Foreign exchange controls in Bangladesh: Musing from a legal ground

Published by The Daily Observer  13  July, 2019 (Link Here)

Foreign exchange controls in Bangladesh: Musing from a legal ground Law Column is authored by the associates of Legal Counsel which is one of the leading full-service corporate law chambers of Bangladesh having core expertise in corporate and commercial law, employment and labor law, family law, property law, corporate taxation and so forth. (www.legalcounselbd.com or email at [email protected]) Bangladesh’s foreign exchange reserves as at the end of April this year, stood at just over US$32 Billion, some 441% higher than a decade ago when it stood at just over US$7 Billion (Bangladesh Bank). This has eased macro-economic issues such as the balance of payments and had a positive effect on sovereign credit rating by the country having an increased ability to meet its foreign exchange needs. However, during the last decade, there has fundamentally been no change or at best, very little change in the strict exchange control regulations that prevail in the country, and this has had various knock-on effects on other parts of the economy and impacting on everyone’s lives, not only those in need of foreign exchange. At its simplest, in Bangladesh money cannot be remitted outside of the country in the same way as can be done in countries with no exchange control such as most developed and even some developing countries. In such countries, a person can send money from their personal bank account in their country’s local currency and remit it abroad to any other country in the world. If such were allowed in Bangladesh now, the government over the years has believed and this author agrees that this would lead to such outflow of capital from the country that the foreign exchange reserves would fall to dangerously low levels, adversely affecting the country’s ability to meet its import needs, which have to be paid in foreign currency. Therefore, Bangladesh has exchange control regulations whereby money can only go abroad officially (thus in a foreign currency) under certain specific categories of remitter. Basically the categories are importers, whom need to make their payments to their foreign suppliers in foreign currency; students studying abroad and hence need to meet their tuition fees and living costs; repatriation of Foreign Direct Investment from abroad; and specific instances of foreign currency needs that require permission from the central bank on a case to case basis, for example international conference fees (that cannot be paid by international credit cards), or more recently, funds needed abroad for Bangladeshi foreign investment. This last case has been growing slowly in Bangladesh, as large local business conglomerates are looking to set up businesses, companies and factory plants abroad, needing to export capital. But this has been very limited, for the same reasons of why there are generally strict exchange-control regulations here, feared capital flight. There is one further category of how money can go abroad officially, and that is the Travel Quota (known as “TQ”) of foreign currency that is allocated to every citizen of the country. At the moment, the quota is set at US$5,000 annually for Bangladeshi nationals travelling to SAARC countries and US$7,000 annually for non-SAARC countries. These quotas allow locals to obtain foreign currency in cash from banks or spend abroad via international credit cards, provided they have sufficient local currency in their accounts to meet these foreign currency payments. Additionally, there is a category of bank account, namely the Resident Foreign Currency Deposit Account (“RFCD” account), that allows for Bangladeshis to deposit up to US$5,000 each time after returning from a foreign trip, where the deposit has to be made within 28 days of the return. These funds can be used again via international debit or credit cards and unlike TQ funds that have a time limit with no roll-over, there is no time limit for RFCD funds to be utilized. Excusing the slight digression into the minutiae of the strict exchange controls that exist in Bangladesh, the major impact these have had on all people’s lives is mainly in property locally, and impacting the government with loss of revenue by illegal capital flight through informal international money transfer locally known as “hundi” and regarded by the government as money-laundering in breach of such exchange controls. Since it is so difficult to remit money abroad, officially at least, from Bangladesh, very normal foreign investment channels for individuals with sufficient disposable incomes and assets are blocked off in Bangladesh, such as buying property abroad or sending money to a relative abroad. These are not possible for a Bangladeshi person to do due to the very limited ways money can leave the country and this leads to narrow investment options for people here, land and property being a major one. Excessive local liquidity arising from untaxed and hence “black” money on top of legitimate post-tax disposable funds of people increases the demand for local land and property as a safe investment destination to park such funds, spiking up the prices due to such high demand. This has lead to the majority of people suffering by having to pay higher rents and being priced out of being able to buy property in their local areas. The paradoxical situation now exists of per square foot property prices in some parts of Dhaka to be higher than that of premium areas of some of the most expensive cities in the world. The other major impact of strict exchange control regulations is illegal capital flight or money laundering by a process of informal international money transfer called “hundi”. In this way, many Bangladeshis have been able to achieve their foreign remittance goals and foreign investment ambitions illegally, leading to foreign currency leaving the country as well as local currency transactions that lead to obtaining foreign currency abroad and thus have no benefit to the local economy as such transactions are not regulated, tracked nor taxed, causing thousands of crores of Taka loss of revenue to the country’s exchequer. In conclusion, as the foreign exchange reserves grows in years to come there may be a time, when such exchange controls should be relaxed partly or fully to bring this “grey” economy back into the real economy and lead to healthy realistic property pricing and allow local people and businesses to globalize via foreign investment abroad.