This action might not be possible to undo. Are you sure you want to continue?
for achieving the objectives of general economic policy.With the shifts of the policy stance of the government in various phases, necessary adjustments were made in the country's monetary policy. The Department of Research in the Bangladesh Bank plays an important role in the formulation of economic policies of the country. The principal function of the Department is to help the bank in the formulation ofmonetary 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 compassof comprehensive reports and reviews which are submitted for perusal of theGovernor, Deputy Governor, and Senior Executives of the bank, as also the bank‘sBoard of Directors. 1.1 Objective of the Study A clear objective help in preparation of well decorated report in which other take the right type of decision .So, we identifying objectives is very much important. Our objective of preparing the report is: ● To know about the Overview on Bangladesh economy ● To know about the Importance of Monetary Rules ● To know about the major Instruments Use by Bangladesh Bank ● To know about the Bangladesh‘s Monetary Policy 1.2 Importance of the Study In our Money and Baking course we will only study on our text book about themonetary policy, but its basic implication in a country is practically unknown to us.So for gathering the practical knowledge about monetary policy is only then canachieve, when a practical task or report will make over it. Here our report providesinformation about to the monetary policy, the important rules regarding themonetary policy, the instruments of monetary policy etc. On the second part of ourreport contains the economy condition of Bangladesh as well as its monetarysystem. So this report will help us to know about the monetary policy ofBangladesh at a glance with its application. 1.3 Bangladesh Economy
Bangladesh is primarily an agricultural country, with a growing industrial sector.The vast majority of its inhabitants are farmers, although few of them have actualownership over the land that they farm. Throughout the 1980s, Bangladesh becamehighly dependent on foreign aid, although this brought little real change in the livesof its people. The economy of Bangladesh is the 31st largest economy in the worldas measured by purchasing power parity (PPP). It has made significant strides in itseconomic sector since its independence in 1971. The Bangladeshi garments industry is one of the largest and most comprehensiveindustries in the world. Before 1980, Bangladesh's economy and foreign exchangeearnings were driven by the jute industry. However, this industry started to falldramatically from 1970, when polypropylene products gained popularity over thejute products. Current GDP per capita of Bangladesh registered a peak growth of 57% in theSeventies immediately after Independence. But this proved unsustainable andgrowth consequently scaled back to 29% in the Eighties and 24% in the Nineties.Bangladesh has also made major strides to meet the food needs of its increasingpopulation, through increased domestic production. Currently, Bangladesh is thefourth largest riceproducing country in the world. The land is devoted mainly torice and jute cultivation, although wheat production has increased in recent yearsthe country is largely self-sufficient in rice production. Nonetheless, an estimated10% to 15% of the population faces serious nutritional risk. Bangladesh'spredominantly agricultural economy depends heavily on an erratic monsoonalcycle, with periodic flooding and drought. Although improving, infrastructure tosupport transportation, communications, and power supply is poorly developed. Thecountry has large reserves of natural gas and limited reserves of coal and oil. WhileBangladesh's industrial base is weak, unskilled labor is inexpensive and plentiful. Overview on Bangladesh Economy ● At the time of independence, Bangladesh pursued a socialist economic policy. ● By 1977, all nationalized institutions were returned to their former owners, but this resulted in little substantial economic progress. ● Between 60% and 75% of Bangladesh's population are landless. ● Bangladesh's GNP per capita is $360. ● Despite its low GNP per capita, Bangladesh has done better in areas of human and social advancement than many other countries with similar income. 1.4 Condition of Investment Sector on Bangladesh Economy
The stock market capitalization of the Dhaka Stock Exchange in Bangladeshcrossed $ 10 billion in November 2007. The earliest strategy of the Bangladeshigovernment was to promote industrialization by making funds available forbusinessmen through subsidies and national banks. But this plan went awry, as thegovernment lacked the political will to stop financing poorly-performingcompanies. As a result, the national banks had built large heaps of 'nonperforming'loans which are unlikely to be ever repaid. The failure of the national banksdiscouraged investments by the emerging private financial sector. Currently,Bangladeshi entrepreneurs generally suffer from lack of funding as many banks arereluctant to invest in industry and have instead turned their attention to consumer credit. 1.5 Condition of Industry Sector on Bangladesh Economy Fortunately for Bangladesh, many new jobs - mostly for women - have been createdby the country's dynamic private ready-made garment industry, which grew atdouble-digit rates through most of the 1990s. By the late 1990s, about
Following the worst of the unrest in late May. silk.44 per cent. Those who had earned their living in the textile industry were forcedto rely more completely on farming. During 2001-2002.5 millionpeople. and the textile industry became dependent onimported yarn. Fresh outbreaks of violenceoccurred on Oct 2. CHAPTER2 Monetary Policy 2. which employs 2. who areamong some of the most lowly paid in the world. 1. which includes knitwear and ready-made garments along with specialized textile products. which included business and worker representatives.6 Condition of Textile Sector on Bangladesh Economy Bangladesh's textile industry. in the processlogging a record growth rate of 24.50. up from the current level of Tk950. but at least some of these protests appear to havestemmed from factory-specific factors. Cottongrowing died out in East Bengal. as textile workers. 3 and 10.53 billion in FY2005-06. and electric power consumption percapita was less than one-fifth.1 Monetary Policy . yarn. which saw at least one worker killedas police shot live rounds at protesters. accounted for 75 per cent ofBangladesh's total exports of US$10. were employed in the garments sector. rather than industry wide discontent. ordering it to report on a suitable new minimum wage in three months. and cloth were the envy of much of the promoter world. for example.125 million.662. 000. Whether this new wage will placate workers. finallyreleased its conclusions on October 9. mostly women. is the nation's number one export earner The sector.Bengali muslin. representing52% of Bangladesh's total exports.The introduction of machine-made textiles from England in the late eighteenthcentury spelled doom for the costly and time-consuming handloom process. The dyes.export earnings from ready-made garments reached $3. At independence Bangladesh was one of the least industrially developed of thepopulous nations. since May of 2006 theindustry has been plagued by on-going industrial unrest. The Commission. regular rest days andsafer working conditions. who allege years ofunsafe and abusive conditions remains to be seen.1. the government formed a WageCommission. and brocade were worn by the aristocracy of Asia and Europe. but far below initial worker demandsfor Tk3. Only the smallest vestiges of a once-thrivingcottage industry survived. Eastern Bengal was known for its fine muslin and silk fabric before the Britishperiod. However.2 million workers. recommending the wage be set at Tk1. have staged regular violentdemonstrations in a bid to achieve a higher minimum wage. Annual per capita consumption of steel and cement was onlyabout one-third that of India.
