INTRODUCTION 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.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 banksBoard 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 Bangladeshs 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

1.5 millionpeople, mostly women, were employed in the garments sector. During 2001-2002,export earnings from ready-made garments reached $3,125 million, representing52% of Bangladesh's total exports. Eastern Bengal was known for its fine muslin and silk fabric before the Britishperiod. The dyes, yarn, and cloth were the envy of much of the promoter world.Bengali muslin, silk, and brocade were worn by the aristocracy of Asia and Europe.The introduction of machine-made textiles from England in the late eighteenthcentury spelled doom for the costly and time-consuming handloom process. Cottongrowing died out in East Bengal, and the textile industry became dependent onimported yarn. Those who had earned their living in the textile industry were forcedto rely more completely on farming. Only the smallest vestiges of a once-thrivingcottage industry survived. At independence Bangladesh was one of the least industrially developed of thepopulous nations. Annual per capita consumption of steel and cement was onlyabout one-third that of India, for example, and electric power consumption percapita was less than one-fifth. 1.6 Condition of Textile Sector on Bangladesh Economy Bangladesh's textile industry, which includes knitwear and ready-made garments along with specialized textile products, is the nation's number one export earner The sector, which employs 2.2 million workers, accounted for 75 per cent ofBangladesh's total exports of US$10.53 billion in FY2005-06, in the processlogging a record growth rate of 24.44 per cent. However, since May of 2006 theindustry has been plagued by on-going industrial unrest, as textile workers, who areamong some of the most lowly paid in the world, have staged regular violentdemonstrations in a bid to achieve a higher minimum wage, regular rest days andsafer working conditions. Following the worst of the unrest in late May, which saw at least one worker killedas police shot live rounds at protesters, the government formed a WageCommission, ordering it to report on a suitable new minimum wage in three months. The Commission, which included business and worker representatives, finallyreleased its conclusions on October 9, recommending the wage be set at Tk1,662.50, up from the current level of Tk950, but far below initial worker demandsfor Tk3, 000. Whether this new wage will placate workers, who allege years ofunsafe and abusive conditions remains to be seen. Fresh outbreaks of violenceoccurred on Oct 2, 3 and 10, but at least some of these protests appear to havestemmed from factory-specific factors, rather than industry wide discontent. CHAPTER2 Monetary Policy 2.1 Monetary Policy

Monetary policy is the term used by economists to describe ways of managing thesupply of money in an economy. 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 includes all monetary decisions and measures irrespective ofwhether 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 (interest rate) of money. From the above discussion monetary policy may be defined as the central bankspolicy pertaining to the control of the availability, cost and use of money and creditwith the help of monetary measures in order to achieve specific goals. 2.2 The Importance of Monetary Rule There is a difference in between pegged and fixed rates, which lies in theadjustment system. A fixed exchange rate is the monetary rule that contains anequilibrating mechanism of the balance of payments. The gold standard was a goodexample of fixed rates. Countries defined their currencies in terms of weights ofgold and exchange rates represented the ratios of the weights. This system got into

trouble very rarely, as during war, countries turned to finance deficit etc. 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. 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. A fixed exchange rate is a monetary rulethat gives the country the monetary policy of the partner country. 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. A flexible exchange rate is consistent with any monetary policy at allhyperinflation. Some countries dont have the option of fixing the exchange ratebecause some countries are too small but one of the countries is too large to fix,such as United States. This is because there is no currency to fix the US dollar. Inthis case the only choice is

