Fiscal & Monetary Policy Final

7/31/2019 Fiscal & Monetary Policy Final

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Fiscal policy

Fiscal policy generally refers to the use of

taxation and government expenditure to

regulate the aggregate level of economic

activity in a country.

Fiscal policy in Bangladesh basically

comprises activities, which the country carries

out to obtain and use resources to provide


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Major objectives

Major objectives of the fiscal policy of Bangladesh areto ensure macroeconomic stability of the country,promote economic growth, and develop a mechanism

for equitable distribution of income.

The main tools to achieve these objectives arevariation in public revenue, variation in publicexpenditure, and management of public debt.


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Targets

The present government has planned to raise thelevel of investment to 30-32 percent of GDP inorder to achieve a GDP Growth rate of 8 percent by

2013 as envisaged in Vision 2021.

This investment may come from the government,the private sector as well as FDI.


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Three stages of Fiscal Policy

A neutral stance of fiscal policy implies a high economy.Government spending is fully funded by tax revenue andoverall the budget outcome has a neutral effect on the level ofeconomic activity.

An expansionary stance of fiscal policy involves

government spending exceeding tax revenue.A contractionary fiscal policy occurs when governmentspending is lower than tax revenue.

In an open economy, fiscal policy also affects the exchange

rate and the trade balance. In the case of a fiscal expansion,the rise in interest rates due to government borrowing attractsforeign capital. In their attempt to get more dollars to invest,foreigners bid up the price of the dollar, causing an exchange-rate appreciation in the short run.


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Aggregate Demand in the Economy

Governments use fiscal policy to influence the level of

aggregate demand in the economy, in an effort to achieve

economic objectives of price stability, full employment, and

economic growth.

Adjusting government spending and tax rates are the best

ways to stimulate aggregate demand.

Governments can use fiscal policy to stabilize prices wheninflation is too high. Removing funds from the economy will

reduce levels of aggregate demand and thus stabilizing prices.


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Actions of Fiscal Policy

Government through a deficit

financing with the issuing of

government bonds, can increase

interest rates across the market,

because government borrowing

creates higher demand for credit in the

financial markets.


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Monetary Policy

Monetary policy is one of the toolsthat a national Government uses toinfluence its economy. Using its

monetary authority to control thesupply and availability of money, agovernment attempts to influencethe overall level of economic

activity in line with its politicalobjectives. Usually this goal is"macroeconomic stability" - lowunemployment, low inflation,economic growth, and a balance of


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"Narrow" money supply or M1 is currency incirculation and the currency in easilyaccessed chequing and savings accounts."Broader" money supply measures such asM2 and M3 include term deposits and evenmoney market mutual funds.Economists debate the finer points of the

implementation and effectiveness ofmonetary policy but one thing is obvious. Atthe extremes, monetary policy is a potentforce. In countries where the printing pressesrun full tilt to pay for government operations,money supply is expanding rapidly and thecurrency becomes rapidly worthlesscompared to goods and services it can buy.Very high levels of inflation or"hyperinflation" is the result.At the other extreme, restrictive monetary

policy has shown its effectiveness withconsiderable force. German which


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The Central Bank attempts to achieve economic stability by varying thequantity of money in circulation, the cost and availability of credit, andthe composition of a country's national debt. The Central Bank has

three instruments available to it in order to implement monetarypolicy:Open market operations are just that, the buying or selling ofGovernment bonds by the Central Bank in the open market. If theCentral Bank were to buy bonds, the effect would be to expand themoney supply and hence lower interest rates, the opposite is true ifbonds are sold. This is the most widely used instrument in the day today control of the money supply due to its ease of use, and therelatively smooth interaction it has with the economy as a whole.