Monetary Policy is the management of moneysupply and interest rates by central bank to influence prices and employment forachieving the objectives of general economic policy. Monetary policy worksthrough expansion or contraction of investment and consumption expenditure. According to Paul Einzig .Monetary policy is the term used by economists to describe ways of managing thesupply of money in an economy.
―Monetary policy includes all monetary decisions and measures irrespective ofwhether their aims are monetary and non-monetary.‖ According to Harry G. and all non-monetary decisionsand measures that aim it affecting the monetary system. to exchange the quantity.‖ From the above discussion monetary policy may be defined as the central bank‘spolicy pertaining to the control of the availability. 2. The gold standard was a goodexample of fixed rates.2 The Importance of Monetary Rule There is a difference in between ―pegged‖ and ―fixed‖ rates. which lies in theadjustment system. Shaw ―By monetary policy we mean any conscious action undertaken by the monetary authorities. This system got into .‖ According to G. Johnson ―Monetary policy employing the central band‘s control of supply of money as an instrument for achieving the objectives of general economic policy. Countries defined their currencies in terms of weights ofgold and exchange rates represented the ratios of the weights. cost and use of money and creditwith the help of monetary measures in order to achieve specific goals.K. or cost (interest rate) of money. A fixed exchange rate is the monetary rule that contains anequilibrating mechanism of the balance of payments.
This is because there is no currency to fix the US dollar. Some countries don‘t have the option of fixing the exchange ratebecause some countries are too small but one of the countries is too large to fix. On the other handpegged rate is an arrangement whereby the central bank intervenes in the exchangemarket to peg the exchange rate but still keeps an independent monetary policy. countries turned to finance deficit etc. as during war. A flexible exchange rate is consistent with any monetary policy at allhyperinflation.such as United States. A fixed exchange rate is a monetary rulethat gives the country the monetary policy of the partner country. Some writers now speak of a ―currency board‖ in order todescribe a fixed exchange rate system because there is a common confusionbetween pegged and fixed exchange rate. Success of gold depends on fiscal prudence. A country fixes the exchange rate between its currency and an important foreigncurrency. A currency board works automatically to preserve equilibrium in thebalance of payments.trouble very rarely. Inthis case the only choice is .
In effect. given the latter‘shigh share in national expenditure. and is therefore anoverriding priority. However. the policy stance is eased toprovide stimulus at times of slowdown when actual output lags the longer runpotential. the exchange rate served as a nominal anchor. The primary objective of the Monetary Policy of Bangladesh is to outline theformulation and implementation of monetary policy of the Bangladesh Bank (BB).inflation targeting or monetary targeting. 2. and economic growth. since independence BB operated under avariety of pegged exchange rate systems amid capital controls ■ To manage the monetary and credit system ■ To maintain the par value of domestic currency ■ To promote 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. and the stance is tightened to slow things down when the economyoverheats with actual output running ahead of the sustainable longer run potential. which comprises— ■ To achieve the price stability ■ To regulate currency and reserves ■ To promote and maintain a high level of production. stimulating higher growth is imperative forrapid reduction and eventual elimination of endemic poverty. So from all of thesediscussion we see that how monetary rules affect the economy and its importance infixing the exchange rate. monetary policies are formulated typically with the output gap (difference betweenthe actual and the longer run potential output) in view. and the pursuit of monetarypolicies comprise the continual balancing act of supporting the highest sustainableoutput growth while adjusting smoothly to internal and external shocks that theeconomy encounter from time to time. monetary policies seek to maintain price stability bysustained stable output growth in the face of internal and external shocks that arefaced from time to time. It is very important that monetaryaggregates contain important information about the economy. In developed economies with production factors at or close to full employment. with the ultimate goal ofmaintaining price stability.and to convey its assessment of the recent and the expected monetary and inflationdevelopments to the stakeholders and the public at large. dominated the inflation . prices of non-tradable goods. The Bangladesh Bank Order of 1972 outlines the main objectives of monetary policy in Bangladesh.3 Objectives of Monetary Policy Monetary policy aims and methods have changed over time. Both in developed anddeveloping economies. Stability of the inflation rate is an important policy and lowinflation rate produce more stable inflation rate. the short-term objectives are determined after a careful and realistic appraisal of the current economic situation of the country. The stimulus provided by monetary policies in accommodatingthe growth aspirations must not however over step towards macroeconomicimbalance destabilizing and jeopardizing future growth. employment and realincome. For developing economies like Bangladesh with significant underemployment/under exploitation of production factors.Diagnosing and treating asset price bubbles symptomatic of overheating are majorissues of current debate in monetary policy. which dependson inflation rate.
