Who's behind flight of dollars?

The economy is clearly under serious pressure as the local currency, Taka, is losing its value at a faster rate against US dollar than before.

On Wednesday (Aug 11), for example, the US dollar was sold at a maximum of Tk119, whereas two days before on Monday (actually, one day before as the market remained closed on Tuesday), the cash dollar traded at a maximum of Tk115.

Though the central bank has been continuing with its support to the scheduled banks by selling large amounts of dollar to tame the heated up foreign exchange market, it is hardly showing any sign to cool off.

Curiously enough, on August 9, the central bank made six commercial banks to relegate their managing directors (MDs) and chief executive officers (CEOs) to lower ranks as they had allegedly quoted high price for US dollar thereby further unsettling the foreign exchange market. The next business day each dollar got pricier by four more Taka.

Against this backdrop, the Bangladesh Bank (BB) has given practically free rein to the local banks to reach drawing arrangement with overseas Authorised Dealers (ADs) in foreign exchange without prior permission from the BB. At the same time, the requirement of obtaining a letter of permission or a certificate from the Bangladesh diplomatic missions abroad to reach drawing arrangement with foreign exchange dealers in the respective countries has also been withdrawn. Needless to say, the objective is to increase the inflow of foreign exchange in the economy. The scarcity of dollar in the market is the apparent reason for continuous rise in the value of dollar against Taka.

But why is this chronic shortage of dollar in the market? Is it only due to paying rising value of import bills against pricier dollar and reduced volume of foreign remittance from migrant workers? Or is the dollar crisis created artificially to smuggle large amounts of foreign currency out of the country?

It appears, multiple factors are at work here causing the flight of dollar out of the country's foreign exchange reserve. However, it has to be acknowledged that the rise in the dollar price is not purely a local phenomenon. In fact, it is a global one. For it happened after the US Federal Reserve raised interest rates in the face of rising inflation in the US economy (in March 2022, the country saw its highest inflation rate at 8.5 per cent in 40 years).

As dollar has become stronger against most national currencies in the world, Bangladesh is obviously no exception. While bigger and stronger economies can weather such shocks from fluctuations in the foreign exchange market for long, it is not so for smaller economies, the sources of earning foreign exchange of which are few.

Sri Lanka's economy fell because its major foreign currency earning industry, tourism, was badly battered by the Covid-19 pandemic. Some wrong policies, for example, regarding its infrastructure projects and, finally, its agriculture, precipitated the crisis leading to the collapse of the economy.

However, most importantly, much depends on how the politicians in power are capable of handling the situation. Undoubtedly, Sri Lanka's leadership failed their country. But Sri Lanka's is a special case and it should not be generalised for all small economies with limited source of foreign exchange income. Bangladesh, too, has only two major sources of foreign exchange earning-remittance and export.

In the post-pandemic dispensation, the disrupted supply chain caused to raise commodity prices globally. But the demand  of market remained rather strong seeing that consumers had money in their pocket, thanks to the generous stimulus packages the governments across the globe injected in their respective economies. Bangladesh, too, took similar measures to keep its pandemic-hit economy afloat.

Demands remained more or less unaffected, but the availability of goods reduced due to supply chain disruption. This gave rise to the obvious, inflation. And the Ukraine war that erupted in the last week of February only added fuel to the fire of inflation.

But the fact that Bangladesh is not alone in the sea of global inflation and that its attendant volatility in the foreign exchange market is also pervasive should not be any reason for complacency. This is for the simple reason that the volume of foreign exchange the country earns from its two sources is small. And the economy cannot afford to lose its precious foreign currencies at such a fast rate.

Measures have already been taken to curtail non-essential imports. The delinquent foreign exchange dealers have been disciplined. Any doubtful trade in dollars through the banking channels is being strictly monitored. But still the flight of dollar outside the economy has not stopped.

In this connection, the Bangladesh chapter of the international corruption watchdog, the Transparency International Bangladesh (TIB) has recently pointed to money laundering, invoice fraudulence during export and import and tax evasion as the routes through which the country is losing its precious dollars.

According to the Global Financial Integrity (GFI), the Washington DC-based think tank that keeps watch on money laundering, corruption and various other kinds of illicit financial transactions worldwide, between 2008 and 2015, money worth US$8.2 billion was taken out of Bangladesh through invoice fraud.

The updated amount would come to more than US$12 billion, if current data on such fraudulence were taken into account. However, the TIB made the observation while advising the government against the deleterious effect of any foreign loan on the economy including that from the International Monetary Fund (IMF). Notably, the TIB warning comes in view of the government's seeking IMF loan amounting US$4.5 billion as balance of payment support.

The TIB's advice also includes the measures the government might adopt to plug the holes through which dollar is flying out of the economy. Particularly, it stressed that the government should introduce 'Common Reporting Standard (CRS), an internationally acknowledged method to prevent tax evasion and money laundering. Anyway, the government would be required to take a raft of measures to stop flight of dollars and maintain the foreign exchange reserve at a comfortable level.

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