The Autonomy of Bangladesh Bank - ECO 432 Term Paper
The Autonomy of Bangladesh Bank - ECO 432 Term Paper
The Autonomy of Bangladesh Bank - ECO 432 Term Paper
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The Autonomy
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Bangladesh Bank
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ECO 432 Term Paper
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Submitted by:
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Sardar Mohammad Imrose
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Sumaiya Mahabub
Kazi Sakif Zaman Reza
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Maria Matin
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Samiha Moyeen
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Table of Contents
Introduction: ......................................................................................................................................... 3
Background: .......................................................................................................................................... 3
Theory of Autonomy:.......................................................................................................................... 4
What is Autonomy? ................................................................................................................ 4
The Rogoff-Conservative Model:....................................................................................... 5
Measuring Autonomy: .......................................................................................................... 6
The Legal Measure: ............................................................................................................... 6
The GMT Index.................................................................................................................... 6
Central Bank Independence and Governance: ................................................................. 8
Advantages and Disadvantages of Autonomy: .............................................................. 9
Relationship in Developing Nations: ............................................................................... 9
References: .......................................................................................................................................... 34
The Autonomy of Bangladesh Bank
Introduction:
It is sometimes criticized there is a glass wall around the Bangladesh Bank which
prevents it from being independent – BB is only autonomous by name but not in practice.
The purpose of this term paper is to identify whether BB is actually autonomous or not; if
yet, then to what extend – both in theory and in practice; and then see the effects of their
policies in recent economic trends to recommend some policy for future developments. The
following order will be maintained to facilitate the understanding of this paper:
Background of Bangladesh Bank
Theoretical Aspects of Autonomy
History of Central Banks’ Autonomy around the World
The Identification of the Extend of Independence of Bangladesh Bank
Case Study of the Reserve Bank of Australia to Observe the Practical Benefits of
Central Bank Autonomy and Compare with Bangladesh Bank
Observe Recent Trends to Construct Conclusion
Policy Recommendations.
Background:
The Bangladesh Bank is the central Bank of Bangladesh. The governor is Dr. Atiur
Rahman with a board of directors consisting of himself as the chairman, 8 directors, and 1
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secretary to assist him. The vision of the Bangladesh Bank is: “To develop continually as a
forward-looking central bank with competent and committed professionals of high ethical
standards, conducting monetary management and financial sector supervision to maintain
price stability and financial system robustness, supporting rapid broad based inclusive
economic growth, employment generation and poverty eradication in Bangladesh”
(Bangladesh Bank). The main functions of BB are:
Formulating monetary and credit policies;
Managing currency issue and regulating payment system;
Managing foreign exchange reserves and regulating the foreign exchange market;
Regulating & supervising banks and financial institutions, & advising the government
on interactions & impacts of fiscal, monetary & other economic policies.
Now that we have given a brief introduction of Bangladesh, we shall start analyzing the
interested topic. For understanding the effects of autonomy, we first need to understand
what autonomy for central banks actually mean. In the following section, the theoretical and
historical account of central bank autonomy will be elaborated.
Theory of Autonomy:
What is Autonomy?
The term autonomy, or independence, in context of Central Banks, refers to how freely
the monetary policy makers can conduct policies with little or no interference from the
government. Also referred to as the “autonomy” of Central Banks, the definition of
independence considers two important aspects. They are political independence and
economic independence (concepts elaborated later on in the chapter in relation to
Bangladesh), However, nowadays these aspects have more popular names: “Goal
independence”, “Target independence” and “Instrumental independence” (Lybek).
