Successor note: Former finance adviser leaves reform roadmap for new finance minister

The immediate past interim government’s finance adviser Salehuddin Ahmed has recommended a far-reaching restructuring of financial sector oversight, including the separation of central banking functions from bank supervision, in a detailed successor note prepared for the new finance minister.

In the 29-page document, Salehuddin Ahmed argues that Bangladesh Bank should be relieved of responsibilities beyond core central banking functions. At present, the central bank formulates and implements monetary policy while simultaneously regulating and supervising commercial banks and non-bank financial institutions.

This dual mandate, he contends, gives rise to potential conflicts of interest and weakens institutional transparency and accountability.

He therefore proposes that supervisory authority over commercial banks and finance companies be vested in a separate, independent regulatory body. Should the government grant policy approval, the financial institutions division could prepare a concept paper to initiate the process.

Salehuddin Ahmed, himself a former governor of Bangladesh Bank, served as finance adviser for one and a half years under the interim government. His recommendation is understood to have been shaped in part by concerns over the central bank’s controversial role in overseeing commercial banks during the Awami League government’s 15-year tenure.

International practice regarding bank oversight varies considerably. Separate agencies supervise banks in countries such as the United States, the United Kingdom and Japan. In contrast, central banks in countries including India and the Philippines retain both monetary policy and supervisory responsibilities.

Contacted by mobilephone on Saturday, Salehuddin Ahmed told Prothom Alo, “There are now so many banks in the country that, in my view, the central bank should confine itself strictly to central banking functions. Even those it does not always perform effectively. I would prefer to see supervisory responsibility for the banking sector assigned to a separate office. That is why I left the idea as a proposal for the future. If implemented, the entire banking sector, and indeed the wider economy, would benefit.”

Core central banking functions include the adoption of measures to control inflation and the formulation of monetary policy in alignment with the government’s broader economic philosophy.

Beyond institutional restructuring, the 29-page successor note of Salehuddin Ahmed outlines future priorities for the finance division, the financial institutions division (FID), the economic relations division (ERD) and the internal resources division (IRD).

It also recommends the establishment of a dedicated bank resolution authority and a deposit protection corporation, as well as the enactment of a separate legal framework governing Islamic banking.

The document stresses that macroeconomic stability, strengthened revenue mobilisation, comprehensive banking sector reform and the effective utilisation of development assistance should be treated as priority areas by the new government.

As immediate measures to address macroeconomic challenges, it calls for enhanced revenue collection, the continuation of a market-based exchange rate regime, focused implementation of high-priority development projects and restraint in contracting high-interest external borrowing.

According to the note, cumulative inflation has risen by 111 per cent over the past decade. In order to preserve the standard of living of public sector employees, implementation of a new pay structure is deemed necessary. Sustained coordination between fiscal and monetary policy is also essential to contain inflationary pressures.

The finance division, the document says, must restore discipline in public expenditure management and sovereign debt management. Rationalisation of subsidies, curbing waste and prioritising expenditure in the context of high interest payments and constrained revenue flows are highlighted as urgent tasks. Improving efficiency in social safety net programmes is likewise identified as an immediate objective.

With regard to the National Board of Revenue (NBR), the note reviews reform initiatives undertaken over the past 18 months and refers to a report submitted to the Chief Adviser’s Office on tax system reform. The incoming authorities are urged to examine and implement its recommendations.

According to the document, core challenges remain substantial: widespread tax evasion, an entrenched culture of tax exemptions, insufficient digitisation of income tax and VAT systems, and persistent deficiencies in fairness, accountability and transparency in revenue administration.