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Transcript of Bank of Bangladesh
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Bangladesh BankBanking System and Monetary
Policy
Nima Doma Sherpa
Pabitra Pandey
Padama Yogi
Presented by:
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History of Bangladesh Bank
Prior to the birth of Bangladesh in 1971, functions of the State
Bank of Pakistan were performed through the Dhaka
Branch office.
After the liberation war, Dhaka branch office of State Bank of
Pakistan was recognized as the central bank of Bangladesh and
it was named Bangladesh Bank.
Bangladesh Bank was established under the Bangladesh Bank
Order, 1972 (Presidents Order No 127 of 1972) which took
effect on 16 December 1971. and the law includes theestablishment, incorporation, capital and management of
Bangladesh Bank.
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Financial system of Bangladesh
4 state-owned commercial banks
4 government owned specializeddevelopment banks
39 domestic private commercial banks
9 foreign commercial banks
4 Non-scheduled banks
31 non-bank financial institutions
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Financial system of Bangladesh
The financial system also embraces
Investment Corporation of Bangladesh,
Bangladesh House Building Finance Corporation,
2 stock exchanges,
62 insurance companies, 599 registered micro-credit organizations,
54 merchant banks (investment banks),
387 depository participants (stock dealers, brokers, etc.),
8 credit rating companies, and
119 registered co-operative banks.
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Introduction
Bangladesh Bank is the central bank and monetary authority
of the country.
The entire operation of the former State Bank of Pakistan in
the eastern wing was transferred to Bangladesh Bank.
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Objectives of Bangladesh Bank
As the central Bank of Bangladesh, the broad objectives of the
Bank are:
a. To regulate currency issuance and to keep foreign
exchange reserves;
b. To manage the monetary and credit system of Bangladesh
with a view to stabilizing domestic monetary value
c. To preserve the par value of the Bangladesh Taka
d. To promote and maintain a high level of production,
employment and real income in Bangladesh and to foster
growth and development of the country's productive
resources.
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Visions of Bangladesh Bank
The Bangladesh Bank (BB),
Through ensuring the quality of services and the
competence of its staff,
Shall operate as a modern, dynamic, effective, and forward-looking central bank
To manage the countrys monetary and financial system
With a view to stabilizing the internal and external value of
Bangladesh Taka Conducive to rapid growth and development of the economy.
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Missions of Bangladesh Bank
Promote and maintain macroeconomic and price stability
Through Formulating and implementing appropriate
monetary policy consistent with the countrys national
development goals;
Pursuing prudent policies to ensure stable internal
and external value of Taka.
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Missions of Bangladesh Bank
Identifying policy priorities for implementation by theGovernment through
Assessing the transmission channels and
The interactions of monetary policy with fiscal, exchange
rate, and other macroeconomic policies and their impact onthe economy;
Proposing necessary legislative measures to attain the central
banks objectives and perform its functions including
strategies and Promoting, regulating and ensuring a secure and efficient pay
ment system, including the issue of Bank Notes.
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Functions of Bangladesh Bank
Regulation and supervision of banks and non-bank financialinstitutions.
Management of the country's international reserves, countrys
foreign exchange and the gold reserve.
Exercises monopoly over the issue of currency andthe banknotes.
Regulation and supervision of the payment system.
Acting as banker to the government and the bankers bank, a
Lender of Last Resort.
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Implementation of the Foreign exchange regulation Act.
Managing a Deposit Insurance Scheme .
Formulation and implementation of monetary and credit
policies.
Money Laundering Prevention.
Collection and furnishing of credit information.
