Discus the Operating Target of Monetary policy in Bangladesh. Explain its components. How does Bangladesh bank try to achieve the operative target of monetary policy?

 Operating Target of Monetary policy: The operational target of monetary policy is an economic variable, which the central bank wants to control, and indeed can control, to a very large extent on a day-by-day basis through the use of its monetary policy instruments. It is the variable the level of which the monetary policy decision making committee of the central bank actually decides upon in each of its meetings.

 Monetary policy in developing economies mainly includes five major macro variables: output growth, inflation, interest rate, exchange rate, and money supply. The success of monetary policy hinges on a

skillful interaction of these variables by the central bank. A pictorial presentation of a star usually features five corners where five major variables related to monetary policy can be placed. If we connect all the corners with outer lines, the star turns into a pentagon without changing the essence of the model that describes the interconnectivity of the major variables of monetary policy.

The variables fall into three different levels: operational, intermediate and final. Money supply and interest rates are often used as operating targets to influence the intermediate targets such as inflation and exchange rates. Economic growth is the final target whose rise increases employment and thus reduces unemployment and poverty.

 How BB tries to Achieve: BB uses the reserve money (operational target) program to target a growth path for broad money (intermediate target) consistent with the projected rate of GDP growth and inflation. Annual monetary program is continually monitored and adjusted in light of unfolding events. The actual developments are also closely monitored to keep in line with the program. Tracking the monetary program and its components on a regular basis allows BB to monitor the growth rates of currency in circulation and demand deposits as early indicators of inflationary bias. Similarly, growth of domestic credit against the program target and rate of deposit mobilization indicate prevalence of excess demand induced by inflationary expectation. Apart from these slope of yield-curve, exchange rate, asset prices etc. are also monitored by the BB to assess market demand for liquidity and the inflationary expectation in the economy. Such a regular scrutiny allows BB to follow up with corrective measures as appropriate with a timely manner.

What do you mean by the concept “price stability” and how it can be measured? What policy options Bangladesh bank can take towards this end

 Price stability means the retention of the purchasing power of the national currency by maintaining low and stable rates of inflation over the medium-term (from 3 to 5 years) measured by the Consumer Price Index. Price stability does not literally mean unchanging prices; it means their moderate growth. In an economy where prices are considered stable, factors such as inflation and deflation have a minimal effect, and prices on goods and services change little from year to year. Generally, price stability is considered to be a good, though not necessarily totally achievable goal for an economy.

How it can be measured: Price Stability is measured by the Consumer Price Index (CPI). Estimating CPI involves surveying people to identify what they purchase on regular basis. This helps determine the basket of commonly used goods and services. Total price of the basket is obtained from market for current period and base period and following formula is used to calculate CPI:

_{Consumer Price Index =}   Current Period Price of the Basket      _{× 100}

               Base Period Price of the Basket

In practice many adjustments are made to CPI on account of seasonality, changes in composition of the basket, etc. and different versions of CPI are calculated to cater to real life needs.

In US, the Bureau of Labor Statistics estimates CPI on regular basis. IMF and World Bank provide CPI and other data for majority of countries.

 

The index is usually computed monthly, or quarterly in some countries, as a weighted average of sub- indices for different components of consumer expenditure, such as food, housing, shoes, clothing, each of which is in turn a weighted average of sub-sub- indices. At the most detailed level, the elementary aggregate level, detailed weighting information is unavailable, so indices are computed using an unweighted arithmetic or geometric mean of the prices of the sampled product offers.

 

Policy Can Exercise: The primary objective of the Bank is to achieve and maintain price stability. Price stability does not necessarily imply that prices do not ever change; rather it entails avoiding persistent increases (inflation) or decreases (deflation) in the general price level. Therefore, the purchasing power of the Bangladeshi taka and hence its credibility would be preserved.

 

Although the Governing Council cannot influence price levels directly, it does have a means to control inflation in a roundabout way: the interest rate. The BB’s primary interest rate serves as the economy’s throttle and brake pedals.

 

A rate increase will push prices down, or at least rein in rising prices. A rate cut will make prices go up faster. An increased interest rate means that it will cost more to borrow money, and people will have less money left to spend. As a result, the economy will slow down and so will price increases. However, since it may take several months for a rate change to work its way through into prices, the effect is not always clearly visible.

