Assignment on:-

Monetary Policy of Bangladesh

Prepared For:
Abdul Bayes
Professor
Department of Business Administration
East west University

Submitted By:

Date of Submission:

Monetary Policy the policy adopted by the central bank for control of the supply of money as
an instrument for achieving the objectives of general economic policy.With the shifts of the
policy stance of the government in various phases, necessary 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 of monetary and credit policies and
also to assist it in discharging its duty as adviser to the Government on economic and
financial matters. To this end, the department keeps the top executives of the bank fully
informed of latest economic development both at home and abroad, in a regular and
systematic manner. For this purpose the Department keeps a close watch on trends in the
domestic economy as well as on international economic developments with particular
reference to monetary, fiscal and trade problems and policies.Domestic and international
economic developments are brought within the compass of comprehensive reports and
reviews which are submitted for perusal of the Governor, Deputy Governor, and Senior
Executives of the bank, as also the banks Board of Directors.

Monetary Policy:
Monetary policy is the term used by economists to describe ways of managing the supply of
money in an economy. Monetary Policy 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. Monetary policy works through expansion or contraction of
investment and consumption expenditure.
According to Paul Einzig Monetary policy includes all monetary decisions and measures
irrespective of whether their aims are monetary and non-monetary, and all non-monetary
decisionsand measures that aim it affecting the monetary system.
According to Harry G. Johnson Monetary policy employing the central bands control of
supply of money as an instrument for achieving the objectives of general economic policy.
According to G.K. Shaw By monetary policy we mean any conscious action undertaken by the
monetary authorities, to exchange the quantity, or cost of money.

From the above discussion monetary policy may be defined as the central banks policy
pertaining to the control of the availability, cost and use of money and credit with the help of monetary
measures in order to achieve specific goals.
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. Monetary policy 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.
Monetary policy is the process by which the monetary authority of a country controls the
supply of money, often targeting a rate of interest for the purpose of promoting economic
growth and stability. The official goals usually include relatively stable prices and low
unemployment. . Monetary theory provides insight into how to craft optimal monetary policy.
Monetary policy is the process by which the government, central bank, or monetary authority
of a country controls
a) The supply of money,
b) Availability of money,
c) Cost of money or rate of interest to attain a set of objectives oriented towards the
growth and stability of the economy.
d) Monetary theory provides insight into how to craft optimal monetary policy.

Objectives of Monetary policy in Bangladesh:

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.

Tools of monetary policy:

Major instruments of monetary control available with Bangladesh Bank are the bank rate,
open market operations, rediscount policy, and statutory reserve requirement.
The methods of credit control can be classified as follows:
Quantitative/ General Methods Qualitative/ General Methods
01. Bank rate policy 01. Rationing of credit
02. Open market policy 02. Direct action
03. Variation of reserve ratio 03. Regulation of consumers credit
04. Moral persuasion
05. Publicity

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 loanable 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. With the passage of time, the age old differences between real and non-real financial
activity is coming down. While traditionally banks have been the main source of
finance for industrialization, the capital market has emerged as a viable alternative for
entrepreneurs to seek capital. Public companies have more open books of accounts
and pay more taxes than non-listed companies. They also share the profits with
common citizens who receive dividends as reward for investing in the companies. The
capital market also mitigates the needs for companies to seek capital from banks
hence reducing interest rates.
6. 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.
7. The year 2012 the world is seeing a continuation of the 2008 economic crisis. The
effects of devaluation are already worsening domestic inflation. Making capital costly
will further discourage domestic investment in industry. This will not allow the
country to augment its production possibility frontier. Hence domestic industry will
also lose its incentive and competitiveness which in the long run can only worsen the
balance of payments situation as imports increase to fulfill the needs of a growing
population.

8. BB should coordinate with the government on policy matters. As I have mentioned

earlier the policy goals of BB and GOB need to be aligned, otherwise it can cause
financial devastation.
9. The BB governor keeps stressing the need to reduce credit flow towards nonproductive sectors. In free market such distinctions are unwarranted. The role of state
and government should be that of a facilitator. BB is trying to modulate the
consumption of citizens which it should not do. It is only encouraging the government
in the process of increasing welfare payments, hence rising deficit.
10. In light of the above and the continued global economic crisis, BB may soften its
stance on credit supply. It can seek to ensure financial sector strength, by asking the
banks to further recapitalize themselves. For that again Banks will need to go for the
right offers, which are best induced by a stable gradually rising capital market.
11. BB and the present government must get over old 'socialist' ghosts from deciding the
crux of economic policy. Real welfare cannot be ensured by policy alone. For
instance, in spite of the continuous supply of agri-credit by BB, farmers remain
underfed, underemployed, under rewarded, although retail prices of their produce go
higher! This is a direct result of market distortion in which both BB and the
Government of Bangladesh have a role to play.
12. The Government should allow citizens new ways to seek capital and also with
discretion invest abroad, just like numerous foreign companies are repatriating huge
amounts of dividend in local investments every year. Such international expansion of
local companies will result in ensuring future capital inflows into Bangladesh.
13. Excessive controls on capital flow from outside the country have resulted in distortion
of currency markets and given primacy to the role of informal money transfers and
dealings. BB and the Government of Bangladesh should set up a prudential strategy to
encourage more foreign currency inflow. Tax breaks to multi-national companies
which operate in Bangladesh should be conditional on reinvestments of capital
locally. Capital repatriation out of the country should be discouraged through policy
and counselling.
14. Presently the Cushion Against Risk of Bangladeshi banks is only 9% against an
average of 14% for India, Pakistan and Sri Lanka. High cost of credit will further
deteoriate the asset quality of banks, leading to higher defaults and even trigger a
banking crisis. The depository insurance policy of BB is inadequate to protect the
depositors interest. For instance., recently the Iranian currency depreciated by as
much as 40% against the US dollar as a result of sanctions. In such volatile economic
times, we have to do everything to save and encourage domestic industry. Industry
cannot flourish and sustain with lending rates of banks/non-bank financial institutions
reaching 16-21 per cent.

