Bangladesh Bank

INTRODUCTION: Bangladesh Bank, the central bank and apex regulatory body for the country's monetary and financial system, was established in Dhaka as a body corporate vide the Bangladesh Bank Order, 1972 (P. O. No. 127 of 1972) with effect from 16th December, 1971. At present it has nine offices located at Motijheel, Sadarghat, Chittagong, Khulna, Bogra, Rajshahi, Sylhet, Barisal and Rangpur in Bangladesh; total manpower stood at 5071 (officials 3914, subordinate staff 1157) as of end FY 2010.

The highest official in the bank is the Governor (currently Dr. Atiur Rahman). Bangladesh Bank is a member of the Asian Clearing Union. HISTORY: After the liberation war, and the eventual independence of Bangladesh, the Government of Bangladesh reorganized the Dhaka branch of the State Bank of Pakistan as the central bank of the country, and named it Bangladesh Bank. This reorganization was done pursuant to Bangladesh Bank Order, 1972, and the Bangladesh Bank came into existence with retrospective effect from 16 December 1971.

The 1971 Mujib regime ran a pro-socialist agenda – in 1972, the government decided to nationalize all banks in order to channel funds to the public sector and to prioritize credit to those sectors that sought to reconstruct the war-torn country – mainly industries and agricultural sectors. The Financial Sector Adjustment Credit (FSAC) and Financial Sector Reform Programmed (FSRP) were formed in 1990 with the objective to remove government distortions and lessen the financial repression.

However, FSRP was expired in 1996 and afterward the Government of Bangladesh formed a Bank Reform Committee (BRC) whose recommendations were largely remained unaddressed by the then government. FUNCTIONS: Bank performs as Balait wishes all the functions that a central bank of any country is expected to perform, and such functions include maintaining the price stability through economic and monetary policy measures, managing the country’s foreign exchange and the gold reserve and regulating the banking sector of the country.

Like all other central banks across the globe, Bangladesh Bank is both the Government’s banker and the banker’s bank, a “Lender of the Last Resort”. Bangladesh Bank, like most of the central banks of different countries, exercises monopoly over the issue of currency and the banknotes. Except for the 1 and 2 taka notes, it issues all other denominations of Bangladeshi Taka. Credit control, Clearing House, Control Money Market, Industrial development, and Natural resources development are also the functions of Bangladesh Bank.

Board of Directors: The board of directors consists of the governor of the bank and eight other members. They are responsible for the policies undertaken by the Bank. ORGANIJATIONS: The highest official in the bank is the Governor (currently Dr. Atiur Rahman). His seat is in Motijheel, Dhaka. The Governor chairs the Board of Director. The Executive Staff, also headed by the Governor, are responsible for the day to day affairs. The Bank also has a number of departments under it, namely Debt Management Dept, Law Dept, and so on, each headed by one or more General Managers.

The Bank has ten physical branches in Bangladesh, in Mymensingh, Motijheel, Sadarghat, Barisal, Khulna, Sylhet, Bogra, Rajshahi, Rangpur and Chittagong, each headed by a General Manager. The headquarters are housed in Bangladesh Bank Building in Motijheel, which has two general managers. HIERARCHY: The executive staff is responsible for daily affairs, and involves the governor, and the four deputy governors under him. Under the governors, there are the executive directors and the economic analyst.

The general managers of the departments come under the directors, and are not part of the executive staff. The four deputy governors are Md. Abul Quasem Abu Hena Mohd. Razee Hassan Shitangshu Kumar Sur Chowdhury Nazneen Sultana. FORMER GOVERNOR: Since its conception, the Bangladesh Bank had ten governors. •A. N. M. Hamidullah (January 18, 1972 - November 18, 1974) •A. K. Naziruddin Ahmed (November 19, 1974 - July 13, 1976) •M. Nurul Islam (July 13, 1976 - April 12, 1987).

