Why is a Strong Central bank needed for Bangladesh?

Bangladesh finds itself at the economic crossroads today.

The country has shown considerable success in its economic development over the past 20 years, owing to sustained economic growth, expanded exports, reduced poverty, and investment in infrastructure.

This success deserves recognition.

To become an upper-middle-income country, Bangladesh must develop strong institutions rather than move along the path of least resistance.

One of the key attributes of institutional legitimacy is associated with the performance and independence of the Bangladesh Bank, the country’s central bank.

It might seem that some individuals regard central bank independence as purely a technical problem that concerns only economists.

However, it is an essential element of macroeconomic stability.

Central bank’s independence enhances the credibility of its policies, ensures the stability of inflation expectations, increases the discipline of the financial sector, and implies that the economy is managed on the principles of a long-term perspective rather than short-term benefits.

All these institutional features are highly relevant for the country that integrates into international economic relations.

The issue is not a hypothetical one but rather a pragmatic question of whether economic development can occur without increasing the central bank’s independence.

The Case for Independence: The Credibility of Monetary Policy
The effects of inflation are borne by all people; however, they disproportionately affect poorer households.

In a situation where the assessment of interest rates and liquidity is based on economic principles, the policy will be consistent.

When consistency reigns, uncertainty decreases, making it easier for consumers to make investment decisions as market expectations remain stable.

On the contrary, when individual expectations about money policy decisions deviate from economic principles, unpredictability increases.

As a result, firms tend to postpone investment, and families lack confidence, making it difficult to manage the economy as a whole.

It is clear why the independence of a central bank adds predictability to monetary policy, since it ensures that policymakers’ decisions stem from an accurate assessment of economic activity.

Order within the Financial Sector
In the presence of a well-developed banking sector, fair laws play a critical role.

The enforcement of prudent regulation must be consistent to guarantee appropriate risk management and bank soundness.

Supervision becomes less effective if the supervisor’s mandate is inconsistent or the regulator is perceived to have ulterior motives.

Forbearance might offer temporary respite, but the practice will eventually exacerbate the systemic weakness.

Professional judgment is essential in any regulatory decision, and regulators must not permit extraneous factors to affect their performance.

In addition, independent and impartial regulatory framework safeguards depositors’ interests while also instilling greater confidence in the financial industry.

Ability to Respond to Emergency Situations
Financial difficulties do not emerge instantly but require some time. Immediate action can help prevent the infection from spreading.

In times of emergency, the regulatory body must respond quickly, which is only possible if it has operational independence.

However, excessive regulation will slow down the process and increase costs. A modern financial market requires an active central bank that can respond to emergencies.

Institutional Environment of Bangladesh
With time, the Bangladesh Bank has played a crucial role in ensuring stability in the country’s economy.

Many individuals have been aware of this organization’s technical and professional capabilities.

With the development and evolution of the financial system in Bangladesh, there is a need to make changes to how institutions are regulated.

This does not mean the government is weak simply because of the central bank’s independence.

On the contrary, it indicates that people know that an advanced economy requires clear regulations and greater autonomy for the regulatory agencies.

What Else Can We Learn from Other Countries?
The Bank of England gained the ability to set interest rates independently in the United Kingdom in 1997.

The key changes include the following:
a. Creation of an expert Monetary Policy Committee;
b. Explicit anti-inflation policy measures;
c. Distinct division of fiscal and monetary functions;
d. Legal safeguards guaranteeing the stability of policy decisions.
These steps made policy feasible, kept inflation expectations unchanged, and boosted investor confidence. Even though institutional independence clarified which body is responsible for what, there was still accountability.

Following the Asian Financial Crisis, Indonesia introduced new policies regarding the operation of its financial system.

Although the Bank of Indonesia retains responsibility for monetary policy, Otoritas Jasa Keuangan (OJK) regulates financial markets. Such specialization improved monitoring, minimized conflicts of interest, and enhanced coordination in crisis management.

What Does “Independence” Actually Mean?
The fact that the central bank is independent does not imply that it is not being scrutinized. Rather, independence means:
Choice of policies informed by economic knowledge; Transparency in communications; Legal clarity; Accountability to Parliament and citizens; Ensuring institutional continuity during inter-election periods. Such systems ensure stability without undermining democracy.

Steps for Bangladesh’s Institutions to Adapt
With the improvement in the Bangladesh economy, there are several factors that can contribute to improving the efficiency of the institution:

a. Legal Mandate Precision: When the law states clearly what should be done, it becomes simpler to forecast the monetary policy.

b. Operational Independence: When operations are given more freedom to manage liquidity and currency exchange rates and also monitor their actions, they become much more flexible.

c. Increased Authority for Supervisors: Laws that give supervisors enough authority to intervene when institutions face problems ensure proper financial discipline.

d. Transparency and Information: Publishing regular publications and making announcements about policies adds credibility to the institution.

e. Coordination Between Institutions: The economy runs effectively if there is coordination between the institutions and fiscal authorities.

Relevance
The economic ambitions of Bangladesh have become more pronounced. At present, investments in infrastructure and export expansion are essential.

However, in the long run, institutional reliability will play an even greater role. International investors do not merely consider economic statistics but also evaluate the reliability of regulatory bodies.

An independent central bank guarantees continuity of policy, transparency of regulation, and economic stability. All of these factors are crucial to maintaining public trust.

The founding principle of the nation was political freedom. For the economy to expand and develop, it requires professionalism, trustworthiness, and institutional independence.

Making Bangladesh Bank more autonomous from an operational perspective is not merely a technical change; it serves to protect the bank and ensure that its operations align with the country’s development goals.

In today’s complex world economy, sound institutions can provide the greatest guarantee of stability.

(The writer is Professor of Finance and Moffett Chair, University of New Orleans; 2016 IsDB Prize Laureate in Islamic Banking and Finance; Member, AAOIFI Ethics and Governance Board and Chairman,
AAOIFI Education Board).