This by the Bangladesh Bank Order (1972),

This paper will examine the independence, accountability, transparency &
governance of Bangladesh Bank in time of setting Monetary Policy Goals,
selecting & using Monetary Instruments, making deficit financing to the
govt. & performing other functional activities prescribed by law. For
sustainable economic growth,Independence& Accountability of Central Bank is
very much important like other factors. This study is mainly based on CBIG
model that is used to measure the degree of central bank independence and
governance. In this work, I will try to find out the level of independence
& good governance as well as the accountability & transparency of
Bangladesh Bank (BB) as the central bank of Bangladesh. After recognizing
several aspects of Bangladesh Bank (BB) independence, accountability,
transparency and governance I will try to find out the ways to enhance its
overall CBIG index by improving the independence in legal, price stability
objective, exchange rate policy, monetary policy & deficit financing and
accountability & transparency aspect.

Keywords: accountability and transparency, Bangladesh Bank
(BB), central bank independence and governance (CBIG), legal independence,
monetary policy and deficit financing, political independence, price stability,
exchange rate policy.

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2. Background

The Bangladesh Bank (BB) is the central bank of Bangladesh. It was
established by the Bangladesh Bank Order (1972), (president’s Order No. 127 of
1972) following the country’s independence in 1971. It initially functioned
like a government department but this changed gradually over time. The first
significant move came in 1989 when the Government of Bangladesh (GOB) adopted a
comprehensive Financial Sector Reform Program (FSRP). This was a transformation
in 1990 from direct quantitative monetary controls to an indirect method of
monetary management. More recently the Bangladesh Bank (Amendment) Act, 2003
reduced the governor’s term of office from five to four years as well as
improved CBIG in other areas, for example, it specified that four directors
(who are not government officials) be appointed to the central bank’s
management board, placed an emphasis of its role in domestic price stability,
introduced a floating exchange rate, and formed a coordination council, to
align the central bank’s policies with those of the government. Another major
impact of the 2003 amendments was to introduce a specific set of objectives for
the central bank; something which was absent in the 1972 legislation. These
objectives include:  to regulate the
issue of the currency and the keeping of reserves; to manage the monetary and
credit system of Bangladesh with a view to stabilizing domestic monetary value;
to preserve the par value of the Bangladesh Taka; and to promote and maintain a
high level of production, employment and real income in Bangladesh; and to
foster growth and development of the country’s productive resources for the
national interest. These at least suggest that the central bank should seek
local price and foreign exchange rate stability. Bangladesh Bank’s CBIG level
further improved in 2003 after implementing the Central Bank Strengthening
Project (CBSP). As an initiative of the CBSP, a Policy Analysis Unit (PAU) was
established in July 2005 to upgrade the Bangladesh Bank’s capacity for research
and policy analysis. Since January 2006, the central bank now provides half
yearly monetary policy statements as well as its own research papers to enhance
its transparency. These publications highlight price stability as the main
objective of the central bank’s monetary policy and as well as explain its
monetary policy strategy and implementation tools.

 It is the background of the central
bank of Bangladesh. The next step is to consider the literature associated with
CBIG, quantify the level of CBIG.



are very few literatures available which address the ways to measure and
enhance the degree of central bank independence and hence we are focusing on
some key reviews related to the model and central bank independence. The
definition given by Ahsan, Skully and Wickramanayake is the most comprehensive
definition and focus on the every aspect (such as legal, political, price
stability objective, foreign exchange rate policy, monetary policy and deficit
financing, accountability and transparency) where a central bank needs
independence or no intervention of government in any way to take good decisions
for the betterment of the economy and serve the purpose for which it is

The legal aspect
of CBIG is related to the various acts passed by the parliament regarding the
independence in appointment and dismissal of the governor and separation of
supervision of financial institution from the central bank (Ahsan, Skully and
Wickramanayake 2008). Amtenbrink (2004) also suggests the necessity of legal
issues to ensure the code of good governance of a central bank. The degree of
CBIG improves as the governor’s turnover rate goes down (Moser and Dreher
2007). Furthermore, Masciandaro, Quintyn and Taylor (2007) found that the legal
independence of central bank improves with the separation of supervision of
financial institutions from central bank.

