University Of Dhaka

Department Of Management Information Systems

Assignment on
What will be the potential macroeconomic consequences of the Monetary
Policy 2021-2022 announced by the Bangladesh Bank?

Course Title: Macroeconomics

Course Code: MIS-201

Submitted To:
Asif Imtiaz
Assistant Professor
Dept. of Management Information Systems

Submitted By:
Asora Yasmin Sneha
ID: 029-14-087
Batch: 14th
Section: A
Department of MIS
 University of Dhaka
What will be the potential macroeconomic
Date of submission: 26-08-21consequences of the
Monetary Policy 2021-2022 announced by the Bangladesh Bank?

Definition of Monetary Policy

Monetary policy is the term used by economists to describe ways of managing the supply of
money in an economy. It is the management of money supply and interest rates by central bank
to influence prices and employment for achieving the objectives of general economic policy. It
works through expansion or contraction of investment and consumption expenditure. The
regulation of the money supply and interest rates by a central bank, such as the Central Bank of
Bangladesh in order to control inflation and stabilize currency. It is one the two ways the
government can impact the economy. By impacting the effective cost of money, the Bangladesh
Bank as a controller of monetary policy can affect the amount of money that is spent by
consumers and businesses.

Objectives of Monetary policy

As stated in the Bangladesh Bank Order 1972, the principal objectives of the country's monetary
policy are

1. To regulate currency and reserves;

2. To manage the monetary and credit system;

3. To preserve the par value of domestic currency;

4. To promote and maintain a high level of production, employment and real income; a

5. To foster growth and development of the country's productive resources in the best national
interest.

Although the long term focus of monetary policy in Bangladesh is on growth with stability, the
short-term objectives are determined after a careful and realistic appraisal of the current
economic situation of the country.
Monetary Policy Statement for 2021-22 by Bangladesh Bank says that-
Despite the shocks from the Covid-19 pandemic and its fallout, preliminary estimates suggest
that Bangladesh economy has attained around 6.1 percent real GDP growth in FY21,
significantly higher than last year's estimated growth of 5.2 percent. This growth has been
supported by healthy growth performances in agricultural and industrial sectors aided by the
government and Bangladesh Bank's growth supportive unprecedented policy measures. On the
other hand, the CPI-based average inflation declined to 5.56 percent (against the target of 5.40
percent for FY21) from 5.65 percent in FY20.

 BB's monetary policy stance for FY22 is designed to continue the ongoing expansionary
and accommodative mode supporting the disrupted economic recovery process while
maintaining appropriate cautions for overall price and financial stability.

 Given the on-going devastating waves of Covid-19 pandemic, the basic challenges that
BB may encounter in the coming months are the restoration of full normalcy in lives and
livelihood, and extending required flow of fund to the intended production pursuits.
Longer sustenance of the current corona virus pandemic situation amid the continuation
of global price hikes, and any unexpected crop loss in the coming seasons due to natural
calamities s might create some undue commodity price pressure down the road.

 The presence of a huge amount of surplus liquidity in the economy attributed to the on-
going expansionary fiscal and monetary stances may also contribute to form some price
pressures in the days ahead.

 The public and the private sector credit growth are projected to be annually grown by
32.6% and 14.8% respectively at the end of June 2022.

 driven sub-branch in the rural remote areas by engaging their own-recruited minimal
workforce for creating quality jobs and enhancing financial inclusion alongside ensuring
proper safety and security; and (4) bringing the education sector, perhaps the most
affected sector due to COVID-19 pandemic, to the refinance scheme so that both the
needy teachers and the students can get their minimum required amount of loans for
purchasing necessary electronic equipment, smart devices.

 Given the economic adversities due to the Covid-19 pandemic, BB will continue its
ongoing progrowth expansionary and accommodative monetary policy stance to support
investment and employment-generating activities, and help create enabling conditions for
the businesses to normalize production and supply chains.
The potential macroeconomic consequences of the Monetary Policy 2021-2022
announced by the Bangladesh Bank will be-

The recently announced Monetary Policy Statement (MPS) 2021-2022 by the Bangladesh Bank
indicates that the monetary policy in Bangladesh has so far restrained the growth-conducive
productive macroeconomic activities by way of limiting access of the inflation and deflation
rate, GDP, price level and so on. While the monetary policy stance is essentially aligned with
the growth paths of Bangladesh economy, considering the effect of ongoing global COVID-19
pandemic challenges, the following discussion illustrates the macroeconomic and monetary
development of Bangladesh 2021-2022 announced by Bangladesh Bank from both global and
domestic contexts.

