For external transactions windows, there are two types of accounts commonly cited: Current account and capital account. Capital flight is frequently used as an illegitimate transaction.
As per foreign exchange regulations of the country, capital-account 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-securitized 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. It covers many items of transactions. Of all items stated in capital accounts, personal capital movement seems to be relevant for the term -- capital flight.
Taka is the local tender of our economy. This is used as a medium of domestic transactions. In respect of cross-border transactions, foreign currency is used. There are a few currencies used as medium of exchange for transactions with the external world like the dollar, euro, pound, etc. Bangladesh earns its income and makes payments in these same currencies.
In addition to economic transactions, fund movement is executed through a financial account such as investments, loans, grants, etc. It has long been observed that the economic transactions of our country are not balanced. The mismatch is supported by investment, loans, grants, etc under a financial-account. International reserve can also support to meet excess demand.
Capital flight is the outflow of remittance under capital account or financial account. The negative gap in economic transactions depends on external support. In this situation, how capital flight is transacted is a question. This may occur in guise of economic transactions.
Of all economic transactions, trade transactions are executed under a set of rules. At every point, transactions need to be declared in different forms regarding the details of goods. Despite that, trade is blamed for misinvoicing in transactions.
Misinvoicing is of two types: Over-invoicing and under-invoicing. They bear different meanings depending on transactions. Over-invoicing in case of export means extra money injected in the home economy through an official channel. Under-invoicing refers to outflows of fund to host countries for inadmissible purposes. In case of import, over-invoicing means money transferred to host countries through official channel. Under-invoicing refers to lower payments abroad against import for retaining money in home countries.
Issues are illegitimate, but they can bring positive impact on external transactions in case of inflows, with negative impact in case of outflows.
In external transactions of the economies like ours, a negative result is observed in current account transactions under "balance of payments" statement. It means that inflows are lower, compared to outflows, against economic transactions. It can be quantified for easy understanding by 100 units of inflows against outflows of 125 units, leaving a negative gap of 25 units.
If the units are embedded by money, it can be expressed in monetary units. The economic transactions consist of exports and imports, receipts and payments on account of factors and transfers. Transactions under transfer accounts constitute one-way traffic, like wage remittances, donations, etc. The position in the example may be negative by 50 units in case of no transfer receipts. This income supports a lot. In the situation of negative position, there is a question whether it is possible by capital to be flown abroad.
Transfer income on account of wage remittances constitutes a major part of external transactions. This is basically remitted by nationals of home countries working abroad. Basically these remittances are sent by two types of people -- people working abroad with work permits and people working abroad as permanent residents or citizens. The former category cannot but remit home until they get opportunities to reside abroad permanently.
We know that GDP (gross domestic product) is the initial path to calculate national income. It contains income within the borders of an economy. GDP is added by income earned abroad, like factor income and transfer income. The same items are subtracted from GDP, earned by the rest of the world in domestic economies. The adjusted result is known as GNI (gross national income).
Income from transfer accounts is generated through remittances sent by nationals working abroad. Is it mandatory for them to remit money home? The answer can be found within foreign exchange regulations.
The regulatory framework on foreign exchange of our country gives waivers from repatriation of foreign currency held by Bangladeshi nationals in accounts abroad which were opened and credited while the account holders were working abroad as resident outside Bangladesh. Normally, an individual residing in Bangladesh for six months or more in the last 12 months is defined as a resident of Bangladesh. If the criterion is not qualified, the person -- other than those holding offices in service of the People’s Republic of Bangladesh -- becomes a resident outside Bangladesh.
The regulations indicate that Bangladeshi nationals working abroad as residents outside Bangladesh can retain their income there. They are also allowed to invest in Bangladesh like direct investments, portfolio investments, or placement of funds in foreign currency accounts. Income against their investment is easily remittable to their countries of residence abroad.
During the financial year 2022-2023, around 1.14 million people left Bangladesh for employment abroad. This is flow data, the stock of people living abroad is reported to be around 13 million. As said earlier, wage remittances constitute a major part of inflows from external sources by Bangladeshi nationals working abroad. During the financial year 2022-2023, an amount of $21.6 billion was reported to have been repatriated.
It is said that monthly average ticket size of inward remittances is around $200-250. If it is true, the expected yearly remittances should be more than $35bn, but actual flows in the financial year 2022-2023 are lower compared to the estimated calculation. In a simple sense, these funds are retained abroad. Maybe it is true, since remitters are not bound to remit money home.
In the hypothetical calculation, the external position is negative by 25 units and 50 units respectively, with and without transfer income. This situation may support a little capital flight under misinvoicing mechanism. Wage earners can retain their income abroad as noted earlier. As such, transfer income is not a right for the home economies; rather a better way if it is repatriated.
The expected repatriation from wage remittances is not the same as calculated above. In this context, reports from different global agencies can be cited. These reports indicate huge capital flight from the economy. But where the source is and why the capital flight path is chosen are questions.
Income generated from domestic source is not a sufficient path for capital flight because of its inadequacy. But there is a way for capital flight through the income generated abroad -- transfer income. It is an easy path, in which wage remittances at higher rates are pooled by agents abroad and funds are made available to beneficiaries in home countries from their sources. The fund is sold to remitters with high margin. This is a shadow market created by demand side.
The other question is: Who are remitters and why do they need such remittances? Taka is said to be convertible on current account transactions as said in terms of acceptance of Article VIII of IMF’s Articles of Agreement. But transactions of prescribed items under current accounts are allowed within the set limits.
People residing abroad are not allowed to take money from Bangladesh out of sales proceeds of their assets, except subsistent expenses in terms of prevailing rules. As a result, this creates demand for money in the shadow market. It is said many transactions requiring remittances abroad need approvals from competent authorities. Permission formalities can, as usual, discourage remitters to avail official channels.
In addition, transactions under capital account without limiting to investment abroad are path-providers for the shadow market in foreign currencies. The shadow market is operational with the support of factor income -- wage remittances of person working abroad, as supply side.
Capital flight under GDP framework is rarely possible in economies like ours. But it can be possible by handsome income generated abroad to cater to the demand of remittance which is inadmissible. Shadow market facilitates so called capital flight, creating desire for the coteries to go for illegitimate transactions.
A simple solution may come by if regulatory framework is revisited to plug in approval paths and bring much needed transactions in automatic route. This will support to suppress the shadow market, which can help factor income to increase, as necessary to the need on account of so called "capital flight." Results of today’s policy come tomorrow. As such, the earlier, the better.
Mehdi Rahman works in the development sector.
