Originally posted in The Daily Star on 4 November 2025
An independent central bank is the cornerstone of economic stability and public trust as it can make operational and technical decisions, such as setting interest rates, regulating banks, and managing foreign reserves, without political interference. Independence ensures that economic realities—not short-term political interests—guide monetary policy decisions. A central bank’s independence signals professionalism, credibility, and commitment to long-term stability, essential for maintaining confidence among citizens, investors, and markets.
Unfortunately, in Bangladesh, successive governments have undermined the autonomy of the Bangladesh Bank (BB), established under the Bangladesh Bank Order, 1972, with the mandate to safeguard monetary stability. BB has increasingly been treated as an extension of the government rather than as an independent authority, eroding its freedom to take timely and effective decisions vital for maintaining the country’s financial health and price stability. The prolonged interference is now evident in the fragility of the banking sector, which is suffering from weak governance, poor oversight, and delayed or misguided policy actions.
Non-performing loans (NPLs) have reached alarming levels. As of March 2025, total NPLs accounted for 24.13 percent of all loans, while those of state-owned banks stood at a staggering 45.79 percent. The Asset Quality Reviews (AQRs) conducted by international auditors have exposed the severity of the problem. Five Shariah-based Islamic banks were found to have NPLs almost equal to their total disbursed loans, revealing symptoms of deeper institutional weaknesses, often stemming from the central bank’s inability to act independently of political and vested interests.
Sadly, without institutional autonomy, the central bank cannot respond to the challenges Bangladesh is currently facing—high inflation, currency volatility, and weak banking discipline—with the speed and consistency required. When key policy decisions, such as raising interest rates or allowing the exchange rate to adjust, depend on political clearance, credibility erodes, and policy effectiveness diminishes.
Under these circumstances, the BB’s recent initiative to revise the 1972 order is timely and necessary. The proposed amendments include granting greater administrative and financial autonomy, reducing the number of bureaucrats on its board to curb government influence, strengthening tenure protection for the governor, and establishing a formal Monetary Policy Committee (MPC). These steps, if implemented sincerely, could restore the central bank’s credibility.
However, the new law must clearly state BB’s primary objective. The central goal should be price stability. Other goals should include promoting economic growth and employment generation. In recent years, BB refrained from tightening monetary policy and instead capped lending interest at nine percent and deposits at six percent, despite persistent double-digit inflation. This policy served politically connected borrowers but penalised ordinary savers, whose returns remained far below inflation. Therefore, price stability must take precedence, even if high interest rates temporarily burden businesses already facing higher costs from corruption, infrastructure gaps, and bureaucratic inefficiencies. Delay in adopting a contractionary monetary policy, coupled with incoherent fiscal policy, kept inflation elevated for nearly three years. Now that inflation is easing, interest rates should be adjusted gradually—guided by data, not politics—to reduce business costs.
Also, the appointment and removal of the governor and deputy governors must be transparent and merit-based. Their tenures should be fixed and protected from arbitrary dismissal. A search committee should oversee appointment processes to ensure that only qualified professionals are selected for the position. Current or former bureaucrats should not be appointed as governors or deputy governors, since that compromises neutrality and raises conflicts of interest. Although the 1972 order includes this safeguard, previous governments routinely ignored it, appointing loyal bureaucrats to serve political ends. Leadership integrity and expertise must be the foundation of institutional independence.
Regarding the MPC, it should not be a symbolic advisory group but a legally mandated body comprising both internal and external experts. It should meet regularly, publish minutes, and explain the rationale behind its policy decisions. Such transparency would enhance the bank’s accountability and strengthen its independence by demonstrating that decisions are based on evidence and analysis rather than government directives. An empowered MPC would enable monetary policy to reflect economic reality rather than the prevailing political mood.
There must also be coherence in exchange-rate policy. The government can suggest the overall exchange-rate regime, but operational control over interventions should rest with BB. The central bank should have a clear and published foreign exchange intervention policy, supported by regular reporting. The previous government’s decision to maintain an artificially high value of taka, while competitor countries allowed their currencies to depreciate, damaged Bangladesh’s export competitiveness and distorted market signals. When taka was finally allowed to depreciate, it did so abruptly, contributing to inflationary pressures and import disruption. A gradual, market-based adjustment, monitored by the central bank within a coherent framework, would have mitigated these shocks.
Meanwhile, the government’s borrowing practices must be disciplined. In recent years, weak domestic resource mobilisation and high public expenditures have driven the government to increasingly rely on borrowing from both commercial banks and the BB to meet fiscal shortfalls. Borrowing from commercial banks squeezes out private sector credit, while borrowing from the central bank effectively amounts to printing money. This fuels inflation and erodes macroeconomic stability. To prevent fiscal dominance and encourage prudent debt management, such borrowing must be strictly limited. The government should, instead, focus on improving revenue collection and reducing inefficiencies in public spending.
Independence, nevertheless, must be balanced with accountability to prevent opacity and mismanagement. BB should enjoy full control over its budget, staffing, and operations, while being subject to rigorous ex-post oversight. This means publishing audited financial statements, submitting performance reports to the parliament, and maintaining transparent communication with the public. The credibility of an independent central bank ultimately depends on both integrity and transparency.
Lastly, the central bank’s internal capacity and culture must change. Even with legal independence, BB’s effectiveness will remain limited if it lacks professional competence and analytical strength. The bank must invest in building expertise in monetary analysis, data-driven decision-making, and financial supervision and promote a culture of integrity, evidence-based policymaking, and ethical conduct.
True independence of the central bank will inevitably face resistance because it reduces the discretion of powerful interest groups. Finance ministry’s Financial Institutions Division (FID) may view the central bank’s increased autonomy as a loss of control, while vested interests within the banking sector may resist stronger supervision and tighter regulations. Overcoming these barriers requires strong political commitment and public awareness. The independence of the central bank is not a technocratic concern; it is central to ensuring economic stability and protecting citizens’ savings from the consequences of poor policymaking.
Ultimately, passing a new law is only the beginning. The real challenge lies in implementation and its effectiveness will depend on future governors’ handling of political pressure, BB’s transparency in communicating its policy decisions, and consistently applying rules across all banks—whether public, private, large, small, politically connected or not.
Institutional independence is not achieved overnight. If the principles of integrity, professionalism, and accountability are upheld, then Bangladesh Bank can finally function as the independent guardian of monetary and financial stability that the country urgently needs.
Dr Fahmida Khatun is the executive director at the Centre for Policy Dialogue. Views expressed in this article are the author’s own.
