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Bangladesh Bank: Headquarters Established Governor Central Bank of Currency
Bangladesh Bank: Headquarters Established Governor Central Bank of Currency
Bangladesh Bank
Headquarters Dhaka
Established 16 December 1971
Governor Salehuddin Ahmed
Central Bank of Bangladesh
Currency Taka
ISO 4217 Code BDT
Website [1]
Preceded by State Bank of Pakistan
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After the liberation war, and the eventual independence of Bangladesh, the Government
of Bangladesh reorganized the Dhaka branch of the State Bank of Pakistan as the central
bank of the country, and named it Bangladesh Bank. This reorganization was done
persuant to Bangladesh Bank Order, 1972, and the Bangladesh Bank came into existence
with retrospective effect from 16th December, 1971.
The general superintendence and direction of affairs and business of the Bank are
entrusted to a nine member Board of Directors which consists of the Governor as
chairman, a Deputy Governor, three senior government officials and four persons having
experience and proven capacity in the fields of banking, trade, commerce, industry or
agriculture - all nominated by the government. The board, which is the highest policy
making body, meets at least six times a year and at least once every quarter under the
chairmanship of the Governor. The Governor, appointed by the government as the chief
executive officer, directs and controls all the affairs of the Bank on behalf of the Board.
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b) To manage the monetary and credit system of Bangladesh with a view to stabilizing
domestic monetary value;
d) To promote and maintain a high level of production, employment and real income in
Bangladesh; and to foster growth and development of the country's productive resources
for the national interest
Functions
7. Initiate disciplinary action against any Board or members of the Board of Directors of
the banks.
8. Issuance of directives and compliance thereof under Banking Company Act, 1991.
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MONETARY POLICY
Monetary policy is the process by which the government, central bank, or monetary
authority manages the money supply to achieve specific goals—such as constraining
inflation or deflation, maintaining an exchange rate, achieving full employment or
economic growth. (Usually the goal of monetary policy is to accommodate economic
growth in an environment of stable prices.) Monetary policy can involve changing certain
interest rates, either directly or indirectly through open market operations, setting reserve
requirements, acting as a last-resort lender (i.e. discount window lending), or trading in
foreign exchange markets.
Monetary policy is associated with currency and credit. For many centuries there were
only two forms of monetary policy: decisions about coinage, and the decision to print
paper money to create credit. Interest rates, while now thought of as part of monetary
authority, were not generally coordinated with the other forms of monetary policy.
Monetary policy was seen as an executive decision, and was generally in the hands of the
authority with seniorage, or the power to coin. With the advent of larger trading networks
came the ability to set the price between gold and silver, and the price of the local
currency to foreign currencies. This official price could be enforced by law, even if it
varied from the market price.
With the creation of the Bank of England in 1694, which acquired the responsibility to
print notes and back them with gold, the idea of monetary policy as independent of
executive action began to be established. The goal of monetary policy was to maintain the
value of the coinage, print notes which would trade at par to specie, and prevent coins
from leaving circulation. The establishment of central banks by industrializing nations
was associated then with the desire to maintain the nation's peg to the gold standard, and
to trade in a narrow band with other gold back currencies. To accomplish this end, central
banks as part of the gold standard began setting the interest rates that they charged, both
their own borrowers, and other banks who required liquidity. The maintenance of a gold
standard required almost monthly adjustments of interest rates.
During the 1870-1920 period the industrialized nations set up central banking systems,
with one of the last being the Federal Reserve in 1913.By this point the understanding of
the central bank as the "lender of last resort" was understood. It was also increasingly
understood that interest rates had an effect on the entire economy, in no small part
because of the marginal revolution in economics, which focused on how many more, or
how many fewer, people would make a decision based on a change in the economic
trade-offs. It also became clear that there was a business cycle, and economic theory
began understanding the relationship of interest rates to that cycle. (Nevertheless, steering
a whole economy by influencing the interest rate has often been described as trying to
steer an oil tanker with a canoe paddle.)
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The advancement of monetary policy as an engineering discipline has been quite rapid in
the last 150 years, and it has increased especially rapidly in the last 50 years. Monetary
policy has grown from simply increasing the monetary supply enough to keep up with
both population growth and economic activity. It must now take into account such diverse
factors as:
Developing countries may have problems operating monetary policy effectively. The
primary difficulty is that few developing countries have deep markets in government
debt. The matter is further complicated by the difficulties in forecasting money demand
and fiscal pressure to levy the inflation tax by expanding the monetary base rapidly. In
general, central banks in developing countries have had a poor record in managing
monetary policy.
