBs need
to be discouraged to invest in real estate and focus on creation of industry/agriculture/service
sectors. Also to prevent excessive lending in real estate, BB should make housing sector loans
adjustable. This is followed in Australia which has helped Australia to escape from fallouts of
the sub prime crisis that has incited the present global economic collapse.
16. BB needs to work with the Government to allow Bangladesh to seek alternative capital from
abroad to reduce the dependence on multilateral lending agencies such as the World Bank/IMF.
While these aid/loans offer lower interest rates, the policy conditions can in the long run impose
huge costs on local economy. For example, presently Malaysia has zero borrowing from World
Bank/ IMF. BB can recommend GOB to go for further pursue government to government
negotiations with Islamic/other countries that have surplus capital. Malaysia is the perfect
example of development using foreign financing.
17. Monetary policies need to be used with much care in a low income country like Bangladesh
where narrow money use is still wide. Contractionary monetary policy coupled with
expansionary fiscal policy will fail as government goes for money printing to finance deficits,
again triggering inflation. BB needs to use its policy tools to allow further recapitalization of
Bangladeshi banks, which are mostly private. To do so, banks need to entice investors by making
good profits. BB has to accept its a better trade off for whole economy that the banks make
money, not BB making money at the expense of the banks, by imposing tight statutory
conditions such as higher Statutory Reserve Ration/Cash Reserve Ratio. Rather BB should
advise the government on using Keynesian fiscal policies in times of economic stress to
stimulate employment and growth. For instance right now, apparently the food reserve is very
comfortable for government. Government can go for labor intensive policies such as canal
digging which will reduce food inventory and allow the government to go for fresh rice
procurement that will ensure fair price to farmers.
18. In a more sophisticated world, BB needs to protect itself and Bangladeshi banks/importers
from suffering losses in foreign currency transactions. Thus BB should explore and encourage
hedging of trades done by local importers/exporters.
19. BB should establish a joint venture export import bank of Bangladesh to assist trade finance
of Bangladesh. This will allow the country to save a huge amount in advising fees that are paid
to foreign banks that eventually increase the cost of trade.