Bangladesh Bank has to choose between policy and discretion

Central banks around the world have a very difficult situation in its struggle to stay from the influence of politics and politicians. The independence of a central bank is directly related to its efficacy of ensuring independence in the affiliated banks and financial institutions under its control. The modern notion of the central bank's independence evolved over time. Following the Great Depression of 1929-1939, the US and other developed countries gave their central banks power to set the objectives, goals, targets and instruments of monetary policy. In the wake of inflation in the 1960s and 1970s, many central banks were successful to keep their policies out of political influence. 

Central bank autonomy is a contentious issue. However, to achieve the objectives of the bank such as inflation control and economic stability, better financial management, etc., it is necessary for the central bank to be free from all the influences. Thus the bank should be fully autonomous in all its functional and decisional activities. 

The independence of the central bank is viewed from two major aspects. One is "goal independence" and the second is "instrument independence". In all these features of independence, the central bank enjoys a fairly greater amount of autonomy in comparison to the other regulatory bodies of the government. The major goals – the maintenance of price level (inflation) and growth – are usually taken as the primary ones. However, the growth rate and inflation rate are often determined by the broad policy consultation of the government in achieving accelerated growth and financial stability.

In a real-world situation, extraordinary independence and full autonomy to the central bank may not be easily achieved. Therefore, central banks like Bangladesh Bank can minimise political and other external pressure by constantly engaging with them and gaining public support for actions which may make Bangladesh Bank autonomous and effective.

Some attributes of interdependence are whether central bank can refuse credit to the government; can meet its expenses without depending on the government; its governor or board of directors can function independently; governor's independence in following monetary policy; freedom to choose its monetary instruments; and finally whether it is free to regulate the banking policy and the banks.

Full autonomy of the central bank can be exercised in achieving three types of independence: "Political", "Macroeconomic" and "Financial" independence. Political independence encompasses objectives like price stability, independent board of directors who will be appointed for long terms, separate from others, accountability of the central bank's action to the parliament and legislature and mechanism for complete resolution.

Macroeconomic independence indicates the formulation of monetary and exchange rate policies without any interference. Financial independence focuses on transparency of accounts, adherence to prudential norms, quasi-fiscal subsidies such as preferential interest rate, exchange rate guarantees, restriction of the distribution of non-cash profits and linkage of losses and net worth of the banks. Therefore, autonomy must be both "administrative" and "operational".

The main purposes of the Bangladesh Bank are monetary policy functions, bankers' bank, the banker of the government and regulators as well as supervisor of the commercial banks. The Bank of England (BoE), which deals with monetary policy functions and other functions, is regulated by Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) – two independent bodies under the overall guidance of BoE. Most of the central banks have dual functions like those of the Bangladesh Bank. Therefore, its tasks are enormous. The performance of the economy as a whole and that of the different sectors are closely linked with the performance of the Bangladesh Bank.

The vision and mission of the Bangladesh Bank are quite appropriate but putting these into action has faced serious challenges and limitations. In the context of the Bangladesh Bank, the debates on macro-economic issues centred around how Bangladesh Bank can set up monetary targets without political pressure and how far monetary policy can be implemented without any political and structural limitations. The authority of the Bangladesh Bank over the constituent banks and financial institutions has recently shown some limitations in controlling corruption, increasing non-performing loans, lack of good governance, weak management and finally erosion of public faith on banks. It seems the Bangladesh Bank, due to both "internal" (within the bank itself) and "external" (outside the purview of the bank) hurdles and finding, it difficult to exert effective control over the banking sector. The pressure groups of stakeholders namely Bangladesh Association of Bankers (BAB), an association of bank owners and the Association of Bankers, Bangladesh (ABB), an association of CEOs/ MDs of banks play vital roles in the regulatory aspects of the banking sector.

It seems that Bangladesh Bank due to both "internal" (within the bank itself) and "external" (outside the purview of the bank) hurdles, finding it difficult to exert effective control over the banking sector. The pressure groups of stakeholders namely Bangladesh Association of Bankers (BAB), an association of bank owners and the Association of Bankers, Bangladesh (ABB) an association of CEOs/ MDs of banks play vital roles in the regulatory aspects of the banking sector.

In Bangladesh, there is a 'dual' system of control of the banking sector. The state-owned commercial banks (SCBs) like Sonali, Rupali, Janata and Agrani and specialised banks like BASIC Bank Limited (Bangladesh Small Industries and Commerce Bank Limited), Bangladesh Krishi Bank (BKB), Bangladesh Development Bank Ltd (BDBL), and some statuary banks like Ansar VDP Unnyan Bank and Karmasangsthan Bank are controlled by the Bank and Financial Institution Division of the Ministry of Finance. On the other hand, all private commercial banks, foreign banks, non-bank financial institutions are regulated by the Bangladesh Bank. This 'duality' of control has resulted in uncoordinated often weak policy measures for the government regulated banks. The Bangladesh Bank has serious limitations to enforce prudential and management norms in these banks, which have made the whole banking sector weak and vulnerable through 'domino effect'.

To have an independent and effective Bangladesh Bank, three major steps are necessary: (a) a strong and independent central bank with more focus on core banking issues, (b) a well thought out set of prudential and management norms of the central bank that are not subject to frequent changes due to external political or administrative pressure, and (c) a system of prompt corrective actions for management of crises and legal or administrative actions against persons responsible for crises in a particular bank or the banking "system" as a whole.

In a real-world situation, extraordinary independence and full autonomy to the central bank may not be easily achieved. Therefore, a central bank like the Bangladesh Bank can minimise political and other external pressure by constantly engaging with them and gaining public support for actions which may make the Bangladesh Bank autonomous and effective. Whether in good or bad times, supervisors always face pressure from lobbyists and form politicians that can undermine the stability of the financial system. 

For the Bangladesh Bank to be successful in regulating the financial sector, it has to have very relevant and pragmatic "polices", prudential and management rules and ensure that these are fully followed by all banks and financial intuitions. "Discretionary" powers or "ad-hoc measure" have to be avoided to safeguard the independence and autonomy of the Bangladesh Bank. The typical case of "policy" versus "discretion" has to be resolved with the strong stance of the Bangladesh Bank where policies and rules will be supreme, and not the discretionary powers of any individual and agency. Time has come for the Bangladesh Bank to strike a balance, showing appropriate professional stance while avoiding the danger of politically motivated reforms in a highly technical domain.

Dr Salehuddin Ahmed, former Governor, Bangladesh Bank, Professor, School of Business, BRAC University