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.

Terms of Trade (TOT)

 In economics, terms of trade refer to the relationship between how much money a country pays for its imports and how much it brings in from exports. When the price of a country's exports increases over the price of its imports, economists say that the terms of trade has moved in a positive direction. The TOT is expressed as a ratio of import prices to export prices, that is, the amount of imported products/commodities that an economy can purchase, per unit of exported products/commodities. Any improvement that occurs in a country's TOT is beneficial to the economy because it means that the country can purchase more imports for the particular level of exports.

For example, in a bilateral trading arrangement, the trade agreement occurs between two countries. Let's suppose that agricultural products are grown in Bangladesh, while biological fuels are produced in Malaysia. The price that Malaysia charges for its exports of biological fuels is $24,000,000.00 a year, and it pays Bangladesh $19,000,000.00 for the produce it imports. At the end of the year, Malaysia would have exported $5,000,000.00 ($24,000,000.00 - $19,000,000.00) more than it has imported.

primary dealer

 A primary dealer is a firm that buys government securities directly from a government, with the intention of reselling them to others, thus acting as a market maker of government securities. The government may regulate the behavior and number of its primary dealers and impose conditions of entry. Some governments sell their securities only to primary dealers; some sell them to others as well.

 

PDs are allowed the following activities as core activities:

 

·    Dealing and underwriting in Government securities.

·    Dealing in Interest Rate Derivatives.

·    Providing broking services in Government securities.

·    Lending in Call/ Notice/ Term/ Repo/ CBLO market.

·    Investment in Commercial Papers.

·    Investment in Certificates of Deposit.

·    Investment in debt mutual funds where entire corpus is invested in debt securities.

Merchant Bank & Offshore Bank

 A merchant bank is a financial institution providing capital to companies in the form of share ownership instead of loans. A merchant bank also provides advisory on corporate matters to the firms in which they invest. In the United Kingdom, the historical term "merchant bank" refers to an investment bank.

 Today, according to the U.S. Federal Deposit Insurance Corporation (FDIC), "the term merchant banking is generally understood to mean negotiated private equity investment by financial institutions in the unregistered securities of either privately or publicly held companies." Both commercial banks and investment banks may engage in merchant banking activities. Historically, merchant banks' original purpose was to facilitate and/or finance production and trade of commodities, hence the name "merchant". Few banks today restrict their activities to such a narrow scope.

 An offshore bank is a bank located outside the country of residence of the depositor, typically in a low-tax jurisdiction (or tax haven) that provides financial and legal advantages. These advantages typically include:

·    greater privacy (see also bank secrecy, a principle born with the 1934 Swiss Banking Act)

·    little or no taxation (i.e. tax havens)

·    easy access to deposits (at least in terms of regulation)

·    protection against local, political, or financial instability

Globalization

 Globalization is a process of interaction and integration among the people, companies, and governments of different nations, a process driven by international trade and investment and aided by information technology. This process has effects on the environment, on culture, on political systems, on economic development and prosperity, and on human physical well-being in societies around the world.

 The concept of globalization is a very recent term, only establishing its current meaning in the 1970s, which 'emerged from the intersection of four interrelated sets of "communities of practice": academics, journalists, publishers/editors, and librarians. In 2000, the International Monetary Fund (IMF) identified four basic aspects of globalization: trade and transactions, capital and investment movements, migration and movement of people, and the dissemination of knowledge. Further, environmental challenges such as global

warming, cross-boundary water and air pollution, and over-fishing of the ocean are linked with globalization. Globalizing processes affect and are affected by business and work organization, economics, socio-cultural resources, and the natural environment.

Foreign-exchange reserves & its Components

 Foreign-exchange reserves are assets held by a central bank or other monetary authority, usually in various reserve currencies, mostly the United States dollar, and to a lesser extent the euro, the pound sterling, and the Japanese yen, and used to back its liabilities—e.g., the local currency issued, and the various bank reserves deposited with the central bank by the government or by financial institutions. In September 2015 Foreign Exchange Reserve by Bangladesh Bank stood US $26379.00 million.

