Core Policies of Central Bank

Monetary Policy
Monetary Policy and its effect on the economy are crucial in the greater context of
Macroeconomics and Policy making. The correct implementation of the monetary
policies helps Bangladesh Bank to set, fulfill, and improve upon its objectives.
These objectives certainly vary from economy to economy, country from country,
but all in all, every government expects price stability, inflation stability, financial
sustainability, market stability, and others. Among all these, price stability could be
emphasized as a key mandate for every nation, because as history keeps repeating
itself, no matter how much the purchasing power of citizens’ increase, price hike is
always a sensitive issue to deal with given in any economic condition. Now, inflation
stability also helps the central bank to predict the environment of the economy, and
hence aids policy makers in economic decision making and financial planning for the
nation. Moreover, economic sustainability is another major concern for the
government, which is done through boosting employment opportunities and
opening up new areas of private and public expansion. This in turn ensures
Financial Market stability. These goals are of the highest priority as economic
activities are influenced by inflation, financial markets, and employment rate
fluctuation.

Based on the theoretical expansion done above, we could say the primary
objectives of monetary policy of Bangladesh Bank are:

 Price stability in both domestic and international matters

 Long-term growth and development
 A high level of employment
 Resource utilization that is both economical and efficient
 Financial and payment system stability

Twice a year, Bangladesh Bank declares its Monetary Policy Statement for the fiscal
year in the months of January and July. Monetary policy is then executed through
the use of tools and instruments such as the bank rate, open market operations
(OMO), repo and reverse repo, and statutory reserve requirements (SLR & CRR).

Here are the explanations of some of these terminologies:

Bank Rates:
Bank Rates are fixed by the Central Bank in terms of Lending rate and Deposit rate.
Effective from April 1, 2021, just as the economy was hit by the COVID-19
pandemic and lockdown, Bangladesh Bank issued an immediate directive that the
market cap for lending interest rate would be maximum of 9%. This was however
an exception for credit card facilities provider. However, lowering the lending
interest rates also caused rapid decline in deposit rates, making it come down to
4.5 percent to 5 percent, depending on the bank credit rating.

OMO:
Open market operations are the principal tools of monetary policy. Bangladesh
Bank's purpose is to structure the federal funds rate–the rate at which banks lend
reserves to one another.

Repo & Reverse Repo:

The repo rate is the interest rate at which Bangladesh Bank lends to private banks
in exchange for government securities such as bonds or bills. A reverse repo is,
logically, the inverse of a repo, in which the commercial banks are making a short-
term, guaranteed loan to Bangladesh Bank. Reverse repos essentially denote
surplus liquidity in the economy, meaning that the commercial banks have money
left over after fulfilling their liabilities and investing and lending what they are
comfortable with. Bangladesh's cash rate (Policy Rate: Month End: Repo Rate: 1 to
3 Days) was set at 4.75 percent pa in April 2021, up from 4.75 percent pa in March
2021.

Statutory Reserve Requirement:

SRR is the amount of the deposit liability that commercial banks are entitled to
keep as a cash deposit with the Central Bank. According to Bangladesh Bank
guidelines, every bank currently maintains a 13 percent SLR on its deposits.

Reserve Management Strategy

Bangladesh Bank keeps the country's foreign exchange reserves in several
currencies to mitigate the risk posed by extensive fluctuations in major currency
exchange rates and highly erratic movement in interest rates in the global money
market. BB has set up Nostro accounts with many Central Banks. The funds
accumulated in these accounts are invested in Treasury bills, repurchase
agreements, and other government securities in the different currencies. It also
makes short-term deposits with various highly rated and reputable commercial
banks, as well as purchases of highly rated sovereign/supranational/corporate
bonds. The operational tasks of investment are performed by a distinct department
of BB and are governed by investment policy established by the BB's Investment
Committee, which is chaired by a Deputy Governor. The primary premise of the
investment plan is to maximize return on investment while minimizing market risk.

