Trend Analysis of Monetary Policy

Chapter 1

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A Term PaperOn

Trend Analysis on Monetary Policy Macroeconomic

Course No. MGT-301

Course No-301

Submitted to:

Md. Thoufiqul IslamAssistant Professor

Department of Management StudiesUniversity of Dhaka

Submitted By:

Name Roll Md. Naimul Haque 114Jahidul Haque 130Asma Ul Husna 131Md. Shafiqul Islam 147Md. Jonayed 215

Submission Date 22-03-2010

University of Dhaka

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Acknowledgement                                      

 We acknowledge my heartiest gratefulness to all who have extended their hand

of co-operation in preparing the report. At first we express my gratitude and acknowledge our indebtedness to our relevant course instructor Md. Thoufiqul Islam for her overall co-operation, guidance, advice and support in discharging our responsibilities consciously and preparing this report.                    It was really personal assignment but we are grateful to all of my group members who helped me a lot and provide many data to make this report successful.            We also acknowledge some of our senior brothers. They have really given us time, were never annoyed by our never ending questions both inside and outside the topic, and have told what the corporate world really is. 

         Finally we want to give thanks to our honorable teacher for giving me such a good assignment and greatly appreciate the co-operation and help we receive from our classmate and other.  

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Letter of Transmittal                             22 March, 2010 ToMohammed Thoufiqul IslamAssistant Professor Department of Management Studies Faculty of Business StudiesUniversity of Dhaka

 Subject:       Submission of Term paper on “Trend analysis on Monetary Policy of Bangladesh ”.  

Sir,

It is my real pleasure to submit this paper titled “Trend analysis on Monetary Policy of Bangladesh” to you as per the requirement for Macroeconomics, Course No 301 under The Department of Management Studies University of Dhaka. 

The broad and overall objective of this paper is to provide the reader with an overview of Application of Monetary Policy of Bangladesh.

Preparing this report has been extremely challenging, interesting and rewarding experience to us and we would like to express our deepest gratitude to you for providing us with such an opportunity. 

Thank you for your advice

Sincerely yours.

On behalf of Group Azure Asma Ul Husna Roll: 131

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Department of Management Studies

University of Dhaka 

Executive Summary

   This report is a partial requirement for the fundamentals of Macroeconomics Course under Department of Management Studies University of Dhaka. This report is titled “Trend analysis on Monetary Policy of Bangladesh. Guided Teacher Md. Thoufiqul Islam assigned the report to us.   The broad and overall objective of this report is to provide the reader with an application of the overall monetary condition of the Bangladesh.

Unlike most of other economies in the region and elsewhere, the governor said output growth in Bangladesh has so far been mildly impacted by the ongoing global economic downturn with estimated 5. 9 percent real GDP growth in last 2008-09 fiscal year following 6. 2 percent of previous 2007-08 fiscal year.

In terms of inflation, the MPS said the immediate past 2008-09 fiscal year (July 2008-June 2009) began with double digit annual average CPI inflation of 10 percent, which later on came down following robust domestic food production and the collapse of global commodity price bubble.

The annual average CPI inflation dipped to 7.3 percent in May 2009 and is likely to fall to 7.0 percent in June 2009, it said.

The MPS said the decline in domestic annual average CPI inflation is likely to be slower and smaller, and is projected to be at 6.5 percent on average in current 2009-10 fiscal year  

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Table of Contents

Serial Name Of the Contents Page No01. Chapter – 1 1

02. Acknowledgement 3

03. Letter of Transmittal 4

04. Executive Summary 5

05. Literature Review 7

06. Background of the Study 8

07. Objectives of the Study 8

08. Limitations of the Study 9

09. Methodology 9

10. Chapter – 2

11. Over view of the Monetary Policy Of Bangladesh 10-11

12. Monetary policy Framework in Bangladesh 12

13. Objectives of the monetary policy 13-14

14. Importance of Monetary Ruses 15

15. Targets of monetary policy 16-17

16. Trends of Inflation 18-19

17. Effects of Inflation in Monetary Policy 20-21

18. CPI inflation 24

19. Maintaining Price Stability 25

20. Monetary and Exchange Rate Policy of Bangladesh 26-27

21. Crowding-Out of Private Sector Credit 28-30

22. Recent Economic Developments in Monetary Policy 31-32

23. Suggestion to improve Monetary Policy 33-34

24. Chapter – 3

25. Conclusion 35

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26. Reference 36

Bibliography & Software Used 37

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Literature Review

1. By Dr Salehuddin Ahmed Governor, Bangladesh Bank Fri, 4 Aug 2006,

2. Bangladesh's half yearly monetary policy designs 6.0 pct GDP growth>

Source: Xinhua, July 20 2009

3. Monetary Policy Statement: A Review

(Ahsan H. Mansur) 9 July, 2009

Dr. Atiur Rahman.