Goal Independence:
Allows the Central Bank to decide its own monetary goal and/or exchange rate system, exclusive to the direct
influence of the politicians. In the case of a floating exchange rate system, the central bank solely concentrates
on the monetary policy. Some common monetary goals are maintaining price stability, controlling money
supply or increasing real growth in the economy
Target Independence:
When the central bank is goal dependent, i.e. the state decides the macroeconomic objectives, it lets the central
bank set the target value to the goal and to come up with the policy instruments with which it will achieve the
target. For instance, if the state wants to keep the inflation rate at a low level of 2 percent, it will probably
adopt a contractual monetary policy where the interest rate is set at a very high level
Instrumental Independence:
This is probably the least independent dimension among the three that we have been discussing. The
government “consults” the central bank and sets the monetary target. The Central Bank is said to be
instrumentally independent as it is free to choose the policy tools to attain a macroeconomic goal. Besides that,
it is both goal dependent and target dependent on the government. The instruments applied by the bank are:
Open-market operations, discount lending and reserve require
In an alternate model, the Central bank’s monetary objectives are weighted against the
government’s objectives. For example, if the central bank supports a real output target which
is feasible with the natural rate of unemployment in the economy but lower than the target
backed by the government. The bank has complete independence if the actual target is closer
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to the bank’s target and if no weight is placed on the government’s objectives. Conversely,
the bank has no independence if the actual is heavily weighted on the government’s
objectives.
.
Measuring Autonomy:
There are several index and formulas derived to measure centre bank autonomy. For this
paper, we can to elaborate on three specific measurements or criteria:
i. Legal Measure by Cukeiman, Webb, and Neyapti
ii. GMT Index by Alesina, Masciandaro, and Tabellini
iii. Central Bank Independence and Governance (CBIG)
According to Cukierman, Webb, and Neyapti (1991), the legal measure of independence
of a central bank is based on four criteria-
index (1991) measures the independence of central banks. This index, with the contributions
of Cukierman (1992) divided the autonomy of Central Banks into two parts: Political
Autonomy and Economic Autonomy. Each of these was to be subdivided into multiple categories
as follows:
Political Autonomy Criteria:
i. Appointment of the Governor of the Central Bank without any influence of
the Government.
ii. Governor of the Central Bank to be appointed for tenure of more than five
years.
iii. Members of the Board of Directors to be appointed without government
influence.
iv. Board members to be appointed for more than five years.
v. There are no provisions where the government decides on who represents
the board.
vi. There are legal provisions aimed to protect during conflict with government.
vii. No need for to seek approval in devising monetary policy.
viii. The charter must include provisions aimed to seek monetary policy stability
as its core objectives.
autonomy of any Central Bank. Should any of these are fulfilled, a point is awarded. Based
on these values the respective indices are constructed (political and economic) which are
then averaged to get an overall rating of a central bank. The higher the score, the more
independent a central bank is.
Central Bank Independence and Governance:
The Central Bank Independence and Governance (CBIG) Index is a measure of the
freedom from political and financial market pressures that the central bank can pursue
during its operations. Several models have been brought forth by different authors but the
model suggested by Ahsan, Skully, Wickarmanayake (2006, p.60) best predicts the CBIG
Index. It is as follows –
Where,
CBIGLeg = Legal Index of CBIG (measures the independence that a central bank is granted by its acts)
CBIGPol = Political Index of CBIG (measures the political influence on the central bank operations)
CBIGPStab = Price Stability Objectives Index of CBIG (is the guideline provided to the central bank
to consider price stability as its main monetary policy objective)
CBIGForx = Exchange Rate Policy Index of CBIG (refers to the function of the central bank under a
fixed and a floating exchange rate system)
CBIGMonPol = Monetary Policy and Deficit Financing Index of CBIG (refers to the devising of
monetary policy, choosing the final target and regulating the government budget financing)
CBIGAccTrans = Accountability and Transparency Index of CBIG (the imposition of the rule that
the central bank is bound to disclose its policy changes and monetary policy statements to the public)
Weight = w1= 5/26; w2= 3/26; w3= 3/26; w4= 3/26; w5= 6/26; w6=6/26
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Advantages and Disadvantages of Autonomy:
Advantages Disadvantages
Absence of political influence allows the Legal measures do not indicate the actual
prices to be stable relation between the central bank and the
govt. Gap is huge in developing nations.
Alternate measure by Cukierman: governor
turnover
Governor turnover measures how frequently a central bank changes its governors. The
shorter the term in office, the stronger is the involvement of the government in the central
bank’s operations, the less is the independence of the bank. In developing countries, there is
a positive correlation between inflation and governor turnover. Advocates of independence
would say that this is a strong evidence of how the government’s interference in the central
bank prevents the bank from making proper decisions regarding price stability. But others
raise questions as such: Is it the political involvement that is producing high inflation or are
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the governors being fired because they are inept at controlling the inflation?
