What Does Wild Fall Of Taka Portend?

Wild fall of Taka causing worries,
Most blame goes to deferred LCs.
Before and after election year,
Gathers abroad illicit capital sheer.

The rapid fall of Taka against major currencies has become headlines recently.Central Bank is selling dollar at Tk 86.70.However, at the exchange market US dollar is selling at TK 93. This rapid depreciation of Taka has been reported to be caused by rising commodity prices,settlement of deferred Letter of Credits, lack of foreign tourists, and rising trade deficit¹.

Government even issued notice banning unnecessary travel of the bureaucrats. But I think bureaucrats’ visit abroad and lack of tourists are poor reasons attributed to wild fall of Taka.The two represent a miniscule part of demand for dollar. The ban came at a time when a minister and her relatives’ visit to another country drew lot of flak in the press. Later, minister claimed that she paid her own expenses and never relied on public money for meeting the expenses. So govt's ban is a diversion to pass the blame to others.

Unease of the govt is compounded by falling remittances, which earlier offset trade deficit and made a current account surplus. In addition, medium and long term debt commitment has also increased, but as percentage of export earnings it is still below 25%(as per my calculation).Along with Occidental multilateral institutions, which are more generous towards Bangladesh, Russian and Chinese credit repayments do not pose serious problem for the moment. Loan repayments of Russian credit line would start from 2023 and some social media put the annual payment somewhere between $565 million. The Ban on Russia and Russian decision to repay the credit in local currency would not cause pressure on US dollar demand. However, such ban could increase dollar demand if US dollar payment could take place in disguise of legitimate international trade via other friendly countries. It is hard to trace such trade payment, so it is better not to embark on such speculation.

So the single reason stands out among others is the deferred LC payment. Most of the LCs opened for importing capital machinery, raw-materials,cooking oil and grains².Rising commodity prices also raised the import expenditure and it is causing the depreciation of Taka. Now here comes another point that we are missing. 2022 is the year before the election scheduled to be held in 2023. Years before and after the election generally witness illicit financial outflow through trade misinvoice. Bout of skirmishes and deteriorating law and order sow panic and lack of trust on domestic system among some quarters. Panic mongers work as sales executive of places where illicit capital finds safe sanctuary.

In an embarrassing report in 2017,Global Financial Integrity (GFI) revealed worrying accounts of illicit financial flow from Bangladesh between 2009 and 2015 with an average flow of $ 8.8 billion. The mismatches between declared value of goods on the invoices and true value of goods were reported to be $5.2 billion in 2008, $6.9 billion in 2010,$8.8 billion in 2011,$7.65 billion in 2012,$9.35 billion in 2013 and $11.92 billion in 2015 ³.As US places sanctions on some personnel of law enforcement agencies for violating human rights, many are under spell of panic. In addition, retribution in politics looms large. Political situation in neighboring countries makes that threat more credible. So exists there a perfect ground for clandestine capital flight through trade anomalies.

However, Canada postponed its residency permit through purchase of flat for two years. But our RMG items are being regularly exported to Canada. And recently one Canadian minister expressed desire to export cooking oil to Bangladesh. So ample means are there to channel out the money.Moreover, Turkey recently opened 2nd-home program like Malaysia. UAE is also running similar campaign.

Two or three quarters later a picture may emerge about the volume of illicit flow. As it happened in the past, this speculation---illegal money transfer through trade data anomalies---may have some roots and may be a reason for depreciation of Taka that is widely ignored.

This depreciation of Taka will work as instrument to curb further import as import is going to be costly. Meanwhile, govt is going to receive another $250 million of ADB’s budget support pretty soon,as reported by the press. Hopefully, Taka will be hovering over some fixed figure for sometimes after that.

Notes And References:

1 “ Dollarer Bazar Osthir,Oshosti(Volatile Dollar Market, Causing Unease)”,Sanaullah Sakib,Daily Prothom Alo(page-1),May 12,2022.

2 “Bank O Khola Bazar E Dollarer Damer Parthokya 8 Taka Chhariyechhey( Difference Between Dollar Exchange Rate At Bank And That Prevails In Market Crosses Taka 8)”,Sanaullah Sakib, Daily Prothom Alo(page-01),May 13,2022.

3 “Bangladesh Lost $50 Billion To Trade Related Illicit Financial Flows In Six Years: Report”,bdnews24.com,December 17, 2021.

Violence & Capital Flight II

Violent election year
Generates enough fear,
Speeding clandestine capital flight
If level of significance is right.

In another embarrassing report,Global Financial Integrity (GFI) revealed worrying accounts of illicit financial flow from Bangladesh between 2009 and 2015 with an average flow of $ 8.8 billion. The mismatches between declared value of goods on the invoices and true value of goods were reported to be $5.2 billion in 2008, $6.9 billion in 2010,$8.8 billion in 2011,$7.65 billion in 2012,$9.35 billion in 2013 and $11.92 billion in 2015 ¹.Data for subsequent years were conspicuously absent as Bangladesh government did not provide the trade data to UN,as claimed by GFI.

Last year in March 07, I wrote this piece in a bid to find the link between political violence and capital flight. Sharing it again:

Global Financial Integrity has recently brought out its another report on illicit financial flow. Unlike previous reports, this time it underscores trade invoicing took place between 2008 and 2017. Illicit Financial Flow was broad and covered many areas. This report concentrates on trade mismatches. However, I did not get the relevant data for Bangladesh up to 2018. Much of the recent data were not available.

