Once upon a time, a controlled foreign exchange regime prevailed for all external transactions. in light of the Foreign Exchange Regulation (FER) Act, 1947.
Restrictions on current account transactions continued till early 1990s.
With the changing situation under philosophy of economic reforms of the country in early 1990s, a major change relating to reform in the external sector took place in Bangladesh.
The change led Bangladesh to accept Article VIII of the Articles of Agreement of the International Monetary Fund early 1990s and adopted the current account convertibility with relaxation in FER Act, 1947.
Within a decade of relaxation of current transactions, the exchange rate of taka was declared floating with market-based flexibility in the first decade of the current century.
Certain safeguards were, however, built into the regulatory framework to protect capital outflows from residents in the name of current transactions.
They are - requirement of repatriation and surrender of export proceeds, with provision of exporter’s retention quota (ERQ) account for their bonafide use in current nature; proof for arrival of goods into Bangladesh against import payment; current account transactions beyond authorization are subject to bonafide checks by central bank; reporting requirements from banks against all foreign exchange transactions for post-facto monitoring.
Transactions on the capital account are partially open.
No restriction is for foreign direct investment except few reserved sectors such as arms and ammunition and other defense equipment and machinery, forest plantation and mechanized extraction within the bounds of reserved forests, production of nuclear energy, and security printing and mining.
Foreign portfolio investment is open to non-resident investors.
Investment in the form of debt capital is subject to prior approval from competent authorities like Bangladesh Investment Development Authority and central bank.
Outward investment is, however, subject to approval from competent authority since Taka is not convertible on capital account transactions.
Recently the government has formulated a Rule on "Capital Account Transaction (Overseas Equity Investment) Rules, 2022."
The Rule allows exporters having sufficient balances in foreign currency accounts known as exporter’s retention quota (ERQ) accounts.
Proposal of investment outside Bangladesh shall not exceed 20% of average annual export earnings of the applicant during the previous five years or 25% of the net worth as per its last audited balance sheet, whichever is lower, subject to availability of the fund in the applicant's retention ERQ accounts.
For approval for investment abroad, there will be a high-powered committee.
However, prevailing foreign exchange regulations permit resident corporations to open offices abroad, with yearly remittance facilities of $30,000.
Exporters in this case have extra advantages since they can use foreign currency funds from their ERQ accounts for maintenance offices abroad.
With regards to inward investment, permission of the central bank is not required for remittance of sale proceeds of shares of companies listed in stock exchanges in Bangladesh.
However, repatriation of sales proceeds of shares of unlisted companies and private limited companies from non-residents to residents is subject to observance of set procedures of central bank which accepts fair value of shares for remittance determined by weighted average calculation of valuation approaches such as net asset value approach, market value approach and discounted cash flow approach; or on any of the suitable approaches depending on the nature of the company, having justified ground.
Repatriation of proceeds
The central bank has further brought simplification in the repatriation process of disinvestment proceeds.
Currently no permission is required for remittance of sales proceeds of shares regardless of amount provided that fair value is determined through net asset value approach on the basis of latest audited financial statements, and the financial statements contain no revalued assets.
Permission is not required to repatriate sales proceeds of shares up to Tk10 lakh without valuation reports.
Sales proceeds exceeding Tk1 crore, up to Tk10 crore are remittable abroad based on the fair value determined on the basis of appropriate valuation methods.
Investment by external sources in the form of term loans is subject to approval formalities.
However, repayment of loans including interest is remittable without approval.
FER Act defines capital account 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.
Portfolio investment is basically purchase of shares securities from secondary markets.
As stated earlier, the portfolio market of Bangladesh is open for foreign investors, including non-resident individuals. Individuals of Bangladesh in the same way can make portfolio investment abroad if such is allowed officially.
Without travels, individuals can use foreign currency for online purchases out of travel entitlement.
In the same way, portfolio investment may be allowed within the annual travel quota.
This may be a productive way to utilize travel entitlement, instead of purchase of virtual contents.
The authorities should definitely think about it.
Residents exporting goods are bound to repatriate payments.
Same is applicable for service exporters as well.
Despite this, there is no foolproof tool to safeguard the service payments if they do not repatriate willingly.
Service exports are delivered virtually, no regulatory records are required in the way as necessary for export of physical goods.
So, repatriation depends on the self-attitude of service exporters for the economy.
No tools work for enforcement to make repatriation.
According to Section 19 of the Act, citizens may be directed through a notification to make a return of their holdings of foreign exchange, foreign securities; and of any immovable property or industrial or commercial undertaking or company outside Bangladesh, held, owned, established or controlled by him or in which he has any right, title or interest.
Under the provision, service exports can be allowed for investment abroad without repatriation but subject to information as per requirement in the notification if announced.
Shadow forex market
There is every possibility to prevail over shadow foreign exchange markets in controlled regimes.
The market is in operation due to demand for transactions under capital account.
Wage remittances and invisible service income become targets for the shadow operators. It is not possible to eradicate the operations but it can be kept within a controlled limit.
This is possible if transactions for capital accounts are allowed within the regulatory framework.
It is expected that the new rule will facilitate overseas investment by exporters.
In the same way of opening offices abroad, a threshold limit on net assets value of a corporation or an absolute figure, whichever is lower, may be allowed for establishment of subsidiaries abroad under automatic route.
Such subsidiaries will work as export promotion or material sourcing stations.
In addition, individuals may be allowed to make portfolio investment abroad out of travel entitlement.
Last but not least, service exporters may be allowed to make investment abroad within the reporting framework under Section 19 of the Act, as said earlier.
The authorities should look into it and find out prospects and constraints.
Whatever the result is, outward capital movement needs to be eased for the sake of bringing transparency in cross border transactions.
This will create opportunities to generate income from external sources in the form of dividend, profit, technical fee, management fee and so on as an alternative window.
We should not miss the train in the name of "wait and see."
The author works in the development sector and can be reached at [email protected]