4. Table 1: Rate of Inflation, End-of-Period (Base :FY96=100) Source:

Bangladesh Bureau of Statistics.

5. Table 2. Monetary Aggregate: Y-o-Y Growth in Percent) Source:

Bangladesh Bureau of Statistics.

6. Table 3. Bangladesh : Monetary Survey Under Alternate Scenarios (Source:

Bangladesh Bureau of Statistics)

7. www.monetary policy of Bangladesh

8. Rodger.A.Arnold (Macro Economics) Page # 229

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Background of the Study:  

The BBA program is designed to focus on theoretical and professional

development of people open to take up business as a profession a well as service as

a career. The course is designed with an excellent combination of theoretical and

practical aspects. This term paper provides the students to link up their theoretical

knowledge into practical fields.

Students are required to prepare a term paper under the guidance of

supervising teachers on a selected subject matter to highlighting his experience and

to conduct an in depth analysis on the subject matter. We have tried my level best

to present my experience of the practical orientation in this term paper.

Objective of the study:

To informed the overall monetary policy of Bangladesh

Inflation rate

Effect of the inflation of the Monetary policy

CPI in monetary policy

Objective of the monetary policy

Problem of monetary policy

Exchange rate of in the monetary policy

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Limitations of the Study

The major limitations of this term paper are as follows:

Large-scale research was not possible due to time constraints.

Relevant date and document collection were difficult by survey

   Non-availability of data in a systematic way.

  Time constraint

 Lack of availability of the reference book is another limitation.

Findings of the actual trend of monetary policy is difficult.

Methodology

The secondary data for completing the analysis on monetary policy had been

collected in various ways. The different sources were from prior research report,

annual reports of Bangladesh bank, Speech of the Governor of Bangladesh on the

basis of the monetary policy. Different books and periodicals related to the banking

sector. Newspapers and Internet and various web sites. The article of Bangladesh

bank. & from financial express.

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Bibliography

1. Table on Monetary Aggregate: Y-o-Y Growth in Percent

2. Table on Rate of Inflation, End-of-Period (Base: FY96= 100)

3. Graphical Presentation of Inflation Trend

4. Graphical Presentation of GDP Growth Rate

5. Graphical Presentation on CPI Inflation

6. Table on Bangladesh: Monetary Survey under Alternate Scenarios

Software Used

For preparing this report we used

1. Micro Soft Office XP.

2. MS Word.

3. MS Excel.

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Over view of the Monetary Policy Of Bangladesh:

Bangladesh’s economy has held up well, despite the global recession.

Although the strength of the global recovery remains uncertain, Bangladesh’s

medium-term prospects are good with a substantial upside which depends on the

government’s vigor to implement structural reforms. The government and the

Bangladesh Bank (BB) should continue their prudent macroeconomic policies and

adopt an ambitious but realistic agenda of macroeconomic and structural reforms

aimed at boosting medium-term growth and rising living standards. In this regard,

the mission welcomes the authorities’ reform plans in the areas of tax policy,

public expenditure management, and monetary and financial sector policy

Bangladesh's half yearly monetary policy, spanning from July to December

period of 2009, has been designed to accommodate 6.0 percent real GDP growth in

the current fiscal year ending in June 2010.

"The MPS aims at extending support to the government to achieve an

economic growth ranging between 5.5 and 6.0 percent and keep inflation at 6.5

percent," the governor said, adding that the policy will amply accommodate the

credit needs of the private sector for attaining the targeted level of real GDP

growth

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Both in developed and developing economies, monetary policy seeks to

maintain price stability accompanied by sustained stable output growth in the face

of internal and external shocks that are faced from time to time. For developing

economies like Bangladesh with significant underemployment/under exploitation

of production factors, stimulating higher growth is imperative for rapid reduction

and eventual elimination of endemic poverty, and is therefore an overriding

priority. The stimulus provided by monetary policy in accommodating the growth

aspirations must not however jeopardize macroeconomic stability and future

growth; and the pursuit of monetary policy comprises of various supportive

measures to attain the highest sustainable output growth while adjusting smoothly

to internal and external shocks that the economy encounter from time to time

policy.