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Monetary base
Monetary policy can be implemented by changing the size of the monetary base. This
directly changes the total amount of money circulating in the economy. A central bank
can use open market operations to change the monetary base. The central bank would
buy/sell bonds in exchange for hard currency. When the central bank disburses/collects
this hard currency payment, it alters the amount of currency in the economy, thus altering
the monetary base.
Reserve requirements
The monetary authority exerts regulatory control over banks. Monetary policy can be
implemented by changing the proportion of total assets that banks must hold in reserve
with the central bank. Banks only maintain a small portion of their assets as cash
available for immediate withdrawal; the rest is invested in illiquid assets like mortgages
and loans. By changing the proportion of total assets to be held as liquid cash, the Federal
Reserve changes the availablilty of loanable funds. This acts as a change in the money
supply.
Many central banks or finance ministries have the authority to lend funds to financial
institutions within their country. The lended funds represent an expansion in the monetary
base. By calling in existing loans or extending new loans, the monetary authority can
directly change the size of the money supply.
Interest rates
The contraction of the monetary supply can be achieved indirectly by increasing the
nominal interest rates.
In other nations, the monetary authority may be able to mandate specific interest rates on
loans, savings accounts or other financial assets. By raising the interest rate(s) under its
control, a monetary authority can contract the money supply, because higher interest rates
encourage savings and discourage lending. Both of these effects reduce the size of the
money supply.
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Currency board
The virtue of this system is that questions of currency stability no longer apply. The
drawbacks are that the country no longer has the ability to set monetary policy according
to other domestic considerations, and that the fixed exchange rate will, to a large extent,
also fix a country's terms of trade, irrespective of economic differences between it and its
trading partners.
Both in developed and developing economies, monetary policy seeks to maintain price
stability accompanied by sustained stable output growth in the face of internal and
external shocks that are faced from time to time. For developing economies like
Bangladesh with significant underemployment/under exploitation of production factors,
stimulating higher growth is imperative for rapid reduction and eventual elimination of
endemic poverty, and is therefore an overriding priority. The stimulus provided by
monetary policy in accommodating the growth aspirations must not however jeopardize
macroeconomic stability and future growth; and the pursuit of monetary policy comprises
of various supportive measures to attain the highest sustainable output growth while
adjusting smoothly to internal and external shocks that the economy encounters from
time to time.
Objectives of the monetary policy of the Bangladesh Bank as outlined in the Bangladesh
Bank Order, 1972 comprise of attaining and maintaining of price stability, high levels of
production, employment and economic growth.
In the decades of seventies and eighties, monetary policy in Bangladesh was conducted
with full direct control on interest rates and exchange rates, as also on the volumes and
directions of credit flows.
The situation began changing in the nineties with the abolition of directed lending and
gradual liberalization of interest rates; the change process culminating in transition to
market based exchange rate of Taka from 31st May 2003. From then on, interest rate and
exchange rate are both market driven, exchange rate is no longer in the role of nominal
anchor for prices.
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Monetary policy in Bangladesh is formulated around inflation and output growth rates as
the basic policy targets. Levels and growth paths of relevant monetary aggregates such as
reserve money, broad money and domestic credit are also projected and monitored as
intermediate targets in conducting monetary policy.
CPI inflation, expressed as the rate of change of Consumer Price Index, is used in
Bangladesh for measuring price stability in conducting monetary policy. Some central
banks opt for suitably defined 'core inflation' excluding from consumption basket items
with typically high seasonal price volatility, viewed as better representing the actual
underlying inflation trend.
The target level of CPI inflation is chosen taking into account the country's past long run
inflation performance, and the domestic and external factors driving the current trend of
domestic inflation. From the early nineties, annual average CPI inflation has consistently
been at single digit levels, reaching a low of 1.94 percent in FYO1 and edging upwards
thereafter, in line with the bottoming out and subsequent upswing of global inflation.
Other than the administered energy prices, consumer prices in Bangladesh are market
driven, and as mentioned earlier, trends of domestic prices of tradable in the open
economy are increasingly mirroring global price trends, the divergence between domestic
and global inflation arising largely from the price trends of the nontaxable
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Instruments employed.
Interest rate: In tightening the monetary policy stance, key policy rates (treasury bill
bond auction yields, ratio and reverse ratio, interest rates of Bangladesh Bank) have been
raised and maintained on uptrend, for these in turn to raise the rates of other financial
costs and returns, restraining demand growth in the real sector.
