Bonikbarta Exclusive

Bangladesh Bank (BB) started functioning as the country's full-fledged central bank with Presidential Order number 127 of the Bangladesh Bank Order 1972. Since its inception, BB has been viewed as an autonomous institution overseeing the country's economic sector. However, the International Monetary Fund (IMF) said this autonomous institution functions under government control; no actual autonomy is displayed by them.

The IMF mentioned that Sections 10, 15, and 77 of the 'Bangladesh Bank Order 1972 impede the central bank's authority in taking any steps towards achieving its objectives. Particularly, it has been observed that these provisions obstruct the central bank from taking necessary steps towards attaining inflation stability in the middle term. Additionally, Section 82 of the order has also placed the central bank under government control.

According to Section 10, the Governor has authority and control over the management of Bangladesh Bank. The government can appoint anyone as Governor for a term of four years, with the possibility of reappointment upon completion of their term. Section 15(1) of the order says that if the Governor or Deputy Governor engages in any act that breaches the trust placed upon them or acts contrary to the interests of Bangladesh Bank, the government may remove them from office.

The Board of Directors of Bangladesh Bank plays a vital role in the policy formulation of the country's banking sector. According to the law, the government appointed the board members of the central bank. Section 77 of the Bangladesh Bank Order gives the government the authority to dismiss the central bank's board if the central bank fails to fulfil the government's obligations. According to Section 82 (2) of the Order, Bangladesh Bank is an institution effectively under the control of the Government of Bangladesh. The budget, salary, and compensation of central Bank employees are also subject to government approval.

According to Section 38 (a) of the Bangladesh Bank Order 1972, the Bangladesh Bank is accountable to the Parliament. Although Governors have faced questions from Parliament in a decade, there appears to be no such accountability. Based on a review of legal constraints, the IMF suggests, that granting autonomy to the Bangladesh Bank is desirable due to the urgent need for policy coherence.

Providing strategic advice for Bangladesh Bank, the IMF released a report titled "Technical Assistance Report" on June 28th, detailing observations from a visit by a delegation from the South Asia Regional Training and Technical Assistance Center (SARTTAC) of the IMF on August 13-17, 2023. This report examines the legal limitations on the autonomy of the central bank. The report recommends several enhancements based on the current operational methods of Bangladesh Bank.

Economists state that the autonomy and governance given to Bangladesh Bank under the law have been constrained only in formality. Despite surpassing the central bank, many important decisions are now being made for the country's banks.

Dr. Wahiduddin Mahmud, an eminent economist who served as a Director of Bangladesh Bank for 16 long years (1993-2009) when asked about the autonomy of Bangladesh Bank opined to Bonik Barta, "Discipline and accountability in the current governance structure are not solely a matter of law. There is considerable doubt about the extent to which existing laws are being implemented. Law is certainly necessary. However, those in positions of authority interpret and apply the law based on their mindset."

Wahiduddin Mahmud added, "Approving the establishment of private banks in the country for over a decade without creating a legal framework was a significant mistake. Subsequently, many of these banks deteriorated. In response, stringent measures were taken from 2002 onwards. Seventy directors of private banks were compelled to refund loans otherwise they were removed from their positions. During that time, various legal actions were also taken, including detailed scrutiny of bank loans and the terms of directors. The strict regulations of the central bank forced private banks to move in the right direction. But in the last decade and a half, the banking sector has gone to the worst."

In September 2018, the IMF also provided several recommendations after evaluating Bangladesh Bank's operations. The IMF's report mentioned that during discussions with the delegation from the South Asia Regional Training and Technical Assistance Center (SARTTAC), Bangladesh Bank officials ensured that there had been no changes in governance, transparency, and accountability since the evaluation in September 2018. Although the Bangladesh Bank Order was amended in 2003, the institution's constitutional autonomy has remained limited. According to Articles 10, 15, and 77 of the Bangladesh Bank Order, the government has the authority to restrict the operations of Bangladesh Bank. Additionally, according to Article 82 of this order, Bangladesh Bank remains under the control of the Bangladesh government.

According to the report, it is necessary to review the provisions of the Bangladesh Bank order regarding the financial process for lending to priority sectors (Rural Credit Fund, Industrial Credit Fund, Export Credit Fund). Such activities of a quasi-financial nature complicate liquidity management and are inconsistent with the new monetary system as they may hamper the propagation of monetary policy. Also, any subsidies that may be associated with these schemes can better be managed through financial accounts.

The IMF said the coexistence of three types of interest rates could create confusion in the central bank's monetary policy. These three types of rates are bank rate, policy rate, and 'smart' (in which 'smart' interest has been cancelled due to market-based interest rates). The bank rate is used for various financial transactions of Bangladesh Bank as per Article 21 of the Bangladesh Bank Ordinance. It also serves as the basis for penalties related to Cash Reserve Ratio (CRR) liquidity. The policy rate is part of the new monetary policy. On the other hand, 'smart' was introduced during the formulation of a new monetary policy. The central bank's decision-making on monetary policy has been complicated by the existence of such rates in official work.

Dr. Salehuddin Ahmed thinks that the central bank has enough legal independence even if it is not like the Bank of England. But that law is not being implemented in practice.

The former Governor of Bangladesh Bank also said to Bonik Barta, "Many decisions of Bangladesh Bank are changing on the request of the government." We are seeing a reflection of that in the process of bank consolidation. The central bank is allocating the loan amount without question that the government wants from the banking sector. However, there is no precedent of any governor being removed for not listening to the government.

The Bangladesh Bank is mandated to be accountable to the National Parliament according to law. However, over a long period, such accountability has not been visibly apparent. When asked why such accountability has not been effectively demonstrated, Dr. Salehuddin Ahmed said, "During my tenure as Governor, I attended parliamentary standing committees on numerous occasions. At that time, there was sufficient diligence in the functioning of these committees. However, currently, there are questions about the activities of these committees. If the Governor were compelled to be accountable to Parliament regarding irregularities and malpractices in bank accounts, the country would benefit."

In the field of autonomy, amendments have been recommended regarding prohibitions in the IMF report. The report states that it is necessary to ensure effective autonomy for Bangladesh Bank. Although it operates autonomously in practice, certain legal provisions create uncertainties in its economic policy management, which can adversely affect long-term credibility among stakeholders in the central bank. Therefore, amendments to the provisions of the Bangladesh Bank Order are necessary.

The IMF believes that the accountability framework of the Bangladesh Bank should also be enhanced. It states that the Bangladesh Bank should be accountable to Parliament. However, the absence of primary objectives in its economic policy has complicated the integrity and accountability of Bangladesh Bank. Once the primary objective of monetary policy is clearly defined, Bangladesh Bank must adhere to the provisions of accountability included in the Bangladesh Bank Order. In addition, the IMF suggests that the direct provision of loans under advance authorization should be removed from the scope of the Bangladesh Bank to ensure integrity.

The report suggests that the policy rate should be considered as the official rate for Bangladesh Bank. Having a single official rate would simplify economic management and align it more coherently with the central bank's mandate. Until such reforms are realized, the role of bank rates should be emphasized with a new policy rate.

In this regard, economist Dr. Ahsan H. Mansur said, "Even though it is in the law, if 'leadership' does not have independence, then no organization can enjoy autonomy. There is no defined criterion for the appointment of the Governor of Bangladesh Bank. The government can appoint anyone to the position of Governor here. The issue of autonomy goes beyond legal frameworks. While there may be some legal constraints, the bigger constraint, in our view, is how the government perceives it. Whatever is said, in a country like Bangladesh, a Governor cannot remain in office if the government does not want it."