The relationbetween labor and capital would be ideal and all-round efficiency will increase. ● The creation of full employment condition will almost automatically. import is curtailed and export expanded. ● Full employment will. makes economic calculationpossible. higher interest rates make it less attractive for foreign countries to borrow from the defect country and induce them to invest there. ● Before full employment is achieved. A very slow rising price level (or mildinflation) may have all the virtues of a stable price level. These will give incentive for thefuller utilization of resources and for higher income. controls business cycle and introduces certainty in economic life. because the workers are not sacred of unemployed situation. which can contribute moredirectly to economic growth.because such economies have both unemployment and under employment open anddisguised. investment can be made in excess of savingand a price increase in a slow rate is permissible. the full employment objective is more crucial. Indeed theprevailing exchange rate during the 1970s and 80s remained mostly overvaluedwhich was also accompanied by high (typically double digit) inflation The Broad Discussion of Monetary Policy Objective ►Price stability Inflation distorts economic calculations and expectations while deflation createsdepression in the economy. the monetary policy should try to achieve at least a near fullemployment situation. lead to increase productivity ofworkers. output and employment. Thus price stability should be the main aim of monetarypolicy. according to Einzig. ► Exchange Stability Maintenance of stable exchange rates is an essential condition for the creation ofinternational confidence and promotion of smooth international trade on the largestscale possible. ● Under dear money policy.behavior. stagnation and under consumption trap. ► Economic Growth This comparatively a recent object of monetary policy. Price stability promotes business confidence. A restrictive monetary policy trends to reduce a country‘s balance ofpayment defect in the following ways: ● It tends to reduce demanding the country. lead to themaximization of social and economic welfare of the society because the resourceswould be used fully and effectively. which in turn tends to reduce the demand for imports as well as for domestic goods. Thus. ● Reduction in domestic demeans holds down the rate of inflation or reduces priceswhich makes imported articles less attractive and makes the defect country‘sexports more attractive to foreigners. In less developed countries. and thereby can iron out cyclical fluctuations. Be that as it ma. though full employment cannot be achievedwithin a short period. ► Full Employment In under developed countries. it must be admitted that price stability does not be necessarilymean absolute constancy of price level.Full employment objective of monetary policy has certainfar-reaching beneficial effects: ● Full employment can maintain a high level of aggregate effective demand. Monetary policy can contribute to economic growth inthe following ways: . If refers to the growth of realincome or output per capita.
At present. the government adopted a comprehensive Financial Sector ReformProgramme (FSRP). ► Balance of Payment Equilibrium Balance of payment equilibrium condition is a position at which a country repaid itsdebts and has attained an adequate reserve at zero balance over time. following which the country's monetary policy assumed a neworientation towards promotion of market economy in a competitive environment. Quantitative/ General Methods: 01. investment and the use of credit in the most productive channels in the economy. Maintaining price stability while supporting the highest sustainableoutput growth is the stated objective of monetary policies pursued by theBangladesh Bank. open marketoperations. Variation of reserve ratio . and the equilibrium rate of interest remains unchanged.5 Instruments of Monetary Policy In 1989. and the channels oftransmission. ● Monetary policy gives guidance. 2. ● When necessary. instruments.the fixation of target continued to remain as the central piece of exercise. ► Neutrality of Money Neutrality of money indicates a situation in which changes in the quantity of moneyoccurs in such a way as to cause a proportionate change in the equilibrium prices ofcommodities. 2. It isrealized that the existence of balance of payment deficit seriously reduces the abilityof an economy to attain other objectives. Open market policy 03. ● Monetary policy minimizes fluctuation in business activity and prices. It can create atmosphere in which a higher rate of saving and investment would be generated.● It can maintain a balance between monetary demand and supply of goods.Bangladesh Bank started moving away from direct quantitative monetary control toindirect methods of monetary management since the beginning of 1990. the money supply is regulated throughindirect manipulation of reserve money instead of credit ceiling. Neutrality of money does not mean constantmoney supply. an increase or decrease in the quantity of money will both produce anddisturbing effects in the economy.4 Strategy of Monetary Policy The MPS (Monetary Policy Statement) starts with expression of the monetarypolicy frameworks in terms of the goals. and statutory reserve requirement. If money isneutral. ● It influences the rate of interest. the way toachieve it had been changed. and itcan also supply money is such a way as is consistent with the supply of goods andservices. Credit ceilings on individual banks and direct controlsof interest rates were withdrawn. Although. It creates saving intuitions and monetization in the saving of thecommunity towards productive investment. So. means that the effect of changed money supply on real variables inthe economy would be neutral. monetary policy must make intoconsideration the international payment problem. Major instrumentsof monetary control available with Bangladesh Bank are the bank rate. ● It creates stability for growth. This mainobjective on monetary policy has become significant in the pose-period. it expands credit and when it is not necessary. Bank rate policy 02. looks after monetization in the unorganized sector and controls the actives of the financial intermediaries. The methods of credit control can be classified as follows: a. if restricts theflow of credit. rediscount policy.
