CHAPTER-1

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1.0 Introduction
Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting
an inflation rate or interest rate to ensure price stability and general trust in the currency. Further goals of a monetary
policy are usually to contribute to economic growth and stability, to lower unemployment, and to maintain
predictable exchange rates with other currencies.
Monetary policy is referred to as either being expansionary or contractionary, where an expansionary policy increases the
total supply of money in the economy more rapidly than usual, and contractionary policy expands the money supply more
slowly than usual or even shrinks it. Expansionary policy is traditionally used to try to combat unemployment in
a recession by lowering interest rates in the hope that easy credit will entice businesses into expanding. Contractionary
policy is intended to slow inflation in order to avoid the resulting distortions and deterioration of asset values.

1.1 Objective of the Study

To give a theoretical overview of monetary policy in general.
To know about Monetary Policy July-December 2015 of Bangladesh.
To explore the monetary policy tools those are used in Bangladesh.
To investigate the challenges to the path of implementation of monetary policy in Bangladesh.
To know about the strategy of monetary policy.

1.2 Methodology of the Study

This study has been prepared on the basis of experience gathered from theoretical knowledge. Only secondary data have
been collected to prepare this study. We have presented our experience and findings by using different figures and tables
in the various part of this study.
The data are collected from the given sources.

Prospectus of Bangladesh Bank

Website of Bangladesh Bank
Newspaper and journals etc.

1.3 Limitations of this Study

We have faced some problems while conducting the study some of which are as follows:
1) Relevant information was not as available as required.
2) Definite timeline

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1.4 Scope of the Study

There are huge scopes to work in the area of this report. The study Monetary Policy of Bangladesh, July-Dec 2015 has
covered overall scenario of macroeconomics situation of Bangladesh, Bangladesh Bank's rules and responsibilities and its
policy towards the successful implementation of monetary policy, current status of monetary policy etc.

CHAPTER-2

2|Page

2.0 Monetary Policy

With the creation of the Bank of England in 1694, which acquired the responsibility to print notes and back them with
gold, the idea of monetary policy as independent of executive action began to be established. The goal of monetary
policy was to maintain the value of the coinage, print notes which would trade at par to specie, and prevent coins from
leaving circulation. The establishment of central banks by industrializing nations was associated then with the desire to
maintain the nations peg to the gold standard, and to trade in a narrow band with other gold-backed currencies.
The regulation of the money supply and interest rates by a central bank, such as the Central Bank of Bangladesh in
order to control inflation and stabilize currency. Monetary policy is one of the two ways the government can make
an impact on the economy. By impacting the effective cost of money, the Bangladesh Bank as a controller of
monetary policy can affect the amount of money that is spent by consumers and businesses.
Monetary policy is the process by which the monetary authority of a country controls the supply of money, often
targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually
include relatively stable prices and low unemployment. Monetary theory provides insight into how to craft optimal
monetary policy.
Monetary policy is the process by which the government, central bank, or monetary authority of a country controls 1. the supply of money
2. availability of money
3. Cost of money or rate of interest to attain a set of objectives oriented towards the growth and stability of the economy.

2.1 Scope of Monetary Policy

Monetary decisions today take into account a wider range of factors, such as:

Short term interest rates;

Long term interest rates;
Velocity of money through the economy;
Exchange rates
Credit quality
Bonds and equities (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.

3|Page

2.2 Objectives of Monetary Policy

The objectives of a monetary policy in Bangladesh aim at growth, stability and social justice. After the Keynesian
revolution in economics, many people accepted significance of monetary policy in attaining following objectives.

Rapid Economic Growth

Price Stability
Exchange Rate Stability
Balance of Payments (BOP) Equilibrium
Full Employment
Neutrality of Money
Equal Income Distribution
These are the general objectives which every central bank of a nation tries to attain by employing certain tools
(Instruments) of a monetary policy. Let us now see objectives of monetary policy in detail:

Rapid Economic Growth

It is the most important objective of a monetary policy. The monetary policy can influence economic growth by
controlling real interest rate and its resultant impact on the investment.

Price Stability

The monetary policy having an objective of price stability tries to keep the value of money stable. It helps in reducing the
income and wealth inequalities.

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
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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.
As stated in the Bangladesh Bank Order 1972, the principal objectives of the country's monetary policy are
1. To regulate currency and reserves;
2. To manage the monetary and credit system;
3. To preserve the par value of domestic currency;
4. To promote and maintain a high level of production, employment and real income; a
5. To foster growth and development of the country's productive resources in the best national interest.
Although the long term focus of monetary policy in Bangladesh is on growth with stability, the short-term objectives are
determined after a careful and realistic appraisal of the current economic situation of the country.

2.3 Major Monetary Policy Instruments Use by

Bangladesh Bank
2.3.1 Bank rate
Bank rate, also referred to as the discount rate, is the rate of interest which a central bank charges on the loans and
advances that it extends to commercial banks and other financial intermediaries. Changes in the bank rate are often used
by central banks to control the money supply.
The rate which central bank lends money to the commercial banks and discounts bill of exchange is called bank rate. If
central bank increases the bank rate then the commercial banks will increase their marker of interest rates. As a result the
borrowers borrow less form commercial banks and amount of credit reduces in the economy. In an opposite way amount
of credit will be increased in the country.

Impacts of Bank Rate Changes

BB(Bank rate)

Effects:
Increase
(cost of credit,
unemployment,

Effects: Increase
(other
interest
rate, investment,

Effects:
An

stable

5|Page

CB(Interest rate)

price

and export);

level);

situation
found

is

Decrease
Borrowers(Advance)

Increase= ;

Decrease

(Production, export,
investment).

Decrease= ;

BB: Bangladesh Bank ;

(Leakage
of
domestic capital,
price level,
import).