What is money market? Discuss the present state of capital market of Bangladesh. What are the reasons behind frequent fluctuations of capital market in Bangladesh recent years

 Money Market: The money market is where financial instruments with high liquidity and very short maturities are traded. It is used by participants as a means for borrowing and lending in the short term, with maturities that usually range from overnight to just under a year. There are several money market instruments, including treasury bills, commercial paper, bankers' acceptances, deposits, certificates of deposit, bills of exchange, repurchase agreements, federal funds, and short-lived mortgage- and asset- backed securities.

Present state of capital market: The primary issues and secondary trading of equity securities of capital market take place through two (02) stock exchanges-Dhaka Stock Exchange and Chittagong Stock Exchange. The instruments in these exchanges are equity securities (shares), debentures and corporate bonds. The capital market is regulated by Bangladesh Securities and Exchange Commission (BSEC). After the crash of 1996, the capital market of Bangladesh has attracted a lot more attention, importance and awareness and a number of investment-friendly regulatory reforms relating to public issue, rights issue, acquisition, and mergers have been implemented by the Securities and Exchange Commission (SEC). Over the last few years, the capital market of Bangladesh has witnessed a haughty growth which is not in line of development in the real sector of the economy. Although, the Securities and Exchange Commission (SEC) of Bangladesh has tried to correct the irregular behavior observed in the market, very often it is argued that lack of proper and firm decisions from the regulator’s side has contributed to make the market more  unstable rather than to reduce it.

Reasons behind the Frequent Fluctuations: Committee identify following broad factors that caused the capital market disaster recently:

 

a)  Primary Issue related Problems:

·Direct listing in Primary issue

·Abuse of Book Building Method of IPO · High premium for stock listing

-Illegal Private placement market

·Asset Revaluation of Companies before listing to charge higher premium.

b)  Secondary market related problems:

-  Circular trading in Secondary market

-  Block trading

-Stock Price Manipulation through Omnibus Accounts

c)  Irregularities in issuance of Right Share/Preference Share/Repeat IPO etc.

d)  Recommendation of Stock Dividend by companies against unrealized Profits.

e)  Regulatory Failure:

-  Inconsistency in regulatory activities

-  Supporting and legalization of unethical activities of Big Investors · Irresponsible Behavior/Weakness in many areas

-  Formulating policies to support market Players (Manipulators) · Lack of Due Diligence.

-  Lack of Co-ordination between SEC and Stock exchanges.

-  Allowing Financial Institutions to invest in capital market aggressively.

-  SEC Failed to take measure against manipulation of financial statements.

What is Balance of payment of disequilibrium? What is the role of IMF in mitigating adverse crisis in Balance of Payment?

 Though the credit and debit are written balanced in the balance of payment account, it may not remain balanced always. Very often, debit exceeds credit or the credit exceeds debit causing an imbalance in the balance of payment account. Such an imbalance is called the disequilibrium. Disequilibrium may take place either in the form of deficit or in the form of surplus.

 Disequilibrium of Deficit arises when our receipts from the foreigners fall below our payment to foreigners. It arises when the effective demand for foreign exchange of the country exceeds its supply at a given rate of exchange. This is called an 'unfavourable balance'.

 Disequilibrium of Surplus arises when the receipts of the country exceed its payments. Such a situation arises when the effective demand for foreign exchange is less than its supply. Such a surplus disequilibrium is termed as 'favourable balance'.

 Role of IMF: If an IMF-member country is experiencing severe balance of payments difficulties and reserve depletion is advanced that country may request assistance from the IMF. Under this approach the IMF may provide a loan to the country in exchange for macroeconomic policy conditionality. IMF financing, usually with structural adjustment-related financing support from the multilateral development banks or other donors, involves commitment to appropriate economic stabilisation policy objectives, provides for economic and balance of payments adjustment and seeks to avoid a crisis, allowing the capacity for loan repayment to develop within a reasonable period of time.

 After the Second War World a new international institution’ International Monetary Fund (IMF)’ was set up for maintaining equilibrium in the balance of payments of member countries for a short term. Membercountries borrow from it for a short period to maintain equilibrium in the balance of payments. IMF also advises member countries how to correct fundamental disequilibrium in the balance of Payments when it does arise

Therefore, Bangladesh had to face great difficulties with regard to balance of payments. At several occasions it approached IMF to bail it out of the foreign exchange crisis that emerged as a result of huge deficits in the balance of payments. At long last, economic crisis caused by persistent deficits in balance of payments forced Bangladesh to introduce structural reforms to achieve a long-lasting solution of balance of payments problem.

