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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

History of Central Banks’ Autonomy: ............................................................................................ 10

Does Bangladesh Bank have Autonomy in the True Sense? ....................................................... 11

The Political Autonomy of Bangladesh Bank.............................................................. 12
The Economic Autonomy of Bangladesh Bank ......................................................... 14
Case Study: The Reserve Bank of Australia & Bangladesh Bank ............................................... 18
Bangladesh Bank Reforms: ............................................................................................... 18
The Reserve Bank of Australia Reforms: ...................................................................... 19
Frameworks of Reserve Bank of Australia’s Reform: ................................................ 20
Data Comparison: ................................................................................................................ 21

Recent Trends and Observations: ................................................................................................... 26

2
Some Positive Trends.......................................................................................................... 27
Page

Some Negative Trends ....................................................................................................... 30

Inflation in Bangladesh ...................................................................................................... 31

Conclusion and Policy Recommendation....................................................................................... 33

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).

Table # 1: Types of Independence

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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

The Rogoff-Conservative Model:

When modeling the independence of a central bank, the Rogoff-conservative central

bank model should be mentioned. In this model, the weight placed on inflation determines
independence. When the central bank places a heavier weight on the inflation rate than the
government, the bank is referred to as a “Rogoff-Conservative Central Bank:. This exhibits
both goal independence and instrument independence, because first, the bank wants to
reduce the inflation rate to a level much lower than that favoured by the government.
Second, it can freely use desired monetary tools necessary to achieve the target inflation rate.

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)

The Legal Measure:

According to Cukierman, Webb, and Neyapti (1991), the legal measure of independence
of a central bank is based on four criteria-

I. Appointment of chief executive: A bank is viewed to be more independent if the chief

executive is appointed by the central bank and not the prime minister or the
finance minister, and has a long term of office.
II. Government involvement in policy decisions: the independence is greater as the policy
decisions are made with less and less participation of the government.
III. Goal of monetary policy: When price stability is given the maximum priority, a bank is
said to have a high level of independence.
IV. Government borrowing from central bank: Finally, the level of independence is greater if
more restrictions are placed on the ability of the government to borrow from the
central bank.

The GMT Index 6

Messrs Grilli, Masciandaro and Tabellini via their formulated index called the GMT
Page

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.

Economic Autonomy Criteria:

i. Easy credit to government at market interest rate.
ii. Credit is extended on a temporary basis.
iii. Central Bank does not participate in the primary market for public debt.
iv. There must be a limit on government borrowing from the central bank.
v. There are no automatic procedures for the government to obtain direct
credit from central bank.
vi. Central Bank sets the discount rate.
vii. Central Bank has no role to oversee the banking sector/share this role with
another organization.
7
There are a number of criterions that must be considered to assess the degree of
Page

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 –

CBIGOverall = w1CBIGLeg + w2CBIGPol + w3CBIGPStab + w4CBIGForx + w5CBIGMonPol + w6CBIGAccTrans

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:

The following table summarizes the pros and cons of autonomy:

Table # 2: Pros and Cons of Autonomy

Advantages Disadvantages

Greater goal and instrument independence Complete independence is seen as a threat,

produces lower average inflation. Low prices questions the accountability of the central
signify a favorable effect on the economy bank. Maintaining a low and stable inflation
isn’t the only issue of concern

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

Positive correlation between inflation and

governor turnover in developing nation.

Relationship in Developing Nations:

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
Page

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.

As mentioned previously, there are mainly three types of independence: - goal

independence, target independence and instrument independence. Studies show that a bank
cannot have all three kinds of independence simultaneously. They mostly have any one of
the three. If we look at UK, the Bank of England lacks goal independence. This is because
the country’s inflation rate is set by the government. The Bank of England, even though it
lacks goal independence, it has high instrument independence because it is able to
manipulate its instruments and set its tools without the interference of the government. On
the other hand if we look at the US Federal Reserve, the goals are set by a legal charter, but
they are very vaguely described, thus, they translate these goals themselves into operational
goals.

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.

Does Bangladesh Bank have Autonomy in the True Sense?

As considerable time and effort has been assigned to the history and the current state of
central bank autonomy all over the world, we may now focus on the independence of Bangladesh
Bank (i.e. the central bank of Bangladesh); its respective degree and its subsequent causes.
Such will be achieved with the help of a model unearthed in various literatures relating to the
11
topic in question. This will later be followed by the observations and outcomes which had
Page

given rise to such a result.

