Central Bank of Bahrain and Money Supply Regulation Essay

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The influence of the Central Bank of Bahrain has grown impressively over the past few decades, with a rapid transformation in the realm of the global economy and an impressive change in its approach towards coordinating money supply.

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However, it has also been noticed that the tools used by the bank are rather scarce – with such tools as net transactions change, which, in its turn, leads to a change in the reserve requirements, the bank is capable of making major alterations in the money supply, yet such a policy comes at a price, seeing how Bahrain’s the financial stability leaves much to be desired.

By introducing more diverse tools and another method of money supply regulation, such as the open market operations, and utilizes modern tools of money supply control, including a direct control over the consumer’s credit and interest rates on credit cards, the Central Bank of Bahrain will create the environment, which will be more favorable for the evolution of the local banks and SMEs.

Indeed, according to the 2009 report, the Central Bank of Bahrain tends to rely on the policy of changing the reserve requirements a little too much (Central Bank of Bahrain, 2009, p. 1).It is quite remarkable that the Central Bank of Bahrain tends to adopt the reserve requirement strategy, which is usually defined as rather uncertain in terms of its outcomes because of the vast and powerful effect that it has on the state economy.

To the credit of the Central Bank, the strategy chosen to affect the money supply seemed to be working relatively well in the past; according to the 2009 report, the prognosis for the following years was very promising, with a “5.8% increase over the end‐2008 level” (Central Bank of Bahrain, 2009, p. 3) and the BD (Bahrain Dinars) reaching 8,404.2 million (Central Bank of Bahrain, 2009, p. 3).

Nevertheless, the reports dated 2010 and 2011 show a less optimistic tendency (Central Bank of Bahrain, 2010). It is assumed that the bank should adopt the open market regulations principle and try exercising a direct control over consumers’ credit (Central Bank of Bahrain, 2011).

Money supply regulation is conducted by the Federal Reserve (Ritter, Sinler & Udell, 2013). The process can be defined as the total amount of financial assets that exist within a specific economy at the specific time slot and is carried out by changing the reserves rates in the bank system, thus, making the deposit creation multiplier alter (Thomas, 2005). According to the Federal Reserve Balance sheet, the FR operates bonds by buying and selling them in the financial market (Boyes & Melvin, 2012).

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The former action triggers an immediate increase in money supply, whereas the latter activity reduces the money supply to some extent. In addition, the FR is capable of altering the reserve requirements by carrying out such operations as reducing or raising the limit (Boyes & Melvin, 2012). As a result, the amount of money that banks can loan out is affected and the money supply increases or drops correspondingly.

Changes in the reserve requirements seem to be the tools that are used the least frequently, yet have the greatest power (Ritter, Sinler & Udell, 2013). In addition, the money supply regulation can be performed by making changes to the discount rate, which the FR is also authorized to do.

Finally, it should be noted that the Federal Reserve traditionally chooses the open market operations, since they often happen to be the easiest and the most affordable way to coordinate money supply. Perhaps, it is the stability of the given method that, contrasted with the radical approach of requirements change and the lack of stability of the discount rate alteration that makes the third method the most trustworthy one (Ritter, Sinler & Udell, 2013).

Seeing how it was stated above that the Central Bank in Bahrain clearly has issues with the money supply control, the necessity to adopt a new strategy becomes obvious. As it has been stressed above, the drastic effects that the current approach of reserve requirements has on the Bahrain economy jeopardizes Bahrain SMEs and state companies, which means that the open market control should be used as an alternative.

Seeing how in the modern global market, the ability to use modern tools and approaches efficiently defines the success of an organization, it will be crucial for the Central Bank of Bahrain to employ such tools as the direct control over consumers’ credit or over interest rate on credit card.

Controlling the customers’ ability to buy durable goods on credit, the Central Bank of Bahrain will be able to stabilize the entire economy by building stability of its elements. More to the point, such a tool as the control over the interest rate of the credit cash advance will help track down the actions carried out by the local banks. Thus, a better overview of the local banks’ policies and an analysis of the effects that their transactions have on the state economy will be possible.

Reference List

Boyes, W. & Melvin, M. (2012). Economics. Stanford, CT: Cengage Learning.

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Central Bank of Bahrain (2009). Annual report. Web.

Central Bank of Bahrain (2010). Annual report. Web.

Central Bank of Bahrain (2011). Annual report. Web.

Ritter, L., Sinler, W., & Udell, G. (2013). Principles of money, banking & financial markets: Pearson new international edition. London, UK: Pearson.

Thomas, L. (2005). Money, banking and financial markets. Willard, OH: Graphic World, Inc.

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IvyPanda. 2020. "Central Bank of Bahrain and Money Supply Regulation." April 2, 2020. https://ivypanda.com/essays/central-bank-of-bahrain-and-money-supply-regulation/.

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