Fiscal and monetary policies management in Bangladesh
Monetary
policy control of money supply, fiscal policy control spending or acquiring
money from public.
Many of you have heard about the Great Depression in the 1930s. The hardships that the developed world went through led to some serious thinking into the realm of economics with a view to avoiding such depressions in future. Prior to 1930, even the greatest nations of the world did not have a systematic way of economic management. The next few decades saw the birth of modern macroeconomics with concepts such as monetary and fiscal policies emerging.
So, what does this buzzword, macro-economic
management, mean? Most of us want a better living standard for us and our
families, no unemployment, no rise in prices of essentials and most
importantly, building up our assets or wealth. These are precisely the
objectives of macro-economic management i.e. control over variables such as
growth, unemployment and inflation. It's time to think about how well we have
been able to manage economic growth, unemployment and inflation in Bangladesh
Let's not turn our attention to the 'how'
part of the story. How does a government boost
its economic growth, minimise inflation and maximise employment?
Basically, it has two tools at its disposal, monetary and fiscal policies. Monetary policy means increasing or decreasing the
supply of money in an economy. This is done by the central bank of a
country. On the other hand, fiscal policy means
governments will spend more or less money or collect more or less tax from the
citizens. This is done directly by the
political governments and is often guided by the political philosophies of the
elected governments. In today's economies, we see a predominant use of monetary policies but balanced mix of fiscal and
monetary approach is needed for proper macro-economic management, more so in a
developing economy.
How does a central bank control the flow
money into an economy? Well, there are several ways. Central banks control the amount of money in a commercial bank for
lending by taking away a certain portion of the public deposits that banks
receive. In technical terms, this is called maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio
(SLR). Currently, CRR is 4.5% percent and SLR is 13 percent in the country. This means that if you deposit
100 taka in my bank, I have to keep 17.5 taka with the central bank and the rest
82 taka is available for lending. By dictating these ratios, central banks
control the amount of credit or lending in an
economy, consequently the money flow. There are other tools as well.
Central banks can increase or decrease its
lending rate to commercial banks, which in turn induces commercial banks
to increase their interest rates, effectively controlling the demand for credit
or flow of money. Central banks can also borrow money from the banks through
instruments such as auctioning of treasury
bills, reverse-repo etc that impact the amount of money a commercial bank has
at its disposal.
Tightening monetary
policy means reducing the flow of money into the economy and accommodative or expantionary monetary policy
means the opposite. Have you ever wondered how much money a country needs? Or,
why don't central banks print unlimited amount of money to make everyone very
rich? Well, money is only a medium for
exchanging goods and services produced in a country, which is not unlimited. So,
suddenly if people of a country have unlimited amount of money to buy limited
quantity of goods and services, everyone will compete with each other to buy
more by paying more to the sellers. As it is
evident, more money is not helping us at all, only resulting in inflation or a
price-hike. However, money supply has to increase with the increase in
the level of economic activity in a country. From this discussion, it should be
apparent by now that monetary policy can be tightened to control inflation in
an economy. Higher interest rates will
discourage consumer and business spending thereby reducing the pressure on
price levels. Reducing business spending also has the flip side of
increasing unemployment in the country. With that context, let us explore how a
government balances between controlling
inflation and increasing unemployment. This is where choices become
difficult and we step into the world of normative
economics or economic value judgments. Inflation is more immediately and
easily visible to the ordinary masses while the impact of unemployment is
deeper, long term and more harmful. A political party seeking easy popularity will obviously devote more resources into controlling
inflation than addressing the issue of unemployment. How many times did
you see the politicians in Bangladesh
While monetary policy is a relatively new
tool, fiscal policy measures have been around for quite a few decades now. A
great economist called John Maynard Keynes
popularised it. The tools of fiscal policy
are government spending, taxes and subsidy. Objectives of fiscal policy
measures are two-fold, stimulating economic
activities and fixing the errors or failures of capitalism or market forces.
In Bangladesh Bangladesh
How does a government spend more money?
Well, it is quite often through increased spending on public infrastructures
such as roads, bridges, ports, buildings etc, increased spending on public
healthcare, education etc or increasing the size of the government by hiring
more people and increasing their salaries. Generally, government spending has a
positive impact on the output and employment level. For example, each road
built creates employment for some workers. These
workers in turn spend their income to buy other commodities, which stimulate
other economic sectors as well. Therefore, every taka spent by the government
trickles down to several levels. This called the multiplier effect of fiscal
spending.