Effects Effects on price level If bank rate increases. In an opposite way amount of credit will be increased in the country. Moreover. Open market policy . Because businessmen becomehighly ambitious of their profits in this situation and will borrow money though theinterest rate increases. So. ●bank may successes during the time of prosperity. Regulation of consumers‘ credit 04. As a result. After that it is the best weapon of central bank to control the amount of credit in the economy. This decreased price level will again encourage expertand discourageimport.b. 01. Direct action 03. Publicity The methods of credit control are described below: a. Rationing of credit 02. So. This will reduce production and increaseunemployment in the economy. 02. Opposite effects of abovewill be experienced if the central bank decreases the bank rate in the economy. ● Reduction in bank rate may not be successful to increase the amount of credit during the time of depression. Qualitative/ General Methods: 01. ● If commercial banks have excessive money then bank rate may not be effective because they will lend in lower interest rates though bank rate increases.investment will be profitable. Bank rate policy The rate which central bank lends money to the commercial banks and discountsbill of exchange is called bank rate. If there is a decrease inthe bank rate the opposite e results of above will be experienced in the economy. income and price level will go downand depression in business and trade will be the outcome. If central bank increases the bank rate then thecommercial banks will increase their marker of interest rates. bank rate policy has several limitations in its operation. cost of credit will increase and the businessmen will reducetheir borrowing s form commercial banks. Limitations of Bank rate policy ●bank rate policy would not be effective if there lacks strong linkage between bank rate and market/ interest rate especially for a developing country like Bangladesh. Quantitative/ General Methods: The methods by which Central Bank controls the total amount of credit in the economy are termed as quantitative methods of credit control. As a result theborrowers borrow less form commercial banks and amount of credit reduces in theeconomy. It will ensure the insertion of foreign capital into theeconomy and leakage of domestic capital will be stopped. increased bankrate will decrease the piece level because amount of credit will be reduced intocountry. Moral persuasion 05. Effects on foreign trades An increase in bank rate wills increases other interest rates in the country. which will make balance of payment favorable.
01. Limitations of open market policy ●Selling. Thus money goes to the central bank andamount of money for credit creation reduces which in turn contracts the amount ofcredit in the economy.During depreciation credit expansion through purchasing creditinstruments is not possible.it increases the amount of cash in commercial banks. ● It is difficult for central bank to supervise whether the credit money is being used purposively or not. This is called reserve ratio. In this case it willnot be effective Decrease in reserve ration may not be effective to expand credit during depression as businessmen are discouraged to borrow in this situation. These methods do not deal with theamount of credit rather change the flow or direction of credit used in differentsectors of economy. In an opposite way central bank canincrease the amount of credit by decreasing the reserve ratio. Because bank having large volume of cash will have sufficientexcess reserve to create credit though reserve ration increases. ● Non-scheduled commercial banks are out of this control. Rationing of credit Rationing of credit means fixing the amount of credit among different sectors of theeconomy. then it can order the commercial banks not to disburse creditbeyond required amount in garments industry and divert the excess amount to juteindustry. it sales the credit instruments in the market. ● Sometimes commercial banks think this type of work as an unwanted intervention by central bank. Limitations ● Borrowers may use the credit money in other purposes. ●Buying. Qualitative/ General Methods The methods used to control credit in special sectors for special purposes are calledqualitative\selective methods of credit control. Because in this period businessmen will not want toborrow from commercial bank. 03. If central bank increases thisreserve ratio. For example. When thecentral bank intends to contract credit. Limitations ● Increase in reserve ration can be effective for that commercial bank having smallamount of cash.it reduces amount of cash of commercial banks .These instruments are purchased by commercial banks and people also buy themissuing cheques to the commercial banks.The method by which the central bank controls the amount of credit by selling andbuying government credit instrument is termed as open market operation. excess reserve in commercial banks will reduce and thus creditcreation will be contracted in the economy. ●Depreciation. Direct action . b. By this method central bank can decrease the amount of credit in onesector and can increase it in other sector. But it may not beable to expand credit if commercial banks repay loan to the central bank with thisincreased cash. if central bank thinks thatthere is excessive investment in garments industry and jute industry suffers formrequired investment.but if commercial banks take loan form central bank it would not be effective to reduce credit. 02. Variation of reserve ratio Each commercial bank has to keep legally a certain portion of its total deposits asreserve with central bank.
which are purchased ininstallment basis. open market operations. central bank sometimes requeststhe commercial banks to increase or decrease credit. and the analytic channels of transmission) be articulated forgreater clarity and transparency benefiting both the policy makers as well as thestakeholders. directly adds to the credibility of the central bank. In contrast. however. As a guardian‘s request. discounting bills of exchange at a rate higher than the prevailing rare.. The downward revision in CRR and SLR were made toenable the banks to increase their lending capacity. 2.6 Major Instruments Use by Bangladesh Bank Major instruments of monetary control available with Bangladesh Bank are thebank rate.1 The Policy Target(s) In this backdrop it is necessary that the monetary policy framework (in terms of thegoals.7. thechallenge in the developing world is how to augment the capacity output throughboth productivity growths as well as via the installation of additional capacity. where the goals are transparent and theirachievement verifiable. rediscount policy. Faster growth in most developing contexts is necessary to reduce (and eventually . ►Bank rate 5% and 20% respectively on 24 May 1992. As a result. 2.e. But central bank should apply different types of method simultaneouslyrather to use single method to make credit control effective. It was followed inUSA during Korean War. If central bank circulates to increase the amount of down paymentor reduce the number of installment then consumer‘ credit will be contracted in theeconomy. The CRR was further lowered to 4%from 4 October 1999. Publicity Sometimes central bank applies publicity as a weapon of credit control. etc. 05. Thus central bank applies various types of measures to control credit in theeconomy. 04. the deviation of actual output from its long-run equilibriumlevel) and the inflation gap. and statutory reserverequirement. Centralbank publishes weekly. A policy system.If it is proved by central bank that credit creation policy of any commercial bank isnot transparent then central bank can take punitive measures against that bank andthus affects its credit creation. These punitive measures may be of not rediscountingbills of exchange.commercial banks follow it and thus amount of credit is controlled in the economy. a majorobjective of this document is to define such a framework. Most industrial economy monetary policy is run with the task of keeping watch onboth the output gap (i.7 Frameworks of Bangladesh’s Monetary Policy 2. As a result the commercial banks become more careful inthe line of their credit creation. which is similarly defined. Regulation of consumers’ credit It is a method to control credit in consumable goods. the commercial bank will compelled to follow sound central bank policy. 03. In an opposite way consumers‘ credit can be increased. Moral persuasion To make the banking system sound and efficient. the instruments. fortnightly or monthly bulletins and annual reports wherebalance sheets and other business and economic condition of different commercialbanks are presented well.