inflation targeting or monetary targeting, which dependson inflation rate. Stability of the inflation rate is an important policy and lowinflation rate produce more stable inflation rate. It is very important that monetaryaggregates contain important information about the economy. So from all of thesediscussion we see that how monetary rules affect the economy and its importance infixing the exchange rate. 2.3 Objectives of Monetary Policy Monetary policy aims and methods have changed over time. Both in developed anddeveloping economies, 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. In developed economies with production factors at or close to full employment, monetary policies are formulated typically with the output gap (difference betweenthe actual and the longer run potential output) in view; the policy stance is eased toprovide stimulus at times of slowdown when actual output lags the longer runpotential, and the stance is tightened to slow things down when the economyoverheats with actual output running ahead of the sustainable longer run potential.Diagnosing and treating asset price bubbles symptomatic of overheating are majorissues of current debate in monetary policy. For developing economies like Bangladesh with significant underemployment/under exploitation of production factors, stimulating higher growth is imperative forrapid reduction and eventual elimination of endemic poverty, and is therefore anoverriding priority. The stimulus provided by monetary policies in accommodatingthe growth aspirations must not however over step towards macroeconomicimbalance destabilizing and jeopardizing future growth; 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. The primary objective of the Monetary Policy of Bangladesh is to outline theformulation and implementation of monetary policy of the Bangladesh Bank (BB),and to convey its assessment of the recent and the expected monetary and inflationdevelopments to the stakeholders and the public at large. The Bangladesh Bank Order of 1972 outlines the main objectives of monetary policy in Bangladesh, which comprises To achieve the price stability To regulate currency and reserves To promote and maintain a high level of production, employment and realincome, 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, the short-term objectives are determined after a careful and realistic appraisal of the current economic situation of the country. In effect, the exchange rate served as a nominal anchor, with the ultimate goal ofmaintaining price stability. However, prices of non-tradable goods, given the lattershigh share in national expenditure, dominated the inflation

behavior. 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. Thus price stability should be the main aim of monetarypolicy. Price stability promotes business confidence, makes economic calculationpossible, controls business cycle and introduces certainty in economic life. Be that as it ma, it must be admitted that price stability does not be necessarilymean absolute constancy of price level. A very slow rising price level (or mildinflation) may have all the virtues of a stable price level, which can contribute moredirectly to economic growth. 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. A restrictive monetary policy trends to reduce a countrys balance ofpayment defect in the following ways: It tends to reduce demanding the country, which in turn tends to reduce the demand for imports as well as for domestic goods. Reduction in domestic demeans holds down the rate of inflation or reduces priceswhich makes imported articles less attractive and makes the defect countrysexports more attractive to foreigners. Thus, import is curtailed and export expanded. Under dear money policy, higher interest rates make it less attractive for foreign countries to borrow from the defect country and induce them to invest there. Full Employment In under developed countries, the full employment objective is more crucial,because such economies have both unemployment and under employment open anddisguised. In less developed countries, though full employment cannot be achievedwithin a short period, the monetary policy should try to achieve at least a near fullemployment situation.Full employment objective of monetary policy has certainfar-reaching beneficial effects: Full employment can maintain a high level of aggregate effective demand, and thereby can iron out cyclical fluctuations, stagnation and under consumption trap. Before full employment is achieved, investment can be made in excess of savingand a price increase in a slow rate is permissible. These will give incentive for thefuller utilization of resources and for higher income, output and employment. The creation of full employment condition will almost automatically, lead to themaximization of social and economic welfare of the society because the resourceswould be used fully and effectively. Full employment will, according to Einzig, lead to increase productivity ofworkers, because the workers are not sacred of unemployed situation. The relationbetween labor and capital would be ideal and all-round efficiency will increase. Economic Growth This comparatively a recent object of monetary policy. If refers to the growth of realincome or output per capita. Monetary policy can contribute to economic growth inthe following ways:

 It can maintain a balance between monetary demand and supply of goods, and itcan also supply money is such a way as is consistent with the supply of goods andservices. It can create atmosphere in which a higher rate of saving and investment would be generated. Monetary policy minimizes fluctuation in business activity and prices. It creates stability for growth. It influences the rate of interest, investment and the use of credit in the most productive channels in the economy. When necessary, it expands credit and when it is not necessary, if restricts theflow of credit. It creates saving intuitions and monetization in the saving of thecommunity towards productive investment. Monetary policy gives guidance, looks after monetization in the unorganized sector and controls the actives of the financial intermediaries. 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, and the equilibrium rate of interest remains unchanged. If money isneutral, an increase or decrease in the quantity of money will both produce anddisturbing effects in the economy. Neutrality of money does not mean constantmoney supply, means that the effect of changed money supply on real variables inthe economy would be neutral. 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. This mainobjective on monetary policy has become significant in the pose-period. It isrealized that the existence of balance of payment deficit seriously reduces the abilityof an economy to attain other objectives. So, monetary policy must make intoconsideration the international payment problem. 2.4 Strategy of Monetary Policy The MPS (Monetary Policy Statement) starts with expression of the monetarypolicy frameworks in terms of the goals, instruments, and the channels oftransmission. Maintaining price stability while supporting the highest sustainableoutput growth is the stated objective of monetary policies pursued by theBangladesh Bank. 2.5 Instruments of Monetary Policy In 1989, the government adopted a comprehensive Financial Sector ReformProgramme (FSRP), following which the country's monetary policy assumed a neworientation towards promotion of market economy in a competitive environment.Bangladesh Bank started moving away from direct quantitative monetary control toindirect methods of monetary management since the beginning of 1990. Although,the fixation of target continued to remain as the central piece of exercise, the way toachieve it had been changed. Credit ceilings on individual banks and direct controlsof interest rates were withdrawn. At present, the money supply is regulated throughindirect manipulation of reserve money instead of credit ceiling. Major instrumentsof monetary control available with Bangladesh Bank are the bank rate, open marketoperations, rediscount policy, and statutory reserve requirement. The methods of credit control can be classified as follows: a. Quantitative/ General Methods: 01. Bank rate policy 02. Open market policy 03. Variation of reserve ratio

