The International Monetary Fund (IMF) said Bangladesh may have experienced capital flight in the last financial year, as evidenced by abnormal capital outflows and unrealized export earnings.
The financial balance, which is part of the balance of payments (BoP), has an average inflow of 0.5% of gross domestic product (GDP) ($2.1 billion) in 2022-23, compared to an average of about 2.5% in the past. ) and is showing signs of capital flight, Washington announced. The based financier said in a recent paper:
The report said foreign exchange shortages and letter of credit margin requirements for payments by bank deposits to curb non-essential imports led to a significant contraction of 16% in imports in FY23.
Exports remained resilient despite slowing growth in major trading partners. The current account balance improved significantly.
Total exports from the Export Promotion Bureau recorded under BoP increased by 6.3% in FY23 compared to the previous year, while the receipts recorded by Bangladesh Bank under commercial banks’ foreign exchange deposits were marginal compared to FY22. increased.
As a result, unrealized export earnings (the difference between export shipments and realized export earnings) increased to $9.6 billion, equivalent to 2.1% of GDP in FY23. The newspaper said this reflected delays in the repatriation and repayment of export proceeds, resulting in a sharp negative short-term trade credit.
High global inflation and continued supply disruptions have increased the import costs of externally financed investment projects, resulting in delays in project implementation and, as a result, corresponding reductions in external project finance disbursements.
Due to the unprecedented reversal of the financial account, foreign exchange reserves continued to decline even as the current account improved above the line.
Historically, Bangladesh’s financial balance has experienced a surplus almost every year.
The IMF notes in a footnote that some of this difference is due to “domestic exports” (where shipments from export processing zones to the domestic market are mistakenly deemed exported) and export proceeds due to quality control issues or vendor bankruptcy. Although this may be due to the cancellation of Unrealized export earnings are a sign of capital flight.
The IMF said: “Uncertainty surrounding the general election has also contributed to the high level of unrealized export earnings, with exporters reportedly refraining from repatriating their profits until the election results are determined. “This could be a short-term factor.”
Latest figures on funds leaving the country through illegal means were not available.
In December 2021, Global Financial Integrity, a Washington-based organization, reported that Bangladesh suffered from 2009 to 2018 due to misinvoicing of imported and exported goods for the purposes of tax evasion and illegal fund transfers by traders. The company announced that it had suffered an average annual loss of approximately $8.27 billion. border.
Yesterday, Zahid Hussain, former chief economist at the Bangladesh World Bank, told the Daily Star that the IMF had only scratched the surface. “That may give us more information about this matter.”
The IMF report said that a faster-than-expected tightening of global monetary policy, an inadequate domestic policy response, and expectations for further currency depreciation were contributing factors to the outflow. The policy rate differential between Bangladesh and the US has narrowed from 4.9% at the start of the pandemic to 1.2% by the end of June 2023.
At the same time, inflation remains high and the inflation gap with the United States is widening. Private foreign credit inflows sharply declined as Bangladeshi companies reduced their borrowings from abroad.
Private short-term net inflows of $3.1 billion in FY22 turned to outflows of $1.9 billion in FY23 as repayments exceeded new loans due to rising global financing costs.
Additionally, frequent changes in exchange rate policy settings, uncertainty surrounding the foreign exchange management framework, and expectations of further currency depreciation have resulted in significant export repatriation delays.
To address repatriation delays, in March 2023, the BB mandated that export receipts be converted at the exchange rate prevailing in the market on the day the proceeds are to be realized.
The IMF said a transition to greater exchange rate flexibility could incur adjustment costs. Furthermore, if not accompanied by an appropriate monetary and fiscal policy stance, a disorderly transition could lead to sharp exchange rate depreciation or exchange rate overshoot.
Attempts to introduce flexible exchange rate regimes in some countries may be short-lived due to the lack of developed foreign exchange markets, appropriate intervention policies, the technical ability to adopt alternative nominal anchors, and monetary policy independence. However, the result is ultimately unsustainable.
The paper said it remains difficult to quantify these adjustment costs in Bangladesh.
First, the net negative impact on the budget due to increased external debt servicing costs and increased implicit fiscal subsidies for imported essentials (including food, energy, and other goods) is likely to be significant. be.
External debt repayments amounted to approximately 1% of GDP in FY23, and fiscal subsidies for natural gas, electricity, fertilizer, and food amounted to 1.4% of GDP in FY23, although the latter in particular will increase further due to depreciation. right. the absence of a domestic automatic price adjustment mechanism;
Second, he said that pass-through through depreciation may contribute to price increases.
According to the IMF, a more flexible exchange rate regime is essential for Bangladesh to rebuild its external resilience and successfully integrate into the global financial system after graduating from an LDC.
“Short-term policy measures should adopt a tight monetary stance and maintain fiscal discipline to support moves towards greater exchange rate flexibility.”
The report states that the BB should adopt an interim exchange rate agreement, reduce reliance on the exchange rate as the main nominal anchor, and gradually move towards credible inflation targeting as the sole nominal anchor of monetary policy. It states that there is.
Transitional exchange rate arrangements could involve a gradual transition from a single reference currency peg to a basket of currencies with narrow band corridors. Gradually increasing flexibility by widening the range of exchange rates would increase awareness of currency risks among market participants.
Zahid Hussain opposed the IMF’s proposal for an interim exchange rate agreement.
“Transitional exchange rate is a long process. The IMF is discussing several implications. What the IMF is not saying is that Bangladesh is already facing the costs of delays in leaving the exchange rate to the market. Thing.”
“But if we can introduce reforms, the supply of US dollars in the market will increase.”
Hussein said the lack of reforms has led to inflation rising to record levels and the inability to pay independent power producers on time.