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Monetary policy framework in Bangladesh

Historically the Central Bank mandate in Bangladesh has been of a broad

nature. The original Bangladesh Bank Order of 1972 that provided the founding

charter cited (a) price, (b) exchange rate and (c) economic growth and high level of

employment among the major goals.3.All three of these elements had been among

the core objectives of most central banks of that epoch. Indeed the practice of

monetary policy in Bangladesh has evolved along these guidelines without further

discussion as to the mutual ranking of the goals. The amended Order of 2003 is

even broader requiring the Bangladesh Bank (BB), among other, to “formulate” its

monetary policy, and to formulate foreign exchange “intervention policy”.4 The

newer piece of legislation, literally interpreted, allowed an even greater freedom to

the central bank in terms of the monetary policy formulation, but hints at a pro-

active stance regarding the exchange rate management. However with the currency

having been successfully floated on May 31, 2003, the market is expected to bring

about any necessary adjustment in the exchange rate prompted by economic

fundamentals. Consequently, the Central Bank is left with there is dual

responsibility to smoothen the short-term volatility in the exchange rate. It is

interesting to note that the analysis of the interaction between monetary and fiscal

policy was added as a major responsibility of the central bank in the 2003

amendment.

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Objectives of the monetary policy:

*The main objective of a classic monetary policy are to maintain stable

and low rate of inflation, high capacity utilization to sustain a low rate of

unemployment & high rate of economic growth.

*Another objectives of the monetary policy of the Bangladesh Bank as

outlined in the Bangladesh Bank Order, 1972 comprise of attaining and

maintaining of price stability, high levels of production, employment and

economic growth.

*Ensuring effective exchange rate management to maintain stability

between export & consumer interest.

*Explicit articulation of monetary policy of an independent central bank

ensures transparency in the economic policy & has become popular in managing

expectations of the stake holders.

*As monetary policy statement was first issued by the Bangladesh

bank, so its intention was to present information on Bangladesh bank’s outlook on

real sector & monetary developments over the immediate future.

*The policy stance BB will pursue on the based on its assessments of

the developments over the preceding period.

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*Monetary policy in Bangladesh is formulated around inflation and

output growth rates as the basic policy targets.

*Levels and growth paths of relevant monetary aggregates such as

reserve money, broad money and domestic credit are also projected and monitored

as intermediate target conducted by the Bangladesh government.

In the decades of seventies and eighties, monetary policy in

Bangladesh was conducted with full direct control on interest rates and exchange

rates, as also on the volumes and directions of internal and external credit flows.

But in the nineties the situation become changing with the abolition of directed

lending & gradual liberalizations of interest rates.

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Importance of Monetary policy:

*Fiscal policy induced “Demand management” approach as propagated

by Keynes, which was popular in the Post-Great depression period later made way

to monetary policy led “Stabilization” approach in the period of high inflation. So

for controlling inflation monetary policy is suitable.

*Monetary policy is flexible & emergency rate changes can be made.

Whereas changes in taxation take longer to organize & implement.

*During the period of “Golden Growth” covering late 1980s till the recent

past, in the mix of Macroeconomic policies, monetary policy continued to reserve

a place of prominence.

*The growing importance of monetary policy & the diminishing role

played by fiscal policy in economic stabilization efforts may reflect both political

& economic realities.

*In the backdrop of global financial meltdown & subsequent confusion in

macroeconomic theories, a new quest has emerged in redefining role &

instruments of macroeconomic policy in fostering in economic development.

*A fix exchange is the monetary rule that ensures an equilibrium mechanism

of the balance of payment.

Stability of the inflation rate is an important policy and low inflation rate

produce more stable inflation rate. It is very important that monetary aggregates

contain important information about the economy. So from all of these discussion

we see that how monetary rules affect the economy and its importance in fixing the

exchange rate.

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Targets of monetary policy:

1. The monetary policy framework (in terms of the goals, theinstruments, and the analytic channels of transmission) be articulated for greater clarity and transparency benefiting both the policy makers as well as the stakeholders.