core inflation may be a more credible targetthan CPI inflation. although anchored along different perspectives. monetary policy must play its due role.modified appropriately in the light of unfolding actual developments. in the Bangladesh context. the construction methodology is made complex bytwo facts. The MTMF projected6. Inview of the good post flood recovery of agricultural output and the better thanexpected holding up of apparels export demand after MFA expiry. Manycentral banks as a consequence focus on the core inflation. (c) Supporting global economic and financial stability (so long as the latter maybe targeted without prejudicing the first two goals) as the chief monetarypolicy goals. While fiscal policy too is relevant in addressing these goals and thus there is a need for policy coordination. food and energyprices. Periodic adjustments in administered energy prices havealways lagged the world market changes in both the time line as well as inmagnitude often most dramatically. While there is no standard measure of core inflation in theBangladesh context at this time.eliminate) common poverty. In broad terms therefore the latter view is consistent with the BB vision as enunciated above. Growth target GDP growth projections of the Medium Term Macroeconomic Framework (MTMF)in the government's National Strategy for Accelerated Poverty Reduction (NSAPR). Anymonetary stimulus to promote growth must keep in perspective the broader goal ofmacroeconomic stability. The Bank of Canadaargues that it is the core concept that better predicts the underlying price stability inthe economy. are used asoutput growth targets for the purpose of monetary policies.5 percent and 6. Price stabilitywould also include the stability of the currency regime.8 percent real GDP growth for FY06 and FY07 respectively.g. However contemporary evidence amply illustrates thatmonetary policy cannot deal well with the inflationary impact of external shockssuch as the recent international price of oil and related energy products. While leading central banks in the industrial world have increasingly adopted the unitary goal of fighting inflation. (b) Ensuring full employment. Secondly. and while theappropriate commodity group weights may require a re-think. Hence as a policy goal. the volatility of the international energy pricesappear not to filter down to the CPI since the relevant domestic prices aresubsidized by the state. First is that food items constitute nearly 60 percent of the CPI index. interestingly directive by enumerating (a) The promotion of price stability. real GDP . Hence the appropriate monetary policy strategy in the Bangladesh context would beto achieve the goal of price stability with the highest sustainable output growth. Inflation Target It is the general wisdom that monetary policy tools are of immediate influence incontrolling inflation.. While it may be useful to focus on the non-food component of the index (whichoccupies only 41.6 percent of the full CPI) in order to gauge at the build-up ofunderlying inflationary forces in the economy. which is typicallyconstructed by subtracting the most volatile components (e. it would be unwise to treat this aloneas a valid measure of core inflation. indirect taxes etc) from the consumer price index (CPI). to ignore foodentirely in defining the core inflation may render the construction a bit like‗throwing the baby away with the bath water. which is a prerequisite for future growth.
such asinvestigations of certain businesses suspected of hoarding supplies. Policy brief on ―Monetary Policies‖ The objective of the Policy Brief exercise is to articulate aconcrete policy agenda.4 percentagepoints compared with the preceding year. They have. The Daily Star.8 percent and 7. declined by 0. CHAPTER3 Review of Literature Election 2001: National Policy ForumDhaka: 20-22 August. at 24. Unavailability of intra year GDP growth estimates is a constraint in appropriate ongoing revision of monetary and othermacroeconomic policies in the context of unfolding economic realities. with strong emphasis on its implement ability. at around the current level under 7. growth wasunderpinned by private consumption. The manufacturing and trade performancesustained steady expansion in services.1Organized by: Centre for Policy Dialogue. The point ofdeparture of the present Policy Brief is the premise that a sound and .5% in FY2007. as well as its encouragement to new importers toenter the market and so induce greater competition. a large increase inworkers‘ remittances from abroad. on an upswing phasesince 2001. as did a further rise in international food and commodityprices.2 Conducting of monetary policies As mentioned in the foregoing.2% in June 2007 on a year-on year basis.Strengthening the capabilities of BBS towards regular estimation and release ofreliable quarterly GDP data has therefore assumed priority.3% of GDP in FY2007. propelled by risingdomestic and external demand. Private investment. on moderation in public investmentfollowing downsizing of the annual development program.But total investment.1).2). A strong expansion in industry (9. Monetary policies willtherefore be on tightened stance until inflation levels off and enters its downswingphase. Inflation continued to creep up.growthtargets for the purpose of monetary policies have been taken as 6.1. withincreases in both food and nonfood prices (Figure 3.5%) andcontinued buoyancy in services (6. Prothom Alo.2%). 200. and high monetary growth heightenedinflationary pressures. aided by growth in bankcredit and workers‘ remittances.7. created uncertainty in thebusiness environment. the near term inflation objective of monetarypolicies will be to contain the annual average CPI inflation. Imported fuel has only a limited impact given its small weight (4%) in theindex and low energy intensity of production. Rising domestic demandpressures. Industrywas sustained by strength in manufacturing (up 11.0 percent. Net exports of goodsand services were a slightly negative factor that subtracted from growth. appear to have had nodiscernible impact on inflation. though byless than in the previous year. to 9. also contributed to sustaining economic expansion. in turn driven by continuedgrowth in external demand for garments.1. 2.0percent respectively for FY06 and FY07. stemming from a steady expansion of income. On the expenditure side. Updated assessment GDP growth remained robust at an estimated 6.7%) largely offset agriculture‘s moderationfollowing its post flood bounce back of the preceding year (Figure 3. The Government‘s recent administrative measures to counter inflation. contributing to price pressures. measures toregulate stock levels and prices. rather.