15. Presently the real estate sector in Bangladesh is still drawing a lot of investment.
NRBs need to be discouraged to invest in real estate and focus on creation of
industry/agriculture/service sectors. Also to prevent excessive lending in real estate,
BB should make housing sector loans adjustable. This is followed in Australia which
has helped Australia to escape from fallouts of the sub prime crisis that has incited the
present global economic collapse.
16. BB needs to work with the Government to allow Bangladesh to seek alternative
capital from abroad to reduce the dependence on multilateral lending agencies such as
the World Bank/IMF. While these aid/loans offer lower interest rates, the policy
conditions can in the long run impose huge costs on local economy. For example,
presently Malaysia has zero borrowing from World Bank/ IMF. BB can recommend
GOB to go for further pursue government to government negotiations with
Islamic/other countries that have surplus capital. Malaysia is the perfect example of
development using foreign financing.
17. Monetary policies need to be used with much care in a low income country like
Bangladesh where narrow money use is still wide. Contractionary monetary policy
coupled with expansionary fiscal policy will fail as government goes for money
printing to finance deficits, again triggering inflation. BB needs to use its policy tools
to allow further recapitalization of Bangladeshi banks, which are mostly private. To
do so, banks need to entice investors by making good profits. BB has to accept its a
better trade off for whole economy that the banks make money, not BB making
money at the expense of the banks, by imposing tight statutory conditions such as
higher Statutory Reserve Ration/Cash Reserve Ratio. Rather BB should advise the
government on using Keynesian fiscal policies in times of economic stress to
stimulate employment and growth. For instance right now, apparently the food reserve
is very comfortable for government. Government can go for labor intensive policies
such as canal digging which will reduce food inventory and allow the government to
go for fresh rice procurement that will ensure fair price to farmers.
18. In a more sophisticated world, BB needs to protect itself and Bangladeshi
banks/importers from suffering losses in foreign currency transactions. Thus BB
should explore and encourage hedging of trades done by local importers/exporters.
19. BB should establish a joint venture export import bank of Bangladesh to assist trade
finance of Bangladesh. This will allow the country to save a huge amount in advising
fees that are paid to foreign banks that eventually increase the cost of trade.

Scope of monetary policy:

Monetary decisions today take into account a wider range of factors, such as:
Short term interest rates;
Long term interest rates;
Velocity of money through the economy;
Exchange rates
Credit quality
Bonds and equities
Government versus private sector spending/savings
International capital flows of money on large scales
Financial derivatives such as options, swaps, futures contracts, etc.

Objectives of monetary policy:

The objectives of a monetary policy in Bangladesh aim at growth, stability and social justice.
After the Keynesian revolution in economics, many people accepted significance of monetary
policy in attaining following objectives.
Rapid Economic Growth
Price Stability
Exchange Rate Stability
Balance of Payments (BOP) Equilibrium
Full Employment
Neutrality of Money
Equal Income Distribution
These are the general objectives which every central bank of a nation tries to attain by
employing certain tools (Instruments) of a monetary policy. Let us now see objectives of
monetary policy in detail:Rapid Economic Growth
It is the most important objective of a monetary policy. The monetary policy can influence
economic growth by controlling real interest rate and its resultant impact on the investment.
Price Stability
The monetary policy having an objective of price stability tries to keep the value of money
stable. It helps in reducing the income and wealth inequaliti

Exchange Rate Stability

Exchange rate is very volatile leading to frequent ups and downs in the exchange rate, the
international community might lose confidence in our economy. The monetary policy aims at
maintaining the relative stability in the exchange rate.
Balance of Payments (BOP) Equilibrium
The BB through its monetary policy tries to maintain equilibrium in the balance of payments.
The BOP has two aspects i.e. the 'BOP Surplus' and the 'BOP Deficit'. If the monetary policy
succeeds in maintaining monetary equilibrium, then the BOP equilibrium can be achieved.