Reserve requirements are a percentage of commercial banks', andother depository institutions', demand deposit liabilities (i.e. chequingaccounts) that must be kept on deposit at the Central Bank as arequirement of Banking Regulations. Though seldom used, thispercentage may be changed by the Central Bank at any time, therebyaffecting the money supply and credit conditions. If the reserverequirement percentage is increased, this would reduce the moneysupply by requiring a larger percentage of the banks, and depositoryinstitutions, demand deposits to be held by the Central Bank, thus

taking them out of supply. As a result, an increase in reserverequirements would increase interest rates, as less currency isavailable to borrowers. This type of action is only performedoccasionally as it affects money supply in a major way. Alteringreserve requirements is not merely a short-term corrective measure,but a long-term shift in the money supply.Lastly, the Discount Window is where the commercial banks, andother depository institutions, are able to borrow reserves from theCentral Bank at a discount rate. This rate is usually set below shortterm market rates (T-bills). This enables the institutions to vary creditconditions (i.e., the amount of money they have to loan out), there byaffecting the money supply. It is of note that the Discount Window is


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Coordination between Monetary and Fiscal Policy

Fiscal policy changes impart impulses to demand and inflation

pressure. This raises the possibility that discretionary fiscal policymight be used jointly with monetary policy in managing shocks tothe economy, so that the burden of maintaining stable growth andinflation might be `shared' across the fiscal and monetaryauthorities.Beyond that, to the extent that fiscal policy and monetary policyimpact on different parts of the economy, the two instrumentsmight be used simultaneously to target two stabilisation objectives- say, price stability at the same time as balance of payments

equilibrium. In this view, the `mix' of monetary and fiscal policywould be managed as well as the overall level of stimulus providedby both monetary and fiscal policy to the economy, thus betterpromoting internal equilibrium (price stability) at the same time asexternal equilibrium (a sustainable balance of payments).Effects on microeconomic efficiency. Monetary policy influencesdemand pressure via interest rates and the exchange rate,whereas fiscal policy influences demand pressure via directspending by the government and changes to disposable income via

the taxation and benefit system.The usual goals of both fiscal and monetary policyare to achieveor maintain full employment, to achieve or maintain a high rate ofeconomic growth, and to stabilize prices and wages. Theestablishment of these ends as proper goals of governmentaleconomic policy and the development of tools with which toachieve them are products of the 20th century.
http://www.britannica.com/EBchecked/topic/389158/monetary-policyhttp://www.britannica.com/EBchecked/topic/221817/full-employmenthttp://www.britannica.com/EBchecked/topic/178400/economic-growthhttp://www.britannica.com/EBchecked/topic/178458/economic-planninghttp://www.britannica.com/EBchecked/topic/178458/economic-planninghttp://www.britannica.com/EBchecked/topic/178400/economic-growthhttp://www.britannica.com/EBchecked/topic/221817/full-employmenthttp://www.britannica.com/EBchecked/topic/389158/monetary-policy


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Fiscal policy of Bangladesh

Fiscal policy of Bangladesh countryconsists of the use of taxes,government spending and publicdebt operations to influence the

economic activities of that country indesired ways.It is concerned with the allocation ofresources between the public andprivate sectors and their use for

attainment of stability and growth.The National Board of Revenue(NBR) is on the supplying side of thefiscal policy in Bangladesh.


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Major objectives of the fiscal policy ofBangladesh are to ensure

macroeconomic stability of the country,promote economic growth, and developa mechanism for equitable distributionof income.The main tools to achieve theseobjectives are variation in publicrevenue, variation in public expenditure,and management of public debt. Theseare reflected in the budgetary

operations of the government, preparedand implemented on year-on-year basis


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Monetary Policy Strategy of the

Bangladesh BankThe original 1972 Order stated the broadobjectives of the Bank: (a) to regulate theissue of the currency and the keeping of

reserves; (b) to manage the monetary andcredit system of Bangladesh with a view tostabilizing domestic monetary value; (c) topreserve the par value of the BangladeshTaka; (d) to promote and maintain a highlevel of production, employment and realincome in Bangladesh; and (e) to fostergrowth and development of the country'sproductive resources for the national interest