History of Central Banks’ Autonomy:
During the 1950’s, there was a financial crisis where the Federal Reserve had lost its
independence and so did the Bank of England. In 1951, it regained its independence and the
policy of independence was quite successful on lowering average prices.
Under the Bretton Woods era (mid 20th century), which was the post war period, the
countries were committed to fixed exchange rates so they could not conduct efficient
monetary policy. At the time, their goals were constrained by the gold convertibility. This
period has high inflation, and because of the gold convertibility problem, the banks could
not use monetary policy or set their goals and targets. This again strengthens the fact that
central bank independence is a primary determinant of a country’s inflation. After this period
when some major central banks like the European Central Bank and the US Federal Reserve,
went for central bank independence, their policies and goals resulted in sufficient lowering of
the average rate of inflation. After this in the 1990’s many developing countries adopted
central bank independence.
From the brief survey of the histories of the Bank of England and the Federal Reserve
several policy lessons can be discerned.
First, central bank independence can be helpful in dealing with financial crises. This was
the case in Western Europe during the classical gold standard era. The Bank of England and
its counterparts in Western Europe as publicly chartered banks of issue effectively
maintained a credible nominal anchor and served as an effective lender of last resort to the 10
financial system. They operated in a rules based regime. Second, based on the experience of
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the Federal Reserve in the interwar period, central bank independence can be harmful if it is
based on a flawed policy doctrine or a structurally flawed institution.
When the banks are not independent, certain targets for the policy is set politically, so
the Banks will choose the best means to achieve that target. The importance of central bank
independence comes to the forefront here primarily because politicians may seek to compel
the central bank to adopt measures that although in the short-run may boost economic
growth, in the long run will lead to an undesirable rise in inflation. Economic growth will
meanwhile return to its original level, or even sink to a lower level (as a result of the higher
inflation). A sufficient degree of independence from political influence allows the central
bank to resist such pressures.
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Observations from Table # 3:
The Governor who is the Chief Executive Officer of the Bangladesh Bank is also the
chairman overseeing the Board of Directors of the institution. His appointment
however is made directly by the government and for tenure of four years thereby
leading to a score of zero in the first two criterions. It may be added that the
appointment of the one in focus has not been in a situation where “competent
candidates for the post of governor are officially short- listed and the list made
public” (Ahmed, 2009).
As in the case of the Board of Directors of BB, there are to be nine members
including the Governor, of which four are to be from a civil society and three are to
be from the executive panel of the government. This explains nought values for
points three and four. In addition the fact that the tenure of board members from
the executive bench is to remain at the discretion of the government (point 5)
reduces political autonomy to a greater degree.
The analysis of the sixth point will be discussed later as it coincides with arguments
stated afterwards. The last two criterions will not be discussed as BB is already
fulfilling them.
Analysis:
1) The inclusion of members from the executive bench in the Board has raised many
eyebrows amongst many specialists in this arena. This arises from the ironic situation
that the government is appointing its own agents (i.e. the exec members) to ensure
that the goals of the government are realized by those whom the government had
appointed (the governor and from the civil society) as those most capable and
deserving for the position. Such a predicament also has had an adverse effect on the 13
transparency of the monetary body. This is owing to occurrences where the political
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entities in the board have used their influence to promulgate decisions which were
more beneficial to the incumbent government’s political agenda and less to the
economic benefit of the nation (in the long run). Examples include cases where loans
have been rescheduled for loan defaulters who were aspiring to stand under the
banner of the ruling party in the National elections (Ahmed, 2009).
2) As capable as the appointed governors may be there has not been an instance where
one has been reappointed (which is possible under law if he/she is below 65 years of
age). In other words there has been a new governor every four years. Such trends in
the change in governors and the political victory of an alternate party (AL/BNP) are
uncanny. These regular alternations have also led to a high value of governor turnover
which is not advised in developed nations.
3) The Bangladesh Bank seems to have inherent restrictions in the in the financing of
its operations too. One is able to state as such as the BB has to rely on the
deliberation of the Ministry of Finance for issues such as pay rises of its employees.