•Shegufta Bakht Chaudhuri (April 12, 1987 - December 19, 1992) •Khorshed Alam (December 20, 1992 - November 21, 1996) •Lutfar Rahman Sarkar (November 21, 1996 - November 21, 1998) •Mohammed Farashuddin (November 24, 1998 - November 22, 2001) • (November 29, 2001 - April 30, 2005) •Salehuddin Ahmed (May 1, 2005 - April 30, 2009) •Atiur Rahman (May 1, 2009 - Present) FUNCTION: BB performs all the core functions of a typical monetary and financial sector regulator, and a number of other non core functions.

The major functional areas include- Formulation and implementation of monetary and credit policies, Regulation and supervision of banks and non-bank financial institutions, promotion and development of domestic financial markets, Management of the country's international reserves, Issuance of currency notes, Regulation and supervision of the payment system, Acting as banker to the government, Money Laundering Prevention, Collection and furnishing of credit information, Implementation of the Foreign exchange regulation Act, Managing a Deposit Insurance Scheme .

Missions: To uphold the vision and in pursuant with the Bangladesh Bank Order of 1972,Bangladesh Bank’s mission is to promote and maintain macroeconomic and price stability through: Formulating and implementing appropriate monetary policy consistent with the country’s national development goals; Pursuing prudent policies to ensure stable internal and external value of Taka;Identifying policy priorities for implementation by the Governmentthrough assessing the transmission channels and the interactions of monetary policy with fiscal, exchange rate, and other macroeconomic policies and their impact on the economy;

Proposing necessary legislative measures to attain the central bank’s objectives and perform its functions including strategies and regulations for and supervision of banking companies and financial institutions withthe aim to providing efficient financial intermediation and financialservices to large, medium, small, and micro enterprises and to pro-poor activities ;Promoting, regulating and ensuring a secure and efficient paymentsystem, including the issue of Bank Notes;

To this end, BB would ensure that it has the requisite human and infrastructural resources and build its capability to promote and ensure a robust and well-functioning financial sector. VISIONS: The Bangladesh Bank (BB), through ensuring the quality of services and the competence of its staff, shall operate as a modern, dynamic, effective, andforward-looking central bank to manage the country’s 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. CONCLUTION: Bangladesh bank plays an important role in every sector of the economy of Bangladesh. So government should provide necessary steps to improve it’s quality.

MONETARY POLICY: INTRODUCTION: 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. It 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. Overview: Monetary policy, to a great extent, is the management of expectations. Monetary policy rests on the relationship between the rates of interest in an economy, that is, the price at which money can be borrowed, and the total supply of money. Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment.

Where currency is under a monopoly of issuance, or where there is a regulated system of issuing currency through banks which are tied to a central bank, the monetary authority has the ability to alter the money supply and thus influence the interest rate (to achieve policy goals). The beginning of monetary policy as such comes from the late 19th century, where it was used to maintain the gold standard. There are several monetary policy tools available to achieve these ends: increasing interest rates by fiat; reducing the monetary base; and increasing reserve requirements. All have the effect of contracting the money supply; and, if reversed, expand the money supply.

Since the 1970s, monetary policy has generally been formed separately from fiscal policy. Even prior to the 1970s, the Britton Woods system still ensured that most nations would form the two policies separately. Within almost all modern nations, special institutions (such as the Federal Reserve System in the United States, the Bank of England, the European Central Bank, the People's Bank of China, and the Bank of Japan) exist which have the task of executing the monetary policy and often independently of the executive. In general, these institutions are called central banks and often have other responsibilities such as supervising the smooth operation of the financial system.

The primary tool of monetary policy is open market operations. This entails managing the quantity of money in circulation through the buying and selling of various financial instruments, such as treasury bills, company bonds, or foreign currencies. All of these purchases or sales result in more or less base currency entering or leaving market circulation. THEORY: Monetary policy is the process by which the government, central bank, or monetary authority of a country controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of interest to attain a set of objectives oriented towards the growth and stability of the economy.

