The newly appointed Bangladesh Bank (BB) governor, Dr Ahsan H Mansur, has effectively started the reformation of the country's banking sector without delay. This is most hopeful as it has long been overdue. The new governor, being a strong proponent of macroeconomic governance, started his day with the bitterest task of swooping down on the top financial hooligans who simply emptied the banking sector through a wholehearted pairing with corrupt politicians in power. An objective assessment of what is happening at the central bank heralds the advent of a dark chapter for the oligarchs who plundered both the capital market and numerous banks simultaneously under the interest of the past rulers.

What the governor has kicked off is no less than a renaissance since his actions have begun to storm the castles and forts of the economic mafia who never thought of being caught red-handed because they governed the government. His prime actions endorse the importance of correcting institutions before talking about theoretical aspects. Dr Mansur is a sound pro-market economist who has equal respect for Smithian ethical doctrines, and he has not deviated from that: his market-based rules for exchange and interest rates are a testimony to that. He has remained different from his predecessors by signalling to the market that he will go after the money launderers and bank looters before fixing theoretical macro irregularities.

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Can the new leadership save the economy?

The revival of Bangladesh Financial Intelligence Unit (BFIU) is also a significant move. BFIU was like a cat without teeth under the two previous governors, while the Anti-Corruption Commission (ACC) was like an anaemic tiger without claws. Both the institutions are prerequisites for the well-functioning of Bangladesh Bank. The political domestication of both BFIU and ACC impeded BB's desired actions in many regulatory aspects. The judicial tardiness of default litigations at higher courts eventually made BB dysfunctional as a financial regulator. That is why many economists advocated for BB to have some magisterial powers to punish the wrongdoers at its own discretion.

The political domestication of both BFIU and ACC impeded BB's desired actions in many regulatory aspects. The judicial tardiness of default litigations at higher courts eventually made BB dysfunctional as a financial regulator. That is why many economists advocated for BB to have some magisterial powers to punish the wrongdoers at its own discretion.

Although the new BB governor has infused blood into the BFIU, pairing with the ACC or higher courts remains beyond his capacity. And that bureaucratic labyrinth will again give refuge to the wrongdoers when the next elected regime begins. The time has come to make some reform so BB can complete the task of judgement and punishment within the financial regulatory framework. Going to the ACC or courts for straightforward financial verdicts is just a waste of time and energy—a rigmarole which eventually helps the culprits. This injustice induces new entrepreneurs to default wilfully since dishonesty pays better. People want an end to this culture to make the banking system fair and self-propelled. We believe the banking commission, which is presumably under construction, will figure out what to do in this respect to remove the trap of judicial bureaucracy.

The institutional damage done by the immediate past BB governor, who was forced to resign after the collapse of the Awami League regime, may be vast quantitatively, but qualitatively it is perverted and infectious. The lax rules he endorsed for the loan delinquents—such as getting rid of the stigma as a defaulter by only adjusting 5-10 percent of defaulted loan—are hard to reverse. The past governor, a retired bureaucrat with no background in economic scholarship but noted as a lobbyist, endorsed a Chattogram-based business group to engulf a couple of banks, as the BB has recently revealed.

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Implementation of a banking commission to address challenges in the sector

The new governor's day dawns with the fight against that vicious conglomerate, which syphoned off millions of dollars from their possessed banks through terrible malpractice and the judicial impunity of the past government. This crusade will give the Bangladesh Bank a tough time. Economists who believe in ethics and politicians who respect minimum fairness must stand beside the new governor so he can bring some semblance of order in the country's banking system and punish the culprits by seizing their assets to adjust for their thefts. He wants to treat the cancer first before giving vitamins to the patient. And that makes him different from other policymakers.

We hope that the BB governor will continue the momentum and spirit to bring order and promote the economy. The prime objective of the central bank is to maximise employment and growth subject to maintaining a moderate level of inflation. The governor should require the banks to report their internal employment figures as well as annual profit figures. The banking administration will remain half-broken if the Financial Institutions Division (FID) at the finance ministry is not eliminated. The pay structure at banks is highly hierarchical and unfair. That must be addressed too. The interim government should appoint a competent leader at the competition commission, which is another example of a domesticated species with a retired bureaucrat at its helm. Institutional leadership must be merit-based, not just qualified for clerical work with unquestionable obedience.

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Issues our banking sector must address

Finally, Economic Adviser Dr Salehuddin Ahmed and BB Governor Dr Ahsan H Mansur must step in a highly measured way to form the banking commission, which will delink political clout from banking affairs for the sake of establishing a corporate culture so the financial sector can see some light at the end of the tunnel. To make it happen, the governor's position must be made constitutionally powerful to strike the final note of the renaissance.

Dr Birupaksha Paul is a professor of economics at the State University of New York at Cortland in the US.

Views expressed in this article are the author's own.

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The government is going to amend the Bangladesh Bank Order, 1972 to align it with global best practices and give the central bank more autonomy so that it can initiate steps to help the economy deal with pressure.

The central bank authorities have prepared the primary draft to modify the order and sent it to the government for approval.

It comes as the BB faces criticism for its failure to restore macroeconomic stability, bring down inflation, and bring back good governance in the ailing financial sector. 

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Why Bangladesh Bank needs to be fully independent

The International Monetary Fund (IMF) also raised questions about the current level of the autonomy enjoyed by the BB and recommended changes to the order.

"The order needs to be substantially amended so that price stability is the overriding objective of the new monetary policy regime, and governance arrangements are aligned accordingly," said the IMF in its technical assistance report regarding the central bank's activities.

