Central bank autonomy is crucial for the economy

The lack of independence had disastrous consequences

It is encouraging that the government recognizes the importance of having an independent central bank. The authorities are reportedly planning to amend the Bangladesh Bank Regulations of 1972, supposedly to bring them into line with global best practices and give it greater autonomy. This development comes at a time when the economy is going through one of its worst crises in recent years, with inflation still hitting new records. As experts have noted, failed government policies have been a major factor in the runaway inflation and other economic problems we are experiencing today. And the role of the government-controlled Bangladesh Bank in this disaster is particularly noteworthy.

It is arguable that many of our problems could have been avoided or better solved if we had an independent and courageous central bank. The government-imposed interest rate caps on both lending and deposit rates—at 9 percent and 6 percent—are a prime example of this. Perhaps a more independent central bank would have realized—and actually listened to the experts—that this was a flawed policy that would ultimately only fuel inflation. The decision to artificially inflate the value of the money was another disaster that could have been avoided.

Even before the recent economic crisis, the uncontrolled “looting” of our banking sector — under political patronage — had caused damage to our economy beyond imagination. These cracks are deepening today as the government, including the central bank, is not clamping down on non-performing loans and the policy towards defaulters continues to be relaxed. The government’s decision to provide continuous facilities for loan restructuring and interest waivers to defaulting debtors was not beneficial in any way. Therefore, we hope that the Bangladesh Bank will be given autonomy to pursue a more stringent policy towards wilful defaulters, without political intervention.

In its technical assistance report on the Bangladesh Bank, the IMF stated that “the bank’s governance needs to be significantly changed to ensure that price stability is the primary objective of the new monetary policy regime and that governance arrangements are adjusted accordingly.” We could not agree more. What is disturbing, however, is that a provision of the governance order called for the establishment of a council consisting of the finance and trade ministers, the bank’s governor and others. This will ultimately constrain the bank’s actions in times of stress.

Therefore, while the amendment initiative may sound good, its success in taking prudent economic decisions will depend on the degree of autonomy ultimately granted to the central bank. Earlier, despite talks of granting it autonomy, we have seen the government doing the exact opposite. Therefore, we hope that the amendment is not just an eyewash amidst the pressure for reforms. It has to be able to address the long-standing concerns about the functions and mandate of the bank. A Bangladesh Bank run by experts that protects the best interests of the nation is the need of the hour.