Stopping capital flight

Foreign exchange rate is vital for the country's economy. Bangladesh has been experiencing a floating exchange rate regime since May 2003. Actually it is not floating exchange rate; it is a managed exchange rate system in our economy.

We have now imperfect capital outflows. Legally, no one can take foreign currency out of the country as much as one wants. Such an outflow is strictly regulated by the Bangladesh Bank. Nevertheless, huge amounts of capital fly out of the economy every year through illegal channels.

In theory, we know that expansionary monetary policy lowers interest rates but the theory does not work in our country. In spite of expansionary monetary policy by the Bangladesh Bank, the cost of borrowing is quite high in our economy than that of any other country in South Asia.

According to the Economic Survey-2014, the average lending rate in Bangladesh is 13.75 per cent in spite of having a huge liquidity in the banking sector.     

The total capital flight from Bangladesh over the past four decades alarmingly represents 30.4 per cent of its 2010 GDP. An unstable political environment has raised the risk of losses of private wealth through expropriation or destruction of assets by violence. Poor governance in turn facilitates theft, embezzlement of national resources, and smuggling of goods and capital across borders, weak capital market, tax evasion , balance of payments leakages, export and import misinvoicing, all of which are  responsible for  inducing illicit financial outflows.

Capital flight will continue to affect the county as the economy will remain deprived of its own money for its economic development. The country will remain out of the tax-net and thus lose an opportunity of substantial revenue generation.

Achievements in poverty reduction, employment generation, and GDP growth in Bangladesh would come under threat if capital outflows continue.

There is nothing above politics in our country. Decent and peaceful political environment, creation of solid institutions, implementation of sound macroeconomic policies, downsized debts and high level of growth and creation of sound capital markets are vital to stem the rot of capital flight from our economy.

The writer is a banker. [email protected]