In its latest Annual Report, Global Financial Integrity (GFI), a Washington-based research outfit, provided an estimate of $6.0 to $9.0 billion that, it claims, was siphoned away from Bangladesh in 2014 via what it calls Illicit Financial Flow (IFF). The media in Bangladesh is abuzz with reports and comments on the significance of this phenomenon. Many columnists also joined the fray to throw in their learned thoughts in the bulging potpourri.
These reports and articles provide a kaleidoscopic view of capital flight in all its colourful dimensions. Their opinions, predictably, vary: so do their prescriptions on how to clip the wings of the flying money. What is flabbergasting, however, is that none spared a thought to question the credibility of the number supplied by GFI. It once again demonstrates our preference to see ourselves through the prisms of people from across the seas.
Global Financial Integrity, let us face it, does not have a magic wand to monitor the illicit fund flow of 200 plus countries of the world. This writer has had the opportunity of exchanging emails with the GFI for clarification on the sources of their data. They have been candid enough to admit that their (to quote verbatim) "estimates of illicit outflows are likely underestimated, as our methodology cannot detect same-invoice faking, the misinvoicing of trade in services and intangibles, and hawala transactions". They also clarified that they compile the data only on the basis of the government-filed International Monetary Fund data. (cf. Capital Flight from Bangladesh: Clarifications from the Global Financial integrity, the Financial Express dated June 18, 2016).
Another contentious issue that seems to have escaped the attention of most of the commentators is the difference between capital transfer and illicit fund flow. Simply stated, capital transfer involves transfer of money abroad mostly through hundi system for buying property, investment in the business and capital market or simply to put it in a bank account, probably in an offshore centre, to hide it away from the prying eyes of the tax and other authorities.
IFF, on the other hand, includes not only capital transfer but a myriad other unofficial cross-border transactions, e.g., financing of smuggling, under-invoicing of imports, buying of job visas by the recruiting agents, travel abroad for study, medical treatment and pleasure. Thus, while money sent away by way of capital transfer is lost forever, other forms of IFF brings back, for better or worse, goods and services, as quid pro quo.
The use of hundi money for financing of smuggled goods into Bangladesh is the main source of leakage of foreign exchange. Smuggling from India alone accounts for about $5.0 billion per year in contrast to Bangladesh goods worth only an estimated half a billion dollar sneak across the porous border. The cost of merchandise, including gold (which alone accounts for about $2.0 billion a year), smuggled from other countries would account for another $ 5.0 billion a year. All told, total outlay on financing of smuggled stuff would be at least $10 billion.
Under-invoicing of imports for the purpose of dodging import duty and taxes, is another variation of smuggling. The size of the fund flowing away from the country through hundi for under-invoicing is estimated to be anything over $5.0 billion even by a very conservative estimate.
Some $2.0 billion quietly leaves the country through the courtesy of manpower exporters to buy job opportunities abroad for Bangladesh nationals as also to navigate through various channels abroad.
Foreign exchange costs for study and medical treatment abroad are available from the official sources but the official formalities are rather complex and dilatory. So people quietly turn to the free market operators even though it involves a small extra cost. It is difficult to say offhand how much money goes out on this account.
Unauthorised foreign workers in Bangladesh, especially from the neighbouring countries, account for a big chunk of IFF. How much money goes on this account is a matter of conjecture but I have seen one media report that, quoting World Bank as the source, tells us that Indian workers in Bangladesh alone sent $3.7 billion last year. Pakistan and Sri Lankan workers, who have strong presence in the apparel sector, would not perhaps lag far behind.
Foreign companies operating in Bangladesh transfer money from Bangladesh to avoid or lessen tax burdens. Over-invoicing of imported machinery and raw materials supplied by their parent offices and inflated head office expenses are the favourite ploys.
Factoring in these divergent elements, including capital transfers, it can be safely assumed that the total outgo constituting annual illicit financial flow would be around $20 billion, a few big notches higher than what the GFI estimated.
Where do the supplies of foreign exchange in the kerb market come from? The following are the principal sources feeding the market:
The lion's share of foreign exchange that gets into the hundi market comes from about eight million overseas Bangladesh workers and diaspora. Several studies, including one done by the World Bank, suggest that close to $10 billion of expatriates' remittances leaks to the hundi market.
Other sources of supplies include money retained abroad by way of over-invoicing of capital goods and machinery, commissions received abroad by suppliers' agents in Bangladesh and kickbacks from foreign firms in exchange for favours extended by a big posse of rent seekers. These are estimated to be in the region of $5.0 billion.
How harmful is IFF? There is no doubt that capital flight is a strong deterrent to new investment for the capital-starved Bangladesh. But the funds that are sent abroad through hundi system on many counts are not completely lost. Here is what we see on the flip side of the IFF spectrum:
The money sent by the manpower agents through the informal channel brings jobs for 400,000 to 700,000 of mostly unemployed youths of Bangladesh. They are a key to our recent prosperity and accumulation of a healthy foreign exchange reserves.
Money sent abroad through informal channel for, say, study or medical treatment abroad is not wasted. In fact, it eases pressure on our regular foreign exchange reserve.
Gold is apparently a luxury item but for middle, lower middle-income families or even poor families one inevitable item on the shopping list is gold jewellery, at least on the occasion of marriage of their children. In some senses money going in the kerb market to finance gold is more useful than foreign exchange released from official sources for import of luxury goods dedicated to the comforts and ostentatious living of the rich.
What apparently transpires from this discussion is that IFF is mainly an offshoot of rigid import and exchange controls that do not recognise the needs, even the genuine ones, for sending foreign exchange from official sources. For instance, employment of our nationals abroad would not have been possible without the money sent to the foreign agents and employers. Every country that employs exchange control must learn to live with IFF.
What can we do? Here is what we see as the possible answer to tackle the menace of IFF:
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. Attention must be focused on rooting out the all-pervading corruption instead of lamenting over flight of capital; that will automatically dry out source of funds for sending abroad in quest of safer havens. With so much unearned wealth floating in the air anti-money laundering initiatives are not only likely to be wasted but create another outlet for corruption.
Bangladesh taka is currently overvalued. It is encouraging imports, especially frivolous and luxury imports, and frequent trips abroad in search of pleasure and shopping. On the other hand, the overvalued taka is acting as damper to promotion of exports while encouraging smuggling of goods from across the border. The recent slide in the wage earners' remittances and falling exports, especially non-garment exports, is attributed to widening gap between free official and kerb market exchange rates, a sine qua non of overvalued taka. Given the high level of inflation gnawing at the intrinsic value of taka for some years now, we need to shake off any pretension and set the exchange rate at a realistic level, through usual market intervention.
The government may review its Import Policy and remove unnecessary restrictions on import of gold and other items essential for the ordinary people. Restriction may rather be imposed on import of luxury and unnecessary items like luxury cars, expensive tiles, toiletry and bathroom fixture as well as soft drinks and canned food which cost sack loads of foreign exchange but cause health hazards. We need not forget that a lion's part of foreign exchange for these imports is earned by our workers abroad through sweat, tear and blood. We have a moral obligation to use it for the benefits of the common people.
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 archaic foreign exchange law, enacted by the British government as war time exigencies, may be replaced by a simpler one befitting the realities of the twenty-first century and the Government's avowed policy of export-led growth.
The writer is a retired Executive Director of Bangladesh Bank. [email protected]
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