This is despite the fact that the BB prepares its own budget and has its own source
of earnings (Bangladesh Bank Order, 2003).
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Observations from Table # 4:
The first three criteria are the ones that should be of most importance as it provides
a clearer picture regarding the dependence of the Bangladesh Bank in the financial
sector. In the case of credit provision, one sees that Bangladesh Bank has little on its
way to control the flow of credit to the government or the ability to provide them at
rates which are relatively favorable compared to market rates (point 5).
Analysis:
1) A vital factor in assessing the degree of economic autonomy of any central bank
would be to monitor its provision of credit to its own government. In the case of
BB, it emerges that BB does not have the authority to restrict such flows of money
(Financial Sector Review, 2006, p.74). The following data gives a clearer picture:
15
The chart above highlights that there has been significant increases in
government borrowing since 1995-1996. Incapacity of the government to meet its
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revenue targets followed by reductions in foreign aid has left with the government
relying heavily on the BB. These huge amounts of credit were funded via the BB’s
express participation in the primary market (criteria 4, economic autonomy). Such
actions have had repercussions on the effectiveness of the BB as the reduced money
supply not only diminishes the effectiveness of future monetary policies but also
increases the risk of a crowding-out effect in the ‘private sector credit’ (Ahmed, 2009).
Many have voiced their collective opinion that there should be amendments made in
the charter of the BB to vest it with powers to deny such favors in the interest of the
economy.
2) A significant portion of the loans have been allocated to numerous public- sector
enterprises (e.g. Bangladesh Petroleum Corporation) of which most perform poorly
due to the existence of politicized unions, substandard asset and liquidity
management and problems related to human resource management. This makes
these institutions contribute to the “largest share of Non-performing asset” of BB
(Bangladesh Bank Annual Report 2004-2005). According to INVESTOPEDIA a
non performing asset is a debt obligation where the borrower has not paid any
previously agreed upon interest and principal repayments to the designated lender
for an extended period of time. The nonperforming asset is therefore not yielding
any income to the lender in the form of principal and interest payments.
As the criterions pertaining to the GMT Index have been discussed extensively, we can
now have a final look at the index itself. The following graph describes how the BB’s
autonomy fares with the rest of the world. Included in the chart are the autonomy indexes of
three broad classes: advanced economies, emerging markets and developing countries:
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Graph # 1: Bangladesh Bank Autonomy – Comparative Perspective
As commented by Ahmed in his paper, the results of the BB’s autonomy are suggests
that it is lagging behind even in comparison to the central banks of developing economies
(ie, India, Sri Lanka, Pakistan, etc). Additionally it is only the case of the BB where the mean
score of the economic index is lower than that of the political index. This goes on to support
previous arguments that there is an excess of political influence in the functioning of the BB
compared to its foreign counterparts. Whether or not increased independence will benefit
Bangladesh is a completely different issue and the subsequent sections of this paper will 17
focus on this.
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Case Study: The Reserve Bank of Australia & Bangladesh Bank
Now that we have a firm understanding of Independence of the central bank, lets focus
on its implications on the central bank of Bangladesh (Bangladesh Bank – BB). However,
before delving into scrutiny we are to derive some basic principles from a country which has
already undergone autonomy of its central bank and has been successful in devising its
monetary policies. For availability of data, and the amount of research work already done in
this topic, we’ve chosen the central bank of Ausralia (Reserve Bank of Australia – RBA)
which, in our opinion, befits the purpose of our research as we can see the explicit benefits
of central bank autonomy. This segment of the paper thus compares the central bank of
Australia (a developed nation) to the central bank of Bangladesh (a least developed nation).
The comparison will be carried out mainly in two forms. First, we are to see whether a
country with higher GDP per capita and lower inflation rate also has a higher CBIG (Central
Bank Independence and Governance) than that of a country with lower GDP per capita and
higher inflation. Secondly, any difference is to be identified and possible areas of
improvement for BB will be highlighted based on the empirical evidences provided from the
analysis of the functions of the RBA occuring over the period 1991 to 2008.