Interest Rate Policy

A variable interest policy was developed as part of the financial sector reform
agenda. Other than Export Credit, banks are allowed to charge/fix their deposit
(Bank / Financial Institutes) and lending (Bank / Financial Institutes) rates. There is
currently no interest rate cap on bank lending, with the exception of pre-shipment
export credit and agricultural loans. Banks, on the other hand, can differentiate
interest rates by up to 3% based on comparative risk factors among borrowers in
the same loan category. With the gradual liberalization of interest rates, banks have
been recommended to declare the mid-rate of the limit (if any) for different sectors,
and banks may alter interest rates 1.5 percent higher or lower than the announced
mid-rate based on comparative credit risk. Banks publish their deposit and lending
interest rates on their websites.

Capital Adequacy for Banks and FIs

Basel-III was implemented with the purpose of strengthening banks' capital bases
and generating a more resilient banking industry. The Basel III rule will be phased
in commencing in January 2015, with complete adoption of capital ratios occurring
in early 2019. Scheduled banks in Bangladesh must now maintain a minimum
capital of Taka 4 billion or a Capital to Risk Weighted Assets Ratio (CRAR) of 10%,
whichever is greater. In addition to the minimum CRAR, a Capital Conservation
Buffer (CCB) of 2.5 percent of total RWA is being imposed and will be kept in the
form of CET1. Aside from the baseline need, all banks have a method for reviewing
overall capital requirements in respect to their riskiness, as well as a plan for
preserving capital at a sufficient level.

The complete implementation of Basel-II for FIs began on January 1, 2012

(Prudential Guidelines on Capital Adequacy and Market Discipline (CAMD) for
Financial Institutions). FIs in Bangladesh must now hold capital of Tk. 1 billion or
10% of Total Risk Weighted Assets, whichever is greater.

Deposit Insurance
The deposit insurance program (DIS) was established in Bangladesh in August 1984
to provide depositors with a safety net. The Bank Deposit Insurance Act of 2000
covers all scheduled banks in Bangladesh. The goal of DIS is to assist strengthen
financial discipline, eliminate moral hazard in the financial industry, and offer safety
net programs to the public at the lowest possible cost in the case of a banking
collapse. A Deposit Insurance Trust Fund (DITF) has also been established to
provide minimal protection (up to Taka 0.01 million) to small depositors in the
event of a bank's failure. The BB Board of Directors serves as the DITF's Trustee
Board.

From January to June 2007, BB implemented a system of risk-based deposit

insurance premium rates that applied to all scheduled banks. Per the new premium
rate instructions, problematic banks must pay 0.09 percent, while private banks
other than problematic banks and state-owned commercial banks must pay 0.07
percent, where the deposit coverage is taka one hundred thousand per depositor
per bank. With this goal in mind, BB has already recommended banks to bring DIS
to the public's attention by putting it on their noticeboard.
Insurance Authority
The Insurance Development and Regulatory Authority (IDRA) was established on
January 26, 2011 as the insurance industry's regulator, after the passage of the
Insurance Development and Regulatory Act of 2010, which replaced its
predecessor, the Chief Controller of Insurance. This organization is run by the
Ministry of Finance, and its general supervision and business direction is overseen
by a four-member executive board led by the Chairman.

IDRA was founded with the goal of becoming the insurance business the country's
foremost financial service provider by establishing an efficient corporate
environment, protecting society's embryonic aspirations, and penetrating deep into
all segments for high economic growth. IDRA's job is to defend the interests of
policyholders as well as other stakeholders under insurance policies, to effectively
supervise and regulate the insurance industry, to ensure the insurance industry's
orderly and systematic growth, and for matters pertaining to or incidental to the
insurance industry.

Regulator of Capital Market Intermediaries

The Securities and Exchange Commission (SEC) regulates capital market
intermediaries and public limited corporations' issuance of capital and financial
instruments. The Securities and Exchange Commission Act of 1993 formed it on
June 8, 1993. The ultimate duty for administering securities legislation falls to a
five-member commission led by a Chairman, which is affiliated to the Finance
ministry.