Revision of the statutory ratios for scheduled banks: The markets are yet to gain
sufficient depth to respond with the changes in policy interest rates. To compensate for
this inadequate interest rate responsiveness of markets, policy interest rate interventions
in Bangladesh are at times supplemented by changes in the Cash Reserve Requirement
(CRR) and Statutory Liquidity Ratio (SLR) for scheduled banks, thus influencing the
volumes as well as costs of funds available for credit growth.
In October 2005, the CRR and SLR were revised upward from 4.5 percent and 16.0
percent respectively to 5.0 percent and 18.0 percent of time and demand liabilities of
scheduled banks, with a view to slowing down overall domestic credit growth as well as
the growth of credit to the private sector.
Annual monetary programs based on the inflation and GDP growth targets of monetary
policy provide a convenient framework for interventions in monetary developments, and
for monitoring the outcome of the monetary policy stance pursued.
Based on the assumption that inflation rises and falls with increase and decrease in the
rate of growth of money stock, the annual monetary programme targets a growth path for
broad money consistent with the inflation and real GDP growth targets of monetary
policy, allowing for the likely change in income velocity of money.
The monetary program is nevertheless very useful as framework for gauging the growth
supportiveness and the inflation stabilization effectiveness of the monetary policy stance
pursued. The broad money growth target of the monetary programme has further been
disaggregated into sub targets on the asset and liability side.
Our present challenge is to stabilize inflation rate. One caveat the pro-poor growth
momentum is facing-is the rise in inflation rate-not only caused by the aftermath of the
flood last year and rapid credit expansion but also due to rise in fuel and commodity
prices around the globe; which is beyond our control. Inflation rate that stood at 7.35
percent in June 05 rose to 7.95 percent in November 05. With a brief down swing during
early months of 2006, it again started moving up to 6.17 percent in March 06. We hope
the monetary stance and prospective growth along with optimistic global economic
scenario would bring down the price level within a short period.
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The tightened monetary stance now being pursued is intended not to slowdown output
growth but to curb excess demand arising from inflationary expectations, thereby
supporting sustained stable output growth over the near and medium term. The fourteen
percent growth of credit to the private sector programmed for FY06 would be sufficient
to support seven percent real GDP growth if CPI inflation is seven percent, even higher
real GDP growth will be supported with lower inflation. The monetary stance is subject
to continuous review in the light of evolving situation, may shift to a neutral stance, and
may even move further to an accommodative stance as values of key macroeconomic
variables change over time.
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Monetary survey
(Taka in million)
1.94 48.32
(a) BANGLADESH BANK 197507 190957 131487 3.43 50.21
(b) DEPOSIT MONEY
28897 31146 21156 -7.22 36.59
BANKS
A. DOMESTIC CREDIT
1903425 1889597 1601141 0.73 18.88
(a+b)
Claims on Public
265923 276458 190098 -3.81 39.89
Sector
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Officially, the rate of inflation in Bangladesh is about 8 per cent. The rate is considered as
a conservative one by non-official sources who maintain that the inflation rate is in the
double digits. Inflation control, therefore, is important for the economy, and from that
perspective, Bangladesh Bank's tight monetary policies or efforts to contain inflation by
decreasing the flow of money may be seen as a routine approach to regulating
inflationary pressure.
But the Bangladesh Bank (BB) needs to take other issues into consideration while
applying traditional money controls through its policies. No economy can grow without
investment and although the cumulative investment figures for the current year are not
available, the same are anticipated to be at a record high level. This investment level
needs to be maintained or further improved for the economy to fare better-- than it has so
far-- in the New Year. The economy needs to grow at an accelerated pace from its average
5 per cent growth to higher growth like 7 to 8 per cent annually to be able to more than
cope with massive unemployment and the problem of poverty.
There has been an outcry in the country to lower the interest rate on lending to promote
greater investment activities. It appeared that the merit of this reasoning was recognized
by the BB and interest rates on loans were reduced notably for a while. The higher
investments in the economy during the last two years had a relationship to the lowered
lending rates. But a reversal of this policy and allowing the interest rates on leading to
rise again could prove to be a damper on investment activities.
Besides, the BB also needs to take into account the non economic factors behind price
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rises that have hardly any links with inflation. According to textbook theories, price rise
of goods and services is the inalienable companion of a growing inflationary situation.
But price rises in the present context of Bangladesh appear to be more for non economic
reasons like outcome of crimes such as hoarding, profiteering, and syndicate formation to
manipulate prices upwards, among others.