Do you think Bangladesh Bank has implemented Floating Exchange regime too early? Discuss.

 To meet up the economic demand and to fulfill the IMF conditionality, on 29 May, 2003 Bangladesh Bank issued a circular stating- effective from 31st May, 2003, Bangladesh Bank floated its exchange rate and followed a fully market based exchange rate for Taka. Under this arrangement, exchange rate is determined on the basis of demand and supply of the respective currencies. Immediately after the inception of floating exchange rate banks, economists, currency traders and businessmen have welcomed the deregulation of the exchange rate saying that Country the country's foreign trade and remittance would get a boast up due to it and it would make the currency market more efficient and effective.

In 2003, the US dollar was traded at Bangladesh Taka (BDT) 55 to one US$. During the first few months after the switching-over to the floating exchange rate, the movement of local currency against USD was tolerable. But during mid-2004 and 2005 its movement was very rapid; so sometimes the central bank -- Bangladesh Bank (BB) -- had to intervene in the market turning to a managed float exchange rate system.

 The withdrawal of upper cap of interest rate and increase of policy interest rate (repo rate and reverse repo rate) may add more fuel to the depreciation of local currency against the greenback as it now requires more local currency to buy greenback from the market. Like increasing fuel import, import of capital machinery for power plant is keeping pressure on the USD.

 But some cooling down of pressures in the country's foreign exchange market is necessary at this stage. For this, the BB will require to come forward with some controlling measures in a cautious manner. It needs to further discourage imports of luxurious goods, fix the higher cap of margin for importing such items, encourage of import-substituting industries, allowing setting up of more exchange houses in countries where the Bangladeshi expatriates are largely concentrated and persuading the multilateral agencies to disburse aid and grant.

Introduction of floating exchange rate was debatable issue and also there were some criticisms about the competence of Bangladesh Bank's from some corner. But Bangladesh Bank performed a tremendous performance. There was no volatility; no speculation in price and market behaves rationally. If we consider the market statistics, we find that macro economic variables have positive performances over the period of time and I think Bangladesh Bank has implemented Floating Exchange regime in proper time.

What is exchange rate? Discuss Advantages & Disadvantages of floating exchange rate regime

 Definition: Exchange rate is the price of one currency in terms of another currency. Exchange rates can be either fixed or floating. Fixed exchange rates are decided by central banks of a country whereas floating exchange rates are decided by the mechanism of market demand and supply.

Advantages

 §  Market Determined Rates: Floating exchange rate means that the market will determine the rate at which one currency can be exchanged for another. The market will set these rates on a real time basis as and when new information flows in. This reduces the need for an elaborate mechanism to ensure that the exchange rates remain within a particular range.

§  Independence: Floating exchange rates allow the governments and central banks of a nation to have a great degree of independence. In case of fixed exchange rates, the Central banks of different nations have to act in tandem.

§  Less Probability of Speculative Attacks: A freely floating currency faces adjustment on a minute to minute basis. There are some days that the currency faces rapid appreciation whereas others when it faces rapid decline. However, for most of the days, the currency remains stable. However, if the currency is traded on the Forex market as a freely floating currency, adjustments happen on a minute to minute basis.

§  Low Requirement of Reserves: A floating exchange system does not require the central bank to hold massive reserves. This is because the Central Bank does not have to conduct active trading operations in order to maintain the value of the currency. Central Bank operations are a very rare event for countries that have a floating rate system. This is a major advantage of this system since holding foreign exchange for trading purposes is an expensive strategy. Firstly, it requires the country to maintain a huge currency reserve.

 

Disadvantages

 The floating currency system also has its critics. They suggest that the system has a few serious flaws. Some of the important ones have been listed below:

 §  Uncertainty: Firstly, a floating exchange rate implies a lot of volatility. The value of currencies change on a real time basis. Also, since Forex market is not regulated, currency values could skyrocket or hit rock bottom in a matter of minutes.

§  Allocation of Resources: At a macro level, the economy faces a problem while allocating resources. This is because as exchange rates change so does the benefit that can be derived from resources. For instance, a rising exchange rate makes imports a better option whereas a falling rate makes exports easier.

§  Lack of Discipline: Lastly, floating exchange rates only make sense if the country has sufficient internal control mechanisms in place. Hence, if there is likelihood that the monetary policy may be misused for personal gains by a group of influential people, then it is better to peg the currency to another more developed currency.