Stable=

CB: Commercial Bank.

2.3.2 Open market operations

Open market operations are the means of implementing monetary policy by which a central bank controls the short term
interest rate and the supply of base money in an economy, and thus indirectly the total money supply. This involves
meeting the demand of base money at the target rate by buying and selling government securities, or other financial
instruments. Monetary targets such as inflation, interest rates or exchange rates are used to guide this implementation.
BB mainly injects or withdraws reserves from the banking system through open market operations (OMO). This is
pursued in two ways:
The first type is the outright purchase or sale of approved securities through weekly auctions in volumes consistent with
the growth paths for RM and M2 targeted in the annual monetary program. BB injects reserves into the banking system by
purchasing approved securities and withdraws reserves from the banking system by selling them. By adjusting the amount
and the officially acceptable interest rate at auctions, BB influences the successful bidding rate, and the subsequent public
announcement of this rate can convey its intention regarding short-term interest rates.
For instance, if BB intends to raise short-term interest rates, it increases the scale of its auction in absorbing operations
and raises its internally acceptable bidding rate so as to push up the successful bidding rate of the auction and thus mop up
excess liquidity from the banking system, which influences short-term interest rates. Any significant changes in the
interest rate may persuade the stockholders to recalculate their return through dividend discount window and may react
accordingly.
The second type of OMO is repo (repurchase agreement) and reverse repo auctions. In order to facilitate liquidity
management on a day-to-day basis, BB goes for second type of open market operation, either through repurchase
agreement (repo) to temporarily add reserves or through reverse repurchase agreements (reverse repo) to temporarily
withdraw reserves. Repurchase agreements are essentially short-term loans collateralized by underlying approved
securities. BB buys the underlying assets for a given price with an agreement by the selling institution to buy it back at a
specified date and price. As the counterpart of repo auctions, BB accepts excess funds from the banks in ascending order
of interest rates to the extent needed to maintain the intended level of liquidity. It can be mentioned that BB has
introduced repo and reverse repo operations from July 2002 and April 2003 respectively.

Impacts of the OMO

Reverse repo and repo interest rates are BBs day to day instruments influencing the growth path of reserve money,
ultimately to influence inflation via growth path of broad money.
Recently, in the backdrop of the global economic slowdown the routine reverse repo operations are also being used
sparingly, to keep credit conditions easy;
6|Page

2.3.3 Statutory reserve requirement

Statutory Liquidity Ratio (SLR)

The SLR is commonly used to contain inflation and fuel growth, by increasing or decreasing it respectively. This counter
acts by decreasing or increasing the money supply in the system respectively. In terms of section 33(1) of the Bank
Company Act of 1991, the Statutory Liquidity Requirement (SLR) is the minimum (in percentage of total time and
demand liabilities) that a scheduled bank has to maintain in liquid assets with BB. The rate was set at 18 percent since
2005. Specialized banks are exempted while banks guided by Islamic laws are required to keep reserve at the concessional
rate of 10 percent.
The objectives of SLR are:
I.
II.
III.

To restrict the expansion of bank credit.

To augment the investment of the banks in Government securities.
To ensure solvency of banks.

Value and Formula

The quantum is specified as some percentage of the total demand and time liabilities (i.e. the liabilities of the bank which
are payable on demand anytime, and those liabilities which are accruing in one months time due to maturity) of a bank.
SLR Rate = Total Demand/Time Liabilities x 100%

Cash reserve requirement (CRR)

The cash reserve requirement (or required reserve ratio or only reserve requirement) is a bank regulation that sets the
minimum reserves each bank must hold to customer deposits and notes. These reserves are designed to satisfy withdrawal
demands, and would normally be in the form of fiat currency stored in a bank vault (vault cash), or with a central bank.
The reserve ratio is sometimes used as a tool in monetary policy, influencing the country's economy, borrowing, and
interest rates.
BB requests banks to keep five percent of their demand and times liabilities on account at the central bank. Cash in till is
not eligible for the CRR.

Impacts of SLR & CRR

Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) for scheduled banks are the other monetary policy tools,
used sparingly in situations of drastic imbalances from major shocks.
Changes of SLR, CRR and Bank Rate and Impact on Interest Rates (percentage)
Lending channel: If SLR Bank lending Bank investment that will Y (Output).
Cash flow channel: If SLR Cash flow of bank Interest rate Bank investment that will Y (output).

7|Page

2.4 Expansionary Policy

Expansionary monetary policy is when a central bank uses its tools to stimulate the economy. That increases the money
supply, lowers interest rates, and increases aggregate demand. That boosts growth as measured by Gross Domestic
Product (GDP). It usually diminishes the value of the currency, thereby decreasing the exchange rate. It is the opposite of
contractionary monetary policy.

2.5 Contractionary Policy

A contractionary policy is a type of policy that is used as a macroeconomic tool by the country's central bank or finance
ministry to slow down an economy. Contractionary policies are enacted by a government to reduce the money supply and
ultimately the spending in a country.
BB has moved to a restrained monetary policy since FY12 in the aftermath of an impending Balance of Payment (BOP)
crisis and a significantly higher inflationary environment.

Difference Between Contractionary and Expansionary Policy

In expansionary policy the central bank focuses on increasing the money supply while in contractionay policy the
money supply decreases in the economy.
In expansionary policy interest rate is decreased but in contractionary it is increased.
When implementing expansionary policy the central bank purchase securities but in the opposite one securities
are sold.
In expansionary policy reserve requirements are decreased but in contractionay it is increased.
Expansionary monetary policy causes an increase in bond prices but contractionary causes decrease in bond
prices.
In expansionary policy investment increases but opposite happen in contractionary policy.
A lower exchange rate cause export to increase in expansionary policy but contractionary policy decrease the
export or trade balance.

