Stopping flight of capital

Two reports related to foreign exchange were published in the Saturday's issue of this paper on the first page. The first report was about sale of US dollars (USDs) by the central bank, the Bangladesh Bank (BB). It said the BB sold the highest amount of foreign exchange (in USD) in its history in the immediate past fiscal year that amounted to USD13.58 billion. The buyers were mostly the commercial banks who needed it to meet various international payment obligations including making payments against import bills. Also, another objective of the BB's selling USDs is to meet the demand of the foreign currency in the market so that the exchange rate of USD against taka could be kept stable.

The other report was that the country's foreign reserve declined to USD29.98 billion or approximately USD30 billion on last Thursday, July 6, following meeting yet another international payment obligation of USD1.1 billion to the Asian Clearing Union (ACU). As a result, the country's forex reserve situation which was USD31.16 billion before the payment (on July 6) came down to USD29.98 billion, or approximately USD30 billion after the ACU payment.

These reports on the sale of foreign currency by the BB, or its making international payments are but routine activities by a central bank and, under the normal circumstances, that should not make any news of note. But with the country's foreign exchange reserve depleting faster than it is being replenished by export earnings, inward remittance and other payments made to Bangladesh from external sources, it is concerning. But there is another reason to be concerned about. It is that the International Monetary Fund (IMF) has extended a credit package worth USD4.7 billion to Bangladesh on certain performance criteria requiring for the government to have a forex reserve limit of USD24.46 billion at the minimum by June for the release of the second tranche of the credit. But the figure for this minimum forex reserve should be calculated by a formula as prescribed by the international lender. In fact, according to the IMF formula, the reserve amount will be way less than the figure now being shown at USD30 billion (approx.).

But apart from such a rise and fall in the reserve figures, there are other issues that should also be concerning. It is about the flight of capital in the form of hard currencies from the country. This is mainly due to the volatility in the foreign exchange market.Through announcing the new monetary policy last month, the BB hopes to restore stability in the unstable forex market. An important indicator of the instability is the continuous fall in the value of taka against the USD. Unlike in the past, when the BB would set the exchange rate of USD against taka, the new policy has left the issue to the market to decide. It is hoped that the difference between the official rate of USD and its market rate will be narrowed down. At a stage, the outflow of hard currency from the economy through illegal means will stop. But is there any visible change in the behaviour of the foreign exchange market? The actual exchange rate of USD against taka in the kerb market still exceeds the rate determined by the BB at Tk 108.85 for each dollar by 5 to 7 taka. This is one of the reasons why the economy is deprived of the entire amount of hard currency that our migrant workers send every month in the form of remittance. In fact, even the country's finance minister admitted that the amount of remittance coming through the formal channel is only half of what is being sent home by migrant workers. In other words, the rest amount is coming through informal channels. Who does not know that the informal channel is the illegal channel popularly known as hundi? The recipients of remittance money get a higher amount of taka per dollar sent by their relatives abroad, but the dollars do not enter the economy. Those remain outside the country. The other sources of earning hard currencies such as through export are also not foolproof. It is an old practice that through under-invoicing, a large sum of the hard currencies earned through export by the country remains abroad. Also, through over-invoicing, a section of dishonest importers illegally sends the country's hard-earned dollars abroad. But the just declared monetary policy hardly provides any answer to this continuous flight of capital through hundi and other illegal means. Had the economy not been deprived of remittance worth over USD20 billion (according to an estimate), the foreign reserve situation would not reach such a critical point.

If the monetary policy cannot stop this flight of capital from the economy, the government should apply enforcement measures in its hands to stop the outflow of hard currencies through illegal means. Also, the government should be able to identify the major hundi channels at home and abroad eating away at Bangladesh's most vital sources of foreign currency earning and bust those rackets. In the case of such rackets lying abroad, the government should seek the collaboration of the governments of those countries to destroy the dens of financial crime there. The government on various occasions expressed its intention to retrieve laundered money hidden in shell companies or kept with illegal offshore accounts.

Shrewd and vigorous diplomatic efforts on the government's part will be required to bring back the money already laundered and stop further flight of capital through hundi and other illicit means. This is the best way to effectively arrest the decline of the forex reserve position.

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