CBIG (political)
focuses on the political pressure on a central bank in its key areas where
decision-making can be influenced like government representatives in central
bank board and change of governor with the change of political party. If there
are higher numbers of government representatives in central bank board or the
governor changes with the change of political party, the degree of GBIG goes
down (Ahsan, Skully and Wickramanayake 2008). Political autonomy is identified
as one of the weakest areas by Arnone, Laurens, Segalotto and Sommer (2007),
where the degree of CBIG may reduce dramatically. Grilli, Masciandaro and
Tabellini (1991); Cukierman (1993); Cukierman and Webb (1995), found that
political instability adversely affects central bank’s activities and hence its

CBIG (price
stability objectives) is related to maintaining price stability as central
Bank’s main monetary policy objective. According to Ahsan, Skully and
Wickramanayake (2008), an independently targeted inflation apart from the
political economics and timely revisions of interest rates would help the
central bank achieving its price stability target. Bade and Parkin (1988), have
not found any association between CBIG and inflation. On the other hand, in developed
countries, Cukierman, Webb and Neyapti (1992); Pétursson (2000); Kuttner and
Posen (2001); Brumm (2006), have found strong relationship between the degree
of CBIG and inflation. 

CBIG (exchange
rate policy) acknowledges the role of a central bank under a fixed and a
floating rate exchange system. The currency market intervention and regulation
formulation should be done by the central bank (Ahsan, Skully and
Wickramanayake 2008). According to Kuttner and Posen (2001), an independent
central bank is required to for the better maintenance of stable exchange rate

CBIG (monetary
policy and deficit financing) focus on the role played by central bank in
formulating monetary policy and choosing its final goal (Ahsan, Skully and
Wickramanayake 2008). According to Eijffinger and Schaling (1993), the ability
to make all the monetary policy decisions by the central bank itself increases
its CBIG. 

(accountability and transparency) focus on the disclosure requirements of a
central bank. According to de Haan, Amtenbrink and Eijffinger (1999), there is
disagreement about the essentiality of accountability and transparency.
According to Lybek and Morris (2004), there is also disagreement about the type
of the autonomy to be delegated to the central bank. Regular communication with
the public on various aspects and changes by central bank is very essential
(Ahsan, Skully and Wickramanayake 2008).


5.Objectives of
the study

The main objectives of conducting this study are as follows:

? To identify the degree of independence, accountability, transparency and
governance of Bangladesh Bank based on CBIG index.

? Unearthing the ways to enhance the degree of Bangladesh Bank independence,
accountability, transparency and governance.


6.1: Research Method: This is an
exploratory research. Therefore, research method followed for the purpose of
the study was desk research and reviews the existing literature on the subject.

6.2: Sources of Data: The primary
sources of data for CBIG index are the country’s central bank acts (includes
amendments, annual reports, web sites, circulars, media releases and other
central bank publications).

6.3: Data Processing and Analysis: For conducting this research, I will use CBIG Index Model.


Index Model: The CBIG
indices I will use for my study is the model examined and suggested by Ahsan,
Skully and Wickramanayake (2008). I will work and take the 2010 to 2016period
for my study. The detailed index construction and calculation procedure is
shown in Appendix A and B. The main equation to calculate CBIG overall index is
explained by equation (1). This overall CBIG index (CBIG Overall) is
constructed with the six sub-indices: 1. Legal (CBIGLeg) 2. Political (CBIGPol)
3. Price stability objectives (CBIGPStab) 4. Exchange rate Policy (CBIGForx) 5.
Monetary policy and deficit financing (CBIGMonpol) 6. Transparency and
accountability (CBIGAcctrans).

CBIG(overall)= w1(CBIGleg) + w2(CBIGpol) + w3(CBIGPstab)+
w4(CBIGForx)+ w5(CBIGMonPol) + w6(CBIGAccTrans)……………………………..

 CBIGleg = Legal Index of CBIG

CBIGpol = Political
Index of CBIG

CBIGPstab =Price
Stability Objectives Index of CBIG

CBIGForx = Exchange Rate
Policy Index of CBIG

CBIGMonPol = Monetary
Policy and Deficit Financing Index of CBIG

CBIGAccTrans =
Accountability and Transparency Index of CBIG 

Weights:  w1=5/26, w2=
3/26, w3 = 3/26, w4 = 3/26, w5 = 6/26, w6 = 6/26

The variables
are equally weighted to construct the sub-indices and the overall index. The
proportional weights of the sub-indices in the overall index reflect the actual
number of variables in each divided by the total number of variables (26). The
index construction details are shown in Appendix A.