In the first article we discussed the Bangladesh Bank board and its central role in maintaining independence of the bank from the government.
Also Read: Bangladesh Bank needs to be free from influence
The Bangladesh Bank will work to support the growth targets of the government, keep inflation low, manage the financing of the government’s deficit, and operate the exchange rate system that the government wishes.
This article will focus on the powers and limitations of the central bank, the making of the budget of Bangladesh Bank within the framework of independence, and the governor as adviser to the government.
Powers and limitations
Most of the private banks in Bangladesh are listed on the stock market and so are partly owned by the general public.
The directors will own 30-50% of the shares, the general public the rest.
These companies should be permitted to run their own business affairs subject to meeting their public and monetary responsibilities.
Directors and senior officers of the private banks should meet “fit and proper tests” of financial integrity and demonstrated character.
Bangladesh Bank should not permit directors to serve who do not pass such tests.
Monetary responsibilities are the rules set up by the central bank for depository institutions, such rules being the public responsibility to safeguard the depositors' funds and the shareholders' investments against fraud.
But that is it.
The central bank should not set salary levels for staff, conditions of employment or interfere in the HR policies of the private bank.
The central bank should not interpose itself between employees and shareholders.
There is no meaningful basis for such intervention.
The Competition Commission has the responsibility of preventing banks from joining together to set salary scales or reducing other forms of competition.
The labour markets will generally handle this problem, providing competitive market compensation levels.
The management of labour comes under the Labour Laws of the country, not Bangladesh Bank.
There was a time when Bangladesh Bank staff were handing over resumes of persons that they wanted the banks to employ.
I had thought this practice had been stopped, but I hear that it has returned and there is a continuing demand to private commercial banks by Bangladesh Bank officers for jobs for their relatives or friends.
I can remember one case where a Bangladesh Bank officer had a little business going taking a payment if he could get someone a job.
The onsite inspection staff is the most vulnerable group as they are in direct contact with commercial bank staff.
The governor should put a stop to this with a penalty, if a central bank officer tries this; say half a month’s salary?
The private banks are also often asked to contribute to some fund for a project to benefit Bangladesh Bank staff.
All these practices the governor should forbid and insist that the bank staff not demand favors or financial contributions for facilities for the central bank staff.
This is in effect a tax on the earnings of the commercial bank.
I used to hear the argument many years ago that the banks had money and this type of request was insignificant.
The difficulty is that what begins small becomes big.
Working for the central bank is one of the most honourable positions that a citizen can have.
It is a privilege being given such responsibility and demands a high level of ethical behavior.
The governor should stress this and insure central bank staff live up to this privilege.
Bangladesh Bank has great power to be used in the public interest to ensure that the banking system operates in a way to direct resources to the best uses and to protect the depositors’ money.
It must recognize there is a limit to the use of these powers when the purpose is the personal benefit or profits of central bank staff.
Perhaps seminars or courses in ethical behavior are appropriate.
We have argued repeatedly that if one denies reasonable profit to the owners of the banks through excess regulation then you will find the owners engage in illegal or ethically dubious activities.
The directors must be held to a high standard but they must also be allowed to operate their banks within the rules that Bangladesh Bank establishes.
These rules should not deal with HR and labour issues.
Preparing the budget of the central bank
The annual preparation of the Bangladesh Bank budget covers five important expenditure categories:
a. The salary structure of the staff. Within limits the central bank should set its own salary structure.
There is no need for the Bank’s salary structure to follow the civil service.
The governor and the board must determine the appropriate compensation structure and defend it before parliament.
The central bank must be independent of the executive branch and approval of the salary structure comes through the responsible parliamentary committee, not the Ministry of Finance.
b. The level of employment.
The central bank carried out a very large increase in employment over the past twenty years, perhaps expanding too rapidly.
The requirements for staff must be worked out by the HR department of the central bank and appropriate recruitment carried out.