b. Qualitative/ General Methods: 01. Rationing of credit 02. Direct action 03. Regulation of consumers credit 04. Moral persuasion 05. Publicity The methods of credit control are described below: a. 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. 01. Bank rate policy The rate which central bank lends money to the commercial banks and discountsbill of exchange is called bank rate. If central bank increases the bank rate then thecommercial banks will increase their marker of interest rates. As a result theborrowers borrow less form commercial banks and amount of credit reduces in theeconomy. In an opposite way amount of credit will be increased in the country. Effects Effects on price level If bank rate increases, cost of credit will increase and the businessmen will reducetheir borrowing s form commercial banks. This will reduce production and increaseunemployment in the economy. As a result, income and price level will go downand depression in business and trade will be the outcome. If there is a decrease inthe bank rate the opposite e results of above will be experienced in the economy. Effects on foreign trades An increase in bank rate wills increases other interest rates in the country. So,investment will be profitable. It will ensure the insertion of foreign capital into theeconomy and leakage of domestic capital will be stopped. Moreover, increased bankrate will decrease the piece level because amount of credit will be reduced intocountry. This decreased price level will again encourage expertand discourageimport, which will make balance of payment favorable. Opposite effects of abovewill be experienced if the central bank decreases the bank rate in the economy. 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. 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. bank may successes during the time of prosperity. Because businessmen becomehighly ambitious of their profits in this situation and will borrow money though theinterest rate increases. Reduction in bank rate may not be successful to increase the amount of credit during the time of depression. So, bank rate policy has several limitations in its operation. After that it is the best weapon of central bank to control the amount of credit in the economy. 02. Open market policy

The method by which the central bank controls the amount of credit by selling andbuying government credit instrument is termed as open market operation. When thecentral bank intends to contract credit, it sales the credit instruments in the market.These instruments are purchased by commercial banks and people also buy themissuing cheques to the commercial banks. Thus money goes to the central bank andamount of money for credit creation reduces which in turn contracts the amount ofcredit in the economy. Limitations of open market policy Selling- it reduces amount of cash of commercial banks .but if commercial banks take loan form central bank it would not be effective to reduce credit. Buying- it increases the amount of cash in commercial banks. But it may not beable to expand credit if commercial banks repay loan to the central bank with thisincreased cash. Depreciation- During depreciation credit expansion through purchasing creditinstruments is not possible. Because in this period businessmen will not want toborrow from commercial bank. 03. Variation of reserve ratio Each commercial bank has to keep legally a certain portion of its total deposits asreserve with central bank. This is called reserve ratio. If central bank increases thisreserve ratio, excess reserve in commercial banks will reduce and thus creditcreation will be contracted in the economy. In an opposite way central bank canincrease the amount of credit by decreasing the reserve ratio. Limitations Increase in reserve ration can be effective for that commercial bank having smallamount of cash. Because bank having large volume of cash will have sufficientexcess reserve to create credit though reserve ration increases. 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. Non-scheduled commercial banks are out of this control. b. Qualitative/ General Methods The methods used to control credit in special sectors for special purposes are calledqualitative\selective methods of credit control. These methods do not deal with theamount of credit rather change the flow or direction of credit used in differentsectors of economy. 01. Rationing of credit Rationing of credit means fixing the amount of credit among different sectors of theeconomy. By this method central bank can decrease the amount of credit in onesector and can increase it in other sector. For example, if central bank thinks thatthere is excessive investment in garments industry and jute industry suffers formrequired investment, then it can order the commercial banks not to disburse creditbeyond required amount in garments industry and divert the excess amount to juteindustry. Limitations Borrowers may use the credit money in other purposes. It is difficult for central bank to supervise whether the credit money is being used purposively or not. Sometimes commercial banks think this type of work as an unwanted intervention by central bank. 02. Direct action

