qwertyuiopasdfghjklzxcvbnm uiopasdfghjklzxcvbnmqwerty qwerty uiopasdf ghjklzxcvbnmqwertyuiopasdf ghjklzxc vbnmqwertyuiopasdfghjklzxc ertyuiopasdfghjklzxcvbnmqw vbnmqw ertyuiop asdfghjklzxcvbnmqwertyuiop asdfghjkl zxcvbnmqwertyuiopasdfghjkl qwertyuiopasdfghjklzxcvbnm zxcvbnm

qwertyui opasdfghjklzxcvbnmqwertyui opasdfgh jklzxcvbnmqwertyuiopasdfghj klzxcvb nmqwertyuiopasdfghjklzxcvb tyuiopasdfghjklzxcvbnmqwer nmqwer tyuiopas dfghjklzxcvbnmqwertyuiopas cvbnmqwertyuiopasdfghjklzx dfghjklzx cvbnmrt yuiopasdfghjklzxcvbnmqwert yuiopasd

The Autonomy of Bangladesh Bank

ECO 432 Term Paper
Submitted by: Sardar Mohammad Imrose Sumaiya Mahabub Kazi Sakif Zaman Reza Maria Matin Samiha Moyeen

fghjklzxcvbnmqwertyuiopasdf ghjklzxc vbnmqwertyuiopasdfghjklzxc ertyuiopasdfghjklzxcvbnmqw asdfghjklzxcvbnmqwertyuiop vbnmqw ertyuiop asdfghjkl

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 Australias Reform:................................................20 Data Comparison:................................................................................................................21 Recent Trends and Observations: ................................................................................................... 26 Some Positive Trends.......................................................................................................... 27 Some Negative Trends ....................................................................................................... 30 Inflation in Bangladesh...................................................................................................... 31 Conclusion and Policy Recommendation.......................................................................................33 References:.......................................................................................................................................... 34

Page

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 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
Page

Rahman with a board of directors consisting of himself as the chairman, 8 directors, and 1

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

Page

Table # 1: Types of Independence

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 banks monetary objectives are weighted against the governments 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 to the banks target and if no weight is placed on the governments objectives. Conversely, the bank has no independence if the actual is heavily weighted on the governments objectives.
. Page

backed by the government. The bank has complete independence if the actual target is closer

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. ii. iii. Legal Measure by Cukeiman, Webb, and Neyapti GMT Index by Alesina, Masciandaro, and Tabellini 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 criteriaI. 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. III. IV. Government involvement in policy decisions: the independence is greater as the policy decisions are made with less and less participation of the government. Goal of monetary policy: When price stability is given the maximum priority, a bank is said to have a high level of independence. 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
Page

Messrs Grilli, Masciandaro and Tabellini via their formulated index called the GMT 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. ii. iii. iv. v. vi. vii. viii. Appointment of the Governor of the Central Bank without any influence of the Government. Governor of the Central Bank to be appointed for tenure of more than five years. Members of the Board of Directors to be appointed without government influence. Board members to be appointed for more than five years. There are no provisions where the government decides on who represents the board. There are legal provisions aimed to protect during conflict with government. No need for to seek approval in devising monetary policy. The charter must include provisions aimed to seek monetary policy stability as its core objectives. Economic Autonomy Criteria: i. ii. iii. iv. v. vi. vii. Easy credit to government at market interest rate. Credit is extended on a temporary basis. Central Bank does not participate in the primary market for public debt. There must be a limit on government borrowing from the central bank. There are no automatic procedures for the government to obtain direct credit from central bank. Central Bank sets the discount rate. Central Bank has no role to oversee the banking sector/share this role with another organization. There are a number of criterions that must be considered to assess the degree of 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.

Page

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= w1 CBIG Leg + w 2 CBIG Pol + w 3 CBIG PStab + w 4 CBIG Forx + w 5 CBIG MonPol+ w 6 CBIG AccTrans

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 = w 1= 5/26; w 2= 3/26; w 3= 3/26; w 4= 3/26; w 5= 6/26; w 6=6/26

Page

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 isnt the only issue of concern Absence of political influence allows the prices to be stable Legal measures do not indicate the actual 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 banks 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 governments interference in the central bank prevents the bank from making proper decisions regarding price stability. But others the governors being fired because they are inept at controlling the inflation?
Page

raise questions as such: Is it the political involvement that is producing high inflation or are

History of Central Banks Autonomy:

During the 1950s, 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 20
th

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 countrys 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 1990s 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 financial system. They operated in a rules based regime. Second, based on the experience of 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
Page

independence, target independence and instrument independence. Studies show that a bank

10

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 countrys 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. topic in question. This will later be followed by the observations and outcomes which had given rise to such a result. As we analyze Lybeks 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 Such will be achieved with the help of a model unearthed in various literatures relating to the

Page

11

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 Banks 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 BBs performance and the graphical representation of the GMT Index.