So, if the fiscal policy measures have
such multiplier effect, why don't the governments spend all the money in the
country and multiply the economic development many times over? Firstly, because the effect of fiscal policy measures is often
short-lived.
Secondly, because governments often do
not do a good job of allocating resources in different sectors. This is in fact
best left to a market mechanism or the private sector. For example, an
experienced and specialized company in automobile accessories is in a better
position than the government to decide on how many batteries and tyres it will
sell and in which market. Too much government spending is said to crowd out or
discourage private sector investment. This reduces competition and therefore
induces inefficiency in the system. The same goes for subsidies. State
subsidised enterprises such as BPC, Biman, nationalised banks etc are major
pockets of wasting our scarce economic resources. On the other hand, public
spending on basic infrastructures, law and order,
disadvantaged group education and healthcare would have far reaching and deeper impact, if done properly.
While both monetary and
fiscal policies have got their respective advantages and disadvantages, they
both complement each
other and are essential for balanced macro-economic management. It is
highly important that our policy formulators acquire the right skills, stay
above undue influence and make the right decisions at the right time, even if
some of those decisions are momentarily unpopular.
The writer is a banker.
The write-up is the excerpt of a presentation made at a training session
organised by Rahimafrooz (Bangladesh) Ltd.
What is Deflation
Deflation
is a decrease in the general price level of goods and services. Deflation
occurs when the annual inflation rate falls below 0% (a negative inflation
rate). Inflation reduces the real value of money over time conversely,
deflation increases the real value of money the currency of a national or
regional economy. This allows one to buy more goods with the same amount of
money over time.
A general decline in prices, often caused by a reduction in the supply of money or credit. Deflation can be caused also by a decrease in government, personal or investment spending. The opposite of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression. Central banks attempt to stop severe deflation, along with severe inflation, in an attempt to keep the excessive drop in prices to a minimum.
Incase of deflation, the demand of any product will be decrease compare with its supply. When the demand of any product is lower than its supply, peoples do not wants to buy any product, the huge quantity of product became unsold to the seller. So price of unsold product will be decline rather than its cost. That why deflation is harmful for any economy.
A general decline in prices, often caused by a reduction in the supply of money or credit. Deflation can be caused also by a decrease in government, personal or investment spending. The opposite of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression. Central banks attempt to stop severe deflation, along with severe inflation, in an attempt to keep the excessive drop in prices to a minimum.
Incase of deflation, the demand of any product will be decrease compare with its supply. When the demand of any product is lower than its supply, peoples do not wants to buy any product, the huge quantity of product became unsold to the seller. So price of unsold product will be decline rather than its cost. That why deflation is harmful for any economy.
Inflation or deflation:
which one is less harmful
All
the country wants a inflation free economy, inflation is harmful for any
economy. But an acceptable level of inflation is beneficial for economy,
because it helps to increase the national income and production. But deflation
is more harmful for any economy than inflation. Because it leads to breakdown
the economic stability of any country. Producers face great loss incase of
deflation. It is a great depression of any economy. So we can clearly say that inflation is less harmful.
What Causes Inflation?
Monetary inflation happens when the amount of money in circulation increases faster than the quantity of goods in circulation. The government is the only entity who can do this. In the old days, they would simply print more money. Today, the government purchases securities from banks, thereby increasing the money supply.
Monetary inflation is often followed by price inflation – the inflation that most consumers can see and identify. Obviously, price inflation happens when the price of goods increases.
Monetary inflation happens when the amount of money in circulation increases faster than the quantity of goods in circulation. The government is the only entity who can do this. In the old days, they would simply print more money. Today, the government purchases securities from banks, thereby increasing the money supply.
Monetary inflation is often followed by price inflation – the inflation that most consumers can see and identify. Obviously, price inflation happens when the price of goods increases.
What
Causes Deflation?
There are four situations that cause deflation.
1. A decrease in the supply of money. Let’s say the only goods
available in the world were green apples, and everyone wanted an
apple just as much as everyone else. If we only had $10, then each
apple would be worth $1. But, if our money decreased to $5, then
each apple would only be worth $.50. here 10 apple for 10 dollar.
2. An increase in the supply of goods. In the same situation as above, let’s assume the number of
apples went up to 20, but we still only had $10. In that case, the value of each apple would again
be $.50.
3. A decrease in the demand for goods. If everyone already had an apple, then no one would want
to use their dollar to buy an apple. The value of an apple falls.
