Is central bank's autonomy under threat?
Shamsul Huq Zahid | Monday, 11 August 2008
If the media reports on the functions of the newly created macroeconomic policy unit under the ministry of finance are true, the top brass of the country's central bank should have ample reasons to feel frustrated.
The unit that has been, apparently, created at the advice of a powerful multilateral lender, is likely to undermine of the autonomy of the central bank guaranteed by law-the Bangladesh Bank Order, 1972.
A report published in a couple of Dhaka dailies, including this paper, late last week said the unit, which is designed to carry out a lot of functions, through a number of wings under its control would, among others, coordinate with the central bank the adoption and updating of the monetary policy, project money supply to the private sector and monitor interest and exchange rates.
The unit, a bureaucratic outfit, being headed by a joint secretary will have three deputy secretaries and nine senior assistant secretaries. More importantly, there will be a foreign advisor, to be recommended for appointment by the International Monetary Fund (IMF), in the unit. The IMF, reportedly, has already sent the name of the advisor to the finance ministry.
The creation of a unit in the finance ministry, apparently, is aimed at curbing the central bank's autonomy in the matters of monetary policy, interest and exchange rates.
The clause 7A (a) of the Bangladesh bank Order, 1972 clearly says that one of the major functions of the central bank will be formulation and implementation of monetary policy from time to time. In addition, under the clause 7A (c) of the same order, the BB is empowered to give "advice to the government on the interaction of monetary policy with fiscal and exchange rate policy, on the impact of various policy measures on the economy and to propose legislative measures it considers necessary or appropriate to attain its objectives and perform its functions".
The latest move has rather made the central bank dependent on the advice of the finance ministry.
Moreover, it remains unclear what will be the role of the 'council for the coordination of fiscal, monetary and exchange policies' after the creation of the new unit in the finance ministry. The clause 9A (1), of the BB Order, 1972 provides for the formation of such a council headed by the finance minister. The commerce minister, the governor of the central bank, secretaries of finance and internal resource divisions and the member (programming) of the planning commission are the members of that council.
The council which is mandated to meet at least once in three months is to coordinate macroeconomic framework, including fiscal, monetary and exchange rate strategies and policies. Now what should the council do if a bureaucratic outfit having the presence of a foreign advisor takes over its job?
Though in letter the central banks are to enjoy a certain amount of autonomy, in spirit they are deprived of the same in most developing countries. The political autonomy of the central banks in the developing country is far less than the economic autonomy enjoyed by them.
The autonomy of the central bank is best set by convention rather than statute, particularly in developing countries. The government does play a major role in ensuring such autonomy. Without a harmonious relationship between the government and the central bank having shared objectives it is hard to achieve successful policy outcomes. There is no denying that central bank of a developing economy cannot ignore the wishes and final inclination of the government. However, it remains a scared duty of the central bank to inform the government either formally or informally about the possible effects of the actions the government does often want the central bank to take.
There is no denying that the Bangladesh Bank is now enjoying more autonomy than what it used to enjoy in the eighties or before. With the financial sector reforms progressing throughout the 90s and thereafter, the Bank has gained more autonomy and more authority as a regulator.
It is obvious that the central bank would exercise its autonomy over the formulation of monetary policy, which is now prepared on half-yearly basis.
In a broad sense, the objectives of the monetary policy cannot be different from that of the country's economic policy. The objectives have always been to maintain price stability, accelerate investment, both domestic and foreign, and reduce poverty level through the creation of more jobs.
On the formulation of monetary policy, there should be no reason for any clash of interest between the central bank and the government. The central bank has always tried to go by the wishes of the government and market realities.
So, why should the government create an additional bureaucratic setup in the finance ministry to coordinate and give the uncalled for suggestions to the central banks in the matters that the central has been doing for decades successfully? Will not it create unwanted irritation in the relations between the central bank and the government?
It could be that the multilateral lender in question, which is installing a foreign advisor in the newly created unit in the finance ministry, has been behind the scheme of things with a view to getting its wishes in the matters of monetary policy and exchange and interest rates fulfilled. The central bank officials, for obvious reasons, are found to be independent minded and the outsiders find it difficult to get their wishes implemented through the former. But the same is not true in the case of government officials.