We all know that the easy monetary policy stance, adopted by the BB since FY10, which at that time it termed as an
"accommodative monetary policy" also led to double digit inflation, stock market bubble formation and its bursting in the
FY11, and sharp increases in land and property prices. The shift in monetary policy stance since FY13 has helped restore
price stability as inflation has been brought down to less than 6.5% and led to corrections in asset prices in general, both
in nominal and real terms.

8|Page

9|Page

Highlights

This is a cautious but explicitly pro-growth monetary policy stance supporting the 7 percent growth target and the
6.2 percent inflation target for the fiscal year 2016.
Reserve money is projected to grow at 16 percent and broad money (M2) at 15.6 percent which are adequate to
support the growth and inflation targets. It has also taken the growth rates of both public and private credit into
account.

Domestic credit is projected to grow at 16.5 percent at the end of the fiscal year 2016. Private sector credit is
projected to grow at 15 percent and public sector credit at 23.7 percent.

This is a growth supportive monetary policy that promotes investments through the strategy of selective easing.

Policy interest rates (repo, reverse repo) will remain unchanged, but easing will be considered after point-to-point
headline general inflation and core CPI inflation take a sustained declining trend.

Bangladesh Bank's supervisory vigilance on banking governance will be straightened further to clamp down on
loan delinquencies.

Besides already ongoing inclusive financing for farm and nonfarm small and medium enterprises (SMEs) and the
export development fund (EDF) support for exporters, new medium to longer term financing windows totaling
USD 500 million will be opened in the fiscal year 2016 for financing of manufacturing enterprises, and for
greening initiatives in the export oriented textiles, apparels, and leather sectors.

As before, Bangladesh Bank's monetary and financial policy stance remains grounded on the developmental
central banking mandate enshrined in its charter.

10 | P a g e

3.0 Bangladesh Banks Monetary Policy Stance

For the First Half of the FY2016: July-December 2015

This Monetary Policy Statement (MPS) is announcing

Bangladesh Banks monetary policy stance for the
first half (H1) of the FY16 as the first leg of its
monetary program for the FY16, drawn up in the
backdrop of sustained spell of CPI inflation
moderation and output growth momentum upheld by
cautious but explicitly growth supportive stance of
monetary and financial policies pursued in the recent
years. As usual, the FY16 monetary program and the
monetary policy stance for the H1 of the FY16 have
been chalked up drawing on the experience with the
preceding program and on inputs from face to face
and online stakeholder consultations.

3.1 Core Objectives

The main objective of Bangladesh Banks monetary
policy is moderation and stabilization of CPI inflation
alongside supporting output and employment growth.
Prolonged global growth slowdown accompanying
low global inflation amply shows that very low
inflation is as unhelpful for growth as is very high
inflation; particularly so for developing economies
where price levels of nontrade able goods are far
below those in advanced economies. Bangladesh
Bank would accordingly emphasize on stabilizing
CPI inflation around the current level rather than on
driving it down much further. Bangladesh Banks
monetary and financial policies will continue
supporting inclusive, environmentally sustainable
growth; addressing in its developmental role the
longer term risks to macro-financial stability
alongside usual business cycle related short-term
ones. The monetary policy stance for the H1 of the
FY16, therefore, will highlight the following points.

stabilizing inflation at moderate level targeted

in
the
national
budget
and
other
macroeconomic policy pronouncements,
supporting the public policy objectives of
inclusive, environmentally sustainable growth,
and

Maintaining orderliness in transition of

domestic currency exchange rate to new market
equilibriums in response to pick up in
investment and consumption driven imports
vis-a-vis trends of export receipts and other
inflows.

As always, Bangladesh Bank formulates its monetary

policy keeping two things in mind - monetary policy
objectives and global as well as domestic
developments.

3.2 Global Developments

Signals received from the global outlook are mixed.
While Europe is floundering in near recession, US
recovery is evident if not robust. Europe has already
been engaged in massive quantitative easing and
considering more to come, but the United States
signals raising the Federal funds rate at least slightly
to combat the rising signs of inflation since their
economy is reinvigorating.
The story of Chinese double-digit growth has gone
out of steam and it will remain so for a while. Its
projected growth for 2016 turns out to be 6.3 percent.
In contrast, India, which fell behind China in the
growth race over the last liberalization period of 3
decades, has exceeded its regional rival by projecting
a growth figure of 7.5 percent for 2016.The global
growth of 3.8 percent includes 2.4 percent growth in
advanced countries and 4.7 percent growth in
emerging and developing nations. The developing
bloc will face 4.8 percent inflation in 2016 while the
number is only 1.4 percent for the advanced bloc.

Table: Overview of the World Economic Outlook

GDP at constant % change
prices
2 2 2
0 0 0
World
1 1 1
2 3 4

Projecti
ons
2
2
0
0
1
1
5
6

17| P a g e

Developing
Economies

1.7
2.1
2.7

China

5.2
5.0
4.6
7.8

India

5.1

Bangladesh

6.3

2.7
2.8
4.3
4.7
7.8
6.8
6.9
7.5
6.1
6.3

7.4
6.3
7.2
7.5
6.1
6.8

Source: IMF World Economic Outlook (April 2015)

Based on these projections, the governments 7.0
percent growth target seems ambitious but attainable
subject to providing the right enabling environment.
The 6.2 percent CPI inflation target announced in
governments FY16 budget, not far off the current
levels, has been used alongside the 7.0 percent GDP
growth target in chalking up Bangladesh Banks
FY16 monetary program.