The SEC's objective is to defend the interests of securities investors, to build and
maintain just, open, and effective securities markets, and to guarantee that
securities are issued properly and that securities laws are followed. SEC's major
functions are as follows:

 Governing the operations of stock exchanges and other financial markets.

 Stockbrokers, sub-brokers, share transfer agents, merchant bankers and
issue managers, custodians of trust deeds, registrars of an issue,
underwriters, portfolio managers, investment advisers, and other securities
market intermediaries must register and be regulated.
 Collective investment schemes, including all types of mutual funds, must be
registered, monitored, and regulated.
 In the securities market, monitoring and regulating all approved self-
regulatory groups.
 In any securities market, prohibiting deceptive and unfair commercial
practices.
 Promoting investor education and offering training to securities market
intermediaries.
 Prohibition of securities insider trading.
 Regulating large-scale stock acquisitions and corporate takeovers.
  Conducting inspections and audits, as well as inquiries and reviews of any
securities issuer or dealer, stock exchanges and intermediaries, and self-
regulatory organizations in the securities market.
 Running researches and disseminating data

Regulator of Micro Finance Institutions

The Government of Bangladesh adopted the "Microcredit Regulatory Authority Act,
2006" (Act no. 32 of 2006) on August 27, 2006, to put Non-Governmental
Microfinance Institutions (NGO-MFIs) under a regulatory framework. The
Government created the Microcredit Regulatory Authority (MRA) under this Act in
order to ensure the openness and accountability of NGO-MFI microcredit activities
in the nation. The Authority is charged with putting the legislation into effect and
bringing the country's microcredit industry under a complete regulatory framework.

MRA's purpose is to guarantee that NGO-MFI microfinance activities are transparent

and accountable, as well as to promote the sector's long-term growth. MRA has
given itself the aim of achieving the following objectives in order to fulfill its
mission:

 To develop and execute policies to guarantee that MFIs have sound

governance and open financial markets.
 Perform in-depth study on major microfinance issues and make policy
recommendations to the government in accordance with the national
alleviate poverty agenda.
 To offer NGO-MFIs with training and connect them to the larger financial
market in order to ensure long-term resource sustainability and efficient
operations.
 Assisting the government in developing an inclusive financial market for the
country's economic development.
 To achieve the MRA's social obligation, define the microfinance sector's goals
for policy guidance and information distribution.

Per the Act, the MRA will be in charge of the following three core functions:

 MFI licensing with express legal authority;

 MFI supervision to ensure that they remain compliant with licensing
standards; and
 Sanctions will be imposed if an MFI fails to satisfy the license and continuous
supervision criteria.

Policy Implementation during COVID-19 Pandemic

Monetary and Liquidity Measures
To maintain ongoing company operations, BB conducted many monetary and
liquidity augmentation measures, including supplying appropriate liquidity and
loanable funds in the market. Reductions in the CRR, bank rate, repo and reverse
repo rates, the adoption of term repo, and the lengthening of the Advance to
Deposit Ratio (ADR) and Investment to Deposit Ratio (IDR) are examples of such
policy initiatives (IDR).

Cash Reserve Ratio (CRR)

 Effective April 1, 2020, the CRR was cut by 50 basis points to 5.0 percent on
a bi-weekly average and 4.5 percent on a daily basis.
 Starting on April 15, 2020, the CRR was cut by 100 basis points to 4.0
percent on a bi-weekly average and 3.5 percent on a daily basis.
 Effective July 1, 2020, the CRR for offshore banking activities was cut by 200
basis points to 2.0 percent on a bi-weekly average basis and 1.5 percent on
a daily basis.
 With effect from 1 June 2020, the CRR for Non-bank Financial Institutions
(NBFIs) has been decreased by 100 basis points to 1.5 percent on a bi-
weekly average basis and 1.0 percent on a daily basis.

