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Overall Monetary Policy Of The Government And Its Impact On The Macro Economic Objectives

1202 words - 5 pages

Overall Monetary Policy of the Government and its Impact on the Macro Economic Objectives

1. Introduction to the Monetary Policy

The Monetary Policy of any country is an important one, as it defines the role and establishment of a central bank within a country and through it attempts to regulate and manage the money supply within an economy in order to achieve specific goals such as

Constraining Inflation or Deflation

Maintaining an Exchange rate

Achieving full employment or economic growth

Affect on the balance of payments

The monetary policy can involve key actions such as

7 Changing certain Interest rates either directly or indirectly ...view middle of the document...

As a medium of exchange

A store of Value

A unit of account

A standard of deferred payment

People are willing to give up goods and services for money, thus money could function as a good medium of exchange.

Money generally keeps its value (Except in the case of inflationary pressure) and therefore is a good store of value.

The value of a product or service can be measured in terms of money, thus making it a good measure of unit of account

Since people are willing to accept money as future payments (Ex – Salaries), it has become a good method of deferred payment

The supply of money is manipulated by financial institutions which act as an intermediary in the money and supply process.

There are quite a number of financial institutions in Sri Lanka

1. Commercial Banks

Also known as retail banks. They attempt to attract savings from customers which are then lent out to other customers or invested. They specialize in individualized banking services. Examples would be Commercial Bank of Ceylon Limited, Hatton National Bank Pvt Ltd, Seylan Bank Pvt Ltd

2. Development financial institutions

Provide medium and long tern Finance to the export sector for growth and development Examples Include The Development Finance Corporation of Ceylon (DFCC) and the National Development Bank (NDB)

3. Merchant/ Investment Banks

Offer a wide variety of services such as leasing, bill discounting, underwriting share issues, margin trading facilities, loan syndication, managing private share issues /placements bridging finance, participation in project equity, other forms of project finance, financial and management consultancy services.

4. Finance companies

There are currently 25 listed finance companies, which offer short term lending and hire purchase activities. They also engage in accepting deposits from the public, and are closely monitored by the central bank

5. Leasing Companies

Even though commercial banks etc provide leasing facilities, there are leasing companies in lease finance which are mainly for commercial vehicle and equipment purchases.

6. Mortgage banks

Engage in long-term lending to selected sectors. The State Mortgage and Investment Bank (SMIB) provide long term primarily for housing purposes. In addition SMIB provides other loans for agricultural purposes

7. Venture Capital Companies

Provide finance for equity of new projects and for the expansion of existing projects.

8. Savings Bank,

Its primary activities are accepting various savings deposits from public, investing in government securities, and investing in long-term debt instruments. Ex – The national Savings Bank (NSB)

9. Pension funds

Employees' Provident Fund and Employers' Trust Fund (Pension Funds). Contributions come by way of legal contributions from employers and employees. EPF is the single largest investor in the domestic financial market. Its primary activities are...

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