3.3 Economic Growth

When China with its double digit growth for 24 years
has now come down to the 6 plus range, Indias 7.5
percent growth projection remains encouraging for
Bangladesh being Indias neighbor and a dominant
trade partner. Needed enabling environment for
attaining 7 percent real GDP growth in the FY16
would include urgent redressing of infrastructural and
administrative deficiencies impeding investments,
alongside preserving political calm and stability.

Given the background, Bangladeshs current level of

inflation at 6.4 percent is already moderate. The
governments 6.2 percent target for the FY16 implies
that we need to go for further reduction by slightly
pressing the brake on the price level. Now if money
supply remains on the current
Stance that is cautious in general but at the
7. %
50
7. %
25
7. %
00
6. %
75
6. %
50
6. %
25
6. %
00
5. %
75
5. %
50

Chart: General & Core

Inflation

Genera
-M
l (12-t -P
A)
Core
(P o )
5
Jun1
5

Emerging Market
and

1.5
1.6

5
Apr-1
5
May-1

Economies

2.3
2.2
2.4
-0.8
-0.5 0.9

5
Feb-1
Mar
-5
1

Other Advanced

3.1
3.1

4
Dec-1
4
Jan-1

Euro Area

An economy cannot thrive without macro stability

which requires moderate inflation and price stability.
Hence, moderate inflation lies in the core objective of
the central bank. The word moderate is susceptible
to various interpretations. But, we try to be more
definitive. For a developing economy like
Bangladesh, various empirical studies and the public
perception define a range of 4 to 6 percent inflation as
moderate. The upper limit of this range may move
further up if the economy is accelerating at 7 percent
or above. Then affording an inflation rate of 7 or 8
percent will be necessary to absorb the speeding up of
employment, output, and wages.

p -4
Oct
1
4
Nov-1

2.4
2.4

1.2
1.4
1.8

USA

3.4 Inflation

3.5
3.8

Aug-1
4
Se -1

3.4
3.4
3.4

Advanced
Economies

Same time generously accommodative for growth

generating pursuits, achieving that target will not be
difficult.
Although general inflation has fallen from 6.87
percent in January 2015 to 6.40 percent in June, core
inflation that counts nonfood and nonfuel inflation is
on the rise. It has inched up from 6.08 percent in
January 2015 to 6.74 percent in June of the same year,
warranting a cautious stance right now. That is
reflected in the money supply and repo rates of the
central bank.

3.5 Money Supply

Based on the conflicting signals from general
inflation and core inflation, we decide to remain on
our current cautious but generously supportive stance
17| P a g e

for inclusive, sustainable output growth. Following

the growth supportive stance, we plan to increase
broad money (M2) at the

food component that occupies almost 60 percent of

the consumption basket played the major role in
pulling the general inflation figure downward.

Table: Monetary Aggregates(Y-o-Y growth in %)

Actual

Program

Item
Jun- Jun- Dec- Jun14 15 15
16
40.3 21.3 17.5 3.2

Net Domestic Assets 10.6 9.9

Domestic Credit

14.3 19.5

11.6 10.1 13.1 16.5

Credit to the public 8.8

sector

-2.6 7.9

23.7

Credit to the private 12.3 13.2 14.3 15.0

sector
Broad money

16.1 12.4 15.0 15.6

Reserve money

15.4 14.3 16.5 16.0

*Constant exchange rates of end June 2015 have

been used.
Rate of 15.6 percent. This stance of money supply
complies with the growth target, absorbs moderate
inflation, and finally takes required level of
monetization into account.

3.6 Policy Interest Rates

The repo and reverse repo rates have been kept
unchanged at 7.25 percent and
5.25 percent respectively, for several months now.
However, gains in inflation decline earned over this
period do not yet make a case for easing of policy
interest rates, given that both headline point-to point
CPI inflation and core CPI inflation have edged up
recently. The fall in general inflation mainly came
from the declining food prices. Food inflation fell
from 7.68 percent in January 2015 to 6.68 percent in
June of the same year. Here runs the public perception
that the fuel price reduction mainly affected general
inflation. But, the government did not adjust that
reduction to domestic prices. Although expectations
owing to the global fuel price might have played a
positive role in dampening inflationary concerns, the

Based on just food prices, which are more volatile in

nature, it will not be prudent to expect that general
inflation and in particular nonfood nonfuel core
inflation will be falling when nonfood inflation is
rising. Hence, Bangladesh Bank remains cautious on
inflation and is refraining from policy rate easing
right away, but will not hesitate to do so as point-topoint and core CPI inflation take sustained downward
turn.
In addition, the fall in interest rates is not significant
enough to warrant a downshift of policy rates
immediately. For example, the weighted average
deposit rate
1
4
1
3
1
2
1
1
09
8
7
6

Chart: Interest rate

Spread

Lending
Rate

Deposit
Rate

Jan-1
1
May
-1
1
Se -1
p 1
Jan-1
2
May-1
2
Se -1
p 2
Jan-1
3
May
-1
3
Se -1
p 3
Jan-1
4
May
-1
4
Se -1
p 4
Jan-1
5
May
-1
5

Net Foreign Assets*

17| P a g e

The credit growth figures in the public

5%
Based on the actual financing needs of the
government. It registered a negative figure of 2.6
percent in the last fiscal year whereas Bangladesh
Bank projects a positive growth rate of 23.7 percent
for the current fiscal year. In contrast, private sector
credit growth has always remained stable particularly
since the fiscal year of 2013 when the figure was
10.8 percent and has stood higher at 13.2 percent in
the FY15. All these figures were coupled with 6-plus
percent economic growth. If the last fiscal year's 13.2
percent credit growth could endow the economy with
6.5 percent
Chart: Private Sector Credit
Growth
Proj.
Actua
15.%
3