2. The key monetary aggregates shown in Table 2 need better rationalization. We fail to understand why net foreign assets (NFA) of the banking system will become negative in FY10, while it has been growing at high double-digit rates in recent years and estimated to have grown by almost 24 per cent in FY09.  This envisaged reduction in the NFA is predicated upon a projected decline in foreign reserves by about half a billion US dollars in FY10 compared with the level recorded for FY09.

3. Import growth has been negative during the last few months and is expected to remain negative in the first half of FY10 based on the import LC opening data. Despite some slowdown due to the impact of global economic meltdown, exports and remittances are expected to grow at moderate rates, as we have seen in recent months.

4. Projections made by Policy Research Institute point to a further significant increase in foreign reserves in FY10 due to continued sizable external current account surplus and positive overall balance of the balance of payments.

5. Foreign reserves have increased by more than $1.5 billion in the last quarter and we would expect a similar outcome in the next six months, exceeding the $8.0 billion level by end-2009.

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Under these circumstances, it would be a major challenge for BB to

contain M2 (broad money) growth at 15.5% as envisaged in the Statement.

Bangladesh Bank authorities certainly are aware that excessive M2 expansion

would put further pressure on the inflation rate, thereby undermining the inflation

objective. Hence the appropriate monetary policy strategy in the

Bangladesh context would be to achieve the goal of price stability

with the highest sustainable output growth. There are various

target which is covered under monetary policy.

* Source : Bangladesh Bureau of Statistics (2009)

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Table 1.Monetary Aggregate: Y-o-Y Growth in Percent)

FY07 FY08 FY 09 June 10

Net Foreign Asset 49.42 15.07 23.90 -4.10

Net Domestic Asset 12.57 18.08 16.00 19.30

Domestic Credit 14.39 21.83 17.10 18.70

Public Credit 12.43 11.68 24.50 25.30

Private Credit 15.01 24.94 15.00 16.70

Broad Money 17.06 17.61 17.20 15.50

Reserve Money 16.10 20.64 31.00 3.50

Trends of inflation

Inflation has emerged as a global phenomenon in recent months largely

reflecting the impact of higher food and fuel prices and strong demand conditions

especially in the emerging economies. In line with global trends, Bangladesh also

experienced rising inflation with the 12-month average CPI inflation touching 9.94

percent in June 2008. The present cycle of rising inflation is the longest in the

history of Bangladesh persisting for seven consecutive years which, in earlier

episodes, usually showed fluctuating movements with the rising trend continuing

for 2/3 years. In the backdrop of recent global developments, this note examines

some of the Characteristics of inflation in Bangladesh including the contribution of

major commodity groups to overall inflation in rural and urban areas.

2. Global Inflation Trends

The global economic growth is projected to slow down to 3.7 percent in

2008, down by more than one percentage point from 4.9 percent achieved in 2007.

The forecast for global growth in 2009 is also low at 3.8 percent. The major drags

on global economic growth are the slowdown in the US economy, unfolding credit

crunch besetting US and Europe, and spillover effects of growth slowdown in

major developed countries to other developed and emerging economies through

trade, financial market, and other linkages. The current growth projections foresee

a deceleration of real growth in emerging and developing economies to6.7 percent

in 2008 and further to 6.6 percent in 2009 from 7.9 percent in 2007.

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* Source : Bangladesh Bureau of Statistics (2009)

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Table 2:Rate of Inflation, End-of-Period (Base :FY96=100)

Inflation

Period Food Non-Food

2004-05 8.73 5.32

2005-06 8.81 5.73

2006-07 9.82 8.34

2007-08 14.10 3.54

2008/2009

July 13.93 5.92

September 12.07 7.19

December 6.83 4.76

March 4.49 6.11

April 4.80 6.53

May 4.89 6.49

Effects of Inflation in Monetary Policy:

1. Inflation refers to continuing increase in price level,since price level is

a monetary variable , monetary policy can affect it.

2. Monetary policy & inflation together account for a significant portion

of fluctuation in the economy exchange rate.

3. Monetary shocks have a strong but relatively short- run impact on

inflation.

4. A tight monetary policy may put a short term effect on inflation &

help stabilize the foreign – trade sector.

5. Monetary policy, if there is a high inflation rate, it may also cause a

slow-down in the economy.

6. Contractionary monetary policy has the effect of reducing inflation by

reducing upward pressure on price level.

7. The non-food inflation, as shown in Table 1 of the Statement, reached

its bottom in December 2008 at 4.76% and since then has been increasing

steadily to reach 6.49% by May 2009. With commodity prices once again on

an upward trend, external environment may not be much favorable in the

coming months and BB may have to take a much more activities.

