Limitations of the application of the monetary policy in developing countries
- Lack of well-developed financial markets. In developing countries, there are no well-developed security markets. This makes the use of open market operations makes ineffective.
- Concentration of banks in urban areas. Most of the banking business is concentrated in few urban centers. The rural sector is still under banked. This limits the scope and effectiveness of the monetary policy.
- Presence of a large subsistence sector. The existence of a large non-monetary sector limits the operations of the monetary policy. This is because many transactions are made through barter trade
- Many Commercial banks in developing countries enjoy a lot of liquidity. This makes the use of bank rate policy and increasing legal reserve requirement ineffective.
- Presence of foreign owned commercial banks. Foreign owned commercial banks may not implement the restrictive effects of the strict monetary policy as required by the central bank.
- Ignorance of the public about the availability of credit facilities in commercial banks. A Monetary policy like selective credit control favoring a sector like agriculture may not be utilized due to ignorance of the farmers about such a credit facility.
- High levels of liquidity preference. Most people in developing countries do not keep their money with commercial banks. This makes it difficult for the central bank to control money which is outside the banking system.
- Inadequate entrepreneurs in developing countries. In most developing countries, there is lack of enough entrepreneurs who can use the expanded credit for investment. This is due to low levels of education and entrepreneurial ability.
- High levels of corruption. There is a high degree of corruption among the bank officials who violet the monetary policy for their personal benefits. This makes the policy ineffective.
- Limited trained personnel in the banking sector. There is limited trained personnel and -funds to finance manpower necessary to effectively monitor the activities of the monetary policy.
- Existence of political Instabilities. These force the governments in developing countries to increase money supply on political grounds hence conflicting with the objectives of the monetary policy.
- High degree of openness of the economies. Many economies of developing countries are highly open and this makes it difficult to control money supply from abroad by the central bank.
CATEGORIES Economics
TAGS Dr. Bbosa Science
