The principle legislation underpinning Bangladeshi monetary policy is the Bangladesh Bank Order of 1972, which created the Bangladesh Bank (BB) and conferred on it limited monetary and exchange-rate policy-making and implementation authority. The BB's operational authority was further strengthened with a 2003 amendment to that original Order. In its 2007 Article IV Consultation report on Bangladesh, the International Monetary Fund (IMF) noted that reforms aimed at strengthening central bank operations achieved some success, as did efforts to improve the exchange rate system. The BB used IMF technical assistance to attain significant improvements in its foreign exchange market function and raise public confidence in the currency. In addition, the BB improved its operations as central bank, enhanced its liquidity management, and expanded its capacity to oversee the banking sector as well as monitoring the compliance of the nationalized commercial banks with performance requirements. However, the publicly available information does not directly address Bangladesh's compliance with IMF's monetary policy standard.

General Overview

In its 2003 Report on the Observance of Standards and Codes (ROSC) focusing on fiscal transparency, the International Monetary Fund (IMF) also made brief mention of issues relating to the transparency of the central bank, the Bangladesh Bank or BB. According to this report, the Bangladesh Bank Order of 1972 confers upon the BB only "limited autonomy" (p. 9) with regard to monetary and exchange rate policies, both in their design and implementation. However, a 2003 amendment to the original legislation extended the Bank of Bangladesh's operational autonomy to a greater degree.

According to the Bangladesh Bank's website, the BB was first established in 1972 with the passage of Bangladesh Bank Order No. 127. This Order established a 9-member BB Board of Directors, charged with oversight and direction of the bank. The BB's governor chairs the board with the assistance of the bank's deputy governor. There are three senior government officials, and four additional persons who are selected for their experience in relevant fields. All board members are nominated by the government. The board is required to meet six times annually, at a minimum, with at least one meeting held every quarter. The BB's primary objectives are the regulation of currency supply and maintenance of reserves; management of the monetary and credit system to maintain stable currency valuations; and promotion of growth, production, employment, and real income.

In its vision statement on the website, the BB declares its commitment to ensure "the quality of services and the competence of its staff," and to "operate as a modern, dynamic, effective, and forward-looking central bank to manage the country's monetary and financial system." To achieve these goals, the BB formulates and implements monetary policy, pursues policies that maintain a stable currency, and sets policy priorities that are consistent with the government's fiscal and other macroeconomic policies. In addition, the BB may propose laws or amendments to further its objectives and improve its performance. According to the BB's mission statement, the bank's operations are guided by a philosophy that places a high value on "a sound regulatory framework conducive to the operation of efficient market mechanism, along with transparency and accountability, professionalism, ethical standards, adoption of modern technology in operational and decision making processes, and trust and respect in all relations." In sum, according to the BB website, the aim of the BB's monetary policy is to contain inflation while fostering sustained economic growth, along with its other responsibility of offering the government policy advice on deficit financing and the management of the public debt. The BB also affirms its commitment to compile the necessary statistics to achieve its mission and to carry out economic research to support its decision-making and government advisory functions.

In a 2004 IMF report, mention was made of the authorities recognition that monetary operations needed to be improved, specifically in the way in which the interbank and securities exchange markets function. Liquidity management by banks was to be enhanced through "strengthening and deepening the primary dealer system" (p. 9). In its 2007 Article IV Consultation report on Bangladesh, the IMF noted that reforms aimed at strengthening central bank operations achieved some success, as did efforts to improve the exchange rate system. According to this report, the BB used IMF technical assistance to attain significant improvements in its foreign exchange market function and raise public confidence in the currency. In addition, the BB improved its operations as central bank, enhanced its liquidity management, and expanded its capacity to oversee the banking sector as well as monitoring the compliance of the nationalized commercial banks (NCBs) with performance requirements. The privatization of one NCB (the Rupali Bank), and the offering for sale of another is seen as a good step towards the ultimate divestment of all remaining NCBs.

The 2007 IMF report suggested that the BB seek to further tighten the money supply, noting that the principle monetary policy challenge has recently become "ample liquidity." According to the report, "although currency growth has declined in the last three months, monetary aggregates continue to exceed program targets" (p. 11). In January 2007, the BB maintained a commitment to cautious restraint, but rising inflation (exceeding 7%) and rising fuel prices call for action to offset the inflationary trend by means of monetary tightening. Contrary to IMF expectations, the Bangladeshi authorities argued that there was a danger in tightening monetary policy for fear that it might have a negative effect on growth. Some improvements in the conduct of monetary policy were noted. The IMF 2007 report stated that the BB is moving toward the adoption of a more market-based model, and government borrowing has become more predictable. The BB is expected to be called upon less frequently to absorb primary issues of government securities. This would permit the BB to make transactions in government securities in the secondary market, its primary monetary policy instrument, with secondary reliance on repos, reverse repos, and the sale of BB securities. The BB remains committed to a flexible exchange rate policy as well, which the 2007 IMF report applauded, particularly as the BB confines its interventions to "countering disorderly conditions and building reserves to targeted levels" (p. 12). Greater exchange rate flexibility deemed possible by the IMF staff, given the current "ample" reserves. Bangladeshi authorities accepted the prospect of greater movement in the exchange rate, but were not prepared to set forth a timetable for the removal of the current exchange restriction. Continued work on restructuring and divesting the NCBs was recommended as important for improving the soundness of the banking sector, but the IMF stated that this will require that qualified directors be appointed to carry these reforms forward. According to the 2007 report, financial intermediation would also be enhanced by reforms in the NCB sector. The BB responded to the IMF's recommendations by agreeing to the need for stronger banking regulations and closer monitoring of credit growth. Amendments to the Banking Companies Act have been proposed, which will provide for stronger loan classification standards.

