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 5/21/12resources to provide use

Major objectives
Major objectives of the fiscal policy of Bangladesh are to 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 are variation in public revenue, variation in public expenditure, and management of public debt.

5/21/12

Targets
The present government has planned to raise the level of investment to 30-32 percent of GDP in order 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.

5/21/12

Three stages of Fiscal Policy

A neutral stance of fiscal policy implies a high economy. Government spending is fully funded by tax revenue and overall the budget outcome has a neutral effect on the level of economic activity. An expansionary stance of fiscal policy government spending exceeding tax revenue. involves

A contractionary fiscal policy occurs when government spending 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 attracts foreign capital. In their attempt to get more dollars to invest, foreigners bid up the price of the dollar, causing an exchangerate appreciation in the short run.
5/21/12

Different action of fiscal policy

Labour market incentives: Cuts in income tax might be used to improve incentives for people to actively seek work and also as a strategy to boost labour productivity. Capital spending. Government capital spending on the national infrastructure contributes to an increase in investment across the whole economy. Entrepreneurship and new business creation: Government spending might be used to fund an expansion in the rate of new small business start-ups. Human capital of the workforce: Higher government spending on education and training can boost up labor market.
5/21/12

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 when inflation is too high. Removing funds from the economy will reduce levels of aggregate demand and thus stabilizing prices.
5/21/12

Actions of Fiscal Policy Government financing government interest because rates through with the across bonds, can the a deficit of increase market, borrowing

issuing

government
5/21/12

creates higher demand for credit in the financial markets.

Monetary Policy Monetary policy is one of the tools that a national Government uses to influence its economy. Using its monetary authority to control the supply and availability of money, a government attempts to influence the overall level of economic activity in line with its political objectives. Usually this goal is "macroeconomic stability" - low unemployment,5/21/12 low inflation, economic growth, and a balance of

"Narrow" money supply or M1 is currency in circulation and the currency in easily accessed chequing and savings accounts. "Broader" money supply measures such as M2 and M3 include term deposits and even money market mutual funds. Economists debate the finer points of the implementation and effectiveness of monetary policy but one thing is obvious. At the extremes, monetary policy is a potent force. In countries where the printing presses run full tilt to pay for government operations, money supply is expanding rapidly and the currency becomes rapidly worthless compared 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 its5/21/12 effectiveness with considerable force. Germany, which

The Central Bank attempts to achieve economic stability by varying the quantity of money in circulation, the cost and availability of credit, and the composition of a country's national debt. The Central Bank has three instruments available to it in order to implement monetary policy: Open market operations are just that, the buying or selling of Government bonds by the Central Bank in the open market. If the Central Bank were to buy bonds, the effect would be to expand the money supply and hence lower interest rates, the opposite is true if bonds are sold. This is the most widely used instrument in the day to day control of the money supply due to its ease of use, and the relatively smooth interaction it has with the economy as a whole. Reserve requirements are a percentage of commercial banks', and other depository institutions', demand deposit liabilities (i.e. chequing accounts) that must be kept on deposit at the Central Bank as a requirement of Banking Regulations. Though seldom used, this percentage may be changed by the Central Bank at any time, thereby affecting the money supply and credit conditions. If the reserve requirement percentage is increased, this would reduce the money supply by requiring a larger percentage of the banks, and depository institutions, demand deposits to be held by the Central Bank, thus taking them out of supply. As a result, an increase in reserve requirements would increase interest rates, as less currency is available to borrowers. This type of action is only performed occasionally as it affects money supply in a major way. Altering reserve 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, and other depository institutions, are able to borrow reserves from the Central Bank at a discount rate. This rate is usually set below short term market rates (T-bills). This enables the institutions to vary credit 5/21/12 conditions (i.e., the amount of money they have to loan out), there by affecting the money supply. It is of note that the Discount Window is

Coordination between Monetary and Fiscal Policy Fiscal policy changes impart impulses to demand and inflation pressure. This raises the possibility that discretionary fiscal policy might be used jointly with monetary policy in managing shocks to the economy, so that the burden of maintaining stable growth and inflation might be `shared' across the fiscal and monetary authorities. Beyond that, to the extent that fiscal policy and monetary policy impact on different parts of the economy, the two instruments might 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 policy would be managed as well as the overall level of stimulus provided by both monetary and fiscal policy to the economy, thus better promoting internal equilibrium (price stability) at the same time as external equilibrium (a sustainable balance of payments). Effects on microeconomic efficiency. Monetary policy influences demand pressure via interest rates and the exchange rate, whereas fiscal policy influences demand pressure via direct spending by the government and changes to disposable income via the taxation and benefit system. The usual goals of both fiscal and monetary policy are to achieve or maintain full employment, to achieve or maintain a high rate of economic growth, and to stabilize prices and wages. The establishment of these ends as proper goals of governmental economic policy and the development of tools with which to achieve them are products of the 20th century.