15.%
5
13.%
2

13.%
6

output growth, a provision of 15

19%

5
Jun-1
5

13.%
5

4
Dec-1
4
Ja -1

p -1
4
Oct
4
Nov-1

13.%
0
12.%
2

14.%
0

5
Apr-1
5
May-1

Jun-1
4
Ju-1

With accommodative stance for growth supportive

understandings, the stock of broad money is projected
to be taka 9099 billion in June 2016, representing
53.0 percent monetization of the economy. This stock
comprises two figures: 1) taka 1946 billion or USD
25.0 billion as net foreign assets (NFA) and 2) taka
7153 billion as net domestic assets (NDA). The
amount of NDA is projected to be composed of
domestic credit of taka 8096 billion and a negative
figure of taka 943 billion against other items (net).
Domestic credit, which represents a 16.5 percent rise
from the previous June figure, can be decomposed
between public and private sector credit as taka 1488
billion and taka 6608 billion, respectively.

n -1
5
Feb
Mar
-5
1

3.7 Foreign and Domestic Assets

l -1
4
Aug
4
Se -1

Fell from 7.71 percent in July 2014 to 6.99 percent in

May 2015. The average spread, which stands on the
average deposit rate to give us the average lending
rate, fell from 5.13 percent in July 2014 to 4.83
percent in May 2015. Consequently the average
lending rate fell from 12.84 percent in July 2014 to
11.82 percent in May 2015. The call money rate has
fallen from 8.57 percent in January to 5.79 percent in
June 2015. The changes are nevertheless not
substantial enough to outweigh the concern about
rising core inflation. Policy rates will, therefore,
remain on the course as before. As already indicated,
we will revise them whenever further developments
warrant us to do so.

percent

17%
15%
13%

3.8 Credit Growth

11%
The

9%
private credit growth appears to be adequate to
support 7.0 percent output growth for the current
fiscal year.

3.9 Selective Easing

government is likely to take more money from the

banking system as reflected in the last budget and
Bangladesh Bank has kept sufficient provisions for
that.

In the FY16 Bangladesh Bank will continue with the

existing stance that is cautious overall but clearly
accommodative in supporting productive pursuits.
Commercial banks have been motivated and
supported in extending loans to the productive and
vulnerable sectors at lower interest rates. Green
17| P a g e

projects will avail loan at a lower rate and so will

export promotion activities. The World Bank has
committed to contribute USD 300 million as credit.
The World Bank money will be for medium to longer
term foreign currency financing of manufacturing
projects. Bangladesh Bank will add another USD 200
million which will be specifically for greening
initiatives in the export oriented textiles, apparels, and
leather sectors.

exchange rate stability by ironing out day-to-day

fluctuations.

In summary, a fund for USD 500 million will be

created to support medium and long-term projects,
especially environmentally responsible investments at
lower interest rates. Bangladesh Bank extends low
cost funds to promote women entrepreneurships, skill
building projects, and energy expansion initiatives.

While the central bank's purchases of foreign

currencies from the market is defusing appreciating
pressures on taka and thus on the exchange rate,
lackluster performances of exports convince us to
lower the value of taka against the dollar and thus
depreciate the exchange rate. Since taka is pegged
with the dollar that has much appreciated against
other major currencies like Euro, the real effective
exchange rate (REER) is also on the rise. Whether
this development appears to be the main reason for
the weak export performance over the last fiscal year
is a matter which remains to be substantiated. Our
exporters have been prudent enough to go for natural
hedging by going mostly for US dollar based export
contracts even with the European buyers.

appreciation pressures on it. The central bank,

however, exercises a managed float to maintain

7
Chart: Forex Reserve & Import Cover

5
4
3
2
1
0

FY1
0
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5

6
Months

Fx reserve
Reserve covers imports
(LHS)
(RHS)

FY09

3
0
2
5
2
0
1
5
1
0
5

FY08

Chart: Exchange Rate of USD/Taka

Bangladesh Banks foreign exchange

FY07

0.015
0
0.014
5
0.014
0
0.013
5
0.013
0
0.012
5
0.012
0
0.01
15

Jun-0
Dec-0
7
Jun-0
7
Dec-0
8
Jun-0
8
Dec-0
9
Jun-1
9
Dec-1
0
Jun-1
0
Dec-1
1
Jun-1
1
Dec-1
2
Jun-1
2
Dec-1
3
Jun-1
3
Dec-1
4
Jun1
4
5

W.A Exchange rate

Bangladesh Bank has kept on buying foreign

exchange to protect external competitiveness of taka
by easing

FY06

3.10 Exchange Rate and Foreign

Reserves

Bangladeshs FY15 export growth slowdown to 3.35

percent is attributable largely to demand weakness in
the European Union from the Greek debt debacle and
other malaise. In the last FY15, imports grew at
around 12 percent - a rate much higher than export
growth of 3.4 percent. If that trend continues,
appreciating pressures will gradually die out, sending
Bangladesh Bank to a position that enables
depreciation with better ease.

FY05

Thus, Bangladesh Bank has adopted selective

easing through judicious variations of interest rates.
If taken together, the productive sectors are accessing
low cost financing and hence contributing
substantially to the supply side capacity of the
economy.

Billion USD

Bangladesh Bank has so far disbursed taka 140,000

million under refinance schemes to support above
subsectors.
It may be noted that the Export
Development Fund (EDF) has been increased to USD
2 billion from only USD 100 million in 2006.
Peasants get low cost credit and so do sharecroppers.

Preserving that stability is an integral part of

monetary policy although infrequent adjustments to
market pressures have been carried out in the past.
That policy stance helped Bangladesh Bank to
maintain exchange rate stability for the last 2 years
and a quarter since early 2013.

reserves have grown fast to a level generally deemed

as adequate, but not yet to a level that could be
viewed as excessive, seen against those of other
developing economy comparators. At the moment,
this amount can meet approximately 6 months' import
17| P a g e

bills. Bangladesh Bank also sees a slowdown in the

growth rate of foreign exchange reserves in the near
future because of imports' outpacing exports by
around 8.5 percentage points.