Functions of Bangladesh Bank
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Supervision of Banks
With a view to promoting and maintaining soundness,
solvency and systematic stability of the financial
sector as well as to protecting interest of depositors,
BB carries out two types of supervision namely (i) on-site inspection and
(ii) off-site monitoring
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On-site Inspection of Banks
As part of Bangladesh Bank's statutory function, currently sixdepartments of BB namely
Department of Banking Inspection-1 (DBI-1),
Department of Banking Inspection-2 (DBI-2),
Department of Banking Inspection-3 (DBI-3), Department of Foreign Exchange Inspection (DFEI),
Financial Integrity and Customer Services Department
(FICSD), and
Bangladesh Financial Intelligence Unit (BFIU)
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On-site Inspection of Banks
These departments conduct different types of inspection which
may be summarised in three major categories:
(i) comprehensive/ regular/ traditional inspection;
ii) risk based/ system check inspection, and
iii) special/ surprise inspection
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Padama
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What is Monetary Policy ?
Monetary policy is a regulation of the money supply andinterest rates by a central bank, in order to control inflation and
stabilize currency.
By impacting the effective cost of money, the Bangladesh
Bank as a controller of monetary policy can affect the amountof money that is spent by consumers and businesses
Monetary policy is the process by which the government,
central bank, or monetary authority of a country controls
The supply of money, Availability of money, and
Cost of money or rate of interest.
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Reasons of publishing MonetaryPolicy Statement
To support the governmentsgoal of faster inclusive economic
growth and poverty reduction, besides maintaining monetary
and price stability.
To anchor inflation expectation of the markets.
Achieving an inclusive economic growth by facilitating
productive sectors while keeping inflationary pressure under
control.
By fixing inflationary rate the authority trying to increase the
outcomes using the maximum infrastructure of the productive
sectors which will contribute in the national income.
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Frameworks of BangladeshMonetary Policy
The Policy Target
Inflation Target
Growth target
Updated assessment
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Previous Monetary Policy(July,2013 of BB)
The July 2013 MPS explained that policy rates were being
kept unchanged due to the risks of inflationary pressures
stemming from wage increases and supply-side
disruptions.
The last MPS also aimed to contain reserve money growth
to 15.5% and broad money growth to 17.2% by December
2013.
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Current Monetary Policy(January,2014 of BB)
The monetary stance in FY14 takes these recent economic and
financial sector developments into account.
Target a monetary growth path which aims to bring average
inflation down to 7%, while ensuring that credit growth issufficient to stimulate inclusive economic growth.
The persisting inflationary pressures over the past few months
with the risks ahead related to the inflation outlook imply that
achieving the FY14 inflation target will be challenging. Assuch BB has decided to keep policy rates unchanged.
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Monetary Policy Objective
Price stability
Full Employment
Exchange Stability
Economic Growth
Neutrality of Money
Balance of PaymentEquilibrium
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Price stability:
Inflation distorts economic calculations and expectations
Deflation creates depression in the economy.
Price stability promotes business confidence, makes economic
calculation possible, controls business cycle and introduces
certainty in economic life.
Full employment:
In less developed countries, though full employment cannot beachieved within a short period, the monetary policy should try
to achieve at least a near full employment situation.
Monetary Policy Objective
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Exchange stability: It is essential condition for the creation of international
confidence and promotion of smooth international trade on the
largest scale possible.
A restrictive monetary policy tends to reduce a countrysbalance of payment defect.
Economic Growth
If refers to the growth of real income or output per capita.Monetary policy can contribute to economic growth.
Monetary Policy Objective
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Balance of Payment Equilibrium The existence of balance of payment deficit seriously reduces
the ability of an economy to attain other objectives.
Monetary policy must make into consideration the
international payment problem.Neutrality of Money
Neutrality of money indicates a situation in which changes in
the quantity of money occurs.
Causes a proportionate change in the equilibrium pricesof commodities, and
The equilibrium rate of interest remains unchanged.
Monetary Policy Objective
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Bank rate
Open market policy
Reserverequirement
QuantitativeMethods
Moral persuasion
Publicity
Restriction ofpurpose
Qualitative
Methods
Instruments of monetary policy:
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Instruments of monetary policy:
Open market operations:
A relatively fine tool that can be used to make smalladjustments. These adjustments can be daily and oftenoccur without much fanfare.
