Monetary Policy the policy adopted by the central bank for control of the supply of money as an instrument for achieving the objectives of general economic policy. As stated in the Bangladesh Bank Order 1972, the principal objectives of the country's monetary policy are to regulate currency and reserves; to manage the monetary and credit system; to preserve the par value of domestic currency; to promote and maintain a high level of production, employment and real income; and 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.

With the shifts of the policy stance of the government in various phases, necessary adjustments were made in the country's monetary policy. In the first years after liberation, the primary target of monetary policy was to regulate not the quantity of money, but the direction of the flow of money and credit in support of the government financial programme. In 1975, Bangladesh entered into a standby-arrangement with IMF and the country's monetary policy got a changed shape, which fixed an explicit target of safe limit of monetary expansion on annual basis. With this change, bangladesh bank started setting short-term objectives of monetary policy in close collaboration of the government and tried to achieve the target by using the direct instrument of control. The principal target of monetary control was broad money (M2) ie, the sum of the currency in circulation and total deposits of money in banks. The targeted growth of M2 depended on a realistic forecast of the growth rate of real GDP, an acceptable rate of inflation and an attainable level of international reserves.

Bangladesh Bank took measures to monitor credit and monetary expansion keeping in view the price situation and international reserves position. Efforts were made to achieve the targeted growth of domestic credit and thereby, the money supply, through imposing ceilings on credit to the government, public, and private sectors. The major policy instruments available to Bangladesh Bank were to set credit ceiling on the banks and provide liberal refinance facility at concessional rate for priority lending. According to the national economic policy, the banks were to provide the desired volume of credit at an administered and low rate of interest. In that situation, Bangladesh Bank practically did not have any effective instrument for making adjustments in the growth of money supply or for transmitting market signals into changes in money supply. The monetary policy therefore, could not function in its true sense. As a result the banking system could not play its role as an effective financial intermediary.

In 1989, the government adopted a comprehensive Financial Sector Reform Programme (FSRP), following which the country's monetary policy assumed a new orientation towards promotion of market economy in a competitive environment. Bangladesh Bank started moving away from direct quantitative monetary control to indirect methods of monetary management since the beginning of 1990. Although, the fixation of target continued to remain as the central piece of exercise, the way to achieve it had been changed. Credit ceilings on individual banks and direct controls of interest rates were withdrawn. At present, the money supply is regulated through indirect manipulation of reserve money instead of credit ceiling. Major instruments of monetary control available with Bangladesh Bank are the bank rate, open market operations, rediscount policy, and statutory reserve requirement.

Bank rate Until 1990, the use of this instrument as the lending rate of the central bank for borrowings of the commercial banks to meet their temporary needs was virtually non-existent in Bangladesh. The rate was changed in a few occasions only to align it with the refixation of the rates of deposits and advances. Moreover, the existence of refinance facilities at rates lower than the bank rate substantially eroded its significance. However, since 1990, the instrument has been put in use to change the cost of borrowings for banks and thereby to affect the market rate of interest. Bank rate was gradually lowered from 9.75% in January 1990 to 5% in March 1994. It was raised to 5.75% from 10 September 1995 and further, to 7.5% and 8% from 19 May 1997 and 20 November 1997 respectively. The rate was lowered to 7% from 29 August 1999.

Open market operations (OMO) These involve the sale or purchase of securities by the central bank to withdraw liquid funds from the banking system or inject the same into that system. OMO allows flexibility in terms of both the amount and timing of intervention, which did not exist in Bangladesh before 1990. Bangladesh Bank introduced a 91-day Bangladesh Bank Bill, a market-based tool for monetary intervention, in December 1990. The bank bill was subsequently withdrawn from the market. At present, OMO operations are conducted through participation of banks in monthly or fortnightly/weekly auctions of treasury bills.

Rediscount policy After the introduction of FSRP, the refinance facility was replaced by rediscount facility at bank rate to eliminate discrimination in access to central bank funds. Refinance facility is now available for agricultural credit provided by bangladesh krishi bank and for projects of Bangladesh Rural Development Board financed by sonali bank. Banks are advised to extend credit considering banker-customer relationship.

Statutory reserve requirement Cash reserve requirement (CRR) of the deposit money banks has a significant potential to regulate money supply through affecting money multiplier, while statutory liquidity requirement (SLR) is generally used to affect the lending capability of the bank. Bangladesh Bank used these two instruments very infrequently before 1990 and very often after 1990. The CRR and SLR were 8% and 23% respectively on 25 April 1991 and were reduced to 7% and 22% respectively on 5 December 1991. Later, these rates were changed twice and set at 5% and 20% respectively on 24 May 1992. The CRR was further lowered to 4% from 4 October 1999. The downward revision in CRR and SLR were made to enable the banks to increase their lending capacity. [Syed Ahmed Khan and Abdus Samad Sarker]