The membership of government officials to the Bangladesh Bank's board creates undue influence on the board's decision-making process, hindering its institutional autonomy, according to the International Monetary Fund (IMF).
The inclusion of three government officials in the central bank's board establishes majority voting power in making a decision, which goes against international best practices as it could lead to undue government influence on a decision made by the board, according to an IMF report on safeguards assessment of the Bangladesh Bank for 2021.
The IMF says the Bangladesh Bank Order should be amended to exclude government officials from the board – so that third parties cannot influence the central bank's decisions.
Currently, the eight-member board of the Bangladesh Bank consists of governor, deputy governor, three directors who are external experts and three government officials. The majority of them are non-executive.
The three government officials are Abu Hena Md Rahmatul Muneem, chairman of the National Board of Revenue, Abdur Rouf Talukder, senior secretary to the finance ministry, and Sheikh Mohammad Salim Ullah, secretary to the Financial Institutions Division.
It is customary for the board to decide by unanimity while a mere majority voting is required in making decisions. This practice could allow the three government officials effectively to have a veto power and exert significant influence on the decision-making by the board, said the IMF in its report.
The institutional autonomy of the Bangladesh Bank is further curtailed regarding the government-related transactions, according to the report.
The report said the central bank is allowed to make temporary advances to the government. The limits of such advances are determined and approved by the finance minister. The interest rates charged on the advances are fixed by an inter-agency committee headed by the finance secretary. The fact that the government sets terms and conditions of those transactions almost unilaterally demonstrates that the Bangladesh Bank is vulnerable to fiscal dominance.
The IMF report also addressed the government influence in appointing external auditors for the Bangladesh Bank. The finance ministry has been appointing external auditors and the Bangladesh Bank is not involved with this process.
The central bank order requires that no less than two audit firms be appointed and their remuneration be fixed by the government. Presently, there is no policy for the selection, appointment and rotation of external audit firms. In the past, a Bangladesh Bank working group used to recommend to the finance ministry about appointment of auditors among the most reputable firms in Bangladesh.
The Bangladesh Bank is no longer part of the selection process, and the finance ministry informs the audit firms about their selection as well as the audit fee that is not negotiable.
The IMF recommends adoption of the policy for the selection, appointment and rotation of external auditors, in agreement with the finance ministry.
MABS and J Partners, a member of Nexia International (a small international audit firm), and Howlader Yunus, a member firm of Grant Thoronton, have been the Bangladesh Bank's auditor since FY19 and FY20 respectively. Both firms are involved in the audit of many local banks and financial institutions, according to the IMF report.
Raising the issue of limited checks and balances in power of Bangladesh Bank's leadership, the report said the Bangladesh Bank Order does not provide double-veto appointment or removal procedures for the governor and deputy governors.
A double-veto procedure requires that two or more bodies or authorities be involved in the appointment or removal procedures in order to ensure checks and balances.
But according to the Bangladesh Bank Order, the government alone appoints the governor, deputy governor and directors. The central bank is not consulted by the government on the selection of the board members. In addition, the government can dismiss the governor, any deputy governor or any director without the involvement of any other body. These appointment or removal procedures are not adequately equipped with checks and balances.
The report said the government may remove the governor or a deputy governor if they breach the trust reposed in them or their continuance in office is regarded as manifestly opposed to the interest of the Bangladesh Bank.
The IMF recommended that the causes for dismissal be more restrictive regarding the governor, any deputy governor and any director. The appointment or dismissal process for the board members should provide for a double veto procedure.
The report said the legal status of deputy governor is unclear in the Bangladesh Bank Order. There are currently four deputy governors. One deputy governor has the senior status since he is a member of the board. However, the order is silent regarding their term of office and maximum number of deputy governors. This lack of clarity is likely to hinder the deputy governor in contributing to internal checks and balances.