Bahrain Monetary Policy

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Monetary Policy in Bahrain

Introduction:

Monetary policy are the actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates. Monetary policy is maintained through actions such as increasing the interest rate, or changing the amount of money banks need to keep in the vault (bank reserves). In the kingdom of Bahrain, The Central Bank of Bahrain (CBB) is responsible for setting and implementing monetary policy. The next papers are going to elaborate in the monetary policy in Bahrain and how the CCB is implementing and controlling it, also explaining the obstacles and how the monetary policy in Bahrain can over come them.

The general definition of monetary policy:

Many authors define monetary policy as the activities undertaken by a government agency, typically the central bank of a country, to moderate the supply of money, availability of money, and cost of money or rate of interest to help promote economic growth, price stability, high employment, and a stable currency for use in international trade transactions.[1]

Monetarist economists believe that monetary policy is a more powerful weapon than fiscal policy in controlling inflation. Monetary policy also involves changes in the value of the exchange rate since fluctuations in the currency also impact on macroeconomic activity (incomes, output and prices).[2]

Monetary Policy in Bahrain:

The Central Bank of Bahrain (CBB) is responsible for setting and implementing monetary policy in the Kingdom of Bahrain. The Central Bank of Bahrain is responsible for setting and implementing monetary policy in Bahrain. There are approximately 400 financial institutions licensed by the Central Bank, which are subject to the Central Bank and the Financial Institutions Law.[3]

Bahrain has a free market economy, with no restrictions on capital movements, foreign exchange, foreign trade or foreign investment. The Kingdom has a leading position in the region as an open, free, transparent and welcoming environment for investors. The monetary policy framework is geared to support the general economic goals of the Kingdom.[4]

Bahrain's monetary policy has long been characterized by stability and the most advance policy in GCC.[5] And in recent years has been underpinned by a fixed exchange rate to the US dollar. This was introduced in 2003 as part of wider efforts by the six nations of the Gulf Cooperation Council (GCC) towards establishing monetary union and a single currency by 2010. There were two direct effects of this policy on the economy in 2006. The first was in terms of the exchange rate itself and the second in relation to local interest rates. The Bahraini dinar has felt the effects of the slide in the value of the dollar on international currency markets in recent years. The dollar has fallen 8% per year over the past five years against the majority of the world's major currencies, particularly the euro. With the Bahraini dinar effectively tied to the dollar, this has meant the dinar has also suffered a steady depreciation. While this might be seen as benefit from such trends as many of its exports are in the form of hydrocarbons. The net fall of the dollar has, therefore been less than helpful.[6]

Since Bahrain has long adopted a conservative and conventional approach to monetary policy, the Bahrain Monetary Agency has developed a wide range of tools to manage monetary growth and interest rates, maintaining a small margin between domestic and dollar-rates.[7]

The tools used by CBB “The Bahrain monetary agency” to manage the monetary growth are:

1. CBB offers a foreign exchange facility for buying and selling Bahraini dinars against US dollar at rates very close to the official exchange rate.

2. CBB offers a set of deposit and lending standing facilities in Bahraini...
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