Every transaction has two wings - receipts and payments. This is the golden rule of bookkeeping. The same is applicable to cross border transactions. For instance, a buyer makes payments to a seller who receives money for the deal. On the other hand, an importer makes fund available to a bank for transferring the same to the supplier abroad. Thus transaction takes place.
It is frequently said that hundi by-passes legal transactions. Formal channel can also facilitate illegitimate transactions through over-invoicing for imports and under-invoicing for exports to cover up money laundering. Cross border transactions can be executed without support from banking channels. These are effected through two channels - current transfers and capital or financial transfers.
Foreign Exchange Regulation Act of the country defines current account transactions as receipts and payments such as - (i) receipts and payments due in connection with foreign trade, other current business including services, and normal short-term banking and credit facilities in ordinary course of business; (ii) receipts and payments due as interest on loans and as net income from investments; (iii) moderate amounts of amortisation of loans or for depreciation of direct investments, in the ordinary course of business; (iv) expenses in connection with foreign travel, education and medical care of self, parents, spouse and children; and (v) moderate remittances for family living expenses of parents, spouse and children resident abroad.
Capital account transaction is defined as a transaction for the creation, modification, transfer or liquidation of a capital asset, including but not limited to, securities issued in capital and money markets, negotiable instruments, non-securitised claims, units of mutual fund or collective investment securities, commercial credits and loans, financial credits, sureties, guarantees, deposit account operations, life insurance, personal capital movements, real estate, foreign direct investment, portfolio and institutional investment.
In theory, taka is freely convertible on current account transactions. It means that transactions on current accounts require no permission from regulator. But insiders have different views; banks are allowed to execute transactions within indicative limit under general authority. Exceeding the authorisation, permission from central bank is required. Contradictory views bring discord in business transactions, though ease of doing business is much talked about issue of the time.
Transactions under capital account for inward investment like direct investment, portfolio investment are open. Other transactions require permission from the authorities. As Taka is not convertible for outward remittances on capital account transactions, every transaction under current account is under monitoring system of the central bank. Every import payment is subject to documentary proof by the entry of relative goods; each shipment of export needs to be matched by inward remittances. Every outward remittance is subject to report to the central bank. All these are meant to ensure that capital transfers do not take place in disguise of current payments. Whether the monitoring system brings effective results is debatable.
It is assumed that Taka is fully convertible on capital account transactions. In that situation, whether monitoring framework is necessary is a question. Central banks of the countries under convertible capital account framework do not follow such monitoring mechanism. They simply collect information to generate different macroeconomic reports.
If current account transactions were fully convertible in the true sense, and capital account in part, the demand for transactions under shadow paths would have waned. As such, monitoring framework for cross border transactions would have been redundant.
To transfer money under the garb of current accounts through banking channel or shadow channels, there is need for foreign currency inflows. Balance of payments shows inflows and outflows. Of the total inflows, export constitutes more than 50 per cent followed by wage remittances. Exporters are required to put regulatory declaration regarding their exports of goods, payments of which are to be repatriated within four months from the date of shipments. No repatriation can lead exporters to face regulatory actions in addition to being deprived of policy supports like cash incentives, bond facilities, low-cost loans, etc. Auto-piloting works in repatriation of proceeds in export trade.
In addition to export of physical goods, cross border service delivery as per mode 1 of GATS is treated as service exports. Examples include consultancy, legal, engineering, accounting, information technology, and many more. Service is a potential sector, for which central bank allows service exporters to retain major parts of inward receipts in foreign currency for meeting expenses. Despite, the sector is yet to present significant position in cross-border transactions. There is a complaint that service exporters do not repatriate payments properly. The underlying reasons, as per insiders, are that service exporters need outward remittances for which required tax payments results in extra cost burden.
Remittances sent by Bangladeshi expatriates are the second highest source of external income. It is not mandatory for non-residents to send the income generated abroad. Non-residents can use the income where they reside. We all know that most of the people living in mega cities like Dhaka are from rural and urban areas. There are professions like - white collar, blue collar, red collar, etc. People under white category usually save money and invest in capital goods like real estate purchases. They send money to village home occasionally. Other people frequently send money. But income generated in mega cities is not bound to go to the origins of its earners. The same is true for non-residents, whose size of inward remittances is small. Only blue collar workers regularly send back money.
Demand for cross-border transactions through dubious channels creates alternative foreign exchange markets. Foreign exchange rate for inward remittances has been set at higher level than that of export receipts. Higher rate for wage receipts is an indication that the remittances are traded otherwise for transfer. Now there comes a question which fund is routed abroad by adjustment of wage remittances. Definitely restrictions on outward remittances and relevant formalities pose problems which result in shadow markets. Such payments are not generally permissible for which specific concurrence is required. It is true that market is created where there is a demand. If the demand is eradicated, the market will disappear.
Open market economy is run by regulatory rule-book under which economic actors work. In case of non-compliance, regulators rectify but do not control. Smooth paths for cross-border transactions can meet demand. This can dissolve shadow market to a large extent and widen formal market with increment of inward receipts from external sources. Hence, shadow channels should not be by-products of policy framework. Revisiting cross-border transactions through formal channels is warranted.