BB was established under the Bangladesh Bank Order (1972) immediately after the
independence of the country in 1971, when it served mainly as a department of the
government. Since then it has undergone major developments but the most significant 18
change came through when the government adopted the Financial Sector Reform Program
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(FSRP) in 1989. Results of the FSRP was a change, in 1990, to an indirect monetary
management from a rather direct intervention which was in practice back then. More recent
developments include those stipulated by the Bangladesh Bank Amendment Act which came
into enforcement from 2003. This Act reduced the term of the governor of BB to a period
of four years from five years and mandated the appointment of four directors, who are not
government officials, as the bank’s central management board. Also, importance was given
to functions such as domestic price level stability and introduction of a floating exchange
rate system. A co-ordination council was also formed to facilitate balance of the central
bank’s policies with those of the government. A list of panoramic objectives with regard to
the interest of Bangladesh’s welfare in various aspects were also specified in this Act.
Another ground breaking implementation for development of the BB was the Central Bank
Strengthening Project (CBSP) in 2003. Success of CBSP includes the establishment of a
Policy Analysis Unit (PAU) in July 2005 to increase the research and policy analysis capacity
of BB. From January 2006, BB has been publishing half yearly monetary policy statements as
well as their research papers to promote transparency since those explain their monetary
policy strategy and implementation tools.
The RBA has undergone many changes since the time of its inception in the year 1959
under the Reserve Bank Act. It was initially operated by the central banking division of the
government owned Commonwealth Bank of Australia and had set objectives such as
currency stability, full employment and economic proseperity and welfare of the the citizens
of Australia. Since 1959, the RBA enjoyed indepence to some level but amendments in the
the 1980s and 1990s further strengthed its position. These included several reforms occuring
over the years such as the responsibility of public debt management being lifted off RBA in
1986, official announcement of price stability to be an objective of the RBA in 1993,
agreement between the governor and the treasurer acknowledging RBA’s independence in
1996, introduction of publication of quarterly monthly monetary policy instruments
highlighting its perception of the economy and its course of action and the newly formed
Australian Prudential Regulatory Authority (APRA) being delegated the responsibility of
19
supervision and regulation of commercial banks in 1998. The independence and governance
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fostered faster after the government signed the statement on the conduct of monetary policy
with the RBA in 2007. This increased the statutory independece of the governor and deputy
governor to that of the Comissioner of Taxes and stated that their appointment was to be
conducted by the Governor-General in Council and can only be terminated upon approval
of each House of the Parliament in the same session of the Parliament. Previously these
were done by the government alone. From the 6th of November 2007, the RBA has started
publishing its board meeting’s minutes and later since February 2008, it published cash rate
announcements and short statements explaining bank’s decisions even if interest rates didn’t
change.
The fact that the RBA has enjoyed indepence to such a great extent has also given rise to
extra responsibilities amongst which is greater accountability. The RBA has been very
successful in this respect. The bank has developed a framework of its own which ensures its
independence and proper execution and is mainly based on four aspects as oulined below –
1) Multiple objectives – The central bank often has to deal with the trade off between
inflation and unemployment. It is generally known that these trade-offs don’t occur
in the long run and by long term, a period of five years or mone is referred to.
However, in the short run these trade offs do take place and it is up to the discretion
of the central bank to take decision at times, say for example, when inflation goes off
the track. Decisions have to be taken to bring inflation back to its normal level
constituting a real trade off with employment. Central banks can thus perform better
if their objective is not only to control inflation but other aspects of the economy as
well. During the second half of 1994 when there was an expectation of the interest
rate to rise above 2-3 percent at a certain period, the central bank resorted to a fairly
strict monetary policy to limit the rise in inflation and the period over which it would
occur. It was argued that such course of action benefitted Australia from the loss it
could have incurred by following a more stringent monetary policy – in terms of lost
jobs and output. This shows the multiple objectives of the RBA where it focuses not
only on reducing inflation but measures the weight of its actions on other aspects of
20
the economy as well – such as employment, output and so on.
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2) A flexible inflation target – Inflation target can be deemed to be an anchor for inflation
expectations and a way to make the monetary policies more deciplined. However at
times of dire need a flexibility helps the central bank to perform better. The RBA has
a target of maintaing 2 – 3 percencent inflation but this rate is flexible. It is also
consistent with the multiple approach concept since inflation has a cyclical effect on
employment and output – policies are allowed for only if their benefits outweight the
costs of lost employment and output.