Repo Rate
 Effective March 24, 2020, the repo rate was decreased by 25 basis points to
5.75 percent.
 It was cut by further 50 basis points to 5.25 percent as of April 12, 2020.
 With effect from July 30, 2020, the rate was cut by 50 basis points to 4.75
percent.

Term Repo Facility

 With effect from May 13, 2020, a 360-day repo facility was launched to
accommodate banks' and NBFIs' longer-term borrowing requirements.

Reverse Repo Rate

 With effect from July 30, 2020, the reverse repo rate was cut by 75 basis
points to 4.00 percent.

Bank Rate
 • With effect from July 29, 2020, the bank rate was cut by 100 basis points
to 4.00 percent.

Advance to Deposit Ratio (ADR) and Investment to Deposit Ratio (IDR)

 The Advance to Deposit Ratio (ADR) and the Investment to Deposit Ratio
(IDR) for traditional banks have been increased by two percentage points to
87 percent as of April 15, 2020.
 With effect from April 15, 2020, the IDR for shariah-compliant Islamic banks
has been increased by two percentage points to 92 percent.
Credit and Interest Rate Measures
In Bangladesh, the coronavirus outbreak has harmed business conditions and
harmed borrowers' ability to repay their debts. In light of these negative
consequences, Bangladesh Bank has suspended existing loan classification rules,
developed a special policy on loan rescheduling and one-time exit, permitted the
transfer of interest/profit to a non-interest bearing blocked account, loosened rules
for late payment and interest calculation on credit card bills, and instructed banks
to disburse agricultural credit at a 4% interest rate in the crops and grains sector.

Some of the specific measures were:

 Banks and NBFIs can't lower their loan categorization status until June 30,
2020, taking effect from January 1, 2020. Any categorization status
improvements, however, can be done in accordance with current norms and
regulations.
 Under effect from March 19, 2020, banks were able to recognize 50% of the
needed provision against their particularly rescheduled loans as General
Provision (eligible for capital status).
 For LTFF debtors, BB granted a postponement of payments facility from
January to December 2020.
 With effect from April 27, 2020, BB directed banks to give agricultural loans
at a 4 percent concessional interest rate using their own money, and the
Bank can collect the remaining 5% interest as a subsidy from BB.

Refinance Facilities under Stimulus Packages

The epidemic not only interrupted worldwide transportation and supply chains, but
it also needed a variety of public policy measures, such as limited company
operations and lockdowns, which severely slowed Bangladesh's industrial, service,
and informal sector. As a result, in order to alleviate the negative effects of COVID-
19 on production, employment, and export profits, BB has continued to implement
appropriate policy measures, including as lending and refinancing facilities, as part
of the government's announced stimulus packages.

Export-oriented Industries
Under effect from April 2, 2020, a BDT 50 billion stimulus fund was established with
the goal of giving monthly salary to active export-oriented enterprises.

Working Capital for Industrial and Service Sector

On 5 April 2020, the Honorable Prime Minister announced a BDT 300 billion
stimulus program for impacted industrial and service sector enterprises.
Special Working Capital Facility for CMSMEs Sector
On 5 April 2020, the Honorable Prime Minister announced a special incentive
package of BDT 200 billion for Cottage, Micro, Small, and Medium Enterprise
(CMSMEs) entrepreneurs that were seriously hit by the COVID-19 epidemic.