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, discounting bills of exchange at a rate higher than the prevailing rare, etc. As a result, the commercial bank will compelled to follow sound central bank policy. 03. Regulation of consumers credit It is a method to control credit in consumable goods, which are purchased ininstallment basis. If central bank circulates to increase the amount of down paymentor reduce the number of installment then consumer credit will be contracted in theeconomy. In an opposite way consumers credit can be increased. It was followed inUSA during Korean War. 04. Moral persuasion To make the banking system sound and efficient, central bank sometimes requeststhe commercial banks to increase or decrease credit. As a guardians request,commercial banks follow it and thus amount of credit is controlled in the economy. 05. Publicity Sometimes central bank applies publicity as a weapon of credit control. Centralbank publishes weekly, fortnightly or monthly bulletins and annual reports wherebalance sheets and other business and economic condition of different commercialbanks are presented well. As a result the commercial banks become more careful inthe line of their credit creation. Thus central bank applies various types of measures to control credit in theeconomy. But central bank should apply different types of method simultaneouslyrather to use single method to make credit control effective. 2.6 Major Instruments Use by Bangladesh Bank Major instruments of monetary control available with Bangladesh Bank are thebank rate, open market operations, rediscount policy, and statutory reserverequirement. Bank rate

5% and 20% respectively on 24 May 1992. The CRR was further lowered to 4%from 4 October 1999. The downward revision in CRR and SLR were made toenable the banks to increase their lending capacity. 2.7 Frameworks of Bangladeshs Monetary Policy 2.7.1 The Policy Target(s) In this backdrop it is necessary that the monetary policy framework (in terms of thegoals, the instruments, and the analytic channels of transmission) be articulated forgreater clarity and transparency benefiting both the policy makers as well as thestakeholders. A policy system, where the goals are transparent and theirachievement verifiable, directly adds to the credibility of the central bank, 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.e., the deviation of actual output from its long-run equilibriumlevel) and the inflation gap, which is similarly defined. In contrast, however, thechallenge in the developing world is how to augment the capacity output throughboth productivity growths as well as via the installation of additional capacity. Faster growth in most developing contexts is necessary to reduce (and eventually

eliminate) common poverty. Hence the appropriate monetary policy strategy in the Bangladesh context would beto achieve the goal of price stability with the highest sustainable output growth. Anymonetary stimulus to promote growth must keep in perspective the broader goal ofmacroeconomic stability, which is a prerequisite for future growth. Price stabilitywould also include the stability of the currency regime. While fiscal policy too is relevant in addressing these goals and thus there is a need for policy coordination, monetary policy must play its due role. While leading central banks in the industrial world have increasingly adopted the unitary goal of fighting inflation, interestingly directive by enumerating (a) The promotion of price stability, (b) Ensuring full employment, (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. In broad terms therefore the latter view is consistent with the BB vision as enunciated above, although anchored along different perspectives. Inflation Target It is the general wisdom that monetary policy tools are of immediate influence incontrolling inflation. 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. Manycentral banks as a consequence focus on the core inflation, which is typicallyconstructed by subtracting the most volatile components (e.g., food and energyprices, indirect taxes etc) from the consumer price index (CPI). The Bank of Canadaargues that it is the core concept that better predicts the underlying price stability inthe economy. Hence as a policy goal, core inflation may be a more credible targetthan CPI inflation. While there is no standard measure of core inflation in theBangladesh context at this time, the construction methodology is made complex bytwo facts. First is that food items constitute nearly 60 percent of the CPI index, and while theappropriate commodity group weights may require a re-think, to ignore foodentirely in defining the core inflation may render the construction a bit likethrowing the baby away with the bath water. Secondly, in the Bangladesh context, the volatility of the international energy pricesappear not to filter down to the CPI since the relevant domestic prices aresubsidized by the state. 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 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, it would be unwise to treat this aloneas a valid measure of core inflation. Growth target GDP growth projections of the Medium Term Macroeconomic Framework (MTMF)in the government's National Strategy for Accelerated Poverty Reduction (NSAPR),modified appropriately in the light of unfolding actual developments, are used asoutput growth targets for the purpose of monetary policies. The MTMF projected6.5 percent and 6.8 percent real GDP growth for FY06 and FY07 respectively. Inview of the good post flood recovery of agricultural output and the better thanexpected holding up of apparels export demand after MFA expiry, real GDP

