Upholding the autonomy of central bank

While it is important to uphold and protect the autonomy of Bangladesh Bank (BB), the citizens at the same time have the right to criticise when the BB goes wrong or express concern about the issues that the people think were not addressed by the BB properly. The central bank of any country is assigned with some common functions, of which the issuance of notes and currency, protecting the value of the issued notes and currency, and noticing the currencies it issued stand firm against other global currencies in the foreign exchange markets are important. In some countries, the supervision and regulation of private banking business are also assigned to it as an additional job - the same way BB here in Bangladesh operates.

BB as the central bank basically performs two functions: first, issuance of currencies and protecting their values; second, supervision and regulation of the business of private commercial banks and other non-bank financial institutions (NBFIs). Protecting the value of the currencies it issues means protecting the purchasing powers of those, and in that sense, it is said that one of the basic functions of any central bank is to ensure a non-inflationary growth in the economy. This is done either by increasing money supply or by taming the same. In a growing economy, if money supply remains static or held to a condition of no more supply, then a sort of price deflation may emerge in the economy, which is bad for investment and also for consumption.

A central bank always wants to see that the economy is lubricated properly with the use of money - dried-up or impairment of economic transactions because of shortage of money supply only lead to a slowness in the economy. How much additional money is to be supplied in a year is programmed by the monetary policy department of the central bank, and to increase or if needed to decrease the same, it uses the open market operation, which is a kind of limited auction market for buying and selling money by the financial intermediaries, and as instruments the BB uses the policy instruments called repos and reverse-repos.

If it wants to increase the money supply, it normally lowers the rates of repos and the opposite is done when it wants to see a contraction in the money supply. In doing so, it takes a host of factors into consideration, such as, the targeted gross domestic product (GDP) growth rate, the credit flow to the private sector, the state of price rise in the economy, and the state of its currency vis-à-vis other currencies in the foreign exchange market. Trade surplus or deficit is another factor that also influences BB's monetary policy. For a long period, the credit flow to the private sector was not upto the level of expectation.

High interest rate was blamed, partly, for low private investment flow in the economy. The BB does not fix up the interest rates directly, it is the demand and supply of investable fund in the economy that, at least theoretically, determines the interest rates. Most of the times in a year, the banks were having more idle money than they should have. But the paradoxical condition was that the interest rates did not come down to the levels they should have. Many blamed the imperfections in the business of banking, including the banks' piling up of a huge bad loan. The BB also was found to be too cautious in making more money available in the market, which we believe, because of its apprehension of an inflationary pressure in the economy.

The BB was found to be more concerned with the issue of inflation than the need for credit flow to the private sector. In recent months, a mild increase in the credit flow to private sector caused a raising of eyebrows in the BB and it ordered a cut in the ADR (advance deposit ratio) of the banks, programmed its broad money (M2) supply growth toward a slower pace. But the banks and the businessmen cried in chorus seeing the BB's tight monetary policy. They were able to bend some of the BB policies towards their interest, although the process and pattern of doing so was seen by many as an interference in the basic functions of the BB and also that of in its autonomy.

We want to say that the BB may perceive an issue wrongly, there we can criticise its policy, but the clients and the banks cannot force their will on the BB in the course of its very policy setting. The Ministry of Finance should have guarded more seriously the autonomy of the BB and in no way, there should have been a meeting of the BB Governor with the banks' clients and the sponsors at the same time at the same place to bring in a basic policy change in the BB's monetary policy.

The banks and their clients may cry loud for more money following the shortage of a liquidity in the money market, but they do not have the right to bring the BB Governor to sit down with them and announce a policy shift with regard to the BB's monetary policy. The example we set recently, if followed in future, we will see the demise, if not the death, of the independence of the BB. The central bank should also have guarded its independence jealously, as no institution remains independent in a country like ours unless the institution itself guards its own independence. If the BB does not remain independent or denied of its lawful independence, we may see one day the government. of Bangladesh is asking it for more loans by printing more money. That had happened in the countries where central banks were not independent.

Abu Ahmed is Professor of Economics, University of Dhaka. [email protected]