One important issue is the number of branches that are required; another is the requirement for onsite supervision.
c. The requirements for computer systems for the central bank.
Investments are needed in both personnel and equipment. Enhanced computer security is an urgent need and the central bank should be prepared to make such expenditures.
A fresh assessment of the central bank’s computer system security would be important as part of developing the investment program.
At present the central bank and the entire banking system is under threat.
d. The fourth component of the budget is training.
I believe major increases in training are required across the range of activities of Bangladesh Bank.
One component of training that I believe is insufficient comprises developing expertise in modern central banking. A program is needed to finance staff, newly joined as well as more experienced in completing Masters Degree programs in finance; internship of a year in major central banks [Federal Reserve and Bank of Japan, ECB, Bank of England, BIS.] One should avoid China and Russia as these are very different economies and the methods of central banking are really not relevant for a market economy like Bangladesh.
I am thinking of 2-4 year programs over a range of specialties.
For research the target should be a PhD in economics and finance.
Operational staff needs the experience of working in a modern central bank.
Existing programs should be expanded.All central bankers should spend time working in a commercial bank.
Newly recruited staff should all work in a commercial bank for six months.
Staff assigned to onsite and offsite supervision should spend six months in a commercial bank prior to their taking up the assignment.
e. Finally there are the capital and maintenance expenditures for the central bank in terms of offices, transportation facilities for staff branch housing and club facilities etc.
The approval of the budget should be in the hands of parliament not the Ministry of Finance.
Independence means that the Ministry of Finance should not be involved.
The approach I am suggesting here rests on achieving the fundamental objective of an independent central bank implementing a clear mission given by the government.
The responsible MPs would work with the governor and the staff in approving an appropriate budget.
The governor as adviser
The governor of Bangladesh Bank is perhaps the best informed person on the condition of the economy.
As such there should be a formal act of offering advice to the Prime Minister and the Minister of Finance.
In addition he should testify before the appropriate parliamentary committee twice a year.
With respect to presenting his views to the Prime Minister and the Minister of Finance, in my view there are four such occasions.
First, is early in the calendar year when the governor should give his opinion on the size of the budget deficit that should be undertaken during the next financial year and how it should be financed.
The focus is not on the purposes of the budget, but how large a deficit can be managed with respect to its inflationary impact and the impact on crowding out private investment.
The second occasion should be soon after the budget is approved and focus on the balance of payments for the next eighteen months, the working of the exchange rate management, recommendations on changes in the Foreign Exchange Act, and discussion on the removal of the anti-export bias of the trade policies, possibly with recommendations for change.
There might be two other annual meetings with the Minister of Finance: one such meeting would be a review of the state-owned banks and the strategy for managing their development.
Second, the governor would alert the Minister of Finance on any emerging problem banks and consider what might be necessary in the coming year to manage such problems.
The governor should testify to the Parliamentary committee twice a year at a scheduled time covering the outlook for the economy and the monetary policy the governor expects to implement during the next six month.
He would respond to the questions of the committee.
Ideally this testimony should be public or released soon after it takes place.
The governor could also carry out the following meetings on a formal schedule:
1. Once a year with the secretary of the Bangladesh Bureau of Statistics to discuss issues related to data that the central bank needs for its mission.
2. Once a year with the chairman of the Bangladesh Securities and Exchange Commission (BSEC) to discuss problems that might arise between the two regulatory organizations with respect to the listed financial institutions.
3. Once a year with the energy secretary to discuss the next two years projections of imports of gas, refined oil products, heavy fuel oil and diesel, and coal.
This is needed for the projection of balance of payments.
All such meetings should be formally scheduled events with such press coverage as is appropriate and with reports by the governor to the board.
This program enables Bangladesh Bank’s views to be known to the appropriate ministers and officials. Central bank’s strong staff will develop viewpoints that should be shared.
Forrest Cookson is an economist who has served as the first president of AmCham and has been a consultant for the Bangladesh Bureau of Statistics.