 Components: A foreign exchange reserve, also called an anchor currency, is a currency that is held in significant quantities by numerous governments and central banks as part of their foreign exchange reserves. These currencies are used to transact global business, and are the pricing currency for global trade—particularly in commodities such as gold and oil. The primary components of Foreign-exchange reserve currency used worldwide is the US dollar, followed by the euro—the official currency of the euro zone -- the British pound, the Japanese yen, and the Swiss franc

Floating of Taka

 In the year 2000, BB relaxed foreign currency dealing, allowing authorized dealers to transact dollars with Bangladeshi Bank. Earlier the banks were obliged to transact at certain fixed rates. In 2002, MOF has reformed exchange rate policy further. Foreign exchange in current account has been made free floating.

 A free floating exchange rate of Taka increases foreign exchange volatility. There are economists who think that this could cause serious problems, especially in emerging economies like Bangladesh. These economies have a financial sector with one or more of following conditions:

 ·    high liability dollarization

·    financial fragility

·    strong balance sheet effects

 

In cases of extreme appreciation or depreciation, Bangladesh Bank will normally intervene to stabilize the currency. Thus, the exchange rate regimes of floating currencies may more technically be known as a managed float. Bangladesh bank might, for instance, allow a currency price to float freely between an upper and lower bound, a price "ceiling" and "floor". Management by Bangladesh Bank may take the form of buying or selling large lots in order to provide price support or resistance or, in the case of some national currencies; there may be legal penalties for trading outside these bounds.

Excess Liquidity

 Excess liquidity occurs where cash flows into the banking system persistently exceed withdrawals of liquidity from the market by the central bank. This is reflected in holdings of reserves in excess of the central bank's required reserves. The importance of excess liquidity for central banks is threefold and lies in its potential to influence: (1) the transmission mechanism of monetary policy; (2) the conduct of central bank intervention in the money market, and (3) the central bank's balance sheet and income.

 

While the causes of excess liquidity in Bangladesh subject to more research, some of the apparent reasons are as follows:

*  The investment activities have declined in the country.

*  Due to the Hall-Mark loan scandal and other scams, banks in the country, especially private commercial banks, became more cautious in approving loans. This also contributed to accumulation in excess liquidity.

*  Due to the fall of share market, people lost their confidence in the capital market and there is a lack of other scopes to go to the capital market in the country. Therefore, people go to the banks for FDR (fixed deposit receipt) and savings certificate for securing safest investment. This has obviously helped banks to

increase their deposits whereas the disproportionate credit demand has contributed to the accumulation of excess liquidity.

Devaluation of Currency

 Devaluation of currency: Devaluation of currency on modern monetary policy is a reduction in the value of a currency with respect to those goods, services or other monetary units with which that currency can be exchanged. "Devaluation" means official lowering of the value of a country's currency within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with respect to a foreign reference currency.

 

Example: A currency is considered devalued when it loses value relative to other currencies in the foreign exchange market. A currency's devaluation is the result of a nation's monetary policy. A central bank can make the conscious effort to make its currency less valuable. If Country XYZ's currency is set at a fixed exchange rate of 2:1 to the U.S. dollar and, due to a weak economy, XYZ cannot afford to pay the interest rate on its debt outstanding, XYZ may devalue their currency. This means the central bank of XYZ will declare their fixed exchange rate to be 10:1 to the U.S. dollar. This makes their debt outstanding is now worth five times less. It's a very tricky maneuver with grave economic consequences.

Deficit Financing

 Deficit financing is a method of meeting government deficits through the creation of new money. The deficit is the gap caused by the excess of government expenditure over its receipts. The expenditure includes disbursement on revenue as well as on capital account.

Advantages of Deficit Financing: When the Government resorts to deficit financing, it usually borrows from the Central Bank. The interest paid to the Central Bank actually comes back to the Government in the form of profits. Through deficit financing, resources are used much earlier than they can be otherwise. The development is accelerated. This technique enables the Government to get resources without much opposition.