5/21/12

Fiscal policy of Bangladesh Fiscal policy of Bangladesh country consists of the use of taxes, government spending and public debt operations to influence the economic activities of that country in desired ways. It is concerned with the allocation of resources between the public and private sectors and their use for attainment of stability and growth. The National Board of Revenue (NBR) is on the supplying side of the fiscal policy in Bangladesh.
5/21/12

Major objectives of the fiscal policy of Bangladesh are to 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 are variation in public revenue, variation in public expenditure, and management of public debt. These are reflected in the budgetary operations of the government, prepared and implemented on year-on-year basis

5/21/12

Monetary Policy Strategy of the Bangladesh Bank The original 1972 Order stated the broad objectives of the Bank: (a) to regulate the issue of the currency and the keeping of reserves; (b) to manage the monetary and credit system of Bangladesh with a view to stabilizing domestic monetary value; (c) to preserve the par value of the Bangladesh Taka; (d) to promote and maintain a high level of production, employment and real income in Bangladesh; and (e) to foster growth and development of the country's productive resources for the national interest
5/21/12

Monetary Policy Framework, based on near term outlook for growth and inflation, are intended to anchor inflation expectations of market participants and the general public. For example The monetary stance for FY 10 was designed to support attainment of the highest sustainable output growth without triggering escalation of inflation. In accommodating the growth aspirations of the government and the private sector with this stance, BBs programs have to place greater directional emphasis on the credit needs of sectors like agriculture and SME typically under-served by the market; seeking to enhance inclusiveness (a qualitative rather than quantitative dimension) of our economic 5/21/12 growth. Downward stickiness of lending interest rates and service charges/fees,

Growth outcome and outlook: Unlike most other economies in the region and elsewhere, output growth in Bangladesh has thus far been only mildly impacted by the ongoing global economic recession ;for example ,with estimated 5.9 percent real GDP growth in FY 09 following the 6.2 percent growth of FY 08. FY10 real GDP growth is projected conservatively to be in the range of 5.5 to 6.0 percent, likely to be outperformed if global economy recovers faster and if the various initiatives proposed in the FY10 national budget including the innovative public private partnership (PPP) for infrastructural development can be implemented in right earnest Inflation outcome and outlook: It was observed FY 09 began with double digit (10.0 percent in July 08) annual average CPI inflation, which came down to single digit levels by the second quarter aided by good domestic agricultural output and the collapse of global commodity price bubble. The decline in domestic annual average CPI inflation is therefore likely to be slower and smaller in FY10, and was projected to be at 6.5 percent by June 2010. Monetary outcome and outlook, Double digit inflation rates and high domestic credit growth (well above 20 percent y-o-y) in Q1 FY09 despite onset of global recession prompted BBs precautionary 25 basis point hike in repo and reverse repo interest rates respectively in September and November 08. Subsequently these hikes were reversed in March 09 as domestic inflation abated.

5/21/12

Key policy measures underlying the new Monetary Policy ( January-July 2012) First there is scope for increasing private sector credit growth for productive investments beyond the programmed level if there is a reduction in growth in credit to the public sector. Limiting public sector borrowing from the banking sector can be achieved by increasing interest rates on savings certificates, through greater external and domestic resource mobilization and by rationalizing public expenditures. In parallel BB will aim to reduce the demand for consumer loans (e.g. the recent step to change the loan margin ratios for consumer items), so as to increase the share of lending going towards growth enhancing investment 5/21/12 purposes.

Third while the interest rate regime will remain liberalized, BB will focus more on monitoring interest rate spreads so that they remain below 5% except for SME lending (as the costs of SME operations are higher) and consumer lending (in order to reduce consumer demand). In future BB expects to see these spreads further reduced as the banking sector becomes even more competitive. By enforcing and making these spreads public through its Open Data Initiative, BB aims to make the pricing of loans competitive and reasonable. Fourth, in order to reach the new external sector equilibrium, overall import demand needs to be rationalized. Opening of L/Cs for non-essential and luxury items will be discouraged while those for essentials such as petroleum will be unhindered. Inter-agency coordination related to petroleum import payments is being enhanced; a new coordination committee will aim to ensure that taka liquidity is provided ahead of time so that banks can purchase the needed foreign exchange on the inter-bank market on a regular basis so that lumpy Bangladesh Petroleum Corporation payments can be met instead of approaching BB for foreign exchange. Fifth, in order to ensure that savings is intermediated safely and efficiently in support of our pro-poor growth strategy we will take further steps to improve the stability, and outreach, of our financial system. Financial inclusion will be promoted through specific products targeted to the needs of the unbanked, and this objective is fully consistent with the monetary program. 5/21/12