Finance minister and governor: Why are they good, when are they bad?

When is a finance minister or a central bank governor, termed good or bad? What makes them successful or a failure? It is not difficult to answer these questions as they both have certain visible and specific tasks.

Let's use an example. When the topic of the world's worst central bank governor comes up, everyone points to Arthur Frank Burns. During the presidency of Richard Nixon, he had been the chairman of the US central banking system, Federal Reserve Bank (the Fed). He had repute as an economist. The renowned economist Milton Friedman and another Fed chairman Alan Greenspan were both his students.

After the Second World War, the seventies was the most difficult time for world economy and the United States. This period of high inflation continued on up till 1982 and was termed 'The Great Inflation'. The world experienced 'stagflation' around the same time too. Burns was blamed for both high inflation and low investments. Inflation was high from before he took over responsibility in 1970. It is expected that a central bank governor in such a situation will use the monetary policy and hike the interest rates, but Arthur Burns did the opposite. This prolonged the high inflation.

Arthur Burns is a perfect example of what happens if you adopt economic policies from a political angle. Nixon's Republican Party was in a bad state. It was Nixon who forced Burns to lower interest rates in order to appease the businessmen. Nixon wanted a populist policy and Burns gave him that.

Arthur Burns would regularly keep a diary. He wrote down his conversations with Nixon, particularly from 1969 till 1974. The book, 'Inside the Nixon Administration: The Secret Diary of Arthur Burns, 1969-74', was published in 2010. It describes how Nixon forced him to take up various populist policies.

For example, he was supposed to deliver a speech in December 1970 at a college in Los Angeles. He wrote the speech sitting in his Washington office. The topic was on controlling inflation, increasing interest rates, etc. After he completed writing the speech and was preparing to fly to Los Angeles, Nixon gave him a call. He clearly said over the phone, "Arthur, don't cross me by contradicting me publicly." It was because Arthur Burns did not have the gumption to cross Nixon that history did not forgive him.  History did not forgive Nixon either.

Another statement of Nixon remains an example of his stance concerning the independence of the central bank. During Arthur Burns' swearing-in ceremony, Nixon jokingly said, "I respect his independence. However, I hope that, independently, he will conclude that my views are the ones that should be followed." History stands witness that Nixon's words were more than just a joke.

One must, nevertheless, be grateful to Arthur Burns. After all, he managed to explain very clearly the duties of a central bank governor in the post-WWII modern economic system. He was in office till 1978. In the five decades that followed, the central governors have basically strived to do what Arthur Burns failed to do. Those who managed to do so, succeeded and the others failed. And that task was to control inflation. Since the monetary policy is a central bank matter, it is basically the task of the central bank to control inflation. Another major task of the central bank is to keep the currency exchange rate stable.

It would be an injustice, however, just to single out Arthur Burns as the worst central bank governor. For example, after remaining three decades in office, when Lebanon's central bank governor Riad Salameh stepped down from office on 21 July last year, The Economist wrote, the world's worse central banker retires.

Depositors faced huge losses due to the steps taken by Riad Salameh. In a matter of five years, the foreign exchange reserves plummeted from USD 31 billion to USD 10 billion. The local currency dropped by 95 per cent in value. He set up a separate exchange system for banks, importers and wealthy persons, exacerbating the sufferings of the general people. There are allegations against him of misappropriating USD 330 million (USD 33 crore). Inflation hit a 222 per cent high during Riad Salameh's term.

Nigeria's Godwin Emefiele is also considered one of the worst central bank governors. During his term, inflation was not in control and the country's currency value dropped. Not only that, currency had to be printed to provide the central government in order to meet the budget deficit. This caused the economy to deteriorate further.

In 2021 when inflation rose to around 7 per cent, Poland's central bank governor Adam Glapinski was dubbed as the worst governor in Europe by the New York-based magazine Global Finance.

In most countries of the world, the central bank governors are held accountable if they fail to keep inflation in control. In many countries there is legal framework in place for this accountability. There is nothing like that in Bangladesh. So, while inflation has exceeded 9 per cent for around two years now, other than statements and speeches, no one has had to give account.

In Bangladesh too, interest rates were lowered and various similar decisions taken to please the businessmen. These decisions were taken before the 2018 election. These decisions were taken at a hotel in a meeting between bank owners and businessmen. That is why New York's Global Finance magazine in 2019 lowered the ranking of Bangladesh Bank's governor at the time, Fazle Kabir, from a 'B' grade to 'D'. It said, "Bangladesh Bank, the nation’s central bank, has lost its independence. Key decisions on monetary policy this year [2018] were made not by the central bank’s policy unit alone, but rather, with help—or pressure—from representatives of the ministry of finance and the Bangladesh Association of Banks."

The magazine in 2023 also gave Bangladesh Bank governor Abdur Rauf Talukdar a 'D' grade. This 'D' grade was due to the weaknesses in Bangladesh's economy and the government control over the central bank. Incidentally, while most countries aggressively lowered interest rates to tackle the post-Covid crisis, Bangladesh still kept the interests rates askance. In the next two years, foreign exchange reserves plummeted by USD 20 billion and the taka value dropped by around 25 per cent. Then there is the high inflation too. The credit rating agencies too have lowered Bangladesh's credit rating. Currency has been printed and provided to the government. The governor has now shifted from the low interest policy, but too late. The crisis remains in the economy.

