Is capital flight the hidden leak in Bangladesh's forex reserve?

Bangladesh Bank's foreign exchange reserves experienced a sharp decline to $19.6 Billion in November 2023 before rebounding to $20.03 billion in January of this year. The reserve stood at $32.49 billion during the same period last year. 

The only way to improve things is to identify the factors leading to this decline in our reserves, and taking swift policy measures to plug these gaps.

Remittance inflows and export performance are crucial economic indicators that can help identify the reasons behind the decline in forex reserves. 

Earnings from merchandise shipments rose 1.99% to $55.78 billion in the just-concluded calendar year despite a slowdown in apparel sales in the international markets.

Migrant workers sent home $21.91 billion in 2023, a year-on-year increase of 2.96%, according to the central bank. Although not substantial, this is still an increase, yet the reserve numbers remain low. Why so?

Why indeed, many analyses aiming to uncover the underlying factors behind the decline in reserves often focus solely on accounting for reduced inflows, overlooking important factors such as unrecorded outflows of dollars from the country and trade-based money laundering (TBML). 

Last September, customs authorities found 33 readymade garment factories and buying houses laundered at least Tk821 crore in the previous six years. The launderers resorted to two tactics – under-invoicing and using incorrect shipping codes.

Experts fear this is only the tip of the iceberg of TMBL in Bangladesh. A lack of information on actual prices of imported and exported goods makes it almost impossible to prevent money laundering through foreign trade, according to a Bangladesh Financial Intelligence Unit report.

Additionally, the recent fluctuating exchange rate and the devaluation of the currency may have diminished investor confidence, prompting investors to withdraw their capital from the country. Reports indicate a slump in the registration of investment proposals in the previous fiscal year.

Additional evidence supporting the significant role of capital outflows includes recent property-buying spree in Dubai, Canada, and the United Kingdom, as documented by numerous news sources. According to a 2021 Global Financial Integrity (GFI) report, $61.6 billion was smuggled out of Bangladesh from 2005 to 2014. Bangladesh loses $8.27 billion annually to trade misinvoicing. By 2030, GFI predicts this could exceed $14 billion annually.

The glaring discrepancy between data from the Export Promotion Bureau and Bangladesh Bank is an eye-opener to direct capital flight—a $12 billion gap between export shipments and actual receipts from abroad. Finally, the IMF recently reported an outflow of 0.5% of GDP in Bangladesh in 2022–23, again indicating capital flight.

Economic and consumer behaviour analysis suggests that the combination of economic instability mentioned above may cause risk-takers to change their preferences, turning them into risk-averse individuals. This means that individuals in this changing economic setting may now choose to invest more in safer assets or have a greater return.

Furthermore, money laundering, a detriment to the economy, has undoubtedly worsened due to the expansion of offshore financial centres and tax havens. These locations attract criminals searching for secrecy, favourable tax rates, and reduced regulatory scrutiny, creating a platform for concealing and transferring illicit funds. Thus, domestic investors may now choose to invest in more stable foreign assets that offer a higher rate of return.

This economic analysis, supported by statistics and empirical evidence, reveals the importance of accounting for unrecorded factors, such as capital outflow and money laundering when analysing the causes of the falling reserves. 

Taking into consideration a combination of national and global economic factors, such as rising dollar rates, tax hikes, an increase in property prices fueled by a shortage of available properties at popular capital flight destinations as well as internal political and economic instability, capital flight emerges as a significant contributing factor to the diminishing reserves.

Urgent policy implementation, focusing on addressing the illicit outflows of capital, may finally bring about an effective outcome to restore the nation's reserves, eventually establishing a robust and sustainable foreign exchange.

Ibnat Hasan is a student of Economics at BRAC University. Sifat Islam Ishty is a Senior Lecturer at the Department of Economics and Social Sciences at Brac University.

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.