[1] Monetary theory provides insight into how to craft optimal monetary policy. Monetary policy rests on the relationship between the rates of interest in an economy, that is the price at which money can be borrowed, and the total supply of money. Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment. Where currency is under a monopoly of issuance, or where there is a regulated system of issuing currency through banks which are tied to a central bank, the monetary authority has the ability to alter the money supply and thus influence the interest rate (to achieve policy goals).

Types of monetary policy: In practice, to implement any type of monetary policy the main tool used is modifying the amount of base money in circulation. The monetary authority does this by buying or selling financial assets (usually government obligations). These open market operations change either the amount of money or its liquidity (if less liquid forms of money are bought or sold). The multiplier effect of fractional reserve banking amplifies the effects of these actions. a)INFLATION TARGETING: Under this policy approach the target is to keep inflation, under a particular definition such as Consumer Price Index, within a desired range. The inflation target is achieved through periodic adjustments to the Central Bank interest rate target.

The interest rate used is generally the interbank rate at which banks lend to each other overnight for cash flow purposes. Depending on the country this particular interest rate might be called the cash rate or something similar. The interest rate target is maintained for a specific duration using open market operations. b)Price level targeting: Price level targeting is similar to inflation targeting except that CPI growth in one year over or under the long term price level target is offset in subsequent years such that a targeted price-level is reached over time, e. g. five years, giving more certainty about future price increases to consumers.

Under inflation targeting what happened in the immediate past years is not taken into account or adjusted for in the current and future years. c)Monetary aggregates: In the 1980s, several countries used an approach based on a constant growth in the money supply. This approach was refined to include different classes of money and credit (M0, M1 etc. ). In the USA this approach to monetary policy was discontinued with the selection of Alan Greenspan as Fed Chairman. While most monetary policy focuses on a price signal of one form or another, this approach is focused on monetary quantities. d)Fixed exchange rate: This policy is based on maintaining a fixed exchange rate with a foreign currency.

There are varying degrees of fixed exchange rates, which can be ranked in relation to how rigid the fixed exchange rate is with the anchor nation. e)Gold standard: The gold standard is a system under which the price of the national currency is measured in units of gold bars and is kept constant by the government's promise to buy or sell gold at a fixed price in terms of the base currency. The gold standard might be regarded as a special case of "fixed exchange rate" policy, or as a special type of commodity price level targeting. TOOLS OF MONETARY POLICY: Monetary base: Monetary policy can be implemented by changing the size of the monetary base. Central banks use open market operations to change the monetary base.

The central bank buys or sells reserve assets (usually financial instruments such as bonds) in exchange for money on deposit at the central bank. Those deposits are convertible to currency. Together such currency and deposits constitute the monetary base which is the general liabilities of the central bank in its own monetary unit. Usually other banks can use base money as a fractional reserve and expand the circulating money supply by a larger amount. Reserve requirements The monetary authority exerts regulatory control over banks. Monetary policy can be implemented by changing the proportion of total assets that banks must hold in reserve with the central bank.

Banks only maintain a small portion of their assets as cash available for immediate withdrawal; the rest is invested in illiquid assets like mortgages and loans. By changing the proportion of total assets to be held as liquid cash, the Federal Reserve changes the availability of loanable funds. This acts as a change in the money supply. Central banks typically do not change the reserve requirements often because it creates very volatile changes in the money supply due to the lending multiplier. Discount window lending Central banks normally offer a discount window, where commercial banks and other depository institutions are able to borrow reserves from the Central Bank to meet temporary shortages of liquidity caused by internal or external disruptions.

This creates a stable financial environment where savings and investment can occur, allowing for the growth of the economy as a whole. The interest rate charged (called the 'discount rate') is usually set below short term interbank market rates. Accessing the discount window allows institutions to vary credit conditions (i. e. , the amount of money they have to loan out), thereby affecting the money supply. Through the discount window, the central bank can affect the economic environment, and thus unemployment and economic growth. Interest rates The contraction of the monetary supply can be achieved indirectly by increasing the nominal interest rates. Monetary authorities in different nations have differing levels of control of economy-wide interest rates.

