Storm over central bank’s ‘autonomy’

Is the Bangladesh Bank (BB) independent?  The answer is both ‘yes’ and ‘no’.  The incumbent finance minister feels that the BB enjoys enough autonomy. But the central bank’s honchos seem to be not that satisfied with their current level of autonomy.

Late last week, Finance Minister AMA Muhith, while talking to the reporters on conclusion of his meeting with an International Monetary Fund (IMF) mission in Dhaka, vented his anger over a central bank proposal for acquiring greater autonomy.

Bangladesh BankThe minister told the media that BB had proposed an action programme to work with the IMF for enhancing its (BB’s) current level of autonomy, reports The Financial Express.

“They (BB) think they do not have much autonomy. But it is totally a lie. I have rejected the proposal. They consider them bigger than the government”, Mr. Muhith was quoted as saying.

Legally speaking, the Bangladesh Bank is not independent. The government appoints the central bank governor and nominates seven directors, including three from amongst the government officials. In the matters of coordination of monetary, fiscal and exchange rate policies, there is a coordination council, headed by the finance minister in the BB.

This is also true in the case of the Reserve Bank of India. The government of India does have a say in many issues. There are instances where the Indian finance ministry had tried to influence the RBI decision on interest rates. But as far as the banking sector regulator the RBI exercises full freedom.

The situation in Bangladesh is a little bit different. The BB has full freedom in dealing with monetary and exchange rate policies. Since it does not have any control over fiscal policy, it usually keeps a watch on the fiscal policy-related developments while formulating the monetary policy which is now a half-yearly exercise.

The discord over ‘independence’ in fact lies in regulatory control over the state-owned banks (SoBs). The government has all through been reluctant to give its management control over the SoBs. However, coming under pressure from the IMF, it had agreed to shed part of its control over the SoBs. It was because the government needed an extended credit facility worth $1.0 billion. In its Letter of Intent issued in March 2012 the government assured the Fund that necessary measures would be undertaken to increase operational independence of SoBs, strengthen their finances, broaden their capital bases with a view to corporatising their operations, minimising fiscal risks and reducing the government’s effective ownership under the BB’s guidance.

Through an amendment to the Bank Company Act, the government has given the BB the power to remove managing directors or chief executive officers in the event of any gross irregularities in the SoBs. But the real authority in the matters of controlling the public sector banks is vested in the Banks and financial institution division (BFID) of the finance ministry. The SoBs in addition to meeting social goals of the government do play a critical role during stressful time of the economy.

No matter who says what, the government is not willing to reduce its effective ownership of the SoBs. But what is the harm if the government gives BB the full regulatory control over the public sector banks as is the case with the private sector banks?

Has the central bank failed to regulate the private banks that control nearly 70 per cent of banking business? There is no denying that high interest spread is a drawback in the case of private sector banks. But in all criteria, the performance of the private banks has been far better than their public sector counterparts. All indicators including return on assets and return on equity are favourable. In terms of asset quality, capital adequacy ratios, non-performing loans the private sector banks have been enjoying certain edge over their public sector counterparts that often hit news headlines because of their lending-related scams.

The Bangladesh Bank order and the Bank Company Act do suggest that the central bank is not ‘bigger’ than the government. The people at the BB must be aware of that fact. What they might be wanting is an effective control over the SoBs. Most people do not know about the activities of the BFID and the power it enjoys over the SoBs.

When financial irregularities in the SoBs are revealed, accusing fingers are naturally pointed at the central bank. The common perception is that as the banking sector regulator, the BB, has failed to carry out its responsibility. But the situation on the ground is altogether different. There could be some failings on the part of the central banks in some regulatory matters. But the situation would have been far better had the BB been entrusted with full regulatory responsibility in the case of SoBs.