Do we really need a central bank?

Pet doors are small portals at the bottom of doors to let pets move in and out of the house. Sir Isaac Newton once made one big hole for a cat and one small hole for its kittens in the same door. We are not sure whether Newton really made it, but the main lesson of this parable is that you don't need to cut a separate small hole when both the big cat and the small kittens can pass through the big hole alone, making the smaller one entirely redundant.

Similarly, if the finance ministry can eventually dictate all major policy decisions in banking, do we really need a separate central bank? Why can't we make the central bank a minor wing of the finance ministry and house regulators inside the secretariat? That type of merger will be cost efficient for the government, ruling out any possibility of disagreement between these two authorities.

Recent news on how the ministry galvanised the ultimate decisions on the extended family-based directorship in banks, and the approval of new banks, created enough apprehension among professionals that we are heading towards a Zimbabwean style central bank, where President Mugabe abused the institution to make it nothing more than an obedient money-printing factory.

The recent developments vindicate how aggressively the ministry turned down all findings of the central bank and did whatever seemed politically expedient. The central bank seemed no less desperate to prove its "good boy" image before the ministry by swallowing non-market irregularities such as high interest on sanchaypatra, augmentation of family-based directorship, and lastly, the approval of new banks. And if the central bank has repeatedly failed to be a custodian of interest-rate rationalisation and corporate development, do we really need a central bank?

The way the finance ministry is interfering in the Bangladesh Bank's affairs is contradictory to the Bangladesh Bank Order. There was an important amendment in the early 2000s that restricted the ministry from randomly intervening in the affairs of the central bank. By law, Bangladesh Bank should enjoy a considerable amount of independence. The government must ensure that the regulator can work safely within the bounds of law. Otherwise, blaming the central bank for every failure is utterly unfair. Having realised the weakness of the central bank, greedy defaulters are taking advantage—reflected by a crescendo of bad loans. Default loans have risen remarkably since the fund heist in early 2016 when the ministry got enough "excuse" to virtually take over the residual authority of the central bank. As a result, habitual defaulters find it wise to "manage" the ministry, easily defying the central bank.

A person need not be an economist to understand that we already have too many banks (57)—adding more will simply make the industry worse as the new banks which came a couple of years ago are already grappling with loan issues and credibility with depositors. The recent debacle in Farmers' Bank is a tragic testimony to how risky it could be to permit the unbridled increase in the number of banks—an oligarchic expansion of aggressive business lobbies which are increasing risks and ignoring employment.

Politically powerful business lobbies were at the root of the 2010 stock market disaster, they forced the government to suspend the VAT law for years, and now they are enough to send the banking sector to the gallows by proliferating wilful defaults. A financial crisis is thus bubbling beneath the surface of the banking sector. And the central bank's gradual loss of independence and guts will be dominantly responsible if economic growth slows down in the near future, because the central bank still penetrates almost 40 percent of GDP through private credit, while the fiscal authority's budget or the stock market size is half of it.

The central bank must raise its voice to let other stakeholders know that the recent moves by the ministry will be counterproductive. The central bank must convince us that its conflict with the ministry is a conflict between economic rationality and short-term political gains. If the regime plans to increase the number of banks based on billionaires, it is the central bank's responsibility to convince us that banks should not be created based on different groups, families, races, or regions. They are common platforms to conduct the nation's financial intermediation among economic agents from rich to poor, army to police, academics to professionals, and from politicians to bureaucrats.

The BIBM chief has termed the current double-digit default ratio, which has been on the rise for the last two years, simply alarming. The central bank must clarify why this is happening when economic growth is inching up every year, making the ballooning of default loans more mysterious than ever before. We need to know whether the default hike is happening for the central bank's management failure or the ministry's excessive interference. Who are the top 20 defaulters who are rattling the whole industry? It is central bank's task to alert other institutions about those delinquents.

Why are speakers at BIBM raising the issue of monopolies in mobile financial services? Why are these monopolies extracting exorbitant charges for money transfers—four times higher than charges in India? It is the central bank's responsibility to prevent the unhealthy rise of monopolies in banking and financial services. It is the central bank's first task to convince the government to stay away from abnormal, non-market interest rates on sanchaypatra to keep monetary policy in traction. It is the central bank's task to protest the non-market rigidity of fuel prices that deprived the nation from enjoying lower inflation.

The time has come to change the style of central banking. It should be more developmental in spirit, more active in financial innovation, and more scholarly courageous in policy implementation.

Biru Paksha Paul is associate professor of economics at the State University of New York at Cortland.

Email: [email protected]

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