Targeted Interest RatesA relatively blunt tool that can be used to make largeadjustments. In typical years, changes in targetedinterest rates a few times per year.
Reserve RatioA rather blunt tool that is only used when very largeadjustments are in order.
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Open Market Operations
Buying Treasury securities: When the Central Bank purchases securities through
the government securities dealers,
The account balances of the dealers are credited with
the amount The total amount of fund at the dealers bank increases
Increased money supply.
Centralbank
Central Bankbuyssecurities
Dealer
Dealersbank
Securities
Reserves
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Open Market Operations
Selling Treasury securities When the Central Bank sells securities (obtained from
previous purchases) to the government securitiesdealers,
The account balances of the dealers are debited withthe amount
The total amount of fund at the dealers bank reducesby the market value of the securities
Reduced money supply growth.
Centralbank
Central Bankbuyssecurities
Dealer
Dealersbank
Securities
Reserves
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T f C t l B k O M k t
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Types of Central Bank Open MarketTransactions
RP or Reverse RP Transaction(temporary change in the level of reserves held by depositoryinstitutions)
RP: Central Bank buys securitiestemporarily
Centralbank
Dealer
Dealers
bank
Securities
Reserves
Later on:
Reserves
Securities returned
Reverse RP: Central Bank sellssecurities temporarily
Centralbank
Dealer
Dealers
bank
Securities
Reserves
Later on:
Reserves
Securities returned
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Reserve Requirements
When a bank takes a deposit into an account on which a checkcan be written, it must place a percentage of that deposit onreserve at a Federal Reserve bank.
That percentage is called the reserve ratio.
banks reducelending
RRraised
banks increaselending
RRlowered
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Reserve Requirements
An increase in deposit reserve requirements decreases the deposit and money multipliers, slowing the
growth of money, deposits and loans
reduces the amount of excess legal reserves - institutions
deficient in required legal reserves will have to sellsecurities, cut back on loans, or borrow reserves
increases interest rates, particularly in the money market,
as depository institutions scramble to cover any reserve
deficiencies.
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Pabitra
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The Discount Rate
The discount rate is the annual percentage interest chargelevied against those institutions choosing to borrow
reserves from the discount window of the Central Bank.
Frequent borrowing is discouraged and may be penalizedwith a higher interest rate.
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Qualitative Methods
Moral persuasion
To make the banking system sound and efficient, central bank
sometimes requests the commercial banks to increase or
decrease credit.
As a guardiansrequest, commercial banks follow it and thus
amount of credit is controlled in the economy.
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Publicity Sometimes central bank applies publicity as a weapon of credit
control.
Central bank publishes weekly, fortnightly or monthly
bulletins and annual reports where balance sheets and otherbusiness and economic condition of different
commercial banks are presented well.
As a result the commercial banks become more careful in the
line of their credit creation
Qualitative Methods
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Direct action If it is proved by central bank that credit creation policy of any
commercial bank is not transparent,
Central bank can take punitive measures against that bank and
thus affects its credit creation. These punitive measures may be of not rediscounting bills of
exchange, discounting bills of exchange at a rate higher than
the prevailing.
Qualitative Methods
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Current money supply
ComponentsOctober,
2014
September
, 2014
October
, 2013
Percentage Changes of
October, 2014 over
September,
2014
October,
2013
1. Currency Outside banks 831087 872988 754409 -4.8 10.16
2. Deposits of Financial
Institutions with Bangladesh
Bank (except DMBs)
4269 4402 3356 -3.02 27.21
3. Demand Deposits with DMBs* 587203 620249 519254 -5.33 13.09
4. Time Deposits with DMBs* 5786879 5752394 5126154 0.6 12.89
5. Money Supply (M1) (1+2+3) 1422559 1497639 1277019 -5.01 11.4
6. Money Supply(M2) (4+5) 7209438 7250033 6403173 -0.56 12.59
Source : Statistics Department, Bangladesh Bank
Note:* Excludes Inter bank Deposits and Government Deposits. 38
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Global Context
Although global growth prospects for 2014 (3.6%) are higher
than the previous two years, the road to recovery in the
advanced economies is projected to remain uneven.