 

The defects of deficit financing are: (i) It leads to increase in inflationary rise of prices of goods and services in the country. (ii) Inflationary forces created by deficit financing are reinforced by increased credit credition by banks. (iii) Investment caused by inflation may not be of the pattern sought under the plan. It normally changed. (iv) If as a result of deficit financing inflation goes too far, it becomes self-defeating.

Deposit insurance Scheme

 Deposit Insurance Scheme (DIS) is now protecting your Deposits in the Bank and insurance benefits in the unlikely event of a number of Banks. Deposit insurance Scheme is a system established by the Government of Bangladesh to protect depositors against the loss of their deposits in the event that a scheduled bank is unable to meet its obligations.

A sound, competitive banking system is important to a nation's economic strength. Every scheduled Bank plays an important role as the intermediation of funds from depositors to consumers and investors as well as in the transmission of monetary policy.

 

Objectives of DIS: The Significant objectives of Deposit Insurance Systems in Bangladesh, like in all other countries, are a contribution to the overall financial stability. Moreover, the followings are the special objectives of Deposit Insurance Systems in Bangladesh:

 

·     Protect small depositors,

·     Enhance public confidence,

·     Enhance stability of the financial system,

·     Increase savings and encourage economic growth,

-    Enhancing more propitious bank services.

Corporate Governance for Bank

 Corporate Governance ensures to bring transparency, accountability and professionalism in the management system of a corporate body that enhances the credibility and acceptability to the shareholders, employees, potential investors, customers, lenders, governments and all other stakeholders. This is truer in case of Banking Industry. Since Banks deal in public money, public confidence is of outmost importance in this Industry.

From a banking industry perspective, corporate governance involves the manner in which the business and affairs of banks are governed by their boards of directors and senior management, which affects how, they:

 

·Set corporate objectives;

·Operate the bank’s business on a day to day basis;

·Meet the obligation of accountability to their shareholders and take into account the interests of other recognized stakeholders

·Align corporate activities and behavior with the expectation that banks will operate in a safe and sound manner, and in compliance with applicable laws and regulations; and

·Protect the interests of depositors.

Convertibility of Currency

 Refers to how easily a currency can be exchanged for gold or another currency. Currency convertibility is important for international trade because people will be less willing to accept a currency as payment if they will be unable to convert it to their own currency.

For example, convertibility of Taka means that those who have foreign exchange (e.g. US dollars, Pound Sterlings etc.) can get them converted into Taka and vice-versa at the market determined rate of exchange. Under convertibility of a currency there are authorised dealers of foreign exchange which constitute foreign exchange market.

Advantages of Currency Convertibility:

1.  Encouragement to exports:

2.  Encouragement to import substitution:

3.  Incentive to send remittances from abroad:

4.  A self – balancing mechanism:

5.  Specialisation in accordance with comparative advantage:

6.  Integration of World Economy:

 

Central Bank Autonomy

 Central bank autonomy refers to the extent to which the central bank carries out these functions independent of executive and legislative control. In recent years, central bank autonomy has assumed growing empirical and analytical significance. On the one hand, the number of countries undertaking central bank reform has gradually increased over the last two decades, escalating dramatically in the early 1990s. On the other hand, this more visible and powerful role for the central bank has been accompanied by a large literature in both economics and political science as to the causes and consequences of autonomy. A central bank must have clearly defined and prioritized objectives, sufficient authority to achieve these objectives and be autonomous to remain credible. At the same time, it must be accountable for the authority delegated to it to ensure  checks and balances. Reforming the legislative framework for a central bank—often after a crisis—can help boost the credibility of monetary policy.

 The four main principles of any legal framework for CBA include: 1. Setting price stability as the primary objective of monetary policy 2. Curtailing direct lending to governments 3. Ensuring full autonomy for setting the policy rate 4. Ensuring no government involvement in policy formulation.