3.11 Balance of Payments

At the end of the last fiscal year 2015, current account
deficit stood at USD 1.63 billion while the nation
enjoyed surpluses over the fiscal years of 2013
through 2014. This does not signify that the external
sector is gradually running into a difficult stage. The
overall balance will still remain positive at USD 4.16
billion in the FY15 - slightly less than USD 5.48
billion from the

CA
B

Overall
Balance

3
2
1
0

FY15

FY14

FY13

FY1
1
FY12

FY10

FY09

FY08

FY07

FY06

FY05

-1

The next current account deficit for the

6 is projected to reach USD 3.55 billion which will
eventually reduce the overall balance to USD 1.13
billion. The jump in current account deficit from USD
1.63 billion to USD 3.55 billion is mainly originating
from an augmenting trade deficit that is expected to
rise from USD
10.02 billion In the FY15 to USD 13.42 billion in the
FY16.

Bangladesh Bank monitors the recent rise of

nonperforming loans with concern and care. While
some of these figures are potentially alarming,
Bangladesh Bank has already taken some corrective
measures to clamp down on classified loans.
Bangladesh Bank will not be lenient in this regard.
While the cases of the credible borrowers with
potential for better businesses will be reviewed, the
central bank will not hesitate to take any stern
measures against the
Chart: Gross NPL Ratios by

Modest current account deficits are usual and

desirable in growing economies.
Bangladesh's
current account deficit that turns out to be less than 1
percent of GDP is comfortably manageable and it
does not pose any risk at this moment. Rather, it
indicates the growing demand for capacity building
and more productivity in the economy since more
than 65 percent of our imports comprise capital
machinery, intermediate goods, and raw materials.
Imports bolster exports in Bangladesh. We expect 14
percent growth in imports, 7.5 percent growth in
exports, and 10 percent growth in remittances for the

All
Type ofSOC
BanksSB
Banks
Bs
s

4
0
3
5
3
0
2
5
2
0
1
5
1
0
5

PC
Bs

FCB
s

Percent

Billion USD

3.12 Banking Governance

Chart: Overall & Current

Account Balance

-2

Recent sustained pick up in investment and

consumption imports will in the near term ease
appreciation pressures on taka, enhancing its export
competitiveness. The growth rate of foreign exchange
reserves will slow down and the import coverage will
fall before reserves turn out to be a liability. The
foreign reserves are projected to keep rising to reach
USD 26 billion in the FY16 from USD 25 billion in
the FY15, but the import coverage will marginally fall
from 6.2 to 5.7 months. Around six months of import
coverage is generally deemed safe and comfortable
for an emerging country like Bangladesh.

FY1

FY14.
6

FY16. An augmenting current account deficit will

turn out to a blessing in disguise for at least a year or
two ahead once it comes to the exchange rate and
reserves.

Q
1

Q
Q
2 20 3
13

Q
4

Q
1

Q
Q
2 20 3
14

Q
4

Q
1
20
15

habitual defaulters and bad borrowers with

a track record of persistent delinquencies. The central
bank has taken various steps to improve supervision
so financial frauds can be minimized. Digital
technology has been deployed to investigate big
financial transactions and loans in order to stop the
repetition of banking irregularities.

17| P a g e

3.15
Chart: Capital Market Developments

3.13 Financial Stability

Financial stability concerns attained high priority
following the global financial crisis in Bangladesh as
everywhere else worldwide. Stress testing exercises
are now routine practices in Bangladesh as diagnostic
and supervisory tools. Bangladesh Bank and all other
financial sectors, capital markets, the insurance
sector, regulatory authorities in Bangladesh hold
regular quarterly consultations toward policy
coordination upholding financial stability.

3.14 Stock Market

Stock markets in Bangladesh have stabilized by now
after the 2010 bubble creation and the subsequent
collapse. Bangladesh Bank proactively lent hand in
stabilizing the capital market, at the same time taking
steps for reining in the banking sectors capital
market exposures within global best practice norms
linked to their capital bases.

Developmental Central Banking

Protecting macro-financial stability is now universally
accepted as a core responsibility of central banking.
Macro financial stability is impacted not only by
shorter term business cycle related risks but also by
longer term environmental risks and inequity driven
social instability risks. Bangladesh Bank has been one
of the few forerunner central banks addressing these
risks in its monetary and financial policies, promoting
socially responsible inclusive and environmentally
sustainable financing.
Bangladesh Banks attention towards promoting
inclusive, environmentally sustainable financing is
not in any way impairing its core price stabilization
objective, as evident from the sustained spell of
Bangladeshs
inflation
moderation
and
macroeconomic stability. Bangladesh Banks attention
to promoting inclusive, environmentally sustainable
financing is already paying off by upholding
buoyancy of domestic demand and growth dynamism.
Unlike amorphous quantitative easing in advanced
economies spilling into asset markets and further
enriching the affluent; Bangladesh Banks monetary
and financial policy support interventions focused on
inclusive and green growth are creating new output,
employment, and income opportunities in large
scales, in all economic sectors including agriculture,
manufacturing, and services. Bangladesh Bank
believes that these innovative approaches rather than
indiscriminate monetary expansion are the launching
pads needed for transition to Bangladeshs aspired
higher growth trajectory.
17| P a g e

Annex 1: Bangladesh Balance of Payments

In million US$
Particulars

Actual
2011-12

Trade balance

Estimation Projection
2012-13 2013-14 2014-15

2015-16

-9,320

-7,009

-6,806

-10,015

-13,416

Export f.o.b.(including EPZ)