The Political Autonomy of Bangladesh Bank

Table # 3: Political Autonomy in Bangladesh Bank

Page

12

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 transparency of the monetary body. This is owing to occurrences where the political entities in the board have used their influence to promulgate decisions which were more beneficial to the incumbent governments 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). deserving for the position. Such a predicament also has had an adverse effect on the

Page

13

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

Page

14

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

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 BBs 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

Page

government borrowing since 1995-1996. Incapacity of the government to meet its

15

The chart above highlights that there has been significant increases in

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 BBs 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:

Page

16

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 BBs 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 focus on this. Bangladesh is a completely different issue and the subsequent sections of this paper will

Page

17

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, weve 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 change came through when the government adopted the Financial Sector Reform Program (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. Since then it has undergone major developments but the most significant

Page

18

government officials, as the banks 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 banks policies with those of the government. A list of panoramic objectives with regard to the interest of Bangladeshs 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 RBAs 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 supervision and regulation of commercial banks in 1998. The independence and governance 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

Page

19

Australian Prudential Regulatory Authority (APRA) being delegated the responsibility of

were done by the government alone. From the 6

th

of November 2007, the RBA has started

publishing its board meetings minutes and later since February 2008, it published cash rate announcements and short statements explaining banks decisions even if interest rates didnt change.
Frameworks of Reserve Bank of Australias 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 dont 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 the economy as well such as employment, output and so on. 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 only on reducing inflation but measures the weight of its actions on other aspects of

Page

20

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 Treasurers view shall stand but he has to present both the Boards 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.

Page

21

Graph # 2: Comparison of CBIG Index of Australia and Bangladesh

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

1.2 1 CB IG Inde x Sc ore 0.8 0.6 0.4 0.2 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

CBIG(Leg) CBIG(Pol) CBIG(Pstab) CBIG(Frx) CBIG(MonoPol) CBIG(Acctrns)

Year

Page

22

Graph # 4: CBIG Index Score (1991 2008) - Bangladesh

1. 2 1 e 0. 8 r o c S x e 0. 6 d n I G I B 0. 4 C 0. 2 0 1 9 9 1 2 9 9 1 3 9 9 1 4 9 9 1 5 9 9 1 6 9 9 1 7 9 9 1 8 9 9 1 9 9 9 1 Year 0 0 0 2 1 0 0 2 2 0 0 2 3 0 0 2 4 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2

CBIG(Leg) CBIG(Pol) CBIG(Pstab) CBIG(Frx) CBIG(MonoPol) CBIG(Acctrns)

It can be observed that Bangladeshs 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 governors 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. The political CBIG Index started off at 0.89 in 1991 but came down to 0.56 in 1996 and 2001 because of the governments 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

Page

23

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 BBs 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. The accountability and transparency index of BB has gradually increased from 0.17 in 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 governors accountability to the parliament. Also the regular monetary reports which have been published since 2006 have contributed to increasing accountability. The

Page

24

RBAs scores in this aspect have been 0.86 till 2006 and increasing to 0.95 in 2007 for the board meetings minutes it publishes.
Graph # 5: Comparison of Inflation of Australia and Bangladesh

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

Page

25

From the graphs above, we can see that Australias 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 BBs 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 banks 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.

Page

26

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.

Page

27

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.

Page

28

Graph # 9: Poverty Headcount Ratio

Source: World Bank, 2007

Graph # 10: Human Development Index

Source: World Bank, 2010

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.

Page

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

29

Some Negative Trends

Graph # 11: Employment in Bangladesh

Source: World Bank, 2009

Table # 5: Corruption Perception Index Bangladesh Ranked 134

Source: Transparency International, 2010

Page

30

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:

Page

31

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). 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

Page

32

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 Banks independence is limited. But the question remains whether central banks 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.

Page

33

References:
Arnone M., B.J. Lauren, J-F. Segalotto and M. Sommers, 2005. Central Bank Autonomy, Monetary Frame Works and Exchange Rate Regimes, IMF working Paper Ahmed, Haydory Akbar | Autonomy of Bangladesh Bank: Some Thoughts | Dhaka, Bangladesh: North South University, Young Economists' Forum; Conference Proceedings of Prime Bank International Conference of Young Economists (ICYE) 2007; pp. 9-15. Ahmed AKN, 1997. Of Deregulation and Central Bank Autonomy. Dhaka: University Press Limited Ahsan, A., Skully, M., & Wickramanayake, J. (2009). A Critical Analysis of Central Bank Independence and Governance in Australia and Bangladesh. JOAAG , 11-20. Bangladesh Bank Order, 1972 (Presidents Order No. 127 of 1972) incorporating all amendments there to up to March 10, 2003 Bangladesh Bank Annual Report 2004-05. Dhaka: Bangladesh Bank Cukierman A., 1992. Central Bank Strategy, Credibility, and Independence: Theory and Evidence, Cambridge, Massachusetts: MIT Press Data in Gapminder World. Gapminder. Date updated: November 2010. Date accessed: 23rd November 2010. < http://www.gapminder.org/data/> Eijffinger, Sylvester C. W. and Jakob de Haan. 1996. The Political Economy of Central-Bank. Department of Economics, Princeton University, Princeton, New Jersey. Fischer, S., 1995, Central Bank Independence Revisited. American Economic Review, Vol. 85, No. 2 pp. 201-206. Grilli V., D. Masciandaro and G. Tabellini, 1991. Political and Monetary Institutions and Public Financial Policies in Industrial Countries, Economic Policy: A European Forum, Vol. 6, October, pp. 342391. Lybek, T., 2004. Central Bank Autonomy, Accountability, and Governance: Conceptual Framework, IMF, Write-up for Presentation at LEG 2004 Seminar August 18, 2004 "Nonperforming asset." Investopedia. N.p., n.d. Web. 6 Dec. 2010. <www.investopedia.com/terms/n/nonperformingasset.asp>. Reserve Bank Independence. (1996). Reserve Bank of Australia Bulletin , 14-20. Walsh, Carl E. 2005. Central Bank Independence. University of California, Santa Cruz.

Page

34