IMF calls for BB order amendment to 'ensure autonomy'

The International Monetary Fund (IMF) has recommended prioritising the amendment of the Bangladesh Bank Order (BBO) to enhance the central bank's autonomy and accountability by mandating price stability as its primary objective.

The IMF, in its report titled "Bangladesh: Technical Assistance Report-Interest Rate Corridor Adoption," made the recommendation saying that it is crucial to the transition of the new interest rate-based monetary policy regime from a reserve money-based monetary policy that was announced in July-December of 2023.

"Crucial to this transition is the amendment of the Bangladesh Bank Order (BBO) to give priority to price stability as the objective of monetary policy, to enhance BB's autonomy and accountability, and to eliminate direct BB lending to priority sectors," said the report.

This amendment should prioritise price stability as the overriding objective of the new monetary policy regime and align governance arrangements accordingly.

IMF report

The newly announced monetary policy regime marks a significant policy shift, and it provides an opportunity to realign BB's governance and operational frameworks with the new monetary policy framework.

The IMF mission, which is providing technical assistance to the Bangladesh Bank for the transition to an interest rate-focused monetary policy framework, recommended that the BBO, which holds the effective power of law, needs to be substantially amended.

This amendment should prioritise price stability as the overriding objective of the new monetary policy regime and align governance arrangements accordingly, it said.

Most importantly, this would enhance the de jure (legal) autonomy of the Bangladesh Bank, improve accountability arrangements, and eliminate direct lending by the central bank to priority sectors.

Amendments to the BBO should be considered as soon as possible, taking advantage of the momentum provided by the central bank's announcement of the transition to an interest rate-based monetary regime, said the report.

During the mission's discussions, Bangladesh Bank counterparts indicated that no changes had occurred to the central bank's governance arrangements regarding its autonomy, transparency, and accountability since the assessment undertaken during 18-30 September 2018.

Provisions in BBO Sections 10, 15, and 77 grant powers to the government, which, though seemingly unused to date, could potentially constrain the Bangladesh Bank's ability to "do whatever it takes" to achieve its objectives, especially if the bank is assigned a primary or overriding objective of price stability specified with a numerical medium-term inflation target, according to the report.

BBO Section 82 also places the Bangladesh Bank under the de facto control of the government, the report said.

After discussions with Bangladesh Bank officials, the IMF assessed that the bank's legal autonomy is not guaranteed by the Bangladesh Bank Order (BBO).

I believe the Bangladesh Bank Order has already vested sufficient power in the central bank. However, if there is no will to utilise the existing powers effectively, granting additional powers would be futile.

Dr Salehuddin Ahmed, former governor of the Bangladesh Bank

From transparency and accountability perspectives, BBO Section 38A holds the Bangladesh Bank accountable to the parliament. However, the absence of a primary objective for monetary policy complicates the Bangladesh Bank's transparency, communication, and accountability, according to the IMF report.

Former Bangladesh Bank Governor Dr Mohammed Farashuddin Ahmed told TBS that the IMF has urged to amend the BBO to enhance the central bank's autonomy, which is positive.

"However, larger proposals were suggested during my tenure as governor, but they were not implemented," he added.

He further said, "I believe the government will act on these proposals, as it typically follows IMF recommendations."

He also advocated for making the governor's position a constitutional post or ensuring a fixed term of six years without eligibility for reappointment.

Dr Salehuddin Ahmed, former governor of the Bangladesh Bank, said, "I believe the Bangladesh Bank Order has already vested sufficient power in the central bank. However, if there is no will to utilise the existing powers effectively, granting additional powers would be futile."

He said, "The central bank is accountable to parliament if it fails to control inflation. However, these issues are rarely debated in parliament, and there is little questioning on these matters."