inter alia.stable macro-economic framework is a fundamental pre-requisite for sustained high growth. the prime objective of the present Policy Brief is two fold: (a) to identify the pressing issues in the areas of public finance and (b) to suggest remedies. The Inflation Debate by Syed A. Initially. September 2002. Bangladesh Bank startedsetting short-term objectives of monetary policy in close collaboration of thegovernment and tried to achieve the target by using the direct instrument of control. . With this change. We highlight differentimportant things. to putbefore the newly elected government a set of actionable agendas to stimulatedevelopment of trade and industry. we becomes gather some more information from the differentwebsites. to come up with policy recommendations to address theattendant challenges. which we found during our survey.e. A. Dhaka CHAPTER4 Methodology of the Study This report on Monetary Policy of Bangladesh is based on both primary andsecondary data.net.cpd-bangladesh. Dhaka: 20-22 August. to provide inputs to the electoraldiscourse on issues related todevelopment of industry and trade in Bangladesh. magazine.Bangladesh Institute of Development Studies. improvements and policy changes in this regard. 2001Organized by: Centre for Policy Dialogue. newspapersetc. Prothom Alo. Inthis connection. include thefollowing: To highlight important milestones in the development of Bangladesh'sindustry and trade sectors over the recent past.. Begum and M. an acceptablerate of inflation and an attainable level of international reserves. The targeted growth ofM2 depended on a realistic forecast of the growth rate of real GDP. to articulate major challenges in thearea of industry and trade. In 1975. in compact way. but the direction of the flowof money and credit in support of the government financial programmed.1 Bangladesh’s Monetary Policy In the first years after liberation. 17 January 2004. Then we accumulate all the data and summarize them and then we analyze thosedata from many angles. which fixed an explicit target of safe limit of monetary expansion on annual basis. PRO-POOR FISCAL AND MONETARY POLICIES: TOWARDS CORRECTING STRUCTURAL INJUSTICEIN SOUTH ASIA.org. the work is started with data those were available indifferent books of Bangladesh economy as well as journal. POLICY BRIEF ON "IMPACT OF MONETARY POLICY ON INDUSTRY AND TRADE" Theobjectives of this Policy Brief on Industry and Trade. rehman@citechco. this report is showing the impact of the rise in the inflation rate higher in Bangladesh Economy Policy. and Based on the above. Millennium Development Goals NeedsAssessment:Bangladesh Country Study. in different aspect and present the information in differentsegment according to their category. Salimullah 2004. Working Draft.The principal target of monetary control was broad money (M2) i. Election 2001: National Policy Forum. The Daily Star. Bangladesh entered into a standby-arrangement with IMF and the country's monetary policy got a changed shape. Rehman Sobhan. Moreover. Website: www. the sum of thecurrency in circulation and total deposits of money in banks. Basher and Sharif Faisal Khan. After doing all of those wesubmit the report to the proper authority CHAPTER5 MONETARY POLICY OF BANGLADESH 5. the primary target of monetary policy ofBangladesh was to regulate not the quantity of money.
external.high levels of production. and BB bill rates as the routinely employed policyinstruments for influencing financial and real sector prices towards the targeted pathof inflation. Efforts were made toachieve the targeted growth of domestic credit and thereby. The prime objective of the policy stance for H2 FY08 is to ensure the useof the financial instruments towards promoting real sector growth at its targetedlevel along with reasonable price stability.Bangladesh Bank took measures to monitor credit and monetary expansion keepingin view the price situation and international reserves position. 1972 comprise attaining and maintaining of price stability. The Bangladesh Bank (BB) has been announcing its monetary policy stance on abiannual basis through the Monetary Policy Statement (MPS) since January 2006. fiscal. and private sectors. The annual monetary programmes adopt the reserve money (RM) and broad money(M2) as intermediate targets. the banks were toprovide the desired volume of credit at an administered and low rate of interest.Objectives of the monetary policies of the Bangladesh Bank as outlined in theBangladesh Bank Order. Note Issuing Process .through imposing ceilings on credit to the government.The major policy instruments available to Bangladesh Bank were to set creditceiling on the banks and provide liberal refinance facility at concessional rate forpriority lending. reverse repo. The policy stancesenvisage repo. The present MPS provides the monetarypolicy stance that BB intends to follow during the second half: January to June (H2)of FY08. employment and economic growth. According to the national economic policy. The policy stance takes into accountrecent developments in real. the money supply. supported by a framework for regular tracking of otherasset and liability side sub-aggregates. and monetary sectors of the economyand the near term macroeconomic outlook for the remaining period of FY08. public.
employment and real income. Asstated in the Bangladesh Bank Order 1972. to promote andmaintain a high level of production. .Monetary Policy the policy adopted by the central bank for control of the supply ofmoney as an instrument for achieving the objectives of general economic policy. and to fostergrowth and development of the country's productive resources in the best nationalinterest. to preserve the par value of domestic currency. the principal objectives of the country'smonetary policy are to regulate currency and reserves. to manage the monetary andcredit system.