As we analyze Lybek’s definition of the autonomy of a Central Bank, we find that

Bangladesh Bank fall under the category of Target autonomy. This, being one of the broader
forms of autonomy may project Bangladesh Bank to be relatively self-ruling. However such
a statement may prove to be otherwise as the definition proposed by Lybek focuses on the
“monetary policy aspects and not on the supervision and regulation of the financial sector”
(Ahmed, 2009). This is particularly significant in the case of Bangladesh owing to the fact
that whatever provisions might there be on paper may not necessarily be applicable (or more
importantly enforceable) in actual terms. To consider the operational aspects of Bangladesh
Bank’s autonomy along with its planning, there was a need to adopt a model more
appropriate and able to weigh in the dynamics of the Bangladeshi scenario. The answer
would be found in the works of Messrs Grilli, Masciandaro and Tabellini via their
formulated index called the GMT index (1991). The following tables will be analyses of BB’s
performance and the graphical representation of the GMT Index.

The Political Autonomy of Bangladesh Bank

Table # 3: Political Autonomy in Bangladesh Bank

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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
Page

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).

The Economic Autonomy of Bangladesh Bank

Table # 4: Economic Autonomy of Bangladesh Bank

14
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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:

Source: Bangladesh Economic review, 2005, MoF, GoB

15
The chart above highlights that there has been significant increases in
government borrowing since 1995-1996. Incapacity of the government to meet its
Page

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:

16
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 Graph # 1: Bangladesh Bank Autonomy – Comparative Perspective

Source: BB reform: changes and challenges, 2006, p.18

Calculation: Political Index= (2/8) =0.025

Economic Index= (1/7) = 0.143
BB Autonomy GMT Index= (0.25+0.143)/2 = 0.196

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.
Page
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.

Bangladesh Bank Reforms:

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
Page

(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 Reserve Bank of Australia Reforms:

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
Page

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.

Frameworks of Reserve Bank of Australia’s Reform:

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.
Page

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

Graph # 3: CBIG Index Score (1991 - 2008) – Australia

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
Page

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.
24
The accountability and transparency index of BB has gradually increased from 0.17 in
Page

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.

Graph # 5: Comparison of Inflation of Australia and Bangladesh

Graph # 6: Comparison of GDP per capita of Australia and Bangladesh

25
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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.

Recent Trends and Observations:

Even though the CBIG and GMT index scores are poor and the amount of government
borrowing from BB has been increasing after 2002, the overall CBIG index score of
Bangladesh improved than previous. It can be said that even though Bangladesh Bank is not
as autonomous as the RBA, but it has gained more independence over the years. But the
question now remains whether BB’s autonomy affects the overall scenario in Bangladesh. If
we can find that along with poor autonomy the economy and development is curbed, we can
say that central bank’s autonomy is essential. However, if the results are seen that despite of
poor autonomy, the overall indicators of development are well in Bangladesh, an alternative
conclusion can derive.

26
Page
Some Positive Trends

Graph # 7: Discount Rate of Bangladesh Bank

Source: International Monetary Fund, 2009

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.

27
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 Graph # 8: Gross Domestic Product (Current Prices)

Source: International Monetary Fund, 2008

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

Source: World Bank, 2007

Graph # 10: Human Development Index

Source: World Bank, 2010

29
In Graph # 9 and 10 we can observe that along with the annual GDP increase, the total
Page

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

Graph # 11: Employment in Bangladesh

Source: World Bank, 2009

Table # 5: Corruption Perception Index – Bangladesh Ranked 134

30
Page

Source: Transparency International, 2010

 In the above graph and chart we can see that in terms of employment, the current
percentage of formal employment is decreasing. This could be caused by various factors (ie,
increase in the informal sector, decrease of child labour, etc). As one of the visions of BB is
to help generate employment in Bangladesh, we can see that there is no real contribution and
neither is there any initiative to do so. However, the primary cause for this is probably
corruption. For two years running (2008 and 2009), Bangladesh has been ranked as one of
the most corrupted countries in the world by Transparency International (score of 2.4 out of
10 in both years – the lower the value, the more corrupt a country). The autonomy of the
central bank will in no country assure the decline of corruption; however, the corruption
does have an effect on efficiency.

Inflation in Bangladesh

One of the biggest duties of BB is to maintain a stable inflation rate. As a small

population of Bangladeshis are privileged, the price level plays a vital role. If things become
expensive, for few people it would not make much difference, but for most, it would get
very difficult to function properly. The following graph shows the inflation rate (average
consumer prices) of Bangladesh in various years:

31
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 Graph # 12: Inflation Rate in Bangladesh

Source: International Monetary Fund, 2008

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).
32
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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.

Conclusion and Policy Recommendation

In written constitutions, Bangladesh Bank is autonomous, however in theory it is seen

that Bangladesh Bank’s independence is limited. But the question remains whether central
bank’s autonomy is necessary for Bangladesh at this stage. We can see that despite poor
scores in the GMT index and CBIG index, Bangladesh Bank has been performing quite well.
The growth in our GDP, poverty reduction, and improvement in the human development
index all tends to show that the management board of Bangladesh Bank is not completely
controlled by the government, but then again, the poor condition of employment and the
inflation rate is growing every year beyond 5-6 % which indicates that there are still rooms
for improvement.

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.

33
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