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How can we rein in capital flight?

Al Mamoon
IN a pre-budget meeting, economists citing a study informed the finance minister that capital flight worth around $1.5 billion (Tk 12,000 crore) is taking place a year from Bangladesh. The minister did not wonder. He rather cited a 2011 study of the Finance Division of his own ministry which revealed that the underground economy in Bangladesh is growing faster at a rate that we have never seen before. It now accounts for 62.75 percent of our GDP; meaning, if our GDP isTk 11,810 billion, currently the size of the underground economy is Tk 7,410 billion. Common wisdom dictates that capital flight is sure to take off amid such a black economy.
By capital flight we understand an exodus of financial assets, capital in particular, from one country to another in ways that are not part of normal transactions. There are a heap of reasons for such abnormal movements. Two of them, however, top the list: i) a lack of stability, ii) country-specific risks, including inflation, volatile political environment and ill governance. We have them both. So far the most open economies have shown the least vulnerability to capital flight and the economies with capital controls that restrict the transfer of assets proved to be more prone to it. Ours is no exception; we have too many red lights on capital outflow in official channels.
Many observers suggest that political instability and uncertainty are particularly important in explaining flight of capital: residents faced with such uncertainty and instability take their money and run to avoid the possibility that the government may in one way or another erode the future value of their asset holdings. An econometric case study on capital flight suggests that political instability is the single most significant cause of capital flight from Bangladesh, while increases in corporate income taxes, higher real interest rate differentials between the capital-haven countries and Bangladesh, and lower GDP growth rates also significantly contribute to capital flight. Besides, it is a global reality that the very genesis of money will decide
whether to stay back at the country of origin or to travel to a new country. A large sum of contractual cuts, rents, commissions and all unearned money which is not reported, not disclosed and not taxed are sent to safer destinations.
Now, how does the money cross borders? There are more ways than one can imagine. As per a Bangladesh Bank official, these are: under-invoicing of exports, over-invoicing of imports, smuggling, retaining of the indenting commission in the overseas countries, use of hundi (also called hawala by Indians), and remitting money through normal banking channels for fake payments. Other factors include taking assistance of non-bank financial institutions where supervision and regulation are shaky, and abrupt use of electronic channels through off-shore financial centres where regulation is almost non-existent. Electronic transfers are the most popular medium today while the most traditional one, cash-carry, still exists.
It is now widely believed that Malaysia is enjoying growing popularity among Bangladeshis to offload capital. Why is that? Why not Dubai, Singapore or other cities? Indeed they all are on the shopping list. Kuala Lumpur emerges to be the hot spot for its easy accessibility. Color money has a proven tendency to move to migrant worker concentrations. The meant to be remitted money from workers community is collected, credited to designated accounts and never actually remitted but their families receive the money here anyway. The capital rather stays back instead of flying. KL got the initial vibe this way. In addition, it offers loving features: KL has the world's third lowest cost of rent and Consumer Price Index, fourth lowest cost of business occupancy, and seventh lowest tax rates in the world. Conducive environment for business, investor friendly environment and tax policies, excellent infrastructure, supportive financial sector and political stability make her stand apart in Southeast Asia. Today Bangladeshis are known as the second largest community in their second home project. KLhas also emerged as a vibrant education hub for this region. Big names like Monash, Nottingham or Curtin University have opened offshore campuses in KL and more and more Bangladeshi students are being enrolled there. These branch campuses operating in Malaysia enable students to acquire prestigious university qualifications in a country that has lower living expenses. Another area of savings is the course fees, which is considerably lower as compared to fees at the main campus. For our tight control on outbound dollars, parents choose alternative ways to pay fees and knowingly or unknowingly become part of the capital flight umbrella.
The UAE has also crafted investor friendly policies and several businesses including real estate in Dubai are drawing attention here India is a traditional destination. Capital is also crossing longer distances, as long as the Atlantic, through immigration applicants, GT module IEITS examinees and so on - all commensurate with each other.
How do we check the trends? How to prevent people from remitting outward illegally? The budget speech of the finance
minister does not say a word about it. The paragraph on combating corruption also focuses on corruption prevention rather than control. It, however, reasserts government's belief on collective efforts to tackle corruption and says, “It will require strong political will, social commitment and institutional drive. “ All three of them are a far cry though.
There are of course measures which, if implemented, can rein in capital movement Measures like making exchange rate stable; keeping fiscal deficit at a tolerable limit allowing the interest rate to be determined by market forces, modernising revenue collection mechanisms, strengthening the central bank's oversight in willful default of bank loans are time tested. We can also try our home grown steps, namely omitting the provisions to legalise undisclosed money from the income tax ordinance, bringing back people's confidence in capital market or devising ways to check tender monopolisation. But you will delve into them only if you have the political will. Does it seem that the will is there? In the wake of new and robust flights many will answer in the negative
The writer is a part-time business faculty at