.5 percent to 7. no minimum limitof note is fixed. The names and relative values of thecoins depicted above are. These coins are currently circulating in Bangladesh as money.50/100 of a Taka ■ One Taka .5/100 of a Taka ■ Ten Poisha . Keeping in view the BB‘s overallobjective of supporting the highest sustainable output growth along withmaintaining price stability. the central bank has to keep a minimum reserve of gold against the issue ofnotes. There will be paper money circulating as well CHAPTER6 MONETARY POLICY STANCE.0 percent during FY08. The bank can also issue notes up to any extent necessary. the MPS for H1 FY08 reiterated its intention to follow amonetary policy primarily to arrest the uptrend in inflationary tendency and reduceinflation expectations. 1 full Taka ■ Five Taka .1 A BRIEF REVIEW The monetary policy stance for Bangladesh for the first half (H1) of FY08 wasannounced through the MPS in July 2007. the policy stance announced in July 2007 was moderatedin the wake of several unexpected domestic shocks and unfavorable internationaldevelopments that brought about significant changes in the macroeconomic scenario.500/100. JULY-DECEMBER 2007 6. Under thissystem.0 percent and an annual average CPIinflation within a range of 6. from left to right: ■ One Poisha . with the primary unit ofBangladeshi money being called the Taka.1. JULY-DECEMBER 2007 AND JANUARYJUNE 2008 6. 5 full Taka **Please note that this listing only includes the coins in circulation.25/100 of a Taka ■ ifty Poisha . Over the last six months. The MPS mentioned that BB would regularly review its policy rates and SLR/CRRof banks in order to ensure consistency with unfolding price developments.10/100 of a Taka ■ Twenty-Five Poisha . The monetary system of Bangladesh is decimal based.Bangladesh use minimum reserve system for issuing note in the country.100/100. Themajor emphasis of the policy stance was on providing necessary support towardsachieving the desired rate of economic growth. The monetary policy stance for H1 FY08 was designedaround a projected real GDP growth rate of 7.1 MONETARY POLICY STANCE.1/100 of a Taka ■ Five Poisha .
On the other hand. • Disruption in normal economic activity.8 percent in 2008 (IMF.5 percent to 7. especially in the agriculture sector and therural economy.0percent for FY08. the developing world is likely to grow by 8. in view of the potential adverse impact of tightened credit condition inrestraining economic growth. price stability in particular. therefore. 6.2 percent in 2007 and 4. and their likelyoutcomes during the remaining period of FY08. central banks around the world were generally moving towards tightmonetary policy to face the challenge of maintaining non inflationary growth. as presented below. and aslower growth outlook for Japan and the Euro area. Prior to these recentturbulences. The MPS for H2 FY08. • Excess liquidity and relatively high spread between deposit and lending rates in the banking sector. the Federal Reserve Bank of the US reduced thefederal fund rate while the Bank of Japan and European Central Bank kept theirpolicy rates unchanged at early 2007 levels. volatile exchange rates in the majoreconomies. makes appropriate adjustments in the monetarypolicy stance using revised growth and inflation projections in the backdrop ofrecent domestic and global developments.2 RECENT GLOBAL DEVELOPMENTS After achieving a robust growth of 5. 6. otherstightened it further.3 RECENT MACROECONOMIC DEVELOPMENTS Growth Outlook for FY08 The objective of BB‘s monetary policy is to support maximum sustainable growthalong with macroeconomic stability in general. In the backdrop of the above developments. • Emergence of current account deficit resulting from widened trade deficit despite a healthy growth in workers‘ remittances. WEO. the global economy isprojected to grow by 5.4 percent in 2008. Atthe international level. however. • Low level of investment and overall economic activity resulting from natural disasters and shaken business confidence. the monetary policy stance for H1 FY08 faced the following key challenges: Strong inflationary pressure emanating from both domestic and external sourcesthat led the CPI inflation to overshoot the targeted range of 6.However. especially in the agriculture sector. On the other hand.1percent in 2007 and 7. was severely affectedby two consecutive floods and a devastating cyclone along with extensive loss anddamage to human lives. such as higher oil prices. while some central banks eased the monetary policy. infrastructure. due to two consecutive floods and a devastating cyclone and theurgent need to undertake relief and rehabilitation efforts. • Lagged effects of higher than programmed monetary expansion during FY07 and earlier years. higher global food inflation. and other assets that would require sometime to repair and reconstruct as well as significant financial and other resources.1.The domestic production. significant pressure on global inflation. This positive outlook. The reaction among the emerging marketeconomies was mixed. is subjectto significant risks. the prices of most of the commodities including oil thatBangladesh imports have witnessed unprecedented rise creating significant upwardpressure on domestic prices leading to increase in the inflation rate beyond thetargeted level. the Bank of Englandcontinued to follow the tightened policy. such thatBangladesh can become a member of the ‗middle income .1.4 percent in 2006. dullness in the housing market in majoreconomies especially in the US.October (2007).
