A renewed interest on capital flight has been triggered by the data recently released by the Global Financial Integrity (GFI), a Washington-based research organisation that keeps a tab on 'Illicit Financial Flows' (IFF) from developing countries. According to GFI, the average illicit financial flow from Bangladesh during the last 10 years was of the order of $5.88 billion per year. The renowned think tank of the country, Centre for Policy Dialogue (CPD) organised a seminar on June 25 at the BRAC Centre Inn with participation of eminent persons in the field of economics, finance and investment.
The observations and recommendations of the experts attending the CPD seminar, reported in the print media, will contribute to the greater understanding of the problems underpinning this important issue. However, as a practitioner who spent decades trying to grapple with the complexities and nuances of foreign exchange, I feel inclined to throw in my humble thoughts on the contentious issues having bearing on capital flight.
Firstly, let me begin by saying that GFI data on illicit capital flow from Bangladesh are not correct; in fact, these data are far removed from the real numbers. It may be recalled that last year also GFI produced a set of unrealistic data on IFF including a ludicrously small amount of $1.78 billion that, they say, flew out of Bangladesh in 2012. Nevertheless, the media in Bangladesh quickly went gaga with that piece of misinformation. It reflects our eagerness to put our trust on anything that comes from across the seas without stopping for a moment to apply our own thoughts regarding its credibility.
Partly to set the record straight and partly to satisfy my curiosity, I sent an email to GFI to clarify the situation. They candidly admitted, with a good degree of generosity, their limitations in collecting the data which they say do not include the money that flies out to foreign lands through the hundi system, the most important conduit for illicit financial flows from Bangladesh. The relevant extracts from the email received from the GFI is reproduced below verbatim:
June 15, 2015
From Joseph Spanjers
Dear Mr. Ali,
Thank you for your thoughts, your overview of the specifics of Bangladesh's capital flight situation, and your interest in our report. You are correct; our estimates for illicit flows are conservative, for Bangladesh and other developing countries…
Estimates of illicit outflows are likely underestimated, as our methodology cannot detect same-invoice faking, the misinvoicing of trade in services and intangibles, and hawala transactions. Likewise, many illicit transactions occur in cash to prevent an incriminating paper trail. For these many reasons our estimates are likely very conservative.
….As stated above, our report does not consider hawala transactions. This is because hawala/hundi transactions unfortunately do not appear in the government-filed International Monetary Fund data that we use to construct our estimates of purely illicit financial flows from the developing world...
While talking about illicit fund transfer, the experts as well as ordinary mortals quickly turn their attention and rhetoric to the favourite topics of black money, political unrest and bad investment climate that induce these illicit transfers. What is missing in the melee is a medley of other players who need foreign money for a myriad other purposes not recognised by the exchange control authority for remittance facility. Here is a brief recital of the demands from those other players:
n The major outlet for hundi money is without doubt attributed to financing of smuggled goods into Bangladesh. India alone accounts for about $5.0 billion per year. I do not want to hazard a guess regarding merchandise sneaking into the country from other countries but it undoubtedly costs a king's ransom. Gold alone accounts for leakage of about $2.0 billion a year through the kerb market. All told, total outlay on financing of smuggled stuff would be at least $10 billion and constitutes the major part of IFF.
n Under-invoicing of imports, which is undertaken to dodge import duty and taxes, is another variation of smuggling. The size of the fund flowing away from the country through hundi for under-invoicing is estimated to be anything over $5.0 billion even by a very conservative estimate.
n Some $2.0 billion quietly leaves the country through the courtesy of manpower exporters to buy job opportunities abroad to buy jobs for Bangladesh nationals as also to navigate through various channels abroad.
n Foreign exchange costs for study and medical treatment abroad are available from the official sources but the official formalities are rather complex and dilatory. So people quietly turn to the free market operators even though it involves a small extra cost.
Factoring in these divergent elements, it can be safely assumed that the total outgo constituting illicit financial flow would be anything from $15 to 20 billion and not what the GFI said.
