The Bangladesh Bank (BB) had always been found to be shy when it confronted the issue of capital account liberalisation. At present, the Bangladesh currency Taka is freely convertible in current account, but that is not so in the capital account. To convert Taka into the capital account, a prior permission is needed from the foreign exchange regulator, the BB, though that permission is not needed for small amounts for some specific purposes like those for education and health care abroad. In these cases, the foreign exchange dealers or the commercial banks are empowered to pay the applicants or the concerned persons up to an amount of Taka in foreign exchange. But for investment purposes or setting up of liaison offices by the Bangladeshi companies or for portfolio investment Taka is not permitted to be converted into the capital account or so to say, the person or the entity concerned is not allowed to take the money in foreign exchange abroad. For these purposes, applications are needed to be filed with the BB and if the central bank is satisfied, then the permission is given to remit the money in foreign exchange.
For portfolio investment, permission is nil until today though other portfolio investors from abroad can bring in any amount of money and invest easily in Bangladesh's stock market and at one point, they can repatriate both capital and capital gains to the places wherever they like. Bangladesh opened up its economy for foreigners but the Bangladeshi investors are not allowed to avail the same opportunities when they want to invest abroad because of non-convertibility of Taka in the capital account. Many other emerging economies also followed the same policy in the past apprehending that if the capital account is liberalised, foreign exchange will see a flight abroad, but in later stages, most of the emerging economies slowly liberalised their capital accounts and also are reaping the benefits from such action.
It was never proved that only liberalised capital account was responsible for capital flight from a country. Rather studies show that the countries that liberalised capital account received more foreign exchanges and also saw more foreign currencies going out. A restricted economy acts as a stumbling block in the way of more foreign income coming in and also sees more income going aboard. The issue of free convertibility of local currencies into foreign currencies is closely related to the issue of trade and investment liberalisation. While Bangladesh is earnestly doing everything to open up its economy for foreign investment and also wants to enter others' markets with its goods, it lags behind in opening up its foreign exchange market.
Foreign exchange market in Bangladesh seems to be a highly restricted one as many restrictions on use of and taking away of money aboard in any foreign currency a person wants are still there. We wonder how a person who sells his land-cum-real estate property in pricey areas Gulshan of Dhaka takes his money abroad! Why should the Bangladesh Bank's policy in this regard force him to take the route of black market to take the sale proceeds abroad? It is a good thing that of late our businessmen started demanding that they be allowed to invest abroad so that they can earn competitive return from the investment. Money at home, if invested, may bring better returns, but still many prospective investors may want to take their money abroad for different reasons. The main question for Bangladesh is whether it wants to allow freedom in the use of money no matter whether that takes place at home or abroad. Bangladesh should give its income earners the idea that they are at freedom to use their incomes whenever and whatever way they like.
Restrictions on the use of money belonging to income earners simply give a wrong message that this country is not free enough for use of money. Bangladeshis are free to bring the money in, but they are not free to take the money out. India for years maintained a restrictive regime on its foreign exchange use, but in the last few years, it lifted most of the restrictions on use of foreign exchange abroad by its nationals. With the liberalisation of foreign exchange regime, many Indians set up companies and business houses abroad and now the world considers India as a big source of capital investment. Why is Bangladesh not allowing the same opportunity to its businessmen while it is sitting on a $ 32 billion idle foreign exchange reserve? Big foreign exchange reserve itself does not mean anything; more important thing is whether more foreign currencies are coming to Bangladesh and going out from the country. A continuous high flow of foreign exchange is much better as a condition than a big piled-up foreign exchange reserve in the Bangladesh Bank's account sitting idle. If capital account is liberalised, then the economy will see more flow of foreign exchange in both the directions.
Such an easing will also tie up our economy strongly with the global economy. Ultimately a currency's strength is also judged which way it is used when left to be transacted in a free market. By liberalising capital market, Bangladesh can also test the strength of its currency. What makes the country afraid in taking appropriate steps in foreign exchange market? Is it lack of confidence? Once Taka stands the test of the market, then it will come back with an added strength. The Bangladesh Bank should slowly consider liberalisation of its capital account and then see what way it works. Unless Bangladesh further liberalises this account, the black market will have its smooth sailing. No restriction in the world could keep the money at home unless the people wilfully keep it within. Foreign exchange use can be restricted in a crisis period only. For the BB, the option will always remain there to re-impose the restriction on the use of capital account whenever it deems it appropriate.
The writer is Professor of Economics University of Dhaka.