3) Consultations between the Bank and the Treasurer – The Reserve Bank Act mandates such
a provision and this has been exercised in the RBA over the years which yielded
fruitful results. In this process both the governement and the central bank are aware
of the same facts – implying that both tell the same story. Also, central banks need to
be informed about the economic activities elsewhere, such as fiscal policies, as it
deals mainly with monetary policies. All these policies are connected and it is a good
idea to devise policies which benefit all the aspects of economy. At times of
disagreement, the Treasurer’s view shall stand but he has to present both the Board’s
view and his arguments for overriding those views to both Houses of Parliament.
4) A Good Board – A very important part of the framework is that the decision making
authority of the RBA should repesent a ‘real world’ dimension when considering the
policy options. The Board has the delegatory authority to take any decision on behalf
of the RBA including those with regard to lowering interest rates. The Board follows
a proper hierarchy where only the Chairman is allowed to speak on behalf of the
Board and the rest comprises of decent, competent people who take their job quite
seriously as evidence suggests.
Data Comparison:
In the following, a comparison of CBIG index between the two central banks’ will be
highlighted. As one can observe, the RBA has been able to maintain a higher overall CGIB
index whereas BB struggled. However, recently, the index score improved.
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Graph # 2: Comparison of CBIG Index of Australia and Bangladesh
1.2
1
CBIG Index Score
0.8
CBIG(Leg)
0.6 CBIG(Pol)
CBIG(Pstab)
0.4
CBIG(Frx)
0.2 CBIG(MonoPol)
CBIG(Acctrns)
0
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
22
Year
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Graph # 4: CBIG Index Score (1991 – 2008) - Bangladesh
1.2
e
r 0.8
o
c CBIG(Leg)
S
x
e 0.6 CBIG(Pol)
d
n
I
G CBIG(Pstab)
I
B 0.4
C CBIG(Frx)
CBIG(MonoPol)
0.2
CBIG(Acctrns)
0
1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8
9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 0
9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 0
1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2
Year
It can be observed that Bangladesh’s legal index to be constant at 0.32 till 2003, but
dropped to 0.28 when the term of the governor of BB was reduced to four years from five
years. However, the legal index of Australia increased to 0.67 in 2008 after being constant
for a period of 10 years (1998-2007) at 0.6. A possible reason for this might be that the term
of the governor has been increased to a period of 7 years. When the governor’s term is more
than that of the elected government, it leads to less influence by the politicians. Although the
legal power to appoint the governor is same in both the countries, the recent change in
Australian dismissal process keeps the standard of the RBA better than BB. The RBA was
freed from the responsibility of regulation and supervision of the commercial banks but the
BB was not. All these lead to a lower legal index score of BB. 23
The political CBIG Index started off at 0.89 in 1991 but came down to 0.56 in 1996 and
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2001 because of the government’s efforts to try to change the governor of BB during these
times. However, the index improved after the BB charter was changed in 2003. Reason why
BB scored poor than the RBA is that there was hardly any political influence in RBA but BB
had to consult the Ministry of Finance for every important decision. The turnover rate in
Bangladesh was strongly linked to changes in government and its representation in BB is
also higher than the RBA. However, the 2003 BB amendment act aims to put an end to this
problem.
The RBA scores a perfect Price Stability Objective Index of 1.00 and one of the main
reasons of it is that it had always considered price stability to be one of its objectives.
Inflation targeting and interest rate forecasting are considered to be vital macroeconomic
tools in Australia. BB strived to implement the inflation targeting system with the help of the
government but no provisions about it were mentioned in the legislation. It was not until
2003 that price stability was included in BB’s charter and the highest score marked was 0.56.
The exchange rate policy index of BB used to be zero until the currency was floated in
2003 achieving the highest score of 0.33. However, the government retains some right and
only entitles BB to little power over the exchange rate policies. In contrast, the RBA has
been responsible for the exchange rate policies in Australia ever since the currency was
floated in 1983. Their immense success in this aspect of intervening and stabilizing exchange
rate movement lead to a relatively higher score of 0.67.
