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The Case for Moving Bangladesh Bank to Chittagong
NOFEL WAHID states the case for moving the central bank of the country away from the capital to the commercial hub.
You might think that relocating Bangladesh Bank to Chittagong is a crazy idea. But is it really? Let's explore the issue a little bit.
The importance of Chittagong as a commercial hub is fairly self-evident. And its importance will only grow over time as our economy grows. A report by PricewaterhouseCoopers (PwC), a well-reputed international consultancy firm, showed that Chittagong is projected to be one of the 30 fastest growing cities in the world by 2025 (see table below).
There are a couple of interesting conclusions that can be drawn from the PwC report. Firstly, Chittagong just barely makes the top 30 list with a real (meaning inflation-adjusted) average growth rate of 6.3% per year for the next 13 years. The fact that Dhaka does not make that list quite obviously suggests that Chittagong is projected to grow at a faster rate than Dhaka.
Secondly, Chittagong's projected annual growth rate is approximately the same as the current national average, if not slightly lower. It implies that Dhaka's economy is likely to grow at a slower rate than many other regions of the country.
In short, the stars have aligned for the port city as far as economic growth and commercial development is concerned.
Chittagong's growth prospects will undoubtedly see new enterprises cropping up everyday, in turn attracting other servicing industries -- all part of a virtuous, self-perpetuating cycle. Key among those other business-servicing firms are banks, insurance companies and mutual funds that make up the financial services industry.
It should come as no surprise if our existing financial institutions, along with prospective ones, start ramping up their presence in Chittagong. Don't be surprised if the Standard Chartered Bank (SCB) announces that it will shift its headquarters to Chittagong in five years time, asking 500 employees to relocate as a result. For all we know, SCB employees may already be petitioning their CEO to make the already be petitioning their CEO to make the move now, just to escape Dhaka's nightmare traffic situation. And who can blame them?
The point is, when the financial industry starts gravitating towards Chittagong, it will take with it its people and their demand for civic amenities, such as better schools, hospitals and hospitality services. That's how economies grow and experience structural change.
The Bangladesh Bank (BB), being an important public institution that regulates the financial industry, must also ride this wave of structural change and relocate to Chittagong.
It is important for financial regulators to be plugged into financial markets and their participants in order to detect and understand adverse market risks before they become crises. The global financial crisis in 2008, among other things, was a lesson on how financial regulators failed their duties because they didn't have their ears close to the ground.
Amran Hossain
How could they have when they were all mostly based in Washington? They were too far away to be talking regularly to the bankers in New York. They were too far away to feel the reverberations when little fissures were erupting on Wall Street in 2005 and 2006.
A good business liaison programme is the bedrock of a robust and effective regulatory regime. And to do it well, you have to be where the action is. That's not to say that sharing common turf with market players is the regulatory panacea to all market risks, but going where the bankers are makes a big difference.
In the Bangladeshi context, one could argue that since the financial industry hasn't yet shifted to Chittagong, there is no need to make the move now. A fair point indeed.
However, it does beg the question -- when should BB relocate to Chittagong? What criteria or indicators can we use to determine when the time is right? These are all valid questions that require deeper examination.
It is also important to keep in mind that public policymaking is often riddled with a timing problem. By its very nature, the public policymaking process is often either perceived to be too slow or too hasty. It is too slow if policymakers are reacting to events ex-post, and it is too hasty when policymakers are trying to implement reforms in anticipation of future developments that haven't yet fully taken shape.
The climate change policymaking process probably provides the most illustrative example of that difficult balance policymakers have to strike between ex-post and ex-ante considerations. Climate change mitigation is such an oft-used term because its use implies a tacit acceptance of the fact that we don't know when 'acting later' becomes too late and too expensive. Or else, we would be talking about climate change reversal, not mitigation.
The same principle applies in this case too. All the evidence suggests that Chittagong's importance as a regional commercial hub and financial services centre is going to grow over time. It may therefore be more beneficial for us to relocate BB sooner in anticipation of this transformation rather than later.
In fact, I would like to go one step further and ask a much bolder question. Are there benefits to be had from relocating BB now? I would argue yes.
Relocating BB now would kickstart the process of decentralisation. Every government in recent memory has paid lip service to the idea of decentralisation, but not much has been achieved. I don't think we can say with any confidence that we have seen a decent plan on how best to progress on the path to decentralisation. But that's not surprising either.
What incentives do bureaucrats and politicians have to decentralise our civil administration? None whatsoever. Not when the unholy politico-bureaucratic nexus that exists in Dhaka has proven to be such a fat cash-cow.
BB, for all intents and purposes, is designed to be beyond this nexus. Afterall, it is an autonomous statutory body, lest we should forget. One can only hope that the issue of relocating BB to another city won't be seen as a high-stake political 'korbani' by the powers that be. If anything, it is a low-hanging fruit that ought to be plucked with relish.
Economists have been studying the link between central bank independence and inflationary outcomes for more than 50 years. Those studies have overwhelmingly demonstrated that independent central banks that lower or raise interest rates according to economic cycles, while paying no heed to political cycles, are most successful in delivering low inflationary outcomes.
If there ever was a country where low inflation -- essentially, low rice prices -- was the key to electoral success, Bangladesh would be it. Relocating BB away from our inept, growth-stifling bureaucracy will only help to foster a stronger legacy of independence within that institution. It may embolden BB to tackle high inflation more aggressively, thereby lowering inflationary expectations and ensuring greater price stability. All of these developments will enhance our economic performance and lead to greater electoral success for governments that venture down this path.
Once again, relocating BB to Chittagong is not a forbidden apple, it's a low-hanging fruit. We should pluck it!
Nofel Wahid is an applied economist, and can be contacted at wnofel@gmail.com.