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Monetary Policy Framework, based onnear term outlook for growth and inflation,

are intended to anchor inflation expectationsof market participants and the generalpublic.For example The monetary stance for FY 10was designed to support attainment of the

highest sustainable output growth withouttriggering escalation of inflation. Inaccommodating the growth aspirations of thegovernment and the private sector with thisstance,BBs programs have to place greaterdirectional emphasis on the credit needs ofsectors like agriculture and SME typicallyunder-served by the market; seeking toenhance inclusiveness (a qualitative ratherthan quantitative dimension) of our economic

growth. Downward stickiness of lendinginterest rates and service char es/fees


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Growth outcome and outlook: Unlike most other economiesin the region and elsewhere, output growth in Bangladesh hasthus far been only mildly impacted by the ongoing globaleconomic recession ;for example ,with estimated 5.9 percentreal GDP growth in FY 09 following the 6.2 percent growth of FY08. FY10 real GDP growth is projected conservatively to be inthe range of 5.5 to 6.0 percent, likely to be outperformed ifglobal economy recovers faster and if the various initiativesproposed in the FY10 national budget including the innovativepublic private partnership (PPP) for infrastructural developmentcan be implemented in right earnestInflation outcome and outlook: It was observed FY 09 beganwith double digit (10.0 percent in July 08) annual average CPIinflation, which came down to single digit levels by the secondquarter aided by good domestic agricultural output and thecollapse of global commodity price bubble. The decline indomestic annual average CPI inflation is therefore likely to beslower and smaller in FY10, and was projected to be at 6.5percent by June 2010.

Monetary outcome and outlook, Double digit inflation ratesand high domesticcredit growth (well above 20 percent y-o-y) in Q1 FY09 despiteonset of global recession prompted BBs precautionary 25 basispoint hike in repo and reverse repo interest rates respectively inSeptember and November 08. Subsequently these hikes werereversed in March 09 as domestic inflation abated.


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Key policy measures underlying the newMonetary Policy ( January-July 2012)First there is scope for increasing privatesector credit growth for productiveinvestments beyond the programmedlevel if there is a reduction in growth incredit to the public sector. Limiting public

sector borrowing from the banking sectorcan be achieved by increasing interestrates on savings certificates, throughgreater external and domestic resourcemobilization and by rationalizing public

expenditures. In parallel BB will aim toreduce the demand for consumer loans(e.g. the recent step to change the loanmargin ratios for consumer items), so asto increase the share of lending goingtowards growth enhancing investment

purposes.


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Third while the interest rate regime will remain liberalized, BBwill focus more on monitoring interest rate spreads so that theyremain below 5% except for SME lending (as the costs of SME

operations are higher) and consumer lending (in order toreduce consumer demand). In future BB expects to see thesespreads further reduced as the banking sector becomes evenmore competitive. By enforcing and making these spreadspublic through its Open Data Initiative, BB aims to make thepricing of loans competitive and reasonable.Fourth, in order to reach the new external sector equilibrium,overall import demand needs to be rationalized. Opening ofL/Cs for non-essential and luxury items will be discouragedwhile those for essentials such as petroleum will be unhindered.Inter-agency coordination related to petroleum importpayments is being enhanced; a new coordination committee willaim to ensure that taka liquidity is provided ahead of time sothat banks can purchase the needed foreign exchange on theinter-bank market on a regular basis so that lumpy BangladeshPetroleum Corporation payments can be met instead ofapproaching BB for foreign exchange.Fifth, in order to ensure that savings is intermediated safelyand efficiently in support of our pro-poor growth strategy wewill take further steps to improve the stability, and outreach, ofour financial system. Financial inclusion will be promotedthrough specific products targeted to the needs of theunbanked,and this objective is fully consistent with the monetaryprogram.

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Fiscal & Monetary Policy Final