Refinance Schemes
 Taking effect from April 13, 2020, BB created a BDT 50 billion revolving
refinancing fund to provide pre-shipment loans to export-oriented
enterprises. This fund has a three-year validity duration.
 Having effect from April 23, 2020, BB has developed a refinancing plan of
BDT 150 billion from its own resources to provide working capital
loan/investment facilities in the big industrial and service sectors. This fund
has a three-year validity duration.
 Under effect from April 13, 2020, a refinancing program of BDT 50 billion was
established to provide working capital to the agriculture industry (floriculture,
pomiculture, pisciculture, poultry, dairy, and cattle). Banks must disburse the
allotted funds by March 31, 2021.
 BB established a BDT 30 billion refinance plan dubbed "Refinance Scheme for
Professionals, Farmers, and Marginal/Small Businessman of Low Income,
2020." The plan will run for three years, starting on April 20, 2020.
 Having effect from April 26, 2020, BB established a BDT 100 billion revolving
refinancing plan for the CMSME sector to provide working capital facilities to
entrepreneurs. This fund has a three-year validity duration.

Other policies included the Export Development Fund (EDF), short-term external
borrowing, uninterrupted digital financial services, critical service management, and
a business continuity plan, among others.

Projection & Recent Activities of Bangladesh Bank

Projections
To counteract the effects of covid-19, Bangladesh Bank has pursued expansionary
monetary measures and offered policy assistance. The impact of these measures,
however, has been varied. The influence of monetary policy on GDP, the private
sector, inflation, and other factors is addressed in length in the following section:

 Back on Track of Growth Trajectory: In the event of a pandemic, the

central bank is anticipated to pursue an expansionary monetary policy in the
hopes that a larger level of money supply in the economy will lower interest
rates, so encouraging increased investment, which will contribute to the
creation of jobs. The Bangladesh Bank is optimistic that its expansionary
monetary policy would provide the best-case scenario results, having set a
target of 7.2 percent GDP growth for 2021-22. However, the World Bank has
suggested that the rate should be 6.4 percent, thus this appears to be unduly
 optimistic. Even if the central bank's optimism is not fulfilled, the
expansionary monetary policy may be considered partially successful since
the World Bank's projection of 6.4 percent growth is a revised projection,
whereas the World Bank's prediction of 6.4 percent growth is a revised
projection of 5.1%.
 The central bank's optimistic forecasts for private sector loan growth
are unlikely to be met: When it comes to predictions for private sector loan
growth, Bangladesh Bank has been overly optimistic. According to the bank,
the growth rate in 2022 would be 14.8 percent. The pace of growth slowed
from 8.6 percent in fiscal year 2020 to 8.4 percent in fiscal year 2021. As a
result, the pandemic has not resulted in increased investment as a result of
the expansionary monetary policies and lower interest rates that have
ensued. Because of the epidemic, there is still skepticism about the future.
Businesses have been hit hard and are still striving to get back on their feet.
Furthermore, according to a poll conducted by the South Asian Network on
Economic Modelling (SANEM) and the Asia Foundation, 69 percent of
enterprises did not get any stimulus funds.
 Inflation is expected to rise as a result of surplus liquidity: When a
country's central bank adopts an expansionary monetary policy to encourage
investment and job creation, inflation is likely to rise. Similarly, during the
epidemic in Bangladesh, real inflation rates were greater than forecasted
ones. Prior to the epidemic, however, most of the fiscal years' inflation
objectives were met. As a result of the epidemic, greater inflation rates have
developed.

Recent Activities
 Devaluation of Currency: In order to preserve the interests of exporters
and remitters, the Bangladesh Bank is considering a steady devaluation of
the taka versus the US dollar. However, because of kinks in the global supply
chain, increased imports and transportation costs, and a slowdown in
remittances, the move may exacerbate inflationary pressures. For the first
time, the central bank depreciated the interbank exchange rate, allowing the
Bangladeshi currency to soar to Tk 86 versus the US dollar.
 BDT 5 billion refinancing fund for village returnees: The fund would
distribute collateral-free loans of up to Tk 500,000 for a three-year period,
with the goal of creating jobs and bringing individuals afflicted by the
epidemic out of poverty. The loans have a 6-percentage-point interest rate
limit. Borrowers would be able to repay loans of up to Tk 200,000 in two-
year installments with a three-month grace period. Loans up to Tk 500,000
have a three-year repayment schedule with a six-month grace period.
 Individual e-transfers from the government have nearly tripled: A
revolutionary Bangladesh Bank platform has assisted the government in
 electronically settling virtually all of its payments to citizens, boosting the
country's financial inclusion goals. Salaries provided to public sector
employees, monetary assistance to the poor and marginalized, and student
stipends are all examples of payments sent to persons via digital channels.
According to data from the central bank, payments using the platform,
known as the Government e-Transaction Processing Hub (GeTPH), increased
by 159% year on year to Tk 92,139 crore last year.