There is no doubt that the central bank should enjoy full autonomy. At present, there is autonomy when it comes to rules and regulations. However, it is being impacted by the political economy

— Atiur Rahman Former governor of BB

Due to a lack of autonomy, the IMF said that the central bank is not able to take steps necessary for the economy, which has been witnessing one of its worst crises in recent times. 

It said the Bangladesh Bank Order (BBO) saw improvements following changes in 2003. However, no changes have occurred to the BB's governance arrangements regarding its autonomy, transparency and accountability since an assessment undertaken in 2018.

"BB's de jure autonomy …. could constrain BB actions in times of pressure."

"The amendment is needed so that it can enhance the de jure autonomy of the BB, enhance its accountability arrangements, and limit its direct lending to priority sectors."

The BB governor's post can be a constitutional one or the tenure of the post can be six years. If the post of the PSC chairman and ACC chairman can be constitutional, why not the governor's post?

— Mohammed Farashuddin Former governor of BB

The IMF said amendments should be considered as soon as possible, taking advantage of the momentum provided by the BB's announcement of the transition to an interest rate-targeting monetary regime.

The government told the Washington-based lender during the second review of the $4.7 billion loan programme in April that it would seek IMF's assistance while reviewing the draft amendments to the BBO to ensure that the order is consistent with international best practices by December.

It intends to submit the amendments for the cabinet's approval within the programme period. The 42-month programme was approved in January last year.

According to the draft amendments, notwithstanding anything contained in any other law in force, the BB will have the sole authority to issue any directive, directly or indirectly, to any bank or financial institution.

Mohammed Farashuddin, a former central bank governor, said if the central bank has strong power, it is good for the country. On the other hand, if it lacks power, its activities are still not disrupted.

Atiur Rahman, also a former governor, said there is no doubt that the central bank should enjoy full autonomy.

"At present, there is autonomy when it comes to rules and regulations. However, it is being impacted by the political economy."

According to Rahman, if the central bank enjoys autonomy, it would be helpful to keep the economy stable. When the government realises the autonomy's importance, it will be in favour of independence.

Both Rahman and Farashuddin emphasised making the post of the governor constitutional.

The tenure of the governor can be six years, said Farashuddin, who held the post from November 1998 to November 2001.

"However, when I say this, I get the response that the governor enjoyed limited power when you were the governor, but you were not blocked by anyone."

He said a governor has power legally. "The power is a symbolic issue. It depends on who uses the power."

The ninth governor of the BB said he did not allow the government to take any loans from the central bank.

Farashuddin said he depreciated the currency several times before informing the then finance minister though the power was vested with the finance ministry.

The seventh governor of the BB said there were strict policies about the number of people who could sit on a board of banks and their tenure.

However, in recent years, the rules have been relaxed. For example, the forbearance for loan repayments and the relaxed loan rescheduling policy had been offered by the central bank. Still, it has failed to rein in the upward trend of non-performing loans (NPLs).

Another mistake on the part of the BB was to introduce a 9 percent lending rate ceiling in April 2020, which made loans cheaper. The interest rate was made market-based only on May 8 this year following advice from the IMF. 

"Loan rescheduling is being allowed nine or ten times too. Interest waiver was given but it has to be stopped," Farashuddin added.

The IMF said some provisions of the order have given the government power that could constrain the BB's ability to "do whatever it takes" to achieve its objectives of price stability.

"The BBO section 82 also places the BB under the de facto control of the government of Bangladesh," it said.

A provision of the order called for establishing a council comprising the finance and commerce ministers, the governor, the secretary of the finance division, the secretary of the Internal Resources Division, and a member of the Planning Commission, for the co-ordination of fiscal, monetary and exchange rate policies.

The BB will ensure that the macro-economic framework as coordinated by the council is reflected in the policies of the BB, according to the provision.

"Therefore, the autonomy of the BB is not guaranteed," the IMF said.

The establishment of a dedicated body chaired by the ministry of finance to perform such coordination could also constrain BB actions in times of pressures, it added.

The central bank has shared data of the net international reserves (NIR) of Bangladesh for the first time.

The NIR now stands at $16.77 billion, Bangladesh Bank Spokesperson Md Mezbaul Haque told reporters yesterday.

The net reserves represent readily-available cash derived from gross reserves.

It is calculated by excluding short-term liabilities from the gross reserves in line with the International Monetary Fund's BPM6 formula.

The central bank usually calculates the foreign exchange reserves using two methods.

One is as per the Balance of Payments and International Investment Position Manual (BPM6), the method used by the IMF, while the other is produced using the central bank's own calculation method.

As per the BPM6 method, the gross reserves stood at $21.83 billion on June 30, up from $19.4 billion on June 26, the spokesperson said.

As per the central bank's own method, gross reserves stood at $26.88 billion on June 30.

Bangladesh's monthly import bill is around $5 billion, which means Bangladesh will be able to cover at least three months of import bills using the NIR.

Bangladesh also achieved the targeted foreign exchange reserves set by the IMF for the first time since agreeing to a $4.7 billion loan programme, which has also played a big role in tackling the forex crunch.

The target was set at $14.7 billion for June.

The reserves also received a boost on June 24, when the IMF approved $1.15 billion in the third tranche of the loan.

The country's foreign exchange market has been volatile because of higher dollar outflow despite the government's austerity measures, including controlling import payments.

Since August 2021, the forex reserves have fallen by $24 billion.