8. The result of the rapid buildup of net foreign assets (NFA) due to

continued large remittance inflows and the decline in import payments in

recent months.

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We do not think that Bangladesh Bank has made any strong attempt to

sterilize the liquidity impact of the reserve buildup and the consequent liquidity

expansion is certainly creating pressures somewhere; the building up of

inflationary pressures in asset markets (stock market and real estate) and in

nonfood prices is probably the manifestation of such pressures. Because of above

considerations, the issue of inflation and BB’s policy response should have

deserved much more attention in the Statement in the form of careful analysis and

providing clear indications about its plan.

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Graphical Presentation of Inflation Trend

Year AV Inflation

2005-2006 7.1

2006-2007 7.2

2007-2008 9.94

2008-2009 6.66

0

2

4

6

8

10

12

2006 2007 2008 2009 2010

Avar

age I

nflat

ion

YEAR

Inflation Trend

avarage inflation year

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Graphical Presentation of GDP Growth Rate

Year GDP Growth Rate

2005-2006 6.4

2006-2007 6.6

2007-2008 6.3

2008-2009 5.9

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Year

CPI Inflation

. In China, CPI inflation increased to 7.1 percent in June 2008 (which

moderated f Inflation in most Emerging market economies (EMEs) rose at higher

rates due to rising oil, other commodity, and food prices and greater weight of food

and energy in consumption baskets rom a high of 8.7 percent in February 2008)

from 4.4 percent a year.

Despite hardening of inflation, many central banks in

advanced economies persisted with accommodative monetary

policy fostering market liquidity and promoting growth. In the face

of the twin challenge of controlling inflation and remaining alert to

downside risks from the slowdown in the advanced economies,

the emerging and developing economies adopted varied

responses. While countries like China, India, and Republic of

Korea tightened

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Figure 1* Source : CPI Inflation in National Statistics

Maintaining price stability

1. Price stability helps create an environment where economic growth may

occur more easily. It does this by enabling money to work as the means by which

people and businesses transact and contract with one another. When inflation is

high, firms and businesses face uncertainty about the future, and this changes the

way in which they behave.

2. We all agree with BB assessment that the prevailing high lending rates in

Bangladesh are discouraging domestic investment. Lending rates thus need to

come down to accelerate growth and employment through higher investment.

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3. By reducing the interest rate investment will increase which will make

the price stable.

4. Increase the production within the country.

5. Inflation impacts on the economic system is by clouding relative price

signals. When inflation is high it also tends to be very volatile.

6. Reduction in government’s borrowings for non-productive expenditures

can have significant lasting beneficial impact on the overall inflationary pressures.”

For these reason it is mentioned that price stability is better than

inflation.

Monetary & Exchange rate policy in Bangladesh:

1. The dollar became the greatest currency of the 20th century because it

was comparatively stable. Considering Dollar, Pound and Gold standard we see

that Gold provided a highly efficient International monetary system. So we should

follow this system with latest alternative.

2. There is a difference in between “pegged” and “fixed” rates, which lies in

the adjustment system. A fixed exchange rate is the monetary rule that contains

an equilibrating mechanism of the balance of payments.

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3. A fixed exchange rate is a monetary rule that gives the country the

monetary policy of the partner country .pegged rate is an arrangement whereby the

central bank intervenes in the exchange market to peg the exchange rate but still

keeps an independent monetary policy.

4. A flexible exchange rate is consistent with any monetary policy at all

hyperinflation. Some countries don’t have the option of fixing the exchange rate

because some countries are too small but one of the countries is too large to fix,

such as United States.

5. As our country is not as large as USA the only choice is inflation targeting

or monetary targeting, which depends on inflation rate.

6. Stability of the inflation rate is an important policy and low inflation rate

produce more stable inflation rate.

7. Greater exchange rate flexibility could help ease the burden on monetary

policy & reduce the costs of managing liquidity for BB, while dampening

inflationary pressures.

8. In the long run, there is also scope to strengthen the monetary policy

framework and stabilize systemic liquidity. To enhance the credibility and

predictability of monetary policy BB should consider moving to a standing facility

for repo and reverse repo operations and adopting an interest rate corridor once

fully functional open market operations are in place. In addition, averaging reserve

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requirements on a two-week maintenance period would help control short-term

volatilidity.