Key trading partners, the US and the EU, are projected to
grow faster in 2014 but private demand still remains very
sluggish in the Euro Area.
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Global Context
On the other hand, Emerging Market and DevelopingEconomies (EDEs) are experiencing a multi-speed recovery
process with growth projected at 4.9% in 2014 and 5.3% in
2015which have both been revised marginally downwards
by about 0.2% points and 0.1% points since the January 2014
MPS (H2FY14).
While China is projected to grow at around 7.5% in 2014 and
7.3% in 2015, the Indian economy is projected to grow by
5.4%, with a projected pick-up to 6.4% in 2015.
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Recent economic developments
Domestic output growth:
The final GDP growth number for FY13 released
by BBS in May 2014, was 6.0% down from the
earlier 6.2% provisional estimate released a year
earlier. BBS preliminary estimates for FY14 growth is
6.1% in line with its ten year average, and higher
than the average GDP growth in developing
countries of 4.9% in 2014.
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Recent economic developments
Domestic output growth:
Manufacturing sector growth was lower in FY14
compared with the previous year partly due to
disruptions during the national strikes.
However agricultural growth is higher in FY14though the final output numbers for the boro rice
crop may affect the final growth figure.
The services sector, which is over half of GDP,
proved resilient in FY14 according to these
preliminary estimates by BBS.
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Inflation
Source: Bangladesh Bureau of Statistics (BBS)
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Inflation
Point to point inflation data shows that food inflation has risensteadily from 5.02% in January 2013 to 9.09% in May 2014.
Food inflation for June 2014 declined to 8.00% possibly
due to declining global and regional food prices.
On the other hand, point to point non-food inflationsteadily declined, from 9.09% in January 2013 to 5.16% in
May 2014.
This is due to the adherence to the monetary program as
well as a slowdown in credit growth and remittances
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Current Account Balance (CAB)
The current account balance (CAB) recorded a surplus of USD
1543 million during July-May FY14 compared to a surplus of
USD 2346 million during the same period of the preceding
fiscal year.
Estimates for FY14 suggest that exports are likely to growth at13% and cross the $30 billion mark.
Moreover import growth of 10% is lower than export growth,
narrowing the trade deficit.
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Remittance Growth
The overall decline in remittances for FY14 of around 2% waslargely due to the inflows in FY14 when the remittance decline
was -8.4%.
In FY14 remittance growth was 5.6%.
Monthly trend of number of worker moving abroad
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Others
Government borrowing (net) from the banking system wassignificantly lower than projected in both the original and
revised FY14 Budget.
Government borrowing (net) from the banking systemamounted to 64.3 billion in FY14 against an original budget
provision of 260 billion for the whole of FY14 and a revised
Budget estimate of 300 billion.
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Limitation of Monetary Policy inDeveloping Country
In under developing countries, and capital markets are narrow
and unorganized.
Similarly, in the situations, the instrument the reserve
requirement does not function properly. 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 existencemonetary policy cannot work efficiently.
The lag between the decision about a particular policy and its
implementation also hinders the monetary policy in its success.
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M t li t f H FY
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Monetary policy stance for H1 FY15
The monetary stance in H1 FY15 takes the recent economic
and financial sector developments into account and will targeta monetary growth path which aims to bring average inflation
down to 6.5% by June 2015, while ensuring that credit growth
is sufficient to stimulate inclusive economic growth.
This would require a monetary program framework that limits
reserve money growth to 15.5% and broad money growth to
16% by December 2014.
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Thank You