Mansur’s decisions might have been unpopular, but were necessary

In reality,  whenever a political government assumes office in any country, it is quite common for them to make changes in key positions across state institutions. This happens not only in Bangladesh but around the world. Governments tend to appoint individuals who align with their own vision, ideology, and policy objectives. 

Even in technical or professional positions, new appointments are often made based on who the government believes can effectively implement its agenda. So, from that perspective, appointing a new governor is not surprising. Many may have anticipated that such a change could happen.

However, in my view, the transition could have been handled more gracefully. If a change was inevitable, it could have been done in a more dignified manner. Instead of the outgoing governor learning about his removal through the media and having to leave abruptly, he could have been informed formally and respectfully.

After all, he was the governor of the central bank, a highly prestigious and important position. In any country, the central bank plays a crucial role in the overall governance structure. It is economically vital and institutionally significant. Those who lead such institutions are respected public figures, and their departure should reflect that respect.

Now, if we talk about the challenges in the banking sector, we must remember that when Dr Mansur took office in August 2024, he inherited a deeply fragile sector. Restoring discipline and rebuilding stability required a series of difficult measures. 

He initiated several important steps. For instance, he dissolved the boards of several banks and reconstituted them. Asset quality reviews were undertaken to assess the real health of weak banks. Various reform policies were introduced and existing frameworks were reviewed and strengthened. Amendments to the Banking Companies Act and formulation of the Bank Resolution Act were part of the reform initiatives 

He also took steps to modernise and revisit the Bangladesh Bank Order of 1972, which relates to the autonomy of the central bank, though that reform remains pending at the ministry level.

One of the major weaknesses in our banking sector has been non-performing loans. Through the asset quality review process, the true condition of the first batch of six weak banks was assessed. A long-term plan, spanning around 10 years, was considered to restructure and merge weak banks. These decisions drew criticism and were not universally popular. 

But sometimes, for the medium- to long-term health of the banking sector, unpopular decisions must be taken. If mergers and restructuring are properly implemented, they can ultimately strengthen those institutions.

The point is, the reforms cannot produce results overnight. Structural reforms take time. They require continuity. Many legal changes are still pending. There is work to be done in regulatory strengthening, in reducing non-performing loans, and in determining whether weak banks should be merged or handed over to stronger entities. These are tasks for the future. The new governor will have to carry forward this reform process.

The central bank's role is complex. On one hand, it must control inflation, sometimes by tightening monetary policy and increasing interest rates to curb excess liquidity in the market. 

On the other hand, it must ensure that investment is not discouraged by excessively high interest rates. Balancing price stability with investment growth is not easy. Moreover, inflation in Bangladesh is not driven solely by excess money supply. 

Supply-side constraints, market monitoring failures, fiscal policy pressures, and increased government expenditure also contribute to inflationary pressure. Monetary policy alone cannot resolve these issues. It must work in coordination with fiscal policy and market regulation.

The former governor took charge at a critical moment and initiated several necessary reforms, even though immediate results were not always visible. Inflation remained a challenge, partly because of structural supply issues in the market. Nonetheless, the policy direction had begun to change.

The banking sector is the lifeline of our economy, and it is also an area where powerful vested interests operate. In the past, we have seen large willful defaulters with strong political connections influence outcomes. To prevent that, reforms must be institutionalised and backed by strong legal frameworks so that Bangladesh Bank can act independently.

We have also seen periods where lending rates were artificially capped, for example, loan rates fixed at 9% and deposit rates at 6%; even when inflation was higher than those rates. Such distortions were influenced by political considerations and powerful interest groups. That is why the autonomy of Bangladesh Bank is extremely important. The governor must be given the space and institutional freedom to make independent decisions. Without that autonomy, meaningful reform will always face limitations.

Ultimately, ensuring the independence of the central bank and giving its leadership the operational space to function professionally is essential for sustaining reform and protecting the long-term stability of the financial system.

Dr Fahmida Khatun is the Executive Director of the Center for Policy Dialogue (CPD).