What measures can be adopted to neutralize the inflationary pressure in Bangladesh

 1. Monetary measures: Monetary measures are used by the government in order to neutralize inflationary pressure. In Bangladesh, it is implemented by Bangladesh Bank. Main tools of monetary measures of credit control include Bank Rate policy, Open Market Operations, Cash Reserve Ratio. These measures are used to achieve full employment, to maintain a fairly stable exchange rate, to achieve rapid economic growth and promote economic equality.

2. Fiscal measures: Fiscal measures relates to public revenue and public expenditure and matters related thereto. Important tools of fiscal measures are Public revenue and Public expenditure. The major sources from where public revenue is generated include income tax, wealth tax, excise duty and sales tax. Public expenditure refers to the expenditure by the government on productive as well as non-productive activities. Productive expenditure includes expenditure on infrastructure development, development of industries like iron and steel, chemicals, heavy engineering, etc. Non-development expenditure includes expenditure on administrative machinery, law and order, defences, etc.

3. Other measures: These may be short term or long term. Short term concerns with the distribution of essential commodities on ration cards at reasonable price. Long term includes population and economic planning. Population planning is used to aware the people about family planning. Economic planning is used to accelerate the economic growth and development of country.

Inflation is basically a Monetary Phenomena– substantiate your views to justify your answer

 Milton Friedman, a Nobel Prize winning economist, once said that "inflation is always and everywhere a monetary phenomenon". I believe that there is validity in his statement if one examines economic trends over a sufficiently long time span. The basis for his monetary view of inflation is anchored in the equation of exchange that is highlighted below:

 M • V = P • Q

 Note that M is the money supply, V is the velocity of money (i.e., the rate of turnover of money in the economy), P is the general price level, and Q is real economic activity. Transforming each variable into a growth rate and rearranging the terms results in the following equation:

 •   •   •   •

P = M – Q + V

 The price level P is the price of goods in terms of money. Its inverse, 1/P is the price of money in terms of goods or the value of money. Like any other commodity the value of money is determined by the supply and demand for it. An expansion of the money supply, holding the demand for money constant, will cause the value of money to fall and the price level to rise. An expansion of the demand for money, holding the quantity constant will cause the value of money to rise and the price level to fall. All price level changes--- and, hence, all inflations and deflations---can be analyzed within the framework of the demand and supply of money. For this reason, inflation is obviously a monetary phenomenon.

 It is probably reasonable to argue that Friedman, under the circumstances in which he made the statement, meant somewhat more than this. He also tended to argue that inflations of any significant magnitude and duration are always money supply phenomena in the sense that they are caused by excess monetary expansion---i.e., increases in the money supply relative to the normal growth of the demand for money that would result from growth of real income and the trend rate of change of velocity.

The demand for money is holding money” What are the major motives for holding money

 Definition: The Motives for Holding Cash is simple, the cash inflows and outflows are not well synchronized, i.e. sometimes the cash inflows are more than the cash outflows while at other times the cash outflows could be more. Hence, the cash is held by the firms to meet the certain as well as uncertain situations.

Motives for Holding Cash:

Majorly there are three motives for which the firm holds cash.

 

    1.Transaction Motive: The transaction motive refers to the cash required by a firm to meet the day to day needs of its business operations. In an ordinary course of business, the firm requires cash to make the payments in the form of salaries, wages, interests, dividends, goods purchased, etc. Likewise, it also receives cash from its sales, debtors, investments. Often the firm’s cash inflows and outflows do not match, and hence, the cash is held up to meet its routine commitments.

 2.           Precautionary Motive: The precautionary motive refers to the tendency of a firm to hold cash, to meet the contingencies or unforeseen circumstances arising in the course of business.

Since the future is uncertain, a firm may have to face contingencies such as an increase in the price of raw materials, labor strike, lockouts, change in the demand, etc. Thus, in order to meet with these uncertainties, the cash is held by the firms to have an uninterrupted business operation.

 

3. Speculative Motive: The firms hold cash for the speculative purposes to avail the benefit of bargain purchases that may arise in the future. For example, if the firm feels the prices of raw material are likely to fall in the future, it will hold cash and wait till the prices actually fall. Thus, a firm holds cash to exploit the possible opportunities that are out of the normal course of business. These opportunities could be in the  form of the low- interest rate charged on the borrowed funds, expected fall in the raw material prices or favorable change in the government policies.