Like elsewhere in the world, the Bangladesh economy was also badly affected by the pandemic
but managed to grow by 5.2 percent during the fiscal year 2019-2020 (FY20), reflecting its
robustness as compared to some South Asian peer countries such as India, Pakistan, and Sri
Lanka. Though facing pandemic induced challenges, Bangladesh will come back to its economic
growth path in FY21, expecting continued huge remittance inflows and recovery in private
sector credit growth. To achieve the targeted growth path, the BB is expected to continue its
policy supports, while the government of Bangladesh has been providing necessary impetuses
through stimulus packages for pandemic-hit economic sectors. By the grace of policy relaxation
along with the low cost refinance schemes, the BB is expected to reach the annual target of broad
money growth by end of June 2021, maintaining consistency with the recovery of economic
growth and containment of inflation in the coming months of FY21.

Inflation is expected to remain low in 2021 and 2022 for both advanced and emerging market
economies compared with historical averages. Bangladesh banks’ proactive actions for more
credible monetary policy frameworks and communications with market participants intended to
support market functioning, consistent with price stability mandates are possible reasons for
subdued inflation.

The nominal exchange rate of Bangladesh remained mostly stable with a moderate depreciating
trend. Year on year, the exchange rate depreciated moderately from 0.47 percent in June 2020
compared to 0.92 percent in June 2019. The depreciation rate, which showed a declining trend
since October 2017, decreased gradually to 0.06 percent at the end of October 2020, but then
experienced a little bit of appreciation (0.12 percent) both in November and December 2021.
However, the nominal exchange rates of some peer countries such as India, Pakistan, Indonesia,
and Sri Lanka except the Philippines experienced more depreciation than that of Bangladesh,
indicating that the nominal exchange rate of Bangladesh remained broadly stable during FY2021
and until November 2021.
In the first half of FY21, the inward remittances witnessed a phenomenal growth of 37.6 percent
announced by Bangladesh Bank as compared to the same period of FY20, mainly driven by
recent policy initiatives of 2 percent cash incentives on inward remittance and relaxation of
conditions for incentives including an extension of document submission time to 2 months
instead of 15 days. The inflow of remittance in FY20 had also increased by 10.87 percent over
the FY19. Strong growth in remittance inflows and positive export growth together with large
financial assistance from multinational international institutions.

If the Bangladesh Bank and policy makers focus on the above significant factors Bangladesh will
see more robust economic growth in the near future.

Monetary policy of Bangladesh

1. The lending rate of banks, which had come down to single digit or low 2 digits, is rather high
now, nearing 16-20 per cent depending on nature of loans.

2. Although Bangladesh Bank (BB) has been pursuing a contractionary monetary policy, the
government of Bangladesh has been pursuing an expansionary fiscal policy, mainly on account
of safety nets and subsidies. The contractionary monetary policy has reduced the total loan able
funds in economy. The government deficit has further shrunk the funds available for private
sector lending. This has led to crowding out of investments. Such policy if sustained in the long
run can raise the cost of borrowing.

3. Bangladesh being an import-led economy, contractionary monetary policy coupled with

consistent devaluation of taka is taking a big toll both on producer and consumer welfare.
Producers are being affected as their productivity is hampered due to rising costs; consumers are
affected as producers pass on costs to consumers.

4. In the coming days, it is expected that the import payments towards meeting the energy needs
of the country will be high. A high interest rate policy is counterproductive to improving the
domestic productive potential of the economy. It also makes local industry less competitive, thus
reducing the scope for import substitution by setting up local industry.

5. Industrialization in Bangladesh is still in its infancy. Worldwide governments are helping local
producers by offering them tax breaks, cash incentive, subsidy etc. Yet, even rich countries
attach conditions when giving aid that the procurement for machinery/expertise should be made
from the donor country.

6. 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.
Recommendation
i) In Bangladesh, capital markets should be expanded and organized enough to succeed the
monetary policy.

ii) The credit control mechanisms like open market operation, bank rate, etc. should be effective.

iii) A narrow bill market should make the discount rate effective.

iv) Banking habits are also underdeveloped which hampers the effectiveness of monetary policy
seriously. So banking habits should be developed.

v) Steps should be taken to abolish the existence of liquidity trap.

vi) To run the monetary policy smoothly and effectively, it is essential to pay sufficient
attentions to increase the GDP.

Conclusion
The Monetary Policy Statement (MPS) is intended to outline the objective and the modalities of
formulation and conducting of monetary policies by the Bangladesh Bank, its assessment of the
recent and the expected monetary and price developments, and the stance of monetary policies
that will be pursued over the near term .Objectives of the monetary policies of the Bangladesh
Bank as out lined in the Bangladesh Bank Order, 1972 comprise attaining and maintaining of
price stability, high levels of production, employment and economic growth. In such a directed
regime with little or no role of financial prices in influencing the magnitudes or directions of
credit the present MPS (Monetary Policy Statement) provides the monetary policy stance. The
prime objective of the policy stance is to ensure the use of the financial instruments towards
promoting real sector growth at its targeted level along with ensuring reasonable price stability.
The policy stance takes into account recent developments in real, external, fiscal, and monetary
sectors of the economy and the near term macroeconomic outlook for the remaining period of
FY08.

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