The finance minister's responsibilities are even more extensive than that of the central bank governor. The Hong Kong-based magazine Finance Asia would work on listing good and bad finance ministers. They assess the finance ministers' performances based in certain topics. For example, a finance minister's responsibility is to deftly draw up the budget and revenue policy, keep the share market stable, control financial institutions, implement economic reforms, and keep up the confidence of the investors particularly in hard times so that the employment situation remains sound.

The most difficult task of the finance minister is, perhaps, to function independently. To perform his duties properly, the finance minister needs political efficiency, control over policy, ability to exert influence over bureaucracy, and to continue to fight in the interests of the people. Yet in most cases the finance minister's duty is to appease the president, prime minister or the military ruler. Therein lies the problem.

Najib Razzak had been the prime minister of Malaysia at one point of time. He had also been in charge of the finance ministry. In 2016 Finance Asia dubbed him as the worst finance minister. He made quite a hullabaloo over the issue. But Malaysia is still reeling under the impact of the financial scandal of his time. The One Malaysia Development Berhad (1MDB) scandal has been described as "one of the world's greatest financial scandals" in history.

There are more examples. Ghana's finance minister Ofori-Atta was dismissed on 14 February. During his term, the country defaulted in foreign debt. Inflation shot up to over 50 per cent. So Ken Ofori-Atta's name found place on the list of world finance ministers.

The local currency of Zimbabwe is in such a pitiful state that it has to carry out transactions in US dollars now. Inflation has skyrocketed. When the UK-based Reputation Poll International awarded the country's finance minister Mthuli Ncube in 2023 as Africa's best finance minister, this became a joke and was met with much derision. When a finance minister and governor are both the worst, what happens? Then a country becomes bankrupt, as in the case of Sri Lanka.

First of all, mention must be made of the success of Bangladesh's finance ministers. The budget deficit has almost always been within limits. No one has been over ambitious in this regard. It has also been possible to maintain macroeconomic stability. Bangladesh has never fallen into trouble over debt repayment. Growth has increased too. Overall, since its independence, Bangladesh has seen considerable economic achievement. Questions, though, have been raised about that macroeconomic stability, particularly in the last three years.

The list of failures of the finance ministers is quite long too. The think-tank Centre for Policy Dialogue (CPD) listed all the financial scandals starting from 2008, pointing out that in this span of time, Tk 920 billion (Tk 92,000 crore) had been misappropriated in the name of loans. There was a big share market scam in 2010, the biggest share market scam of the country since 1996.

The banking sector has become more fragile. There is a glaring lack of good governance in the sector. Due to the lenient stance towards loan defaults and repeatedly providing them with all sorts of facilities, even on paper the default loans have exceeded Tk 1.5 trillion (Tk 1,50,000 crore). The actual volume of loan default is much higher. And Bangladesh also ranks among the countries with the lowest tax-GDP ratio.

Almost all the finance ministers of the country may have maintained continuity in keeping up macroeconomic stability, but they have also kept up impressive continuity in facilitating loan defaulters, facilitating the politically influential persons, not taking action against those misappropriating funds and money launderers, creating scope to whiten black money, approving banks on political considerations and so on.

Governor Abdur Rauf Talukdar has been governor for about two years now. But finance minister Abul Hasan Mahmud Ali is comparatively new. Before becoming finance minister, he had been the head of the standing committee for the finance ministry for five years. In these five years he held around 14 meetings of the committee, though the committees are supposed to hold at least one meeting a month. Finance minister AHM Mustafa Kamal did not attend office regularly in the last three years of that time. He is now the head of the standing committee for the finance ministry. In this situation, the new finance minister will have to establish that the finance minister has an important role in managing and running the economy. The question is how far that will be possible.

Meanwhile, preparation has begun for the new budget of the coming financial year. The pressure may have lifted to an extent, but the economy still hasn't overcome the hurdles as yet. In June the new finance minister will present the new budget, and the governor will have to announce the new monetary policy. This is the prime time to coordinate the two policies and bring inflation under control. The common people want relief in the market. The banking sector unrest must also be lessened. Presently most of the decisions in the banking sector are taken from a political angle. Reducing interest rates, setting up new banks, merging banks -- all these are political decisions. We must break away from this. The big challenge is to increase revenue collection. The investment slump must be overcome. Reserves must be increased. The dollar crisis must also be addressed.

All in all, there are many challenges in front of the finance minister and the governor. Their places in history will be determined by how they tackle these challenges. It will be determined, who is good and who is bad. That is how, at least, the finance ministers and governors are evaluated in other countries. We want to evaluate them in this manner too.            

* Shawkat Hossain is head of online, Prothom Alo

* This column appeared in the print and online edition of Prothom Alo and has been rewritten for the English edition by Ayesha Kabir