It is very important that monetary aggregates contain important information

about the economy. So from all of these discussion we see that how monetary rules

affect the economy and its importance in fixing the exchange rate. The effect that

monetary policy is having on the exchange rate and the effect that the exchange

rate is having on the economy may be matters that Monetary Policy Challenge

teams will need to take into account when making their Official Cash Rate

recommendation.

Crowding out of private sector credit

Monetary Policy: Changes in the money supply, or the rate of growth of the

money supply ,to achieve particular macroeconomic goals. Monetary policy affects

income and expenditure through cost and availability of money. For example, a

proposal to decrease the rate of growth of the money supply is a monetary policy.

Crowding out: The decrease in private expenditures that occurs as a

consequence of increased government spending or the financing needs of a budget

deficit.

Crowding out can be direct or indirect that are described as follows:

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Direct effect: If government supplies more money on public sectors, for

example: in public University, to increase seat facilities, to ensure better facilities,

to enhance technological advancement, etc , students will choose public

universities rather than private universities. It’s a direct effect of crowding out.

Indirect effect: If government supplies more on social programs, national

issues and defense rather than private sectors or issues, investments will increase,

interest will be low and finally employment rate will be raised. It’s an indirect

effect of crowding out.

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Table representation of crowding out

Monetary policy for a developing economy on the basis of Crowding

out: A developing economy has to make a very large scale of mobilization of

productive resources of all types and has to organize their most efficient allocation.

The task of implementing the development plans of sizable dimensions is a big

task and all out effort is required on the part of all authorities to ensure their

successful implementation. Here, public sectors get more economic steady than

private sectors. For the stabilization of price, national economic growth, greater

employment, etc, crowding out is necessary for the developing economy.

Table 3. Bangladesh : Monetary Survey Under Alternate Scenarios

(percentage change over the previous year)

Components Bangladesh Bank

Estimates

PRI Estimates Last 4 years

Average

NET FOREIGN ASSETS -4.1 21.8 19.5

NET DOMESTIC ASSETS 19.3 14.4 18.4

DOMESTIC CREDIT 18.7 14 19.3

Public Sector Credit 25.3 25.2 20.2

Credit to Govt.(net) 29.6 29.2 24.2

Credit to Other Public 0 8.7 11.4

Private Sector Credit 16.7 10.2 19.2

BROAD MONEY 15.5 15.5 18.3

** If Broad money is 15.5% and Public borrowing 167.5 Billion Taka

* Source : Bangladesh Bureau of Statistics (2009)

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BB monetary projection assumes a significant decline in foreign reserves, it

can accommodate a respectable growth in private sector credit (16.7%). In the

event of the likely scenario that the NFA (which is a part of M2) increases by

about 20% as happened in FY09, the limit on M2 growth of 15.5% would

constrain the scope for credit expansion to the private sector. Assuming that the

fiscal targets (i.e. revenue and expenditure) of the budget are attained, the above

scenario of monetary aggregates would certainly crowd out the private sector if BB

intends to adhere to its M2 target (as shown under the PRI scenario in Table 3).

However, such a suggestion directly goes against the much needed

expansionary fiscal policy stance adopted in the FY10 budget. Would it rather not

be appropriate for BB to urge the government to implement its development plan

expeditiously and also intensify government efforts to mobilize larger amounts of

foreign assistance in the form of budget support to help reduce government

borrowing and release more resources for private sector credit expansion?

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Recent economic development in Monetary policy

In a developing economy, Monetary Policy has a special role today. A

developing economy has to make a very large scale mobilization of productive

resources of all types and has to organize their most efficient allocation.

Increasing GDP and containing inflation rate are major challenges for

developing countries which can ensure by Monetary Policy.

Recently Monetary Policy by central bank emphasize on – Literacy Program Agriculture Firming New Life Fund Water Resources and Arsenic Mgt Sewing Project Vocational Training Job Training Poultry and Livestock etc.

During the last twenty five years of planning the central bank of Bangladesh has tried to regulate –

*The cost of credit * The quantity of credit *The purpose or use of credit etc. The central bank can promote economic development by taking monetary Policy which can make a satisfactory provision for the following- Bank rate or Interest rate: By increasing or decreasing of interest rate central

bank can make satisfactory provision. Sound Currency System: Monetary Policy helps to economic development

which leads to the expansion of market and increasing specialization.

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By means of controlled of credit, the monetary authority ensures growth with stability.

