Challenges ahead of the finance minister and state minister

I am not writing this column to make a comment on the one-sided election of 7 January 2024. I am writing this column to point out the challenges ahead of the new finance minister and state minister for finance.

Finance minister Abul Hasan Mahmud, while serving as a diplomat for Pakistan, left the Pakistan side in April 1971 to declare his allegiance to the Bangladesh government in exile and join the war of liberation. The courageous decision taken by diplomats like him to join the liberation war created a stir around the world during war.

After retiring from diplomatic service, in 2001 he joined Awami League. In 2014 he served as the minister for disaster management and relief. Then from 2014 till January 2019 he served as foreign minister. Mahmud Ali had been a student of economics at Dhaka University. As a member of  parliament, from 2019 he headed the parliamentary standing committee for finance ministry affairs for five years. Prime minister Sheikh Hasina has now appointed his as the finance minister in the new cabinet. We wish him success.

State minister for finance Waseqa Ayesha Khan is daughter of my respected senior Ataur Rahman Kaiser. She has been Awami League’s finance and planning affairs secretary for the past few years. And now she has been bestowed with a much graver responsibility as state minister for finance. My best wishes for her too.

Fifty-two years after achieving our victory, we should have been awash with elation in 2024 over our commendable economic achievements. But due to the inefficiency and inaction of our last finance minister Mustafa Kamal, in March 2024 our economy is faced with multiple crises.

This list includes: Firstly, unreined inflation in our economy, an alarming nosedive of our foreign exchange reserves, the steady increase in the rate of the dollar against the taka, inertia in the inflow of remittance through formal channels due to expatriates using the hundi channels, failure to open LCs for import due to the alarming dollar crisis, the spiraling of the dollar rate in the kerb market from Tk 87 per dollar in 2021 to Tk 120 in 2024, the depreciation of the taka by almost 28 per cent.

Secondly, massive money laundering by means of over-invoicing in the case of imports and under-invoicing in the case of exports, siphoning off bank loans from the country overseas by means of hundi (informal money transfer channel), extreme deterioration of the default bank loan problem, export income being invested overseas in property and business instead of being brought back into the country, the government’s continued complacence regarding corruption and looting of capital.

Thirdly, the alarming steady decline in the current account of the balance of payment for the past four years, a serious deficient created in the financial account of the balance of payment after a long time, foreign direct investment coming to an almost complete standstill in the 2022-23 financial year and indications of a slowdown in export revenue in 2023.

Each and every one of these problems would certainly be a reason to lose sleep over for the finance minister of any country. Under the leadership of the prime minister, the new finance minister and state minister for finance must immediately apply all their power to resolve these problems. The first task will be to rein in the unreined spiraling of the dollar rate and control the alarming inflation cause by the 28 per cent depreciation of the taka. Attention must be paid to halting the plunge in the country’s foreign exchange reserves. After paying the Asian Clearing Union debt, the gross forex reserves in March 2024 stand at less than USD 20 billion according to IMF’s BPM-6 calculation method. The biggest challenge before the government is to restore the growth trend in reserves.

Meanwhile, the opening of LCs has declined  since August 2022 due to various measures being imposed to control imports. The country’s import revenue fell by USD 21.11 billion from USD 80.40 billion in 2021-22 to USD 65.29 billion in the 2022-2023 fiscal. This is a 24.43 per cent decrease. The control of imports continues even in the eight months of the 2023-24 fiscal.

In the meantime, it has not been possible to stem the inflow of remittance by means of the hundi system. The main reason that the hundi business is booming is that the difference of dollar rate between the existing rate in inter-bank transactions and in the hundi channel remains at around 7 to 8 taka. If this difference persists, the decision to gradually leave the dollar rate to the market will not yield tangible results.

If we look at the compounded effect of capital flight due to hundi along with under-invoicing in imports and over-invoicing in exports, export revenue not returning to the country and other basic problems we will see that every year a minimum of USD 15 billion to USD 16 billion capital is being siphoned out of the country (or the dollars are not coming into the country), and half of this is being laundered through the uncontrolled hundi system.

Remittance sent in by expatriates fell from USD 24.77 billion in 2020-21 to USD 21.61 billion in 2022-23, the main reason of which is the boom in the hundi business. However, from October 2023 to February 2024 there has been an increase in remittance through formal channels. Despite that, my opinion is that it has become imperative for the government to take stern action regarding the money launderers in the demand structure of the hundi system.

There is all reason to believe that capital flight through hundi channels has surpassed all three previous methods. It is mainly the corrupt elements in the country, the owners of black money and the culture to take bank loans and not return the loans, that has created the demand for which ‘hundi dollars’ are remaining overseas.

Whether it is the politicians who skim off a margin from anything, corrupt bureaucrats and engineers, the big-scale loan defaulters, the powerful businessmen and industrialists – they have hundi dollars used to build up homes overseas, set up businesses abroad, establish Begumpara in Canada, the Sydney fraternity in Australia or the second homes in Malaysia. Alongside the old methods, hundi business has created capital flight as the top problem of the country. So I feel this too is one of the top challenges for the new finance minister and state minister.

Corruption remains the main problem for Bangladesh. According to the corruption rankings of 2023, Bangladesh ranks second only to Afghanistan in corruption among South Asian countries. According to Transparency International’s ranking in 2023, Bangladesh ranks at 10 among the most corruption-ridden countries. From the angle of the demand for hundi dollars, it is apparent that corruption is closely linked to capital flight through hundi channels. Unless strong measures are actually taken against corruption, it will be impossible to halt capital flight. If capital flight is not halted, it will be impossible to halt a long-term decline in foreign exchange reserves.

My request to the honourable finance minister would be to form a strong committee of consultants comprising eminent economists of the country to provide recommendations to the government regarding economic policy. At the same time, a banking reforms commission must be formed immediately. Thirdly, a few default loan tribunals should be set up to take punitive action against the deliberate big loan defaulters. Fourthly, bring the upper class persons under the income tax net in order to improve the tax-GDP ratio. Above all, take measures to enact a law on the lines of the Anti-Corruption Ordinance of 2007-08 for the sake of effective measures against corruption.

I feel that if these measures are taken up, within a year the economic crisis will clear up to a considerable extent.

* Dr. Moinul Islam is an economist and former professor of the economics department at Chittagong University

* This column appeared in the print and online edition of Prothom Alo and has been rewritten for the English edition by Ayesha Kabir