In the United States, the Federal Reserve can set the discount rate, as well as achieve the desired Federal funds rate by open market operations. This rate has significant effect on other market interest rates, but there is no perfect relationship. In the United States open market operations are a relatively small part of the total volume in the bond market. One cannot set independent targets for both the monetary base and the interest rate because they are both modified by a single tool — open market operations; one must choose which one to control. Currency board A currency board is a monetary arrangement that pegs the monetary base of one country to another, the anchor nation.

As such, it essentially operates as a hard fixed exchange rate, whereby local currency in circulation is backed by foreign currency from the anchor nation at a fixed rate. Thus, to grow the local monetary base an equivalent amount of foreign currency must be held in reserves with the currency board. This limits the possibility for the local monetary authority to inflate or pursue other objectives. The principal rationales behind a currency board are threefold: 1. To import monetary credibility of the anchor nation; 2. To maintain a fixed exchange rate with the anchor nation; 3. To establish credibility with the exchange rate (the currency board arrangement is the hardest form of fixed exchange rates outside of dollarization). Unconventional monetary policy at the zero bound

Other forms of monetary policy, particularly used when interest rates are at or near 0% and there are concerns about deflation or deflation is occurring, are referred to as unconventional monetary policy. These include credit easing, quantitative easing, and signaling. In credit easing, a central bank purchases private sector assets, in order to improve liquidity and improve access to credit. Signaling can be used to lower market expectations for future interest rates. For example, during the credit crisis of 2008, the US Federal Reserve indicated rates would be low for an “extended period”, and the Bank of Canada made a “conditional commitment” to keep rates at the lower bound of 25 basis points (0.25%) until the end of the second quarter of 2010. STEPS OF BANGLADESH BANK FOR MONETARY POLICY:

The central bank announces its monetary policy for the second half of the current fiscal year with a continued tightening approach. It could be more inclined toward supporting economic growth, keeping inflation at a tolerable level and boosting trade and commerce. For one and a half year, the Bangladesh Bank pursued a tight monetary policy. “The central bank always announced accommodative monetary policy statement aiming to stimulate trade and business activities,” said an official of the central bank. But the main goal is to achieve the GDP (gross domestic product) target and check inflation.

Like every year, after discussing with economists, business people and journalists, it will announce its second half-yearly monetary policy statement for the January-June period of this fiscal year (FY) 2012-13. Taking into consideration the present situation hit by rising inflation due to the latest fuel price hike, the BB will continue to take a cautious approach for money supply and credit growth, said another official. The monetary policy might also reflect last month’s recommendations of the International Monetary Fund that the central bank adopts a cautious or restrained monetary policy until the non-food inflation becomes stable at a single digit. Non-food inflation rose to double digits in the recent years and outpaced food inflation.

The BB officials said one of the main targets of the central bank will be to contain non-food inflation. Food inflation in 2012 was 7. 43 percent, down from 12. 83 percent a year ago, while non-food inflation soared to 11. 45 percent from 6. 83 percent in 2011, according to Bangladesh Bureau of Statistics. The central bank officials said that both public sector and private sector credit growth need to be under control to contain inflation. The central bank, however, feels somewhat comfortable as bank borrowing fell 50 per cent to Tk 70 billion in first half of the current fiscal year. The target for private sector credit growth may be set at around 18 percent by June next which was 18. 3 percent under its last monetary policy.

The central bank is under pressure from the business circles and analysts to cut lending interest rates to help accelerate economic growth, which remained flat over the last several years. Businessmen have long been demanding for an increase of the private sector credit growth at the range of 22 percent to 25 percent for achieving the targeted growth at more than 7 percent. Private sector credit growth already came down to around 19. 68 percent in fiscal 2011-12 from around 25. 84 percent in fiscal 2010-11. The credit growth in the private sector decreased to below 17 percent in December last from around 18 percent in the previous month due mainly to the lower money supply by the central bank, according to BB statistics.