and . therefore. power. fertilizer. However. Although the MPS of H1 FY08 used a projected GDP growth rate of 7. diesel. the agriculture sector is likely togrow at a rate lying between 2.0percent to 6.2 percent from the recent projection of the Policy Analysis Unit (PAU)of BB for FY08. The country‘s real GDP has been growing at an annual averagerate of more than 6 percent over the last five years. BB has taken steps to ensure timely disbursement of adequate agricultural creditand this needs to be supported by measures by the government to ensure adequatesupply of agriculture inputs (such as.5 percent in FY08 compared with thegrowth of 3.3 percent and 2. revised the GDP growth rate downward to lie in the range of 6. recent domestic and international developments including recurrent floods. According to the projections.group country‘ by the endof the next decade. and persistentprice hike of essential commodities in the international market have adverselyaffected the economy‘s growth prospects requiring a downward adjustment in theprojected GDP growth rate for FY08 BB has.0 percent forFY08.devastating cyclone (Sidr). it is possible to achieve even a highergrowth in agriculture through recouping the losses especially to theaman crop andother agricultural sub-sectors due to consecutive floods during July-September 2007 and the devastating cyclone in mid-November 2007. temporary disruption in domestic supply.2 percent in FY07. through significantlyincreasing crop production during theb o ro season (boro rice contributes more than55 percent of the country‘s total rice production) and rapidly implementingrehabilitation measures in other subsectors.
73 8.20 8.25 Food 7.16 7.11 9.94 3.18 -Industry 8.32 5. A comprehensiverehabilitation programme is also necessary in the cyclone affected areas.51 -Services .73 8.good qualityseeds) through streamlining the input distribution system.49 7.76 8. FY 05 FY 06 FY 07 Oct.51 -Agriculture 2.42 Economic growth Real GDP 5.35 7.40 5.90 6.20 4.28 9.20 10.72 Point-to-point inflation CPI 7.74 9.06 Food 8.33 6.34 7.54 9.81 9.29 Non-food 4.96 6. 07 Average inflation CPI 6.90 7.73 Non-food 5.82 11.63 6.
January.3 percent as against15.40 6. Banglapedia_allbd. use Subject: Ref-Banglapedia. In recent years. The projections suggest that industrysector growth in FY08 is likely to be driven by large scale manufacturing industriesgrowth between 8. Zaid. These will be financed through a $1. To facilitate the Corporation‘s operations. 2. 1999. The Dhaka Chamber of Commerce and Industry 06. However.5 percent and 8. in FY2008.SBD M_0309. the Government needs to quickly introduce anautomatic price adjustment mechanism and improve theCorporation‘s operating efficiency. Bangladesh: Key Challenges for the Next Millennium. 05. Bangladesh Economic Review 1999. No. Centre for Policy Dialogue (CPD). which experienced a relatively slow growth in FY07. January. "Bangladesh's Privatisation Policy". Ministry of Finance. "Changes and Challenges: A Review of .40 6. www. to avoid re-accumulation of losses at BPC and ofnonperforming loans (NPLs) at the four nationalized commercialbanks (NCBs). Government of Bangladesh. 08.1 percent at the end of June 2007 indicating a rebound in the industrial growthpotential in FY08. Bakht.3 percent compared with 6. The construction sector. 1999 09. Centre for Global Education. because the electricitytariff to the distribution companies was raised by 10% in March References 01. Bangladesh Bank.htm 02. growth in the industry sectorhas been driven by the export oriented manufacturing sector. The services sector is expected to grow at a rate between 6.7 percent and 8.4 percent in the first quarter of FY08 due mainly to a declinein export of readymade garments.7 percent inFY08 which was 9.1 billion bond to beissued in FY2008. Annual Report 2000. Centre for Policy Dialogue (CPD). isexpected to benefit from the strong growth in remittances and BB‘s refinanceprogrammed for housing at a lower rate. Based on year-on-year basis. Tanweer.74 -Table 1: Selected Economic Indicators BB projects the industry sector growth to lie between 8. Volume 4.9 percent and a robust growth between 10. 2006 03. Journal of Emerging Markets. The World Bank.7 percent in FY07.5 percent in FY07.com.cpd-bangladesh. GDP.6. The losses of the BangladeshPower Development Board should also fall. 2001 07. "Changes and Challenges: A Review of Bangladesh's Development 2000" 10. Monetary Policy Statement. the Government isassuming its overdue bank loans (contracted largely to cover pastlosses).1percent and 6.org 04. Akram. New York. Preparation of the Sixth Fiver Plan: Position paper on Industry.1 percent for SMEs facilitated by the focused support programmesadopted by the government and the BB. Although exportearnings declined by 5. USA. the growth ofcredit to the private sector at the end of October 2007 was 16. which would provide the banks with an earningasset. April. the situation has improved since then and theexport earning is likely to rebound soon.9percent and 11.
Trade Policy Reform for Higher Growth. Ministry of Planning. Government of Bangladesh 19. The Fifth Five Year Plan 1997-2002. March. Government of India 18.Bangladesh's Development 2000" 11. Volume Three. Centre for Policy Dialogue (CPD). Centre for Policy Dialogue (CPD). 1996 Glossary Business cycle CPI Current account deficit Deflation EFTPOS GDP–Gross Domestic Product Growth . Planning Commission. Government of Bangladesh 14. "Experiences with Economic Reform: A Review of Bangladesh's Development 1995" 13. World Bank. Recommendations of the Seminars Organised by the Dhaka Chamber of Commerce and Industry in the Year 2000 16. The Eighth Five Year Plan 1992-1997. Volume I. 1991 17. Report of the Task Forces on Bangladesh Development Strategies for the 1990's. Memorandum of the President of the International Development Assistance andthe International Finance Corporation to the Executive Directors on a CountryAssistance Strategy of the World Bank Group for the People's Republic ofBangladesh. University Press Limited. Developing the Infrastructure. "Changes and Challenges: A Review of Bangladesh's Development 2000" 12. Industrial Policy 1999. Planning Commission. Ministry of Industries. 1998 15.
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue listening from where you left off, or restart the preview.