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INTRODUCTION:
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 a d j u s t m e n t s w e r e m a d e i n t h e country's monetary policy. T h e Department o f Research in the B a n g l a d e s h B a n k p l a y s a n i m p o r t a n t r o l e i n t h e f o r m u l a t i o n o f 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 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 compasso f c o m p r e h e n s i v e r e p o r t s a n d r e v i e w s w h i c h a r e s u b m i t t e d f o r p e r u s a l o f t h e Governor, Deputy Governor, and Senior Executives of the bank, as also the banksBoard of Directors.
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, and 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.
Short term interest rates; Long term interest rates; Velocity of money through the economy; Exchange rates Credit quality Bonds and equities (corporate ownership and debt) Government versus private sector spending/savings International capital flows of money on large scales Financial derivatives such as options, swaps, futures contracts, etc.
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. Full Employment 'Full Employment' stands for a situation in which everybody who wants jobs get jobs. However it does not mean that there is a Zero unemployment. In that senses the full employment is never full. Monetary policy can be used for achieving full employment. If the monetary policy is expansionary then credit supply can be encouraged. It could help in creating more jobs in different sector of the economy. Neutrality of Money The monetary policy should regulate the supply of money. The change in money supply creates monetary disequilibrium. Thus monetary policy has to regulate the supply of money and neutralize the effect of money expansion. Equal Income Distribution Monetary policy can make special provisions for the neglect supply such as agriculture, small-scale industries, village industries, etc. and provide them with cheaper credit for longer term. This can prove fruitful for these sectors to come up. Thus in recent period, monetary policy can help in reducing economic inequalities among different sections of society.
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
9. The BB governor keeps stressing the need to reduce credit flow towards non-productive 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.