Capital flight is the primary cause of Bangladesh's enduring foreign exchange crisis and the government must take effective measures to address t
Capital flight is the primary cause of Bangladesh’s enduring foreign exchange crisis and the government must take effective measures to address this issue, said economists at a roundtable today.
“The Bangladesh Bank should take effective measures to identify who did this [money laundering], how they did it, and where they laundered the money,” said Dr Shamsul Alam, former state minister for planning, at a post-budget discussion organised by the Editors Guild, Bangladesh in Dhaka.
Professor Selim Raihan, executive director of the South Asian Network on Economic Modeling (Sanem), said tax defaulters, loan defaulters, and money launderers are interconnected and recognised figures. “Why are actions not being taken against them?” he asked.
Selim also said that vested groups now influence government policy-making.
AK Azad, an independent lawmaker and owner of Ha-Meem Group, one of the largest garment exporters, said, “Money laundering continues unabated with impunity. The government must hold the launderers accountable and bring back the money.”
The businessman-turned-lawmaker also criticised current policies for favouring money launderers over honest taxpayers, who pay 30% tax while launderers can whiten their money by paying only 15%.
“Identify those who laundered money and trace their investments. Take action against them, and you [finance minister] will witness the return of capital,” he urged.
Masrur Reaz, chairman of Policy Exchange of Bangladesh, said the forex situation has worsened despite the government and the central bank’s measures over the last two years.
“Net forex reserves have dropped to around $13 billion, and the exchange rate has increased to Tk117 per US dollar, up from Tk90 two years ago,” he said.
He said a substantial amount of intentionally defaulted loans had been laundered abroad using trade invoice manipulation.
According to a 2021 Global Financial Integrity (GFI) report, $61.6 billion was smuggled out of Bangladesh between 2005 and 2014. Bangladesh loses $8.27 billion annually due to trade mis-invoicing. GFI predicts that by 2030, this figure could exceed $14 billion per year.
Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, pointed out that while certain individuals have withdrawn substantial sums from banks, the Bangladesh Bank has injected new funds into those same banks to offset the resulting losses.
Budget lacks critical reform measures
To deal with the worsening financial conditions, economists urgently called for reforms in the banking sector, tax system, and overall economy. They observed that these critical reforms were notably absent from the proposed budget for FY2024-25.
Mansur said while the proposed budget emphasises macroeconomic stabilisation, it lacks any focus on reform. The government is facing significant challenges, and reform is essential. Initiating reforms now will likely yield results in three to four years.
He also said the central bank should maintain its stance of letting the exchange and interest rates be determined by the markets.
Regarding the Bangladesh Bank lending money to the government through ‘ways and means’ instead of devolvement, he pointed out that these are essentially the same. He noted that if this practice continues, inflation cannot be controlled.
Professor Selim Raihan of Sanem expressed surprise that the proposed budget did not include any measures to address the non-performing loan (NPL) crisis in the banking sector. He pointed out that the actual NPL rate is 25% or higher, contrary to the reported 10%.
Dr Shamsul Alam suggested that the government should consider forming a banking commission to restore discipline in the industry.
He also pointed out the importance of securing the $46 billion in foreign funds currently in the pipeline, as it could significantly boost the country’s forex reserves. Foreign loans are still cheaper than domestic ones.
The former state minister for planning also hailed the government for enacting the Offshore Banking Act in March this year as he believes that this move will help Bangladesh get foreign currency, especially the US dollar and euro as Pakistan has become successful by offering a similar kind of benefits.
AK Azad of Ha-Meem Group said the NBR’s revenue collection target of Tk4,80,000 crore for the upcoming fiscal year starting 1 July is unlikely to be achieved. He attributed this to the private sector being under significant strain, as imports of capital machinery and raw materials have decreased substantially.
“Where will the VAT and tax come if there are no new investments?” he questioned.
Azad also said every day eight to 10 factories are being shut down because of inadequate gas supply despite doubling the price in the last year.
Masrur Reaz warned that the government’s reliance on bank borrowing to meet the budget deficit could create a crowding-out effect for the private sector. If this occurs, cottage, micro, and small industries will be the first victims.
Speakers at the roundtable also talked about the need for full digitisation of the NBR to boost revenue and reduce the hassles faced by taxpayers.
Sadeka Halim, vice chancellor of Jagannath University, Muhammad Abdul Mazid, former chairman of NBR, and Shyamal Dutta, editor of Daily Bhorer Kagoj, spoke among others.
Mozammel Babu, editor-in-chief of Ekattor TV and president of the Editors Guild Bangladesh, moderated the discussion.
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