 

Thus, the cash is the most significant and liquid asset that the firm holds. It is significant as it is used to pay

off the firm’s obligations and helps in the expansion of business operations.

Discuss the main function of modern Central Bank. What kind of relationship between the central bank and the government, according to you is ideal for the growth of Bangladesh economy

 1.  Regulator of Currency:

The central bank is the bank of issue. It has the monopoly of note issue. Notes issued by it circulate as legal tender money. It has its issue department which issues notes and coins to commercial banks. Coins are manufactured in the government mint but they are put into circulation through the central bank.

 

2.  Banker, Fiscal Agent and Adviser to the Government:

Central banks everywhere act as bankers, fiscal agents and advisers to their respective governments. As banker to the government, the central bank keeps the deposits of the central and state governments and makes payments on behalf of governments. But it does not pay interest on governments deposits. It buys and sells foreign currencies on behalf of the government.

 

3.  Custodian of Cash Reserves of Commercial Banks:

Commercial banks are required by law to keep reserves equal to a certain percentage of both time and demand deposits liabilities with the central banks. It is on the basis of these reserves that the central bank transfers funds from one bank to another to facilitate the clearing of cheques.

 

4.  Custody and Management of Foreign Exchange Reserves:

The central bank keeps and manages the foreign exchange reserves of the country. It is an official reservoir of gold and foreign currencies. It sells gold at fixed prices to the monetary authorities of other countries. It also buys and sells foreign currencies at international prices. Further, it fixes the exchange rates of the domestic currency in terms of foreign currencies.

 

5.   Lender of the Last Resort: By granting accommodation in the form of re-discounts and collateral advances to commercial banks, bill brokers and dealers, or other financial institutions, the central bank acts as the lender of the last resort.

6.  Clearing House for Transfer and Settlement:

As bankers’ bank, the central bank acts as a clearing house for transfer and settlement of mutual claims of commercial banks. Since the central bank holds reserves of commercial banks, it transfers funds from one bank to other banks to facilitate clearing of cheques. This is done by making transfer entries in their accounts on the principle of book-keeping. To transfer and settle claims of one bank upon others, the central bank operates a separate department in big cities and trade centres.

 

7.  Controller of Credit:

The most important function of the central bank is to control the credit creation power of commercial bank in order to control inflationary and deflationary pressures within this economy. For this purpose, it adopts quantitative methods and qualitative methods. Quantitative methods aim at controlling the cost and quantity of credit by adopting bank rate policy, open market operations, and by variations in reserve ratios of commercial banks.

 

Besides the above noted functions, the central banks in a number of developing countries have been entrusted with the responsibility of developing a strong banking system to meet the expanding requirements of agriculture, industry, trade and commerce.

 

In principle, there is a clear division of responsibilities and accountabilities between the central bank on the one hand, and the government and the Minister of Finance on the other hand. Information sharing, cooperation and coordination between the central bank and the government are important in a number of respects. Fiscal Policies (Govt. spending, taxes etc.) are determined by the Ministry of Finance while Monetary Policies (Interest rate, inflation etc.) are formulated by the Central Bank.

Coordination of Monetary and Fiscal Policy

If the fiscal authorities know the central bank’s policy reaction function and its formal or informal analytical model, they can anticipate the monetary policy response to a given fiscal action and adjust the action accordingly. In principle, coordination between monetary and fiscal policy can thus be achieved without negotiations between the monetary and the fiscal authorities, and the central bank can take advantage of being the first mover (by establishing a credible reaction function), which is important to avoid undermining its price stability objective. To implement this approach, it will still be useful if the central bank and the government can establish a culture of no surprises, to assist each other in staying the course in spite of a myriad of daily challenges.

 

Macroeconomic Management Challenges

In low-income countries the dependence on selected commodity exports can make them highly susceptible to terms-of-trade shocks, the predominant role of the primary sector can lead to large fluctuations in output, demand and government revenues (in part simply as a result of fluctuations in the weather), and  the volatility of aid flows can be a further huge challenge in trying to stabilize output. In addition, if market imperfections are such that monetary policy can have permanent effects on real variables, the central bank may be subject to yet more political pressures. These factors and a scarcity of reliable statistics and analytical models may require very close interaction between monetary and fiscal authorities. This in turn puts a premium on well considered government arrangements.