growthtargets for the purpose of monetary policies have been taken as 6.8 percent and 7.0percent respectively for FY06 and FY07. 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.Strengthening the capabilities of BBS towards regular estimation and release ofreliable quarterly GDP data has therefore assumed priority. Updated assessment GDP growth remained robust at an estimated 6.5% in FY2007, propelled by risingdomestic and external demand. A strong expansion in industry (9.5%) andcontinued buoyancy in services (6.7%) largely offset agricultures moderationfollowing its post flood bounce back of the preceding year (Figure 3.1.1). Industrywas sustained by strength in manufacturing (up 11.2%), in turn driven by continuedgrowth in external demand for garments. The manufacturing and trade performancesustained steady expansion in services. On the expenditure side, growth wasunderpinned by private consumption. Private investment, aided by growth in bankcredit and workers remittances, also contributed to sustaining economic expansion.But total investment, at 24.3% of GDP in FY2007, declined by 0.4 percentagepoints compared with the preceding year, on moderation in public investmentfollowing downsizing of the annual development program. Net exports of goodsand services were a slightly negative factor that subtracted from growth, though byless than in the previous year. Inflation continued to creep up, to 9.2% in June 2007 on a year-on year basis, withincreases in both food and nonfood prices (Figure 3.1.2). Rising domestic demandpressures, stemming from a steady expansion of income, a large increase inworkers remittances from abroad, and high monetary growth heightenedinflationary pressures, as did a further rise in international food and commodityprices. Imported fuel has only a limited impact given its small weight (4%) in theindex and low energy intensity of production. The Governments recent administrative measures to counter inflation, such asinvestigations of certain businesses suspected of hoarding supplies; measures toregulate stock levels and prices; as well as its encouragement to new importers toenter the market and so induce greater competition, appear to have had nodiscernible impact on inflation. They have, rather, created uncertainty in thebusiness environment, contributing to price pressures. 2.7.2 Conducting of monetary policies As mentioned in the foregoing, the near term inflation objective of monetarypolicies will be to contain the annual average CPI inflation, on an upswing phasesince 2001, at around the current level under 7.0 percent. Monetary policies willtherefore be on tightened stance until inflation levels off and enters its downswingphase.

CHAPTER3 Review of Literature Election 2001: National Policy ForumDhaka: 20-22 August, 200,1Organized by: Centre for Policy Dialogue, Prothom Alo, The Daily Star, Policy brief on Monetary Policies The objective of the Policy Brief exercise is to articulate aconcrete policy agenda, with strong emphasis on its implement ability. The point ofdeparture of the present Policy Brief is the premise that a sound and