Bridge Financing

 A bridge Financing is interim financing for an individual or business until permanent financing or the next stage of financing is obtained. Money from the new financing is generally used to "take out” the bridge loan, as well as other capitalization needs.

 Bridge financing are typically more expensive than conventional financing, to compensate for the additional risk. Bridge financing typically have a higher interest rate, points , and other costs that are amortized over a shorter period, and various fees and other "sweeteners". The lender also may require cross-collateralization and a lower loan-to-value ratio. On the other hand they are typically arranged quickly with relatively little documentation.

Examples: A bridge financing is often obtained by developers to carry a project while permit approval is sought. Because there is no guarantee the project will happen, the loan might be at a high interest rate and from a specialized lending source that will accept the risk. Once the project is fully entitled, it becomes eligible for loans from more conventional sources that are at lower-interest, for a longer term, and in a greater amount. A construction loan would then be obtained to take out the bridge loan and fund completion of the project.

 

HOW BANGLADESH BANK CAN HELP FOR THE DEVELOPMENT OF THE FINANCIAL SYSTEM OF THE COUNTRY

 Being the central bank of the country, Bangladesh Bank (BB), is trying to operate as a modern, dynamic, effective,  and forward-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.

 

 The activities that helps the development of the financial systems of the country are :

 

        Providing effective prudential supervision;

        Ensuring information access,

        Market intelligence, and contingency planning to avoid systematic risks;

        To assist banking and financial entities to become efficient and competitive;

        Discover new modalities for delivering agricultural & industrial credit;

        Enhance the access of small and medium enterprises to investment funds;

        Further develop the market in public and private debt and risk capital;

    Promoting measures for inclusion of people hitherto bypassed in formal financial systems.

 

In addition, the Bangladesh Bank will continuously adopt necessary measures for taking a proactive  stance  in  decision  making;  compiling  relevant  statistics  and  conducting  high quality and timely economic research to review the country’s financial and economic conditions to support decision making; ensuring efficient and professional management of BB’s human and financial resources; and establishing BB’s distinct identity based on its values and strategic roles.

HOW CAN BANGLADESH BANK STABLE THE EXCHANGE RATE

The purchase, sale and rediscount of bill of exchange and promissory notes drawn on and payable in Bangladesh are also included in the activity of the bank. The bank acts as the lender of last resort for the government as well as for the country's scheduled banks. All scheduled banks are required to maintain a minimum reserve with the Bangladesh Bank. The present statutory liquidity reserve (SLR) requirement is 20% of total demand and time liabilities, 4% of which is to be maintained as cash reserve ratio (CRR), and the rest 16% as approved securities. The SLR requirement for Islamic banks is 10% and they are to keep 4% of this reserve as CRR and the rest 6% in approved securities.

 

Bangladesh Bank exercises its wide range of power in credit control through different types of traditional and non-traditional methods. In addition to bank rate and open market operations, it uses a number of other weapons. It can vary the minimum reserve requirements of scheduled banks whenever circumstance so warrant. Being responsible for maintaining external value of Bangladesh currency, the bank also handles the exchange control. It ensures that all foreign exchange inflows are accounted for, and surrendered to the  authorized  dealers.  It  allocates  and  rations  foreign  exchange  in  line  with  the  set priorities. Bangladesh Bank is empowered to manage the country's international reserves, which represent aggregate of its holding of gold, foreign exchange, SDR and reserve position in the IMF. The bank also acts as the representative of the government in different international agencies and other forums such as World Bank, IMF, Asian Clearing Union, ADB, etc.

 

Bangladesh Bank is empowered to act as the watchdog of the country's BANKING SYSTEM, and all scheduled banks are accountable to Bangladesh Bank, which has extensive powers to ensure  soundness  of  the  banking  system.  No bank  can  commence banking  business  in Bangladesh and no existing bank can open a new branch in or outside the country or shift any branch from one place to another without obtaining a license/permission from the Bangladesh Bank.