Bangladesh’s financial sector showed mounting signs of strain as rising non-performing loans (NPLs), persistent inflation, and accelerating capital flight revealed the economic costs of diminished central bank independence.
To address Bangladesh’s economic issues, it must uphold the central bank’s independence, said the Policy Research Institute (PRI) at a discussion yesterday.
Over the years, political influence over monetary policy has undermined financial stability. Stressing that economic logic, not political considerations, must guide regulation, with independence balanced by strong democratic oversight, experts said at a roundtable discussion program organized by PRI with support from the UK International Development (UKID), titled “The Imperative for Central Bank Independence.”
Ashikur Rahman, principal economist, PRI, delivered the keynote presentation.
He said: “The issue of central bank independence has long been a subject of discussion. Theoretical models and cross-country experience are suggestive that inflation can be effectively controlled when inflation expectations are anchored at low levels, money supply is properly managed, and the exchange rate remains stable. Economic logic should direct monetary policy, not narrow political interests, which can only happen if we have an independent and capable central bank.”
Regarding the costs of autonomy loss of Bangladesh Bank, Rahman highlighted that regulatory forbearance allowed NPLs to surge to Tk420,000 crore (March 2025). Inflation climbed to 11.66% in July 2024 and remains elevated relative to regional peers, eroding real incomes. Widespread money laundering and capital flight have deepened liquidity shortages and eroded public trust in the financial system.
The presentation also stated that persistent inflation and financial instability have reversed poverty reduction gains.
The figures showed that over the past 50 years, central bank independence improved across 155 countries.
Empirical evidence shows that greater central bank independence is associated with lower and more stable inflation, without hindering growth.
Evidence suggests that in a tighter monetary environment, inflationary effects of supply shocks are much smaller than in the case of a loose monetary environment.
Earlier, the session was chaired by Sadiq Ahmed, vice chairman of PRI.
In his opening remarks, Ahmed said that the government mostly focuses on the growth and employment. But an independent central bank will focus on inflation control, unlike a central bank under political pressure.
‘Autonomy not an option’
Amir Khasru Mahmud Chowdhury, standing committee member, Bangladesh Nationalist Party (BNP), said: “Either you are [the institution] independent or not—autonomy is not an option. If we want to solve Bangladesh’s economic problems, we must ensure the independence of the central bank. During our time, there were no political appointments in the Bangladesh Bank.”
He emphasized that most of the major economic reforms in Bangladesh took place during BNP’s tenure.
“We (BNP) even abolished the Banking Division because it served no real purpose, but it was later reinstated, creating further complications. It is surprising that the banks have survived despite so much looting,” he added.
Criticizing current banking practices, the former commerce minister said: “Banks are using short-term deposits for long-term lending, which is driving up non-performing loans (NPL) in the sector.”
He also highlighted the importance of coordination between monetary and fiscal policies. “Transparency will increase if the system is automated, as the future economy is moving toward a cashless society. We need to reduce direct contact and make the system fully automated.”
Amir Khasru added: “We will create 10 million jobs within 18 months through IT, domestic and foreign investment, and manpower exports. The independence of the central bank must be ensured, and the private sector should also come forward in this regard.”
Key agenda
Fahmida Khatun outlined why an independent central bank is necessary.
She noted: “The political government must take the initiative by passing an independence law and ensuring its proper implementation. The financial sector is the lifeline of the economy, and safeguarding its integrity is essential.”
Nasim Manzur remarked: “The coexistence of the Financial Institutions Division (FID) and Bangladesh Bank is unnecessary. Bangladesh has to be freed from bureaucratic control. Full independence of the Bangladesh Bank is what we need, not merely autonomy.”
M Masrur Reaz remarked: “Bangladesh must have a clearly defined monetary policy role, with explicit legal provisions prohibiting direct government lending. Bangladesh Bank should determine its own budget. The X-factor here is political will. Without it, none of these reforms will work. Politicians must learn from past experiences.”
Showkat Aziz Russell said: “The number of bank branches now seems to exceed that of grocery stores. These are mostly mushroom banks. Such over-licensing and excessive branching have driven up the cost of funds. Ironically, Bangladesh Bank appears to be the only profitable institution in the country.”
Abdul Hye Sarker said: “Accountability alongside independence will be crucial to address.”
Zaidi Sattar, chairman of PRI, said: “We need a central bank that will support macroeconomic stability and promote growth-friendly policies. Central bank independence is ideal, but it doesn’t look easy to happen at once, as it is a very political decision.”