Recommendations for Bangladesh Bank

In light of recent macroeconomic developments, it is argued that the banking
system has already been inundated with historically high levels of surplus liquidity
as a result of ongoing expansionary and accommodative monetary and fiscal policy
stances, even though growth of some other monetary and credit aggregates has
been relatively slow due to ongoing COVID-19 related uncertainties. If the
circumstances warranted, BB will take appropriate policy action at any moment if
unanticipated price pressure develops or irregular asset price bubbles occur due to
the availability of sufficient surplus reserves in the banking sector. BB may also
consider taking quick action after acquiring foreign exchange from the foreign
exchange market to prevent any further injections of local money into the system.
However, given to the recent rise in oil and other commodity prices in global
markets, BB's market interventions to minimize appreciation pressure on the local
currency may be reduced in the coming months. Significant improvements in both
domestic and external demand, particularly with the progress of COVID vaccination
in the coming months, are expected to be beneficial in addressing excess liquidity
and restoring a good balance between the local currency and foreign currency
markets without the need for additional measures. The primary issues that BB may
face in the next months, given the current pandemic crisis, are restoring full
normality in lives and livelihoods, as well as extending necessary find flow to
productive pursuits, particularly those that have been inoperative, resulting in
employment and income losses. To that aim, BB will place a strong focus in the
coming days on fully implementing the government's stimulus packages as well as
enhancing its own refinancing windows. For this reason, BB will evaluate all policy
alternatives for fostering new entrepreneurs and creating new jobs, including: (1)
continuation of the ongoing refinance policy with a greater focus on micro, small,
and labor-intensive medium enterprises, particularly in the transportation, tourism,
hospitality, healthcare, and small businesses sectors; (2) fully operationalize its
credit guarantee scheme to expedite CMSMEs financing, particularly in the light
engineering, duster and value chain, and women entrepreneurs' development
sectors; (3) allowing banks and financial institutions to lend to micro, small, and
labor-intensive medium enterprises; (4) Including the education sector, which is
likely to be the most impacted by the COVID-19 epidemic, in the refinancing
program so that both needy instructors and students may obtain the minimal
amount of loans required to purchase necessary technological equipment and smart
devices.

Along with promoting a socially responsible finance attitude, BB's financial system
and monetary management will be extremely watchful in feeding financial stability
so that nothing may threaten our ultimate successes in meeting the Sustainable
Development Goals (SDG) by 2030. BB will use all of its monetary policy tools to
handle the situation whenever it arises in the future months in order to ensure
monetary sustainability.

References
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COVID-19 Pandemic. Bangladesh Bank.

Bangladesh Bank. (2022). Monetary Policy Report 2021-2022. Dhaka: Bangladesh

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asks-bankers-to-augment-remittance-inflow-amid-dollar-crunch-1642041266

Lee, I. H. (2021, Dec 21). Monetary Policy Transmission Mechanism of Bangladesh.

Micro Finance Institutions (MFIs). (n.d.). Retrieved from Bangladesh Bank- Central
Bank of Bangladesh: https://www.bb.org.bd/fnansys/mfi.php

MONETARY POLICY AND SUSTAINABILITY- THE CASE OF BANGLADESH. (2015).

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TBS. (2022, Jan 20). Growth recovery and higher inflation: Intended and
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Uddin, A. Z. (2022, Jan). Govt e-transfer to individuals nearly triples. Retrieved

from Daily Star:
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