Ours is a closely held society, so we constantly suffer from policy inertia or lack the ability to say a loud “no” to many odd practices going around. It may be “why we are poor, because we are poor” or even our age-old inability to go or think beyond.
The debate around whitening black money in Bangladesh continues to surface every fiscal cycle, but the evidence over decades shows that these schemes have little lasting impact.
The shadow economy remains entrenched because the underlying incentives that allow illicit finance to thrive have not been dismantled. The interim government led by Chief Adviser Professor Muhammad Yunus faced the urgent task of addressing this challenge not with temporary measures, but with structural reforms that target the root causes.
Interestingly, we didn’t see much talk from him or his lieutenants on this. Law enforcement still remains a tough challenge as well as full of ambiguities.
Bangladesh’s shadow economy is vast. Studies over the years, both domestic and international, have suggested that it accounts for anywhere between one third and four fifths of the formal economy.
This means that a significant portion of the nation’s wealth is not taxed, not monitored, and often not reinvested productively.
Black money schemes that allow individuals to legalize assets with small tax payments while imposing heavier burdens on honest taxpayers have created a sense of injustice. As a result, compliance has weakened and the culture of evasion has been reinforced.
Past data shows the limits of such schemes. Since independence, only about Tk470 billion has been legalized, with the majority of that occurring during the Covid-19 crisis when money could not easily be transferred abroad.
Attempts in recent years to encourage repatriation of laundered funds through low tax rates have failed to bring results. Instead, capital flight has intensified.
Global Financial Integrity reported that between 2009 and 2018, Bangladesh lost on average $8.275 billion per year through trade mis-invoicing, that is, deliberate falsification of values in import-export transactions.
That represented about 17% of the country’s international trade value during that period.
Data for some years were missing, but in 2015 alone, Bangladesh’s loss reached $11.871m. In total, over a span of six years (from among those years for which data were available), the outflows via trade-related illicit financial flows were estimated at nearly $50bn.
The paradox is that in moments of crisis, the shadow economy has helped sustain consumption and keep parts of the economy moving when formal channels slowed. But this is at best a temporary cushion.
The long-term consequences are far more damaging. The government is deprived of much-needed revenue, development financing becomes more difficult, and reputable multinationals hesitate to invest in a market where rules are not consistently enforced.
The interim government now has or had an opportunity to break this cycle. Instead of recycling whitening measures, Bangladesh must focus on strengthening institutions that detect and punish tax evasion, improving transparency in financial management, and widening the tax base in a way that feels fair to citizens.
Rationalizing tax rates so that compliant earners are not penalized while evaders are rewarded will be critical. Tax calculation, reporting, and payment remains a complex experience that could do with simplification.
Equally important will be tackling trade-based money laundering through better monitoring of imports and exports, building capacity at customs, and using technology to detect under and over-invoicing.
Public trust is central. Citizens are more likely to pay taxes when they see accountability in how funds are collected and spent. The interim administration can set a new standard by ensuring transparency in public finance and reducing political compromise in enforcement.
If the state demonstrates that rules apply equally to all, from small businesses to large conglomerates, the incentive to remain in the shadows will gradually diminish.
Money whitening schemes have been tried repeatedly and failed repeatedly. The roots of the problem lie not in the lack of opportunities to legalize black money, but in the lack of consequences for creating it in the first place. Bangladesh cannot afford to let its economy be shaped by shadow finance. The task before the interim government is or was to strengthen institutions, enforce accountability, and build a culture of compliance. That is the only way to shrink the shadow economy and unlock the country’s true growth potential.
Mamun Rashid is an economic analyst and chairman at Financial Excellence Ltd.
