The central bank of all market economies conducts monetary policy to achieve macroeconomic stability. In the process, some distorting exogenous factors often creep into the authority's policy parameters, of which budget deficit is among the most noticeable offenders.

Unlike many countries, a significant share of the persistent budget deficits in Bangladesh is attributable to "corruption." However, an independent ACC and BB can bring some order into the fiscal and monetary operations of the government. As we know:

• Tax evasion (by bribing the tax officials) contributes to a shortfall in revenue, creating a gaping hole in the deepening deficits.
• Corruption cuts future profit potential of investments. A reduction of profits for firms means less tax revenues for the government.
• Unfavourable business environment deters and delays foreign investment and thus retards future growth potential. Less growth and less production mean less tax revenues.
• Finally, the banking sector's defaulted loan loss must be curtailed. Losses of nationalized banks become a burden of the exchequer and add to the deficits.

Once the ACC wages an all out "anti-corruption revolution," budget deficits will lessen through increased tax collections. In fact, with the good governance spearheaded by CTG, the treasury has already begun to cash in increased tax revenues and decreased borrowings.

Government borrowing from banks has decreased by Tk 698 crore in the first month of the present CTG due some restrained fiscal measures and increased revenue collection (Tk 6,300 on January 12 minus Tk 5,602 crore on February 13). January alone saw a growth of 8% in revenue collection compared to 3% of January 2006.

The fear of facing the ACC for tax evasion may have partly contributed to this increase in revenue.

A reduction of budget deficits will enable BB to conduct monetary policy with less borrowing by the government. Lower budget deficits will also cutback government borrowing from banks and leave scarce funds available for business investment at a lower interest rate. Lower budget deficits would also entail less inflationary pressure induced by debt monetization.

However, to achieve macroeconomic stability through realizing price stability and stable GDP growth it is the central bank and the country's financial institutions that must play a major role. The February 4 approval of the by-laws converting the nationalized commercial banks (NCBs) -- Sonali, Janata and Agrani -- into public limited companies was a bold but crucial first step on the road to set sound orders in the banking sector.

The NCBs will now operate like any other businesses (independent of government interference), with the explicit goal of maximizing profits within the ambit and specifics of BB guidelines. Efficiency gains in asset and liability management will enhance the banks' liquidity, solvency, and profitability. Instead of ballooning budget deficits accrued from loan losses of these banks, we will see smaller deficits and increased tax revenues.

To strengthen the monetary and banking sector the BB must be given the necessary autonomy which Governor Salehuddin Ahmed asked for on January 15. The following recommendations may be considered:

• Historically, the three bureaucrats in the 9 member board of directors (BOD) have had little or no experience in central banking. They should be replaced by the chairman of the SEC, director general of BIDS and the secretary of finance as permanent members. The BOD must be comprised of honest professionals with credible banking and financial market experience, and be free of political affiliations.
• Power to set the "bank rate" (interest rate on bank's short term borrowing from the BB), cash reserve ratio, and other policy instruments should lie with the BOD with some latitude given to the BB governor.
• The BOD should decide the pay and allowances of BB employees since the BB generates its own revenue and its operations are not funded by tax payer money.
• The rank of the governor should be raised to that of a cabinet minister given that the BB is an institution of domestic and global attention.
• The governor and the deputy governors should be nominated by the BOD and confirmed by the relevant parliament standing committee (PSC) prior to their appointments. These are not on the job learning positions.
• The BB should report to the relevant PSC on a quarterly basis apprising the lawmakers about the state of the economy and future course of policy stances.
• The government borrowing limit of Tk1000 crore directly from the BB is a farce, since this limit is routinely exceeded. Government should compete with business investors to borrow funds from the open market.
• Large transactions over Tk 50,000 or so should be processed through bank cheques or certified personal cheques. This will reduce sudden reserve swings (avoiding liquidity crunch) and at the same time leave a paper trail to track just where, and to whom, the money is going.

There are certain areas in which the BB, on its own accord, can kick off some initiatives. For example, alongside weekly "reverse repos," the BB should conduct "repos" on a daily basis to help stabilize banks' reserves positions and minimize erratic jumps in the "call money rate" (interest rate on inter-bank borrowing of reserves).

The market interest rates must not be interfered with (accommodating internal or external pressure) unless it is determined that stabilizing persistent swings in interest rate are desirable for stable growth. Furthermore, the BB should be the lender of last resort, called upon only by healthy banks in extreme situations. Such discriminatory treatment will encourage discipline in asset and liability management in the banking system as a whole.

The BB may work with the NCBs to popularize banking in rural markets to tap small savers and encourage savings. In big cities the use of personal cheques by citizens for all major transactions may help stabilize banks' reserve fluctuations since use of cheques will not drain bank reserves as unpredictably, or as quickly, as cash withdrawals.

Printing new currencies have costs. Use of cheques will extend the life of paper currencies and hence reduce the cost (assuming check processing is not cost prohibitive) to the Treasury to replace damaged currencies. Any cost savings to the government means fewer deficits.

Finally, BB needs to trim non professional employees from its roster. Only the nation's most promising students of economics, finance, banking, and statistics should build their career here.

Bangladesh Bank is one of the few institutions where the ubiquitous culture of corruption has not intruded, save one hiccup about two years ago involving a counterfeit currency scandal. Nonetheless, it is an institution in which I would have loved to work if I could rewind a few years of my career.

Dr. Abdullah A. Dewan is Professor of Economics at Eastern Michigan University.