Thus, BB ought not to frustrate the trend towards higher investment by exercising tighter
monetary policies. It needs to prudently apply controls in money supply so that investors
are not disheartened
Bangladesh inherited an interest based banking system right from the British Council
period and employment of the Muslim as in banks was more or less restricted. During the
period 1947-1971 when country was a part of Pakistan, banking of course came under
Muslim control but the system did not changed (M.A.Haque, 1994).Though Pakistan was
created in the name of Islam, the rulers did not take any practical attempt to establish
economic system based on Islamic Principles.
Since independence, Bangladesh saw a new trend in banking both at home and abroad
during the seventies, Islamic Development Bank (IDB) at the international level and a
number of Islamic banks at national levels were established in the Muslim world. At
home, some entrepreneurs were actively working for introduction of Islamic banking.
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Two professional bodies “Islamic Economics Research Bureau” (IERB) and “Bangladesh
Islamic Bankers Association” (BIBA) were taking practical steps for imparting training
on Islamic Economics and banking to a group of bankers and arrange some national and
international seminars/workshops to mobilize local and foreign people investors. Their
professional and right-thought activities were streamlined by a number of enthusiastic
businessmen in Bangladesh. They concentrated mainly in mobilizing equity capital for
the prospective Islamic bank. Due to continuous and dedicated work of the above groups
and individuals and active support from the Government, Islamic banking could be
established in early eighties. Islamic banks have been operating in Bangladesh for about
one and half decade alongside with the traditional banks. Out of over 50 banks only five
banks (including one foreign Islamic bank) and two Islamic banking branches of a
traditional bank, Prime Bank Limited (PBL) have been working on Islamic principles.
Like any other traditional commercial banks, they do mobilize deposits and provide
loans. But their modes of operation, based on Shariah, are different from the other
traditional commercial banks. However, the five Islamic banks operating in Bangladesh
are:
1. Islami Bank Bangladesh Limited (IBBL);
2. Al Baraka Bank Bangladesh Limited (AL-Baraka);
3. Al-Arafah Islami Bank Limited (Al-Arafah);
4. Social Investment Bank Limited (SIBL); and
5. Faysal Islamic Bank of Bahrain EC (FIBB).
Besides the above five Islamic banks, Prime Bank Limited has opened two Islamic
Banking branches on 18 December, 1995 and 17th December, 1997 respectively while
Dhaka Bank Limited has started operation with an Islamic Counter at its Principal Office
in conjunction with conventional banking operations since inception of the bank in July,
1995.
The central bank has the sole authority to issue currency and manage the liquidity of the
economy. Among others, the objectives of the monetary policy are to ensure stability of
the value of Taka and regulate the banking system prudently. As a central bank,
Bangladesh Bank was not aloof from the ongoing changes in the world financial system.
Bangladesh Bank had issued license in 1983 for establishment of the first Islamic bank in
Bangladesh. The Bangladesh Government had participated in establishing the Bank, by
subscribing five percent share in the paid up capital. Considering lack of Islamic financial
markets and instruments or products in the country, Bangladesh Bank had granted some
preferential provisions for smooth development of Islamic banking in Bangladesh.
Among the preferential provisions, the following are important.
1. Islamic banks in Bangladesh have been allowed to maintain their Statutory Liquidity
Requirement (SLR) at 10% of the total deposit liabilities while it is 20% for the
conventional banks. This provision had facilitated the Islamic banks to hold more liquid
funds for more investment and thereby generate more profit.
2. Under indirect monetary policy regime, Islamic banks were allowed to fix up their
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profit-sharing ratios and mark-ups independently commensurate with their own policy
and banking environment. This freedom in fixing PLS ratios and Mark-up rates had
provided scope for the Islamic banks to follow the Shariah principles independently for
realizing goals of Islamic Shariah.
Source: International Journal of Islamic Financial Services Vol. 2 No.1
IMF suggests tighter monetary policy
"This is the key challenge for the authorities in Bangladesh," Thomas Rumbaugh, IMF
adviser for the Asia and Pacific, told a press briefing at the IMF Resident Mission in
Dhaka yesterday.
The IMF official said this replying to a question whether their prescription to contain
inflation would be possible if the government raises the fuel prices further and the
import cost increases due to the soaring dollar prices.
He insisted on increasing the interest rates further as a means of tight monetary policy.
"Some further increases in interest rates may be required to bring inflation in line with
other countries," he said.
