General perception regarding capital flight is that capital flies by way of under-invoicing of exports and over-invoicing of imports. It is what one learns from the book on elementary economics. These were true in the old days of rigid exchange control when the local currency taka was overvalued by anything from 50 to 300 per cent in relation to free market price. (It is worth refreshing the memory that in the early seventies free market price of a pound sterling was around Tk. 60 against the official price of a little less than Tk 20). Now that exchange control has been eased and taka floated, the margin between the official price and the free market price has become very thin.
There is not much charm left for resorting to the cumbersome process of mis-invoicing to take money abroad. In fact, the little gain one can make by over-invoicing of imports and under-invoicing of exports is wiped out by the bank charges for advising, negotiating and handling the documents. Exchange control regulations concerning repatriation of export proceeds, establishment of letters of credit also make it difficult to retain money abroad.
How harmful is capital flight? There is no doubt that capital flight is harmful for capital starved Bangladesh. At the risk of creating a furore, this scribe thought that the funds that go out of the country are not all lost. For instance, as mentioned earlier, nearly TK 200,000 is spent by manpower agents for purchase of a job card, known in the Gulf region as 'akama'. About 300,000 people are sent abroad every year. The estimated costs work out to Tk. 60 billion equivalent to about $800 million. With the exchange control people refusing to provide dollar, they do not have option but to turn to the magicians in the kerb market. You may blame them for doing something that the authorities do not like but these workers sent by the agents are key to our recent prosperity that our government proudly cites as a success story. Our recent experiment with government-to-government deal has not only faltered but drove many to perilous journeys across seas by rickety boats only to end in mass graves in Thai jungles.
And there are provisions for release of foreign exchange for, say treatment abroad but you need to get a recommendation from the Medical Board set up by the DG Health. Apart from the hassles and the inevitable costs involved in dealing with the government agency, the process can take ages to complete. By the time the recommendation comes, you will probably remember another example of a past perfect tense you read in the school-the patient had died before the recommendation came.
Similarly, following the declaration of taka as convertible for current transactions, foreign exchange is available from official source for study abroad. But the hassles, documentation and the peripheral costs are high. So, people quietly turn to the free market operators to buy foreign exchange at a small premium.
So what we see as kerb market transactions for treatment or education and many other similar purposes are in fact substitutes for official transactions. These save foreign exchange from the reserve. Similarly, money used for under-invoicing is not lost. Its quid pro quo comes back in the form of merchandise. What is lost is the government revenue, not capital.
Gold is apparently a luxury item but is entwined in the cultural heritage of the subcontinent from time immemorial. Think of a middle, lower middle or even poor family marrying off their daughters and sons. One inevitable item on the shopping list is gold jewellery, however small it may be. But the restriction on import/export of gold imposed by British India in the 1940s as war time measure still continues to pose a big hurdle for import of gold.
 Although India and Pakistan have liberalised gold import, there are apparently not many in this country prepared to think out of the box. In a sense, money going in the kerb market to finance gold is more useful than foreign exchange released from official sources for import of SUVs, 4 WDs and an assortment of luxury goods dedicated to the comforts and ostentatious living of the rich.
As for the effects of smuggling, I would not like to trigger controversy but let us say that without Indian cows our plate at the dinner table would be much less exciting and our fate in the life hereafter will be infinitely difficult without the assistance of the bovine community, sacrificed on religious festivals, to get past the bottomless abyss, to the eternal garden of bliss. India too should feel relieved to get rid of its surplus stock which is allegedly destroying the ozone layers with their lethal gases expelled from the dual chambers in the stomach. If the BSF people knew this win-win situation for both the countries, they would not have mercilessly killed the cattle traders.      Â
There has been a flurry of anti-money laundering and other laws but 'quiet flows the capital'. These have, by and large, opened the opportunity for rhetoric, foreign visits and at times extortions. World leaders talk big, set up institutions, employ consultants but the flight of money-a trillion or so - across the national boundary continues unabated.
The financial services industry in the western world has become more vocal about the rising costs of anti-money laundering regulation and the limited benefits that they claim it brings. One commentator wrote that "[w]ithout facts, [anti-money laundering] legislation has been driven on rhetoric by ill-guided activism …rather than by an objective understanding of its effects". The Economist magazine has become increasingly vocal in its criticism of such regulation, particularly with reference to countering terrorist financing, referring to it as a "costly failure".
What can we do? What we are doing is trying to catch the rainbow and running after the shadow. Black money is the swiftest flier and thanks to the traditions set by the post-75 governments, the opportunity for amassing black money is endless. You may enact hundreds of laws but cannot stop it from flying over the hills and seas or wherever it likes. So, our effort would be to root out corruption and ensure good governance. Until that is done, we can at best shed tears for the money taking to wings in quest of safer havens.
Another step that can be taken is to make Bangladesh taka convertible for capital transactions. Will it trigger outflow of capital? The answer is that capital or whatever you call it is flying already. Freeing the capital transactions will foster trust in our taka and may even see a reversal of the trend.
The government may review its Import Policy and remove unnecessary restrictions of gold and other items essential for the ordinary people. Restriction may be imposed on import of luxury and unnecessary items like soft drinks and canned food which cost sack loads of foreign exchange but cause health hazards. Â
Under-invoicing is the major source of illicit money transfer. It is not difficult to stop it. The syndicate doing it is strong and they have their allies in various agencies. A tough stance and strong political will can only plug this source of leakage.
The writer is a retired central bank official and author of books on banking and foreign exchange. The views expressed are his own and do necessarily reflect those of FE.
saali40@yahoo.com
Quiet flows capital despite anti-money laundering laws
Syed Ashraf Ali | Published: June 13, 2015 00:00:00 | Updated: November 30, 2024 06:01:00
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