stable macro-economic framework is a fundamental pre-requisite for sustained high growth. Inthis connection, 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, improvements and policy changes in this regard. Election 2001: National Policy Forum, Dhaka: 20-22 August, 2001Organized by: Centre for Policy Dialogue, Prothom Alo, The Daily Star, POLICY BRIEF ON "IMPACT OF MONETARY POLICY ON INDUSTRY AND TRADE" Theobjectives of this Policy Brief on Industry and Trade, inter alia, include thefollowing: To highlight important milestones in the development of Bangladesh'sindustry and trade sectors over the recent past, to articulate major challenges in thearea of industry and trade, to come up with policy recommendations to address theattendant challenges, to provide inputs to the electoraldiscourse on issues related todevelopment of industry and trade in Bangladesh, and Based on the above, to putbefore the newly elected government a set of actionable agendas to stimulatedevelopment of trade and industry. PRO-POOR FISCAL AND MONETARY POLICIES: TOWARDS CORRECTING STRUCTURAL INJUSTICEIN SOUTH ASIA, Rehman Sobhan, September 2002, rehman@citechco.net; Website: www.cpd-bangladesh.org. The Inflation Debate by Syed A. Basher and Sharif Faisal Khan, this report is showing the impact of the rise in the inflation rate higher in Bangladesh Economy Policy. A. Begum and M. Salimullah 2004, Millennium Development Goals NeedsAssessment:Bangladesh Country Study, Working Draft, 17 January 2004,Bangladesh Institute of Development Studies, Dhaka CHAPTER4 Methodology of the Study This report on Monetary Policy of Bangladesh is based on both primary andsecondary data. Initially, the work is started with data those were available indifferent books of Bangladesh economy as well as journal, magazine, newspapersetc. Moreover, we becomes gather some more information from the differentwebsites. Then we accumulate all the data and summarize them and then we analyze thosedata from many angles, in different aspect and present the information in differentsegment according to their category, in compact way. We highlight differentimportant things, which we found during our survey. After doing all of those wesubmit the report to the proper authority CHAPTER5 MONETARY POLICY OF BANGLADESH 5.1 Bangladeshs Monetary Policy In the first years after liberation, the primary target of monetary policy ofBangladesh was to regulate not the quantity of money, but the direction of the flowof money and credit in support of the government financial programmed. In 1975, Bangladesh entered into a standby-arrangement with IMF and the country's monetary policy got a changed shape, which fixed an explicit target of safe limit of monetary expansion on annual basis. With this change, 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.The principal target of monetary control was broad money (M2) i.e., the sum of thecurrency in circulation and total deposits of money in banks. The targeted growth ofM2 depended on a realistic forecast of the growth rate of real GDP, an acceptablerate of inflation and an attainable level of international reserves.

Bangladesh Bank took measures to monitor credit and monetary expansion keepingin view the price situation and international reserves position. Efforts were made toachieve the targeted growth of domestic credit and thereby, the money supply,through imposing ceilings on credit to the government, public, and private sectors.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. According to the national economic policy, the banks were toprovide the desired volume of credit at an administered and low rate of interest. The Bangladesh Bank (BB) has been announcing its monetary policy stance on abiannual basis through the Monetary Policy Statement (MPS) since January 2006.Objectives of the monetary policies of the Bangladesh Bank as outlined in theBangladesh Bank Order, 1972 comprise attaining and maintaining of price stability,high levels of production, employment and economic growth. The policy stancesenvisage repo, reverse repo, and BB bill rates as the routinely employed policyinstruments for influencing financial and real sector prices towards the targeted pathof inflation. The annual monetary programmes adopt the reserve money (RM) and broad money(M2) as intermediate targets; supported by a framework for regular tracking of otherasset and liability side sub-aggregates. The present MPS provides the monetarypolicy stance that BB intends to follow during the second half: January to June (H2)of FY08. 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. The policy stance takes into accountrecent developments in real, external, fiscal, and monetary sectors of the economyand the near term macroeconomic outlook for the remaining period of FY08. Note Issuing Process

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. Asstated in the Bangladesh Bank Order 1972, the principal objectives of the country'smonetary policy are to regulate currency and reserves; to manage the monetary andcredit system; to preserve the par value of domestic currency; to promote andmaintain a high level of production, employment and real income; and to fostergrowth and development of the country's productive resources in the best nationalinterest.

Bangladesh use minimum reserve system for issuing note in the country. Under thissystem, the central bank has to keep a minimum reserve of gold against the issue ofnotes. The bank can also issue notes up to any extent necessary; no minimum limitof note is fixed. These coins are currently circulating in Bangladesh as money. The monetary system of Bangladesh is decimal based, with the primary unit ofBangladeshi money being called the Taka. The names and relative values of thecoins depicted above are, from left to right: One Poisha - 1/100 of a Taka Five Poisha - 5/100 of a Taka Ten Poisha - 10/100 of a Taka Twenty-Five Poisha - 25/100 of a Taka ifty Poisha - 50/100 of a Taka One Taka - 100/100, 1 full Taka Five Taka - 500/100, 5 full Taka **Please note that this listing only includes the coins in circulation. There will be paper money circulating as well