Besides, the nature of work that the newly created unit and wings under it will be doing is very much technical and requires specialized kind of people to accomplish. It remains to be seen how the officials of the administrative cadre collect, collate and analyze all the economic data, give suggestions and make effective coordination with the central bank.
The unit that has been, apparently, created at the advice of a powerful multilateral lender, is likely to undermine of the autonomy of the central bank guaranteed by law-the Bangladesh Bank Order, 1972.
A report published in a couple of Dhaka dailies, including this paper, late last week said the unit, which is designed to carry out a lot of functions, through a number of wings under its control would, among others, coordinate with the central bank the adoption and updating of the monetary policy, project money supply to the private sector and monitor interest and exchange rates.
The unit, a bureaucratic outfit, being headed by a joint secretary will have three deputy secretaries and nine senior assistant secretaries. More importantly, there will be a foreign advisor, to be recommended for appointment by the International Monetary Fund (IMF), in the unit. The IMF, reportedly, has already sent the name of the advisor to the finance ministry.
The creation of a unit in the finance ministry, apparently, is aimed at curbing the central bank's autonomy in the matters of monetary policy, interest and exchange rates.
The clause 7A (a) of the Bangladesh bank Order, 1972 clearly says that one of the major functions of the central bank will be formulation and implementation of monetary policy from time to time. In addition, under the clause 7A (c) of the same order, the BB is empowered to give "advice to the government on the interaction of monetary policy with fiscal and exchange rate policy, on the impact of various policy measures on the economy and to propose legislative measures it considers necessary or appropriate to attain its objectives and perform its functions".
The latest move has rather made the central bank dependent on the advice of the finance ministry.
Moreover, it remains unclear what will be the role of the 'council for the coordination of fiscal, monetary and exchange policies' after the creation of the new unit in the finance ministry. The clause 9A (1), of the BB Order, 1972 provides for the formation of such a council headed by the finance minister. The commerce minister, the governor of the central bank, secretaries of finance and internal resource divisions and the member (programming) of the planning commission are the members of that council.
The council which is mandated to meet at least once in three months is to coordinate macroeconomic framework, including fiscal, monetary and exchange rate strategies and policies. Now what should the council do if a bureaucratic outfit having the presence of a foreign advisor takes over its job?
Though in letter the central banks are to enjoy a certain amount of autonomy, in spirit they are deprived of the same in most developing countries. The political autonomy of the central banks in the developing country is far less than the economic autonomy enjoyed by them.
The autonomy of the central bank is best set by convention rather than statute, particularly in developing countries. The government does play a major role in ensuring such autonomy. Without a harmonious relationship between the government and the central bank having shared objectives it is hard to achieve successful policy outcomes. There is no denying that central bank of a developing economy cannot ignore the wishes and final inclination of the government. However, it remains a scared duty of the central bank to inform the government either formally or informally about the possible effects of the actions the government does often want the central bank to take.
There is no denying that the Bangladesh Bank is now enjoying more autonomy than what it used to enjoy in the eighties or before. With the financial sector reforms progressing throughout the 90s and thereafter, the Bank has gained more autonomy and more authority as a regulator.
It is obvious that the central bank would exercise its autonomy over the formulation of monetary policy, which is now prepared on half-yearly basis.
In a broad sense, the objectives of the monetary policy cannot be different from that of the country's economic policy. The objectives have always been to maintain price stability, accelerate investment, both domestic and foreign, and reduce poverty level through the creation of more jobs.
On the formulation of monetary policy, there should be no reason for any clash of interest between the central bank and the government. The central bank has always tried to go by the wishes of the government and market realities.
So, why should the government create an additional bureaucratic setup in the finance ministry to coordinate and give the uncalled for suggestions to the central banks in the matters that the central has been doing for decades successfully? Will not it create unwanted irritation in the relations between the central bank and the government?
It could be that the multilateral lender in question, which is installing a foreign advisor in the newly created unit in the finance ministry, has been behind the scheme of things with a view to getting its wishes in the matters of monetary policy and exchange and interest rates fulfilled. The central bank officials, for obvious reasons, are found to be independent minded and the outsiders find it difficult to get their wishes implemented through the former. But the same is not true in the case of government officials.
Besides, the nature of work that the newly created unit and wings under it will be doing is very much technical and requires specialized kind of people to accomplish. It remains to be seen how the officials of the administrative cadre collect, collate and analyze all the economic data, give suggestions and make effective coordination with the central bank.