Prior to 2003 the monetary policy and deficit financing index of the BB was only 0.22
since it had to follow direct orders from the Ministry of Finance – implying a very low
operational independence. Later a Coordination Council was established of which the
Ministry of Finance is the Chair and the BB governor is a member to facilitate
communication. In contrast, the RBA marks a high score of 0.83 since 1991 implying that it
has been independently handling the monetary policy and deficit financing independence.
One of the main reasons for this is that the RBA does not provide money to the
government and is in charge of the overall monetary policy.
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The accountability and transparency index of BB has gradually increased from 0.17 in
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2002 to 0.39 in 2003 and finally to 0.72 in 2006. Improvements as such occurred primarily
for the amendment act in 2003 which identified accountability as one of its objectives
increasing the governor’s accountability to the parliament. Also the regular monetary reports
which have been published since 2006 have contributed to increasing accountability. The
RBA’s scores in this aspect have been 0.86 till 2006 and increasing to 0.95 in 2007 for the
board meeting’s minutes it publishes.
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From the graphs above, we can see that Australia’s GDP Per capita is far higher than
that of Bangladesh and it has also been successful in maintaining an inflation rate lower than
Bangladesh. We analyze the data and interpret the graph in the later sections of the paper.
What we are to look at in this segment is whether the high GDP per capita and low inflation
rate of Australia leads to a higher CBIG Index. In other words, the relationship between
high GDP and low inflation with CBIG is to be highlighted.
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Some Positive Trends
Here we can observe that Bangladesh Bank has been able to maintain steady discount
rate throughout. There has not been any high fluctuation. After 2003, the discount rate has
been 5 %, which is lower than the call money rate (9% or higher). This shows that BB is
encouraging people to borrow money, which probably has a positive influence in our
investment and output.
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Graph # 8: Gross Domestic Product (Current Prices)
We can see that in terms of nominal rates, the GDP of Bangladesh has been increasing
throughout the years. Till about 2000, this growth was quite gradual, however, after that, the
growth has been exponentially high. This contributes positively to our economy and also to
help improve our lifestyle.
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Graph # 9: Poverty Headcount Ratio
poverty rate is decreasing and at the same time, the livelihoods of Bangladeshi people are
improving. So despite of poor autonomy, the people in general seem to be doing well.
However, there are obviously some areas for improvements which the following graphs
would depict.
Some Negative Trends
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Inflation in Bangladesh
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Graph # 12: Inflation Rate in Bangladesh
Here we can see that before 1990, the inflation rate in Bangladesh was very high. After
the Financial Sector Reform Program in 1989 (mentioned in the previous sections), the
inflation rate drastically fell. For about 10 years, it was low; however, there were years where
the rate peaked to very high levels (1995 and 1998). The reason for this is not poor monetary
policy, but natural disasters (a high percentage of our GDP is contributed by the agricultural
sector). The BB was successfully able to restore the price level to a lower rate the following
year, indicating good monetary policy makings. Moreover, the global financial crisis of 2008
did not have any immediate effect on Bangladesh because the governor of BB (during that
period) Dr. Salehuddin Ahmed was able to analyze, understand the situation, and took
precautionary measures (as discussed in a seminar by him at BRAC University).
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It is also seen that after 2000, the inflation rate has been increasing, and continues to.
Even though the price level did increase, the change was more gradual and it was easier for
people to cope up, instead of just suddenly having high prices the next morning (regardless
to say high price levels is not good for the poor people of Bangladesh). It must be kept in
mind as well that most of the inflation that took place in Bangladesh recently was due to
cost-push inflation, not necessarily poor monetary policies. BB has been able to keep up an
acceptable inflation rate, but this time, compared to previous data, the change/increase is
more gradual and adaptive.
Bangladesh today is a developing country and most likely that is the prime cause of this
poor autonomy. However, we gave seen that the practical benefits of autonomy is vast. If
Bangladesh wishes to be a developed country in the future, a strong financial sector and
price stability is needed, for which the autonomy of the central bank is beneficial. The
holistic development of our country will only be ensured if we can help curb down
corruption, improve education, provide more chances of employment, etc.
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