CHAPTER6 MONETARY POLICY STANCE, JULY-DECEMBER 2007 AND JANUARYJUNE 2008 6.1 MONETARY POLICY STANCE, JULY-DECEMBER 2007 6.1.1 A BRIEF REVIEW The monetary policy stance for Bangladesh for the first half (H1) of FY08 wasannounced through the MPS in July 2007. Keeping in view the BBs overallobjective of supporting the highest sustainable output growth along withmaintaining price stability, the MPS for H1 FY08 reiterated its intention to follow amonetary policy primarily to arrest the uptrend in inflationary tendency and reduceinflation expectations. The monetary policy stance for H1 FY08 was designedaround a projected real GDP growth rate of 7.0 percent and an annual average CPIinflation within a range of 6.5 percent to 7.0 percent during FY08. The MPS mentioned that BB would regularly review its policy rates and SLR/CRRof banks in order to ensure consistency with unfolding price developments. Themajor emphasis of the policy stance was on providing necessary support towardsachieving the desired rate of economic growth. Over the last six months, 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.

The domestic production, especially in the agriculture sector, was severely affectedby two consecutive floods and a devastating cyclone along with extensive loss anddamage to human lives, infrastructure, and other assets that would require sometime to repair and reconstruct as well as significant financial and other resources. Atthe international level, 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. In the backdrop of the above developments, 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 6.5 percent to 7.0percent for FY08; Low level of investment and overall economic activity resulting from natural disasters and shaken business confidence; Lagged effects of higher than programmed monetary expansion during FY07 and earlier years; Excess liquidity and relatively high spread between deposit and lending rates in the banking sector; Emergence of current account deficit resulting from widened trade deficit despite a healthy growth in workers remittances; Disruption in normal economic activity, especially in the agriculture sector and therural economy, due to two consecutive floods and a devastating cyclone and theurgent need to undertake relief and rehabilitation efforts. The MPS for H2 FY08, therefore, makes appropriate adjustments in the monetarypolicy stance using revised growth and inflation projections in the backdrop ofrecent domestic and global developments, as presented below, and their likelyoutcomes during the remaining period of FY08. 6.1.2 RECENT GLOBAL DEVELOPMENTS After achieving a robust growth of 5.4 percent in 2006, the global economy isprojected to grow by 5.2 percent in 2007 and 4.8 percent in 2008 (IMF, WEO,October (2007). On the other hand, the developing world is likely to grow by 8.1percent in 2007 and 7.4 percent in 2008. This positive outlook, however, is subjectto significant risks, such as higher oil prices, volatile exchange rates in the majoreconomies, higher global food inflation, dullness in the housing market in majoreconomies especially in the US, significant pressure on global inflation, and aslower growth outlook for Japan and the Euro area. Prior to these recentturbulences, central banks around the world were generally moving towards tightmonetary policy to face the challenge of maintaining non inflationary growth.However, in view of the potential adverse impact of tightened credit condition inrestraining economic growth, 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. On the other hand, the Bank of Englandcontinued to follow the tightened policy. The reaction among the emerging marketeconomies was mixed; while some central banks eased the monetary policy, otherstightened it further. 6.1.3 RECENT MACROECONOMIC DEVELOPMENTS Growth Outlook for FY08 The objective of BBs monetary policy is to support maximum sustainable growthalong with macroeconomic stability in general, price stability in particular, such thatBangladesh can become a member of the middle income

group country by the endof the next decade. The countrys real GDP has been growing at an annual averagerate of more than 6 percent over the last five years. Although the MPS of H1 FY08 used a projected GDP growth rate of 7.0 percent forFY08, recent domestic and international developments including recurrent floods,devastating cyclone (Sidr), temporary disruption in domestic supply, and persistentprice hike of essential commodities in the international market have adverselyaffected the economys growth prospects requiring a downward adjustment in theprojected GDP growth rate for FY08

BB has, therefore, revised the GDP growth rate downward to lie in the range of 6.0percent to 6.2 percent from the recent projection of the Policy Analysis Unit (PAU)of BB for FY08. According to the projections, the agriculture sector is likely togrow at a rate lying between 2.3 percent and 2.5 percent in FY08 compared with thegrowth of 3.2 percent in FY07. However, 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, through significantlyincreasing crop production during theb o ro season (boro rice contributes more than55 percent of the countrys total rice production) and rapidly implementingrehabilitation measures in other subsectors. 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, fertilizer, power, diesel, and

good qualityseeds) through streamlining the input distribution system. A comprehensiverehabilitation programme is also necessary in the cyclone affected areas. FY 05 FY 06 FY 07 Oct. 07 Average inflation CPI 6.49 7.16 7.20 8.25 Food 7.90 7.76 8.11 9.29 Non-food 4.33 6.40 5.90 6.72 Point-to-point inflation CPI 7.35 7.54 9.20 10.06 Food 8.73 8.81 9.82 11.73 Non-food 5.32 5.73 8.34 7.42 Economic growth Real GDP 5.96 6.63 6.51 -Agriculture 2.20 4.94 3.18 -Industry 8.28 9.74 9.51 -Services