23,989

26,567

29,765

30,762

33,069

Import f.o.b (including EPZ)

33,309

33,576

36,571

40,777

46,485

-3,001

-3,162

-4,189 -4,708

Receipts

2,694

2,830

3,065

3,126

3,439

Payments

5,695

5,992

7,254

7,834

8,383

-1,549

-2,369

-2,571 -2,797

Services

Primary income
Receipt
Payments
Of which: Official interest payments
Secondary income
Official transfers
Private transfers
Of which: workers' remittances
CURRENT ACCOUNT BALANCE
Capital account
Capital transfers
Financial account
Foreign Direct investment
Portfolio investment
Other investment
Errors and omissions

193
1,742
373
13,423
106

120
2,489
476

171
2,742
538

-4,944

-2,987

137

123

2,934

3,110

600

650

14,928 97 14,912 79 15,889

65
14,831
14,833
13,317
15,824
14,338
14,115
12,734
15,174
2388
1346
-447
-1631
629
644
482
500
629
644
482
500
2770
3075
1436
5220
1726
1504
1191
1700
850
368
825
240
2670
676
746
71
5
418
-659
4160
-977
5483
5128
494

17,796 150
17,646
16,691
-3551
550
550
4131
1900 900
1331
0
1130

OVERALL BALANCE
24| P a g e

24| P a g e

24| P a g e

CHAPTER-3

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4.0 Importance and Consistency of Policy Stances JulyDecember 2015

The continuation of prevailing policy stance is certainly commendable. The quantitative targets such as expansions of
broad money (15.6%) and credit to the private sector (15.0%) for FY16 appear consistent with the GDP growth target of
7.0% and inflation target of 6.2%. The analysis presented in the MPS regarding non-food (core) and food inflation is
appropriate given that non-food inflation is trending upwards and has reached 6.74% in June 2015. The BB's position that
this jump in the core inflation at present warrants "a cautious stance" is admirable.
In the MPS, BB also underscored the importance of supporting and boosting private sector investment consistent with
targeted growth rate of 7.0% growth rate. Certainly, BB's effort to support export growth through an expanded Export
Development Fund (EDF) amounting $2.0 billion, and establishing a sizable fund for foreign currency financing of
investment in environmentally sustainable projects in the textile and leather processing sectors are steps in the right
direction to promote investment.
These efforts notwithstanding, it is widely known that endangering private sector investment requires much more than
what could be supported through the monetary policy. In particular, it is generally accepted that private investment in
Bangladesh is constrained by infrastructure deficiencies and general political and governance issues. While monetary
policy in general cannot influence these major issues which lie beyond its domain, it certainly does have an important role
in promoting investment by lowering the borrowing rates.
Lowering lending rates to single digit levels, as demanded by private sector investors and business community in general,
is not unreasonable but certainly cannot be delivered over the short term. Reduction of lending interest rates to single-digit
level will require bringing down the inflation rate further to perhaps 3.0-4.0% level and reduction of the spread between
the deposit and lending rates to 3.5-4.0% from the current level of about 5.0%. The average lending interest rate in China,
at 5.6% in FY14, was substantially lower than that of Bangladesh, at 12%-13.0%. The lower Chinese borrowing rate can
be attributed to the low inflation (about 2.0%) and low interest rate spread (less than 3.0%) in the Chinese economy.
The argument that higher growth requires higher inflation (the old "Phillips Curve" argument) should not be used to
justify higher inflation in Bangladesh which is well above its trading partners. Higher inflation in Bangladesh results in a
case of perverse taxation that harms the poor and thus contributes to social inequality, leads to real exchange rate
appreciation eroding the country's competitiveness, and contributes to rapid asset price increases making the poor poorer
(as they do not have much asset holding). Bangladesh needs to move out of the mindset that 6.0-7.0% inflation is
necessary for growth rate of 7.0% or higher. It needs to be more aggressive on the inflation objective like the Reserve
Bank of India.
BB's view that inflation need not be lowered and may even have to be upped (as implied in the MPS) is contrary to the
Chinese experience. The Chinese experience certainly does not indicate that an "inflation of 7.0 or 8.0% is necessary to
absorb speeding up of employment, output and wages growth', as stated in the MPS. If such is the monetary policy stance,
then Bangladesh's quest for single lending rate will be futile. Double digit lending rates in such a situation is a natural
outcome and Bangladesh has long been successful in achieving this feat despite the bad governance and inefficient
management in the financial sector.

24| P a g e

3.0 Findings
3.1 Expected and Achieved Target

The growth target was 7% while only 6.5% was achieved

Broad Money was projected to grow at 15.6% but it was 14.2% in December 2015.
Domestic credit was projected to grow at 16.5% what was actually 10.9% in December 2015. Private sector credit
and public sector credit was projected to grow at 15% and 25.7% which was 13.8% and a negative number of
1.7% at the end of the fiscal year 2015.
Inflation was expected to land in 6.20% which was ultimately achieved, some effects of food price rise had an
impact on inflation rate.
A static set of policy rates on repo and reserve repo was supposed to be kept for this fiscal year.