Where do the supplies of foreign exchange in the kerb market come from? The following are the principal sources feeding the hawla/hundi market:
n The lion's share of foreign exchange that gets into the hundi market comes from about 7.5 million Bangladesh workers and diaspora abroad. Several studies, including one done by the World Bank a couple of years ago, suggest that close to 40 per cent of the remittable money of the expatriates is diverted to the hundi market. It means that out of the estimated remittable savings of $25 billion of the expatriates, about $15 billion comes via official channels while the remaining $10 billion is parked in the hundi market.
n Another $4.0 to 5.0 billion dollar gets into the pool of foreign exchange in the parallel market from other sources like indenting commission earned retained by the Bangladesh agents of foreign suppliers and kickbacks received by the rent seekers in the country for dispensing of favour for award of contracts. Foreign money also sneaks into the country through the hundi market to finance terrorism or simply to plant new ideologies.
How do they send money abroad? General perception which is also reflected in the paper read in the CPD-sponsored seminar, is that 80 per cent of the IFF takes place by way of invoice mismatch i.e. under-invoicing of exports and over-invoicing of imports. It is what one learns from the old books on elementary economics. Now that exchange control has been eased and taka floated, the margin between the official price and the free market price has become very thin. There is not much charm left for resorting to the cumbersome process of mis-invoicing to take money abroad. In fact, the little gain one can make by over-invoicing of imports and under-invoicing of exports is wiped out by the bank charges. Besides, no one would like to leave a paper trail for illicit fund transfer.
There are easier, quicker and relatively inexpensive ways of shifting money from Bangladesh. One of the articles I fished out from website says that a building in Chittagong is known as hundi building. There must be similar outfits in the capital catering to the needs of the burgeoning group of the capital's fortune hunters. All it costs is a small premium over the official exchange rate.
How harmful is capital flight? There is no doubt that capital flight is harmful for the capital-starved Bangladesh. There is nothing that can be done to prevent ill-gotten money flying to offshore and other foreign centres in quest of safe havens - not at least in a country not conspicuous for honesty and integrity.
Here is what we see on the flip side of the IFF spectrum:
n The money sent by the manpower agents through the informal channel brings jobs for 400,000 to 500,000 of mostly unemployed youths of Bangladesh. They are key to our recent prosperity and accumulation of a healthy foreign exchange reserves that we proudly cite as a success story.
n Money sent abroad through informal channel for, say, study or medical treatment abroad is not wasted. In fact, it eases pressure on our regular foreign exchange reserve.
n Gold is apparently a luxury item but for a middle, lower middle or even poor family one inevitable item on the shopping list is gold jewelry, at least on the occasion of marriage of their sons and daughters. In some senses money going in the kerb market to finance gold is more useful than foreign exchange released from official sources for import of SUVs, 4 WDs and an assortment of luxury goods dedicated to the comforts and ostentatious living of the rich.
What can we do? Here is what we see as the possible answer to tackle the menace of IFF:
n Black money is the swiftest flier and thanks to the traditions set by the post-75 governments, the opportunity for amassing black money is endless. Attention must be focused on rooting out corruption instead of lamenting over flight of capital. That will automatically dry out source of funds for sending abroad in quest of safer havens or to dodge taxes.
n Bangladesh taka may be made convertible for capital transactions. Will it trigger outflow of capital? The answer is that capital or whatever you call it is flying already. Freeing the capital transactions will foster trust in our taka and may even see a reversal of the trend.
n The government may review its Import Policy and remove unnecessary restrictions on import of gold and other items essential for the ordinary people. Restriction may rather be imposed on import of luxury and unnecessary items like soft drinks and canned food which cost sack loads of foreign exchange but cause health hazards.
n Under-invoicing is the major source of illicit money transfer. It is not difficult to stop it. The syndicate doing it is strong and they have their allies in various agencies. A tough stance and strong political will can only plug this source of leakage.
n The archaic foreign exchange law should be thrown away and replaced by a simpler one befitting the realities of the twenty-first century.
The writer is a former Executive Director of Bangladesh Bank.