6.40 6.40 6.74 -Table 1: Selected Economic Indicators BB projects the industry sector growth to lie between 8.5 percent and 8.7 percent inFY08 which was 9.5 percent in FY07. In recent years, growth in the industry sectorhas been driven by the export oriented manufacturing sector. Although exportearnings declined by 5.4 percent in the first quarter of FY08 due mainly to a declinein export of readymade garments, the situation has improved since then and theexport earning is likely to rebound soon. The projections suggest that industrysector growth in FY08 is likely to be driven by large scale manufacturing industriesgrowth between 8.7 percent and 8.9 percent and a robust growth between 10.9percent and 11.1 percent for SMEs facilitated by the focused support programmesadopted by the government and the BB. The construction sector, which experienced a relatively slow growth in FY07, isexpected to benefit from the strong growth in remittances and BBs refinanceprogrammed for housing at a lower rate. Based on year-on-year basis, the growth ofcredit to the private sector at the end of October 2007 was 16.3 percent as against15.1 percent at the end of June 2007 indicating a rebound in the industrial growthpotential in FY08. The services sector is expected to grow at a rate between 6.1percent and 6.3 percent compared with 6.7 percent in FY07. GDP, in FY2008. To facilitate the Corporations operations, the Government isassuming its overdue bank loans (contracted largely to cover pastlosses). These will be financed through a $1.1 billion bond to beissued in FY2008, which would provide the banks with an earningasset. However, to avoid re-accumulation of losses at BPC and ofnonperforming loans (NPLs) at the four nationalized commercialbanks (NCBs), the Government needs to quickly introduce anautomatic price adjustment mechanism and improve theCorporations operating efficiency. The losses of the BangladeshPower Development Board should also fall, because the electricitytariff to the distribution companies was raised by 10% in March

References 01. Banglapedia_allbd.com, use Subject: Ref-Banglapedia.SBD M_0309.htm 02. Bangladesh Bank, Monetary Policy Statement,January, 2006 03. www.cpd-bangladesh.org 04. Akram, Tanweer; "Bangladesh's Privatisation Policy", Journal of Emerging Markets, Volume 4, No. 2, Centre for Global Education, New York, USA, 1999. 05. Annual Report 2000, The Dhaka Chamber of Commerce and Industry 06. Bakht, Zaid; Preparation of the Sixth Fiver Plan: Position paper on Industry, January, 2001 07. Bangladesh Economic Review 1999, Ministry of Finance, Government of Bangladesh. 08. Bangladesh: Key Challenges for the Next Millennium, The World Bank, April, 1999 09. Centre for Policy Dialogue (CPD), "Changes and Challenges: A Review of Bangladesh's Development 2000" 10. Centre for Policy Dialogue (CPD), "Changes and Challenges: A Review of

Bangladesh's Development 2000" 11. Centre for Policy Dialogue (CPD), "Changes and Challenges: A Review of Bangladesh's Development 2000" 12. Centre for Policy Dialogue (CPD), "Experiences with Economic Reform: A Review of Bangladesh's Development 1995" 13. Industrial Policy 1999, Ministry of Industries, Government of Bangladesh 14. 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, March, 1998 15. Recommendations of the Seminars Organised by the Dhaka Chamber of Commerce and Industry in the Year 2000 16. Report of the Task Forces on Bangladesh Development Strategies for the 1990's, Developing the Infrastructure, Volume Three, University Press Limited, 1991 17. The Eighth Five Year Plan 1992-1997, Volume I, Planning Commission, Government of India 18. The Fifth Five Year Plan 1997-2002, Planning Commission, Ministry of Planning, Government of Bangladesh 19. Trade Policy Reform for Higher Growth, World Bank, 1996 Glossary Business cycle CPI Current account deficit Deflation EFTPOS GDPGross Domestic Product Growth