Waris Assignmnt

Name: Waris Mushtaq
Roll no: 1713-BC-19

Submitted to: Hesan Zahid
Subject: Financial and Regulatory Institutions
Role Of Monetary Policy In Development of Country
Due to the distinct economic conditions and demands of the two types of economies, monetary
policy in a developing country must be considerably different from that of a mature one. A
developed nation's monetary policy may set full employment, price stabilization, or exchange
stability as objectives. However, in a developing or impoverished nation, economic expansion is
the most important and fundamental requirement. Therefore, the monetary authority of a growing
country may play a crucial role by adopting a monetary policy that fosters the circumstances
essential for rapid economic growth. Monetary policy should strive to promote economic growth
in a developing nation. The following development needs of emerging economies can be met
through monetary policy. Any growing nation in the contemporary era may be concerned with the
issue of how to effectively employ monetary policy to promote economic growth. The
development of the economy of a developing nation from a stage of fundamental backwardness to
one of self-sustaining growth depends heavily on the monetary policy.
1- Role in Development:
By influencing the availability and uses of credit, regulating inflation, and upholding the balance
of payments, monetary policy may significantly contribute to quickening economic growth in a
developing nation. By ensuring an elastic supply of credit once development picks up steam,
efficient monetary policy may assist in fulfilling the demands of growing commerce and
population.
2- Financial Institution Growth and Creation
A developing economy's currency and credit system must be improved as its main goal of
monetary policy. It is important to establish more banks and financial institutions, especially in
places that lack them. The expansion of commercial banks and the establishment of alternative
financial organizations, such as mutual societies, cooperative saving societies, savings banks, etc.,
would serve to increase credit availability and mobilize people's voluntary savings for use in
productive endeavors. The monetary authority must also make sure that institutional funds are
allocated to high-priority sectors or industries in accordance with the needs of the nation's
development strategy.
3- Centralized and efficient banking
An impoverished nation's central bank must operate efficiently to control and regulate the amount
of credit using a variety of monetary instruments, including as the bank rate, open market
operations, cash-reserve ratio, etc., in order to satisfy its country's developmental needs. By
directing money away from speculative and counterproductive activities and toward productive
purposes, stronger and more effective credit regulations will have an impact on how resources are
allocated.
4- Debt administration
Another duty of monetary policy in a growing nation is debt management. Debt management
strives to
(a) choose the best time to issue bonds,
(b) keep their prices stable, and
(c) keep the cost of repaying the public debt to a minimum.
The monetary authority should manage the debt in a way that makes it possible for public
borrowing to expand steadily over time and on a large scale without jarring the system. To keep
the debt load low, this must be done at modest rates. However, a robust money and capital market
as well as a range of short- and long-term securities are necessary for debt management to be
successful.
5- Appropriate Interest Rate Structure:
Massive amounts of public and private investment are needed for economic development. The
financing of extremely ambitious programmers of economic development in all sectors of the
economy requires that credit be made available to private entrepreneurs at the lowest rates possible.
This is because the cheap money policy should be followed because it makes public borrowing
affordable, keeps the cost of servicing public debt low, and thus stimulates investment both public
and private. Therefore, a low interest rate policy encourages investment for economic growth.
Contrarily, it is noted that a policy of cheap money may encourage merchants and speculators to
borrow more money from banks and use it for stockpiling, hoarding, and other speculative
activities. However, this propensity on the side of private investors may be curbed by applying
selective credit control and directing investment in the right directions. However, some economists
recommend a high interest rate policy based on the following factors:
(a) It will act as an anti-inflationary policy by prohibiting speculative and unwanted investment
borrowing from banks;
(b) It will encourage savings, expanding the pool of sources that may be invested in.
6- Credit Access
The monetary authority should use its credit management tools to influence and mould the nature
and pattern of investment and output in order to ensure a faster pace of economic growth. It goes
without saying that this will rely on the variety of credit institutions present in the economy as well
as the types of credit regulations used by the Central Bank. The financial system is still
underdeveloped in the majority of developing nations. Commercial banks primarily fulfil the short-
term credit needs of entrepreneurs and traders, but they are hesitant to fulfil the medium- and long-
term credit needs of business, industry, and manufacturing in general. Contrary to quantitative
credit management, selective credit control distinguishes between necessary and unnecessary uses
of bank credit and facilitates the flow of money into preferred channels and uses without having
an adverse impact on the economy as a whole. Therefore, in a developing economy, the monetary
authority should implement an appropriate monetary policy to regulate how money and credit are
used. This will ensure that investable resources flow into the desired channels without having a
negative impact on investment and output. Development will go more quickly as a result.
7- Stable Policies
Above all, the goal of monetary policy in less developed nations is to promote growth, which
implies that monetary authorities should do so. In a nutshell, the monetary authority's promotional
function in a developing nation may be to increase the effectiveness of the banking system as a
whole, offer responsible credit when necessary, and react quickly to shifting circumstances. In
order to promote quick economic growth and effective monetary management, it is crucial for the
monetary authority to improve the state of the unorganized money and capital markets in
underdeveloped nations.
In other words, the development, operation, and growth of financial institutions are significantly
influenced by the monetary policies of a developing country.
To summarize it, in order to promote quick economic growth and effective monetary management,
it is crucial for the monetary authority to improve the state of unorganized money and capital
markets in underdeveloped nations.

Waris Assignmnt

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Waris Assignmnt

Uploaded by

Copyright:

Available Formats

Name: Waris Mushtaq

Roll no: 1713-BC-19

You might also like