4. An increase in the demand for money. When the demand for more money increases, it’s
symptomatic of people starting to hoard money. The value of the apples falls in relation to the
dollar.
There are four situations that cause deflation.
1. A decrease in the supply of money. Let’s say the only goods
available in the world were green apples, and everyone wanted an
apple just as much as everyone else. If we only had $10, then each
apple would be worth $1. But, if our money decreased to $5, then
each apple would only be worth $.50. here 10 apple for 10 dollar.
2. An increase in the supply of goods. In the same situation as above, let’s assume the number of
apples went up to 20, but we still only had $10. In that case, the value of each apple would again
be $.50.
3. A decrease in the demand for goods. If everyone already had an apple, then no one would want
to use their dollar to buy an apple. The value of an apple falls.
4. An increase in the demand for money. When the demand for more money increases, it’s
symptomatic of people starting to hoard money. The value of the apples falls in relation to the
dollar.
Some
effects of Inflation:
1. Hardships for poor people and fixed income salaried households
2. Business Profits tend to go up in times of inflation
3. Demand for pay hikes and wage increases
4. Social tensions
5. Value on money lent out falls in purchasing power - value of money to be repaid falls in terms of purchasing power falls.
6. Interest may rise.
7. Exchange rate may fall
8. Central Bank may try to control money supply growth through hike in cash reserve, raising discount rates (lending intrest rate) and conduct open market sale of securities.
The
effects of deflation
The flip-side of inflation is deflation.
This occurs when average prices are falling, and can also result in various
economic effects. For example, people will put off spending if they expect
prices to fall. Sustained deflation can cause a rapid economic slow-down.
Some effects of Deflation
Some effects of Deflation
1. Company profits may fall
2. Private domestic capital investment may fall
3. Unemployment may increase.
4. Real value of loans to be repaid may rise,
What is National
Income?
The total amount of income earned by
all the people and institutions within a country from the production of goods and
services as well as from the wages, salaries, profits, rent, and interest (usually
measured over a period of one year).
GNI is quite similar to Gross
National Product (GNP), which measures output from the citizens and
companies of a particular nation, regardless of whether they are located within
its boundaries or overseas.
Gross domestic product (GDP) is defined as "the value
of all final goods and services produced in a country in 1 year"
GDP is calculated in
the following 4 ways: GDP video economic growth
(1) Consumption Expenditure (C):
It includes expenditure by household (a) durable goods such as, automobile, refrigerators etc, (b) non-durable goods such as: food, shirts etc and (c) services such as doctors, education etc.
(2) Gross Investment:
It includes (a) all final purchase of machinery, equipment, and tools by business enterprise (b) all current construction (c) changes in inventories
(3) Government Expenditure (G):
This includes all governmental spending (federal, state and local) on the finished product of business and all direct purchases of resources such as labour etc, it excludes all govt. transfer payments, because it doesn't reflect any current production.
(4) Net Exports (NX) = Export - Import :
This includes the difference between the imports and exports, called net exports. it is the component of the total demand for our goods. it can be negative positive or zero.
Defining green banking is relatively easy. It means promoting environmental-friendly practices and reducing your carbon footprint from your banking activities. This comes in many forms. Using online banking instead of branch banking. Paying bills online instead of mailing them. Opening up CDs and money market accounts at online banks, instead of large multi-branch banks. Or finding the local bank in your area that is taking the biggest steps to support local green initiatives.
Any combination of the above personal banking practices can help the environment. So this leads to the question, which banks are green. In general, online banks and smaller community banks have better track record than larger banks. For instance, take a look at the banks that British Petroleum has been reported to seek lines of credit from this past summer after the oil spill
Green banking
The central bank has taken steps to encourage green banking in Bangladesh
through the issuance of guidelines on green banking and Environmental Risk
Management (ERM).The central bank introduced Tk 2.0 billion refinance line for financing solar energy, biogas and effluent treatment plant (ETP) at only 5 percent interest rate.
Steps have also been taken to set up solar power system at the rooftop of BB Head Office, encouraging banks and financial institutions in minimizing paper transactions and installing solar power system, opening up refinance line for solar energy, bio-gas and effluent treatment plant (ETP) at reduced interest rates.
“Receipt and delivery of inward remittances from workers abroad are now largely electronic, and the electronic mode has made large inroads also in payments of utility bills.”
Use of credit and debit cards for e-payment at vendor site POS terminals is spreading steadily. “Mobile phone and/or smart card based online purchases of goods and services are catching on in popularity.
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