With regard to forecasting of key monetary aggregates, which underpins the monetary programmer, BB needs to be more
realistic and accept the ground reality. For May 2015, the public sector credit growth was originally projected to be 25.3%
while the actual growth was negative 2.7%. Similar discrepancies are also observed in the forecasts for the Net Foreign
Assets (NFA), with previous projected growth rates for NFA being much lower than the actual outcomes. These
observation points to the fact that BB's forecasting was substantially off in certain key areas and it should revisit its
quantitative framework and take better cognizance of the policies that are in place at the time of preparing the quantitative
exercise.
These very large discrepancies between the actual and projected outcomes in key monetary aggregates raise questions
about the quality of financial programming exercises underpinning the monetary policy. Based on past experience, we are
apprehensive that the actual and projected outcomes in this MPS-particularly with respect to NFA and government
borrowing will also continue to be very different. For example, even as outsiders we can convincingly argue that given the
relatively higher interest rates offered by National Savings Schemes (NSS), the level of non-bank financing will continue
to be very high as it was in FY15, and net borrowing by the government from the banking system may very well be
negative once again if the government policy with regard to national savings instruments continues as it is now. Similarly,
the increase in the NFA will be much higher than the growth rate programmed in the MPS, in part because of continued
strong inflow of foreign assets induced by the significantly high interest rates offered on taka assets. Overall, we would
like to see a better exercise that reflects outcomes closer to reality.
The MPS should have also warned that the widening interest rate differential between the banking system deposits and
NSS instruments will also pose a serious challenge for monetary management and to the health of the banking sector. In
FY15, due to high rate of purchase of NSS instruments, deposit growth in the banking system was limited to only 12%.
Despite the reduction in NSS interest rates by 2.0 percentage points in May 2015, the spread between the NSS instrument
and bank deposit rates is still very wide and non-bank financing through NSS is continuing at the rate of Tk. 25 billion per
month which is considerably in excess of the budgeted monthly inflow.
If the NSS interest rate structure remains as it is, the deposit growth in the banking system will be very low, constraining
credit expansion by commercial banks. The Treasury bill market will also dry up, undermining bond market development.
Based on these considerations, BB should have made a louder plea for further reduction in NSS rates in the MPS by
linking it to T-bill rates of similar maturities. While that was not done, BB and the Ministry of Finance should still work
together to bring about the required reduction in the NSS interest rates by overcoming the associated political challenges.

24| P a g e

3.2 Limitation of Monetary Policy in Bangladesh

In a developing country like Bangladesh the monetary policy lacks few things.

Capital markets are narrow and unorganized. Similarly, in the situations, the instrument of the reserve requirement
does not function properly.
By its nature, monetary policy is not effective in the short run.
The role of monetary policy is not compulsive but permissive. This seriously limits the efficiency of monetary policy
in backward countries.
In under developed society where liquidity trap is in existence monetary policy cannot work efficiently.
Administrative honesty and firmness are not very rigorous in less regular countries which reduce the efficiency of
monetary policy a policy a lot.
A huge percentage of money never comes in the mainstream economy, rich people, traders ,business and other people
prefer to spend rather than to deposit money in the bank ,this shadow money is used for buying precious metals like
gold silver ,ornaments ,and land and in speculation ,this type of lavish spending give rise to inflation trend in
mainstream economy and the monetary policy fails to control it.
As the economy launch itself into a orbit of economic growth and development, the financial sector comes up with
great speed as a result many non-banking financial institutions (NBFI) come up, these NBFIs also provide create in
the economy, however the NBFIs is do not come under the purview of a monetary policy and thus nullify the effect of
a monetary policy.
Lastly, the lag between the decision about a particular policy and its implementation also hinders the monetary policy
in its success. Here we found that monetary policy suffers from various limitations in Bangladesh. So, it should be
supplemented by fiscal policy to make it effective. Despite this information, monetary policy sets the tone of
economic development in recent years.

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4.0 Conclusion & Recommendations

The Monetary Policy Statement (MPS) is intended to outline the objective and the modalities of formulation & conducting
of monetary policy by the BB, its assessment of the recent and the expected monetary and price developments, and the
stance of monetary policies that will be pursued over the near term. Objectives of the monetary policies of BB as outlined
in the Bangladesh Bank Order, 1972 comprise attainting and maintaining price stability, high levels of production,
employment and economic growth in such a directed regime with little or no role of financial prices in influencing the
magnitudes or directions of credit the present MPS provides the monetary policy stands that BB intends to follow during
first half of FY15-16 The prime objective of the policy stance is to ensure the use of the financial instruments towards
promoting real sector growth at its targeted level along with ensuring reasonable price stability. The policy stance takes
into account recent developments in real, external, fiscal & monetary sectors of the economy and the near term
macroeconomic outlook for the remaining period of FY16. In conclusion, we believe that, despite some deficiencies in the
quantitative framework, the latest MPS contains valuable insight into monetary policy stance of the BB for the coming
months. BB's cautious monetary policy aimed at supporting 7.0% growth and 6.2% inflation target is appreciable.
However, the cavalier attitude towards high inflation in Bangladesh in future is unwarranted and counterproductive. BB
should also take steps to boost deposit growth of the banking system and thereby create the base for private sector credit
expansion in a sustainable manner by working closely with the Ministry of Finance. The observations made above are in
line with BB's core objective of a supportive monetary policy which promotes investment, price stability, and inclusive
and sustainable growth at much higher rates.

4.1 Recommendations on Monetary Policy July-Dec

2015
Policy makers should plan to tackle macro slippages such as the large current account deficit, exchange rate volatility and
rising inflation. They should strive to stem financial sector insolvency and prioritize the completion of ongoing reform
initiative. Following recommendations are provided after studying the monetary policy for the FY2 2015:
a) In Bangladesh, capital markets should be expanded and organized enough to succeed the monetary policy.
b) Banking habits are also underdeveloped which hampers the effectiveness of monetary policy seriously. So
banking habits should be developed especially in rural areas.
c) Steps should be taken to abolish the existence of liquidity trap.
d) To run the monetary policy smoothly and effectively, it is essential to pay sufficient attentions to increase the
GDP.
e) 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 subprime crisis that has incited the present global economic
collapse.
f) 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.
g) 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
24| P a g e

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 tradeoff 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.
h) 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.
i) 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.

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