The Financial Express

Estimating the size of black economy

Estimating the size of black economy

The legal scope of whitening black money has been retained finally in the finance bill, endorsed at the national parliament on Wednesday, with a penalty and hard conditions. Thus black money or undisclosed income can be whitened or declared by way of investing it in financial assets, real estate and industry. The blanket provision of whitening the black money by paying 10.0 per cent flat tax ended on June 30 this year. New scope with penalty will be effective from July 01, the first day of the new fiscal year 2021-22 (FY22), until the last day or June 30, 2022. The new finance act also barred the relevant government agencies from asking questions about the sources of such undisclosed income when declared in the tax return.

Though the finance minister did not propose extension of the money whitening scheme on June 3 at his budget speech, he has made the change at the last moment. So any debate and discussion could not take place in parliament on the decision. It appears that the minister wanted to avoid any discussion and criticism during the budget session. However, economists, business leaders, and civil society members have criticised the last moment extension of the money whitening option. They argued that this would discourage honest taxpayers and encourage tax evasion.

What is clear from the extension of the legal scope to whiten black money with amnesty is the strong presence of the black money in the economy, which is also growing every year. Though the government does not formally recognise the prevalence of the black economy, it cannot deny the negative impact of the underground economy. In recent years, the finance minister's budget speech does not categorically mention anything about the black economy or increase of black money in the country. The Eighth Five Year Plan (8FYP) also skips the issue. The Seventh Five Year Plan (7FYP) mentioned it only once, saying that the so-called "Black Money" is circulating in the domestic economy, it is the responsibility of the tax department to find their owners. Former finance minister AMA Muhith in 2013, at his post-budget press briefing, mentioned that the amount of undisclosed money in the economy is something between 41 and 82 per cent of the country's Gross Domestic Product (GDP). So far, it was the only formal statement from the government on the dominance of the black economy. His statement was based on an inside analysis of the subject at the finance ministry.

It is tough to determine the actual size of the black economy, which is also termed as the shadow economy, hidden economy, underground economy, illegal economy, parallel economy, submerged economy or even informal economy. By whatever name we may call it, the essential characteristics of the matter are the same: untaxed and unregulated off-the-books transactions, avoiding or ignoring the country's laws, adopting illegal means to operate. Nevertheless, researchers use certain methods to estimate it, and the estimated value is mostly indicative.

Late Dr Sadrel Reza, former Director General of Bangladesh Institute of Development Studies (BIDS), first estimated the size of the black economy in Bangladesh. According to his estimation, the size was one-third of the formal economy. He made the assessment in the late eighties with reference to the fiscal year 1985-86 (FY86). Dr Asaduzzaman, another researcher of the BIDS, estimated that the country's shady economy stood at 21.40 per cent of the country's GDP in FY90.

Professor Abul Barkat, also president of the Bangladesh Economic Association (BEA), has done extensive work on estimating the size of the black or shadow economy in Bangladesh. In his latest magnum opus titled Boro Pordaey Somaj-Orthoniti-Rajniti (On the larger canvas of society-economy-politics), he discussed the sources of creating black money and presented a time series estimation of black money in Bangladesh. According to the estimate, the amount of black money in the country is around one third or 33 per cent of the annual Gross Domestic Product (GDP) in the current or market price. Thus, in FY19, the amount of black money in Bangladesh was Tk 8.40 trillion when GDP at market price stood at Tk 25.42 trillion. Real GDP or GDP at the constant price in FY19 was Tk 11.05 trillion. Thus, it may be said that the size of black money stood at Tk 9.22 trillion in FY20 and Tk 10.18 trillion in FY21. 

The provisional GDP, calculated by the Bangladesh Bureau of Statistics (BBS), showed that GDP in market price stood at Tk 27.96 trillion in FY20 and Tk 30.87 trillion in FY21. BBS is, however, yet to release the final estimation of GDP for FY20 and a full set of provisional estimations of national account for FY21.

Prof Barkat's estimate also matched mainly with an international estimate. A working paper of the International Monetary Fund (IMF), released in 2017, showed that the average size of the shadow economy of the 158 countries between 1991 and 2015 was around 31.9 per cent. It also showed that Bangladesh is listed among the 31 countries where the average ratio of the shadow economy is more than 30 per cent, estimated on the basis of of Predictive Mean Matching Method (PMM). The paper, jointly prepared by Leandro Medina and Dr Friedrich Schneider, focused on the shadow economy's existing and new estimation methods. The IMF paper, titled 'Shadow Economies Around the World: What Did We Learn Over the Last 20 Years?', also showed that the ratio of shadow economy came down to 27.60 per cent of Bangladesh's annual GDP in 2015, which was 36.65 per cent in 2003.

Prof Barkat also argued that the country's leading source of black money was corruption-driven bribe and rent-seeking. There is little to differ with his observation. The 8FYP also said: "Addressing corruption will receive top priority from the government in order to eliminate it from public institutions and society at large."

So, such government move will be critical to developing a mechanism to measure or estimate the size of the black economy in the country. The Indian government in 2011 prepared and published a white paper on black money where it defined and estimated the amount of black money. The paper reviewed the current steps to deal with the black money and also proposed a strategic framework for the way forward. Bangladesh now needs to prepare and publish a white paper on black money to effectively deal with the menace of the growing size of the black economy. Without acknowledging the increasing amount of the black economy, no remedy will work.

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