 

Sole Supplier of Money

The Central Bank is the banker to the banks and is the sole supplier of liquidity (or reserves) to these banks. A part of the reserves is supplied while performing central banking functions other than monetary policy operations and constitute the autonomous drivers of liquidity. These functions include government cash management, meeting currency demand of the public and foreign exchange management. Thus, in its role as the banker to the government, the Central Bank’s cash management operations involve provision of liquidity to tide over temporary deficit of the government as also facilitate investment of the temporarily surplus cash balances of the government.

Conclusion: The Brussels conference resolution of 1920 was to the effect that "banks, especially banks of issue, should be freed from political pressure and should be conducted solely on the lines of prudence." This trend has been reflected in the central banking statutes relating to ownership of capital, participation in administration, and intervention in monetary policy.

Explain the concept of Export Diversification. Do think that the export of Bangladesh is sufficiently diversified? Justify your answer.

 Export diversification: Export diversification, by definition is the changing of a country's export structure. This can be attained by changing the existing basket of commodities or by embellishing them through innovation and technology. Dennis and Shepherd (2007) define export diversification as widening the range of products that a country exports. As a matter of fact, export diversification can take two forms, namely, horizontal and vertical. Export diversification has different dimensions and can be analysed at different levels.

Horizontal diversification causes changes in the primary export mix in order to reduce the effect of the fluctuation of global commodity prices. It also implies that the number of export sectors has increased. This reduces the dependency on a few sectors to lead export-oriented growth.

On the other hand, vertical diversification involves contriving further uses for existing and new innovative commodities by means of value-added ventures such as processing and marketing. Vertical diversification occurs when the export mix of a country shifts from primary products to manufactured products.

 

Justification: Export is the lifeline of the economy of Bangladesh. The most important contributing sector is the exporting sector in the GDP. But, overdependence on a few products or on a single product is not a wise decision. For sustenance of business, it needs diversification of both export products and export destinations. With an export of only $0.36 billion in fiscal 1973, the country has managed to increase it to $30.2 billion by the end of fiscal 2014. Firstly, let us take a quick look at some of the facts regarding exports of Bangladesh. The exports are largely dominated by readymade garments, whose share was 81.2 percent in FY2014. Around 96 percent of all exported goods are manufactured commodities. With about four million workers and 81.2 percent of total export earnings, a lot of the country's fate depends on a single sector. High export concentration on the garment sector can make the economy vulnerable to shocks.

However, if the export basket contains several commodities then the probability of all of them suffering an adverse shock simultaneously is small. Any adverse outcome in the export of one good could be cushioned by the export of other commodities thus reducing the impact on export revenue and balance of payments.

Export diversification can help increase overall exports and thus growth rate of the economy. Bangladesh has a high endowment of labour and the benefit of labour-intensive manufacturing which it can take advantage of. However, addressing domestic problems like land acquisition, energy and infrastructure inadequacy is key. Moreover, political stability is vital for uninterrupted flow of production as well as giving signal to the international buyers of the country's reliability. Though it may be a challenge, with appropriate policies, the country will be able to diversify exports and increase its overall exports and hence economic growth rates.

Reserve Vs Provision

 Reserves: 1. It is created by debiting the profit and loss appropriation account. 2. It is created to meet an unknown liability, or to strengthen the financial position of the company or for equalization of dividends etc. 3. A reserve is created only when there is profit in the

business. 4. It can be distributed among shareholders as dividend. 5. The reserve is created without taking into consideration the actual amount required except in the case of redemption of debentures when a definite sum is set aside. 6. Creation of reserve depends upon the financial policy of the business and discretion of its management.7. It is usually shown on the liability side of the balance sheet as it is not a specific reserve.

 

Provisions: 1. It is created by debiting the profit and loss account.2. It is created to meet a known liability or a specific contingency, e.g. provision for bad and doubtful debts, or provision for depreciation etc.3. A provision is created irrespective of whether there is profit or loss in the business.4. It is not available for distribution as dividend among

shareholders.5. A provision is made for a definite amount and, therefore, a definite sum is set aside every year to

meet the known contingency.6. Making of a provision is a must to meet known liability or contingency.7. The provision is generally shown on the assets side of the balance sheet.

IMF and World Bank

 

1.      The International Monetary Fund is a controller of the world’s monetary system. 1. World Bank is a global financial institution.

2.      The IMF focuses on bringing economic stability, 2. World Bank laid emphasis on economic growth of the developing nations.

