Budget-eve is perhaps the most relevant time to think about the Achilles heel that underlies most of the macro-economic woes of Bangladesh economy. It is a generic name that has been downplayed through the use of various names representing its different manifestations. The time to call a spade a spade is long past but it is never too late. So let the policy makers gather their wits about and say, what had been obvious all along, that the challenges Bangladesh economy has been grappling with stem from its burgeoning black economy. Yes, it is the proverbial villain of the piece. It is because of the invisible black economy that the major policy instruments that are used for macroeconomic management, monetary and fiscal policy, in Bangladesh have been stymied and rendered ineffective.
Fiscal policy that pervades all sectors of the economy through mobilisation of resources in taxes, fees etc hits a brick wall when it confronts the black economy. The invisible part of the economy simply refuses to be amenable to the national income accounting. As a result, not only it eludes computation for the gross domestic product (GDP) or gross national income (GNP), it also makes no contribution to resource mobilisation by the government in its annual budget. Invisible money in the black economy earned through legal means (exports) or illegal means (smuggling) remain outside the reach of tax dragnet because of nondisclosure. In other words, taxable income remains untaxed. This is the most important reason why tax-GDP ratio in the country has hovered below 10 per cent, to be exact 7.8 per cent, which is the lowest in south Asia. This paltry amount of revenue earnings compared to ever increasing obligation for public expenditures has led the government down the slippery slope of deficit financing through bank borrowing and external loans. Borrowing has become not only chronic, it has also increased in volume, making debt servicing onerous. The fall out of recurrent borrowing to bridge the budgetary deficit has been one of the major factors contributing to runaway inflation. If problems of supply chain and increase of prices in international market were the major cause, then inflation could not remain stubbornly as high as over 9 per cent for the last one year because inflation in America, UK and the EU has come down from over 9 per cent to around 3- 4 per cent. Why similar decline in both headline and core inflation has not taken place in Bangladesh and in other developing countries like India? The answer is simple: the developed countries mentioned above don’t have black economies of the magnitude that developing countries have. The developed countries also go through periods of fiscal deficit and public borrowing but the use of borrowed money in these countries leads to productivity gains and higher employment. Structurally handicapped with a sizable black economy, the developing countries cannot reap this public debt dividend. On the other hand, government of Bangladesh (and other developing countries similarly situated) has to undertake expenditures of various types which benefit both the taxpayers and tax evaders.
Like fiscal policy, operation of monetary policy in Bangladesh is also in jeopardy because of the presence of black economy. This is because the transmission network of monetary policy does not encompass the nether world of the black economy. Tinkering with policy rate or repo rate by the central bank does not affect the actors in the black economy. On the other hand, the expenditures of black money on essential and non-essential goods and services significantly add to inflationary pressure. Granted, some of the black money is stashed away in offshore banks in safe havens and do not cause any harm like fuelling inflation, apart from tax evasion. But the black money that remains in Bangladesh at any point of time is enough to destabilise the economy by financing illegal activities like drug trafficking, non-payment of taxes and inflationary spending.
It should be mentioned now that the damage inflicted on the formal economy by the black economy depends on its size. If it is 10 or even 20 per cent of GDP, the deleterious effects on the economy can perhaps be tolerated without much of an adverse impact. But if it is higher than this, not only growth of economy is compromised, macroeconomic management becomes difficult. Bangladesh now is in such a critical situation. This observation begs the question: how big is the black economy in Bangladesh?
Until now, use of black economy has not been in vogue in discussions on the economy. The popular narrative of late has highlighted inflation, declining reserves, depreciation of value of Taka, and non performing loans of banks resembling the description of elephant by the blinds. Surprisingly, the cat came out of the bag during a recent discussion with the International Monetary Fund (IMF) mission when it visited Bangladesh last month to review the progress of various reform measures mooted by the organisation. While making a presentation of the policy paper on revenue mobilisation in the presence of the IMF mission, the National Board of Revenue (NBR) mentioned that 30-40 per cent of Bangladesh GDP amounting to Taka 136-180 billion remained outside the formal economy. The NBR officials called it ‘the unaccounted for economy’, perhaps euphemistically. So, for the first time we know the official estimate of the black economy in Bangladesh. The unofficial and more credible figure must be higher than the official one. Even the conservative estimate of the size makes it out to be the proverbial elephant in the room. Obviously, the black economy did not come to have this humongous size overnight, it grew apace with the growth of the official GDP that now stands at US$454 billion. The trajectory of its growth can be plotted from the figures estimated by an Indian economist about the Indian black economy at the turn of the century. He that though accurate figures are not available, the black economy as a percentage of the national income ( GDP) is supposed to have grown from about 3 per cent in the mid-fifties to 7 per cent by the end-sixties to 20per cent by 1981, to around 35 per cent by 1990-91 and 40 per cent by 1998-1996. (Arun Kumar, The Black Economy in India, 1999). During the past quarter century India’s black economy must have grown farther, coming to nearly 50 per cent of its GDP.
While pointing out the size of the ‘unaccounted economy’ NBR officials appeared nonchalant about it, rationalising that the tax potential of the formal economy claimed their priority attention as 60 per cent of the registered taxpayers (10 million) were yet to be brought within the tax net. An important goal as it is, the government can ignore the black economy only to its disadvantage because of its huge size. If officially the size of the ‘unaccounted economy’ is 30-40 per cent of GDP, unofficial estimate should place it higher, perhaps at 40-50 per cent. Given the size, it would be no exaggeration to say that half the challenges of macro management will disappear if the black economy is reduced in size through measures to bring it within the fold of the formal economy and preventing it from flourishing like a pestering wound. As part of this campaign holders of black money may be allowed from time to time chance to make it legal by paying taxes at rates over existing ones. There is nothing immoral or iniquitous about this as offenders will be required to pay taxes at a penal rate. On the other hand, black money, being accounted for, will be required to be spent on legal activities ensuring transparency.
Campaign to bring the black economy to account may start with identifying the factors that give rise to it and is subsequently nourished like a parasite. The good news is that the causes of the growth of black economy are already known. These are corruptions by political leaders, political workers, government functionaries at all levels, tax evaders among businessmen and industrialists, money-launderers among businessmen using over-invoicing of import bills and under-invoicing of exports earnings, and smugglers of goods including contraband items. The bad news is that the political will to launch a crackdown on these known players in the black economy is often found wanting or very feeble. As a result, Bangladesh has become a paradise for rent-seekers, profiteers, extortionists, and godfathers – all thriving in Mafiosi-culture. Unless a frontal attack is made against this culture of get-rich-quick in the murky nether world of black economy, the ritual of annual budget that is going to be unveiled in a week’s time will not only give a sense of de ja vu, it will further nourish the rot that set in ever since free market neo-liberalism took over. If there is going to be a serious attempt at a sustainable turnaround of the economy the budget should zero in on healing the Achilles heel of Bangladesh economy instead of using band-aids. Success will not come overnight with one budget. But a beginning can be made.
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