By monetary policy central creates special financial institution for promoting

economic development in different sectors such as -

Agriculture finance corporation

Industrial finance corporation

Export finance corporation etc.

One important instrument of Monetary Policy is interest . A rise in interest

rates has important effects both direct & indirect upon those who borrow & t

those lend & also on the funds to & from the country.

Another important instrument which expansion of bank credit.This instrument

effective in freezing additional liquidity when banks are acquiring large new

resources.

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Suggestion to improve Monetary Policy

1. The expansion of the money supply can be achieved indirectly by

decreasing the nominal interest rate.

2. In Bangladesh, BB can set the discount rate as well as achieve the

desired reserve funds rate by open market operations.

3. By increasing the availability of lonable funds.

4. The central bank may mandate specific interest rate on loans,

savings account or other financial assets.

5. Reduce inflation by reducing upward pressure on price level in

monetary policy.

6. By decreasing the interest rate.

7. Increasing the size of the monetary base which directly increase the

money supply.

8. Open market operation should use to increase the money supply.

9. In order to increase money supply BB would buy bonds in

exchange for hard currency.

10. The monetary authority exerts regulatory control over banks.

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11. Expansionary policy can be implemented by allowing banks to hold a

lower proportion of assets to be held as liquid cash.

12. There is also an urgent need to strengthen accounting practices, to

unify and broaden regulations.

13. Measures should be taken to increase efficiency in the financial

markets.

14. Improving the quality and timeliness of economic statistics would

strengthen policy making.

Related Policy taken Under the Monetary Policy:

Bangladesh seeks share from G20 announced bailout fund

Bangladesh's trade deficit narrows in July-May period

Bangladesh offers tax incentive to lure investment in power

Bangladesh's exports growth keeps on plunging

Bangladesh reduces Internet bandwidth price by 33 percent

Bangladesh's first deep-sea port expected to start operation in 2016.

There are both downside and upside risks to the baseline

projections. A prolonged global slump could hold back exports and remittances.

Continued shortage of energy supply may further discourage private-sector

investment and FDI. On the other hand, private sector investment may jump, if the

global recovery is deemed more robust than expected.

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Conclusion

The Metropolitan Chamber of Commerce and Industry (MCCI) has

criticized the central bank’s recently announced monetary policy, saying it will

push up inflation and lending rate. The chamber urged the government to ensure

that administered prices of fuels, utilities and fertilizers are not increased, as higher

prices will aggravate the inflationary situation.

The MCCI urged the central bank to consult the leaders of private sector

business and industry, and collectively evolve a strategy for controlling inflation

and achieving and maintaining the highest attainable output growth in the

immediate and medium terms.

The chamber recommended that an appropriate inflation control measure

should include mechanisms to rein in the government’s profligate spending and

thus cut budgetary deficits.

It should be understood that any increase in government borrowing from the

banking system means less credits available for the private sector. Lesser credit to

the private sector will have a negative effect on industrialization and growth, The

MCCI noted.

To help spur investment and sustain economic growth in context global

economic downturn, the governor said Bangladesh Bank (BB) will take tougher

stance against the commercial banks to compel them ease credit conditions at least

for next six months.

It should be understood that any increase in government borrowing from the

banking system means less credits available for the private sector. Lesser credit to

the private sector will have a negative effect on industrialization and growth, The

MCCI noted.

38

Refference

1. By Dr Salehuddin Ahmed Governor, Bangladesh Bank

Fri, 4 Aug 2006, 09:17:00.

2. Bangladesh's half yearly monetary policy designs 6.0 pct GDP growth>

Source: Xinhua[08:47 July 20 2009

3. Monetary Policy Statement: A Review

(Ahsan H. Mansur) 9 July, 2009 is the first policy statement by the new

Bangladesh Bank Governor

Dr. Atiur Rahman.

4. Table 1: Rate of Inflation, End-of-Period (Base :FY96=100) Source:

Bangladesh Bureau of Statistics. www.the financial exprers-bd.com/

23/07/2009

5. Table 2. Monetary Aggregate: Y-o-Y Growth in Percent) Source:

Bangladesh Bureau of Statistics. www.the financial exprers-bd.com/

23/07/2009

6. Table 3. Bangladesh : Monetary Survey Under Alternate Scenarios (Source:

Bangladesh Bureau of Statistics) www.the financial exprers-bd.com/

23/07/2009

7. www.monetary policy of Bangladesh

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