3.      The size of the World Bank is more than 3 times larger than the size of the International Monetary Fund.

4.      The International Monetary Organization is a unitary organization 4. World Bank is bilateral organization.

5.      At present there are 188 member countries of the IMF 5. World bank it has 188 member countries of IBRD and 172 member countries of IDA.

 

6.      International Monetary Fund came into existence to provide advice and assistance. 6. Conversely, the World Bank is created to facilitate lending.

7.      The major objective of the IMF is to deal with matters related to the financial sector and macroeconomics. 7. On the other hand, the purpose of the World Bank is to reduce poverty and to promote economic development.

Fiscal Policy Vs Monetary policy

 1.    The policy of government in which it utilizes its tax revenue and expenditure policy to influence the aggregate demand and supply for products and services the economy is known as Fiscal Policy. 1. The policy through which the central bank controls and regulates the supply of money in the economy is known as Monetary Policy.

2.    Fiscal Policy is carried out by the Ministry of Finance whereas the 2. Monetary Policy is administered by the Central Bank of the country.

3.    Fiscal Policy is made for short duration, normally one year, while the 3. Monetary Policy lasts longer.

4.    Fiscal Policy gives direction to the economy. 4. On the other hand, Monetary Policy brings price stability.

5.    Fiscal Policy is concerned with government revenue and expenditure, 5. Monetary Policy is concerned with borrowing and financial arrangement.

6.    The major instruments of fiscal policy are tax rates and government spending. 6. Conversely, interest rates and credit ratios are the tools of Monetary Policy.

Political influence is there in fiscal policy, 

7.This is not with the case of monetary policy.

Bonus Share Vs Right Share

 1. Meaning: 

1. Bonus shares are such shares that are allotted to the shareholder out of the company’s reserve and profit. The allotees do not have to pay for the shares since such shares are allotted in the place of the dividend. 

1. Right shares are first offered to the existing shareholders of the company, who have to make payment for acquiring the shares.

 2. Purpose: The purpose of issuing such shares is to pay the dividend to the shareholders in the form of shares instead of cash. 

2. The purpose of issuing right shares is to increase the subscribed capital of the company. 

3. Consideration: Bonus Shares are allocated to the shareholders without any consideration in terms of money. 

3. In case of allotment in right share, the allotee has to pay full value of shares.

4. Right to issue: A company has the right to issue bonus shares only if it so authorised by the articles. 

4. A company having share capital has the implied right to issue these for acquiring its unissued capital.

Velocity of Money

 The rate at which money is exchanged from one transaction to another, and how much a unit of currency is used in a given period of time. Velocity of money is usually measured as a ratio of GNP to a country's total supply of money.

The velocity of money provides some unique insight into the state of our economy. But exactly what insight is up for debate. Many people contend that the velocity of money is an indicator or predictor of inflation; unfortunately it’s not that simple.

First we need to understand how the velocity of money is calculated so that we have more insight into what may be driving the changes in velocity. The velocity of money is calculated as the ratio of nominal GDP to the amount of money in circulation.

 

In sum, all we can really say with regard to the velocity of money is the following:

 

·    It increases when GDP rises faster than the money supply, or when GDP falls slower than the money supply

·    It decreases when GDP rises slower than the money supply, or when GDP falls faster than the money supply

Treasury Bill Market in Bangladesh

 Treasury bill market is restricted to buying and selling of government treasury bills. In the past, it was basically concentrated in transaction of government treasury bills of 3-month maturity at predetermined rates. Commercial banks were obliged to buy these bills as approved security to meet their statutory  liquidity requirement (SLR) under the Banking Companies Act. However, the availability of the government treasury bills depended only on the fiscal consideration of the government. Bangladesh Bank had no scope of its own to increase or decrease their supply. Besides, interest rates were not market based and were fixed arbitrarily by the government from time to time. In addition to the commercial banks, Bangladesh Bank also had to hold a portion of government treasury bills.

 

Despite regular auction of Bangladesh Bank Bills, government treasury bills continued its normal transaction in the market. However, following the declaration of Bangladesh Bank Bills as approved securities for the SLR purposes, the effectiveness of the bills weakened as an instrument of monetary control. The auctions of Bangladesh Bank Bills were, therefore, suspended from March 1997. Newly introduced 28-day, 91-day, 182-day, 364-day, 2-year and 5-year government treasury bills since September 6 1998.