The briefing was organized at the end of an 8-day mission of an IMF team led by
Thomas that reviewed the recent economic developments and the implementation of
policies supported by the Poverty Reduction and Growth Facility (PRGF)
arrangement.
"It's inevitable that the government will have to adjust the oil prices," Thomas said,
adding that the price hike will have onetime impact on the inflation, not a permanent
one.
"That's why Bangladesh Bank needs to keep very prudent monetary policy so that the
inflation does not go up," he said.
During their visit to Bangladesh, the mission members met Finance and Planning
Minister M Saifur Rahman, Finance Secretary Siddiqur Rahman Chowdhury,
Bangladesh Bank Governor Dr Salehuddin Ahmed and senior government officials.
"Growth momentum in Bangladesh's economy has been maintained during this fiscal
year,"Thomas told the briefing on their observations.
He expected that the GDP growth would be about 6 percent but observed that
inflation, though declined slightly, at 6.5 percent was still higher than desirable.
Thomas added that the external current account was better than expected in the first
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half of FY06 with strong growth in exports and some slowing in non-oil imports.
Apart from further raising the interest rates and the prices of fuel oil, the IMF also
suggested increasing revenue collection as a matter of priority as the government is
preparing the budget of FY07.
On petroleum prices, it observed that the present policy entails considerable and
growing economic costs, mainly benefiting higher income consumers, reducing
economic efficiency, and only delaying the inevitable adjustments as losses continue
to mount on the BPC and the NCBs financial position deteriorates.
Replying to a question, Thomas said there are some liquidity problems in the foreign
exchange market while the market needs some improvements in terms of efficiency.
The 3-year PRGF arrangement was approved in June 2003 with a total lending
commitment of $493 million, being disbursed in seven installments, which were later
augmented by about $75 million under IMF's Trade Integration Mechanism (TIM).
Five installments worth $409 million have so far been released with the latest one
($97 million) in February. Discussions on the release of the sixth installment will take
place in May this year if the government continues to implement policies, particularly
on the NCBs and the NBR.
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Conclusion
Through above discussion, we tried to explain some important issues in monetary policy
and its implication in overall economic situation of Bangladesh.
Bangladesh Bank still work heard to get the overall economic trend of the country stable
by checking the monetary policy and implementing some other relevant policy which will
prove to be effective in the long run as well as it will help to create congenial economic
environment in the economy.
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Reference
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Executive Summary
Bangladesh Bank came into existence with retrospective effect from 16th December,
1971. The general superintendence and direction of affairs and business of the Bank are
entrusted to a nine member Board of Directors which consists of the Governor as
chairman, a Deputy Governor, three senior government officials and four persons having
experience and proven capacity in the fields of banking, trade, commerce, industry or
agriculture - all nominated by the government. The board, which is the highest policy
making body, meets at least six times a year and at least once every quarter under the
chairmanship of the Governor. The broad objectives of the Bank are t o manage the monetary
and credit system of Bangladesh with a view to stabilizing domestic monetary value.
Functions Review and drafting of banking statutes, Determination of capital adequacy
requirements, asset classification and provisioning standards. To preserve the par value of
the Bangladesh Taka; formulate policies with a view to restraining insider lending.
Monetary policy is the process by which the government, central bank, or monetary
authority manages the money supply to achieve specific goals. Monetary policy can
involve changing certain interest rates, either directly or indirectly through open market
operations, setting reserve requirements, acting as a last-resort lender (i.e. discount
window lending), or trading in foreign exchange markets. Monetary policy is associated
with currency and credit. For many centuries there were only two forms of monetary
policy: decisions about coinage, and the decision to print paper money to create credit.
The tools of the monitory policy are monetary base, reserver requirements, interenwest
rate, currency board, etc. Monetary policy in Bangladesh is formulated around inflation
and output growth rates as the basic policy targets.
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Letter of Transmittal
To
Md. Harunur Rashid
Lecturer
Department of Business Administration
Dhaka City College
Dear Sir,
It is a great pleasure to submit our report “ Monetary Policy & Its Implication of
Bangladesh Bank”. We have given our best effort to furnish the report with relevant
information that we have collected from many source.
We have concentrated our best efforts to achieve the objectives of the work and hope that
our endeavor will serve the purpose. We shall be highly grateful and obliged if you kindly
accept our report and evaluate it with your sagacious judgment.
Thank you
Sincerely
GALAXY
BBA 5th Batch
Sec- A
Dept. of Business Administration
Dhaka City College
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