The 2015 report was complete and I found it handy back then. Immediately after the 2015 report , I tried to find out any possible link between political violence and illicit financial flow. Was there a correlation between the two? There was a little bit of correlation.

I still hinged on that 2015 data and looked on whether election years have any differential effect on illicit financial flow. For the political violence data, I relied on Odhikar, an NGO works on human rights issues. And from 2015 report I gleaned the data on illicit financial flow.

The regression function I constructed looked like this:

lnIFF_i = a₁ + bPolViol_i + a₂D_i

where lnIFF_i= log natural of illicit financial flow, PolViol_i= victims of political violence, D_i= 1 when the years are election years; prior and after years fall here. = 0 when the years are normal years.

Here a₂, coefficient of dummy variable, captures the differential effect of election years.

Since the data is time series in nature, I checked for autocorrelation. Durbin Watson statistic prior to natural log transformation reported 1.40 for 10 observations and 1 explanatory variable.

Then I carried out the semilogarithmic regression. At 5% level of significance, the model did not turn out to be significant. F= 3.339, p=0.095 (for degrees of freedom 2 and 7) . However it is significant at 10% level of significance. The intercept, a₁=8.273, appeared to be significant (t=44.79, p=0.000000721). The slope coefficient of political violence, b=0.000013, turned out to be insignificant (t=1.099, p= 0.308). The coefficient for dummy variable, a₂=0.4210 was found to be insignificant (t= 2.116, p=0.0720). However, it was significant at 10% level of significance.

Stat analysis did not find any evidence of differential effect of election years on illicit financial flow. What is interesting is that if the level of significance is raised at 10% level of significance then there is evidence that election years have some kind of differential effect on illicit financial flow. However, slope coefficient of political violence is still insignificant.

Let's interpret the result. At 10% level of significance, mean illicit financial flow of election years was higher than non-election years by 50.97%. As election years were more violent, as reflected in the political violence stat, more people laundered clandestine money abroad.

Based on higher level of significance , there is statistical evidence that violent election years accelerated the process of illicit financial flow. Clearly panic has its own economics. Sowing panic has intended /unintended consequences. However, finding conspiracy theory is not my goal. But my endeavor to see effect of violent election years on clandestine capital flight was not a failure².

Notes And References:

1 “Bangladesh Lost $50 billion To Trade-related Illicit Financial Flows In Six Years: Report”,bdnews24.com,December 17,2021 Link here

2 “Violence And Capital Flight “,Rezaul Hoque,https://hoquestake.blogspot.com,March 07,2021 Link here

Violence & Capital Flight

Violent election year
Generates enough fear,
Speeding clandestine capital flight
If level of significance is right.

Global Financial Integrity has recently brought out its another report on illicit financial flow. Unlike previous reports, this time it underscores trade invoicing took place between 2008 and 2017. Illicit Financial Flow was broad and covered many areas. This report concentrates on trade mismatches. However, I did not get the relevant data for Bangladesh up to 2018. Much of the recent data were not available.

The 2015 report was complete and I found it handy back then. Immediately after the 2015 report , I tried to find out any possible link between political violence and illicit financial flow. Was there a correlation between the two? There was a little bit of correlation.

I still hinged on that 2015 data and looked on whether election years have any differential effect on illicit financial flow. For the political violence data, I relied on Odhikar, an NGO works on human rights issues. And from 2015 report I gleaned the data on illicit financial flow.

The regression function I constructed looked like this:

lnIFF_i = a₁ + bPolViol_i + a₂ D_i

where lnIFF_i= log natural of illicit financial flow,
PolViol_i= victims of political violence,
D_i= 1 when the years are election years; prior and after years fall here.
= 0 when the years are normal years.

Here a₂, coefficient of dummy variable, captures the differential effect of election years.

Since the data is time series in nature, I checked for autocorrelation. Durbin Watson statistic prior to natural log transformation reported 1.40 for 10 observations and 1 explanatory variable.

Then I carried out the semilogarithmic regression. At 5% level of significance, the model did not turn out to be significant. F= 3.339, p=0.095 (for degrees of freedom 2 and 7) . However it is significant at 10% level of significance. The intercept, a₁=8.273, appeared to be significant (t=44.79, p=0.000000721). The slope coefficient of political violence, b=0.000013, turned out to be insignificant (t=1.099, p= 0.308). The coefficient for dummy variable, a₂=0.4210 was found to be insignificant (t= 2.116, p=0.0720). However, it was significant at 10% level of significance.

Stat analysis did not find any evidence of differential effect of election years on illicit financial flow. What is interesting is that if the level of significance is raised at 10% level of significance then there is evidence that election years have some kind of differential effect on illicit financial flow. However, slope coefficient of political violence is still insignificant.

Let's interpret the result. At 10% level of significance, mean illicit financial flow of election years was higher than non-election years by 50.97%. As election years were more violent, as reflected in the political violence stat, more people laundered clandestine money abroad.

Based on higher level of significance , there is statistical evidence that violent election years accelerated the process of illicit financial flow. Clearly panic has its own economics. Sowing panic has intended /unintended consequences. However, finding conspiracy theory is not my goal. But my endeavor to see effect of violent election years on clandestine capital flight was not a failure.