In general, the IMF 2007 report recommended that the BB follow up on recent reforms implemented in the financial sector, and reiterated its encouragement of a tighter monetary policy in the face of expected inflationary pressures that could continue into 2008. In the words of the report, it would also be good to develop the secondary securities market, because this "would contribute to enhancing monetary policy and support financial sector development" (p. 18).

The Principles

Clarity of roles, responsibilities and objectives of central banks.

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Whereas there is no publicly available information that directly addresses Bangladesh's compliance with this principle, an entry in the online "Banglapedia," produced by the Asiatic society of Bangladesh, reported that the legislative underpinnings of the BB include a range of individual acts and orders, including: Bankers Books Evidence Act of 1981, Insolvency Act of 1920, Banking Companies Ordinance of 1962, Bangladesh Bank order of 1972, Foreign Exchange Act of 1986, Money Loan Court Act of 1990, Banking Companies Act of 1991, Financial Institutions Act of 1993 and 1993 Rules, Companies Act of 1994 and Bankruptcy Act of 1997. The IMF's 2003 ROSC on fiscal policy pointed out that the Bangladesh Bank Order of 1972 conferred limited authority on the BB insofar as monetary and exchange rate policies are designed and implemented, but that a 2003 amendment to that order provided the BB with even greater operational authority. The Banglapedia article also notes that the BB's mandate confers upon it the power to serve as the banking system's "watchdog." According to this entry, "no bank can commence banking business in Bangladesh and no existing bank can open a new branch in or outside the country or shift any branch from one place to another without obtaining a license/permission from the BB."

Open process for formulating and reporting monetary policy decisions.

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Although there is no publicly available information that directly addresses Bangladesh's compliance with this principle, the BB website specifies that both the formulation and implementation of monetary policy is the responsibility of the BB's 9-member board of directors. All members of the board are government appointees. The board is chaired by a governor, who is assisted by a deputy governor, three senior government officials, and four additional members selected for their experience in relevant fields. The board is required to meet at least six times annually, with at least one meeting held every quarter. Monetary policy formulation is assisted by the input of the BB's research department.

The BB website also discloses that the bank has a Monetary Management and Technical Unit which is responsible for preparing a range of reports. These include annual and quarterly reports on monetary, credit, and reserves programs, as well as fortnightly and monthly reports on the current economic situation. These latter reports are submitted to the Prime Minister and Minister of Finance. In addition, the unit provides a variety of analytical reports and a report called the Current Economic Trend, which covers major economic developments and is used in the regular meetings of the board of directors. The unit also compiles data, prepares reports, and responds to queries raised by the IMF, World Bank, and other international bodies, as well as such domestic entities as the various ministries and the parliament.

Public availability of information on monetary policy.

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Although there is no publicly available information that directly addresses Bangladesh's compliance with this principle, the BB website discloses a variety of sources of information on monetary policy that is available in electronic form to the general public. The BB's Research Department is responsible for preparing the Annual Report and Quarterly Bulletins. Other reviews are produced that cover the monetary and credit situation, balance-of-payments data, the exchange rate and the price of gold, import and export data, information on the governments revenues and expenditures, and consumer and commodity prices. Such reports may be issued on a weekly, monthly, quarterly, or annual basis. There is as yet no legislative mandate for simultaneous release of all data, and the current policy is to provide access "on demand" prior to any general release. There are, as yet, no advance release calendars, but these are currently under consideration. Bangladesh is not a subscriber to the IMF's Special Data Dissemination Standard, but participates in the less stringent General Data Dissemination System (GDDS). According to the GDDS website, revisions to published data are identified in footnotes, and changes in methodology are announced in the monthly "Economic Trends", the quarterly "Bangladesh Bank Bulletin" and quarterly "Scheduled Banks Bulletin."

Accountability and assurances of integrity by the central bank.

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Although there is no publicly available information that directly addresses Bangladesh's compliance with this principle, the IMF conducted a "safeguard assessment" on the BB in 2005, in which it determined that the BB needed to improve the safeguards that were then in place. The IMF's 2005 Article IV Consultation report specifically identified weaknesses in the following areas: "legal, financial reporting, internal audit, and internal control" (p. 36). In the 2003 ROSC, the IMF suggested that authorities establish an oversight committee that would ensure "the incorporation of clear assurances of data quality, specifically, a statement of reconciliation at the macroeconomic level between fiscal and monetary and external data sets" (p. 24).