Mystery behind surge in import of capital machinery

There has been a flurry of speculations in the media about the reasons for abnormal rise in import of capital machinery in the recent months in the backdrop of the turmoil in the political arena. The conclusion drawn in the media reports is that people are sending money away from Bangladesh by over-invoicing import of capital machinery that attracts zero or small customs duty and taxes. One enthusiastic economic reporter of a daily newspaper (not Financial Express) quoted several sources including a former Adviser of a caretaker government and other think tanks to lend support to his assumptions about the linkage of import growth to capital flight. These assumptions are based on the fact that:
n During the third quarter (July-September 2012-13) payment against LC reported by Bangladesh Bank as LC settlement shot up by 15 per cent over the same period of the preceding year.
n LC for import capital machinery worth $717.68 million were opened between July and September last year reflecting an increase of 32.37 per cent over the corresponding period in the preceding year (July-Sept  2011-12).
We should remember that there is always an inevitable time lag between the date of opening of LC and the date on which payment is made on shipment of the underlying merchandise. It is more so for capital machinery which is often fabricated on receipt of the LC. The current Import Policy (2012-15) allows shipment of capital machinery within a period of up to 17 months in contrast to nine months for general merchandise. It means that the LCs settled between July-Sept, 2013 were opened before the onset of political turmoil, well, at least, before it took an ugly turn after the Tribunals set up for trial of war criminals started to pronounce their verdicts. In this situation, the idea of linking political disturbances to the import payments or LC settlement during the period from July-Sept of 2013 is rather farfetched. The ancient Greeks probably called this kind of reasoning as reductio ad absurdum (argument to absurdity).   
Similarly, the sporadic hartals and blockades during that period (July-Sept 213) could not have significant influence on the decisions to open the LCs for machinery and equipment because of the generally held belief that these would be a passing phenomenon. One must realise that in spite of all the adverse circumstances, including the all-pervasive financial meltdown in 2008 that threw the world economy on a tailspin, Bangladesh not only survived the cataclysm of prolonged worldwide recession but maintained a satisfactory rate of growth of over 6.0 per cent. Many had predicted that the meltdown would stall the growth of Bangladesh's RMG (ready-made garments) sectors but it grew by leaps and bounds, so to say.
 The escalation of political tension and violence on the eve of January 05 election will no doubt adversely affect the growth outlook but hopefully the built-in resilience of the economy would serve as a buffer against significant slowdown.         
Over-invoicing of imports is an age-old channel for sending money abroad when the kerb market price of foreign currency was significantly higher than the official rate. The charm of building funds abroad by over-invoicing faded after the declaration of taka as convertible for current payments in 1994 and its floatation in 2003. Although, the exchange rate is still influenced by the central bank through periodical interventions, the kerb market rate, until very recently, remained very close to the official rate.
The thin margin of taka one or so does not justify any one to take the hassles and costs to stash money abroad by over-invoicing imports. The hassles include scrutiny of the LC-opening bank through Credit Risk Grading, collateral security, clearance from the Credit Information Bureau, multiplicity of documents and other rituals. The costs are also numerous: bank charges for opening, advising, payment, confirmation, acceptance and negotiation of LC, interest for the credit period, SWIFT charges etc. In addition, there is also the opportunity cost for the money deposited as LC margin. Some capital items also attract import duty at the rate of up to 6.0 per cent ad valorem.  These costs outweigh the thin margin between official and kerb market rate. How does capital then fly away from the country?
Various studies suggest that five to six billion dollar of migrants' money gets to the kerb market every year. The fund is mainly stationed in Singapore or Hong Kong from where it is made available to those needing foreign exchange to finance smuggling, under-invoicing of imports to evade import duty and taxes. It is also the principal source for transfer of black money and other miscellaneous purposes in the twinkle of an eye, to use a hackneyed phrase. An estimated two billion dollar is also used by the manpower exporters to buy jobs for the potential migrants.
All said and done, people having black money earned through kickbacks, extortions and myriad other ways would prefer this route for capital transfer rather than the costly, complex and protracted means of over-invoicing imports. The recent uncertainty in the political front has apparently seen a spate of capital transfer leading to widening of margin between the exchange rates in the official and unofficial markets. They are obviously in a hurry and wouldn't mind paying the costs to transfer the ill-gotten money.
While dismissing the idea of linkage between flight of capital through over-invoicing and political tension, I would like to point out that only a few groups of people can stand to gain by over-invoicing.
The first group consists of industrial enterprises setting up a new factory or expanding and renovating an old one with term loans from the commercial or industrial financing banks. They generally over-invoice import of machinery and equipment to generate their part of contribution to equity to qualify for the loan.
The second group comprises some of the multinational companies who overvalue the cost of machinery to inflate their capital contribution in the joint venture companies set up in Bangladesh. They also allegedly sometimes overvalue the inputs supplied by the head office to their Bangladesh outfits to transfer money by circumventing exchange control and to reduce taxes in Bangladesh.    
The third group consists of fraudsters who masquerade as importers and open LC in favour of their overseas collaborators and ship rubbish or empty containers and collect money by producing 'said to contain' bill of lading and get lost in the wilderness while the LC-opening bank licks the wounds.
Still another group does not exactly over-invoice but import luxury goods in the garb of capital machinery to dodge duty and taxes. How they get past the customs' network is another issue but instances are not lacking. What we could suggest is that the Bangladesh Bank and the National Board of Revenue (NBR) may look at the genuineness of some of the large LCs to unearth the mystery of sudden surge of LCs for import of capital items in October and November of 2013.
The writer is a former central banker and author of a number of books            on foreign exchange                          and risk management. [email protected]