Banning hundi won’t solve Bangladesh’s forex problem
Bangladesh's foreign exchange market has somehow gotten entangled in public discussion and the government's crusade against corruption. Corruption takes many forms: bribery or graft; embezzlement; money laundering, kickbacks (usually in dollars abroad); tax avoidance and under-invoicing; and finally, transfer of money to undeclared overseas accounts. All these sources of corruption are fuelling the secondary foreign exchange market, also known as hundi, driving it to new heights.
Consequently and in tandem with the dollar crisis, the hundi market has also been in the news in Bangladesh. This market has many other names. Some folks refer to it as the black market (which has an illicit connotation), whereas in academic circles, the preferred moniker is parallel, informal, or the kerb market. It may not be too far-fetched to consider the hundi market as a vital nexus that connects Bangladesh with the rest of the world.
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A former chief economist of Bangladesh Bank has suggested that the hundi market be taken out, while others have been advocating for tightening the noose around it to choke off the blood circulation in that segment of the financial market. Another senior economist rues that "the central bank and the economy of Bangladesh lose foreign exchange/reserves."
The government would like to see the supply of dollars go up and demand go down. One of the odd characteristics of the conversation on the prevalence of multiple exchange rates, capital flight, and the excess demand for the US dollar is the absence of a discussion on the sources of demand for the hundi dollars.
Hundi has existed for as long as I can remember. More than four decades ago, in 1982, I was travelling to India for a few weeks with my wife. I was working for the International Food Policy Research Institute (IFPRI), and my salary was paid in dollars. Therefore, while I had dollars in my bank account in Washington, DC and in my American Express bank account in Motijheel, I could not carry the currency on my person while boarding the flight to Kolkata. "No problem," a knowledgeable friend said, and introduced me to a hundi merchant on Nawabpur Road, who gave me a little square paper, on which he scribbled something. I then took the chit to a dealer in Kolkata's Old Bazaar and exchanged the token for Indian rupees.
I was told that this anachronistic transaction mode is still in vogue for those who wish to take money out of the country. The details might be slightly different, but the basic rules are pretty much the same. Of course, you pay a premium price for convenience. The official exchange rate for a US dollar is now Tk 105, but the unofficial rate is Tk 120, and there is widespread apprehension that the latter may go higher after Ramadan.
Let's take a quick look at the supply and demand forces at play in the hundi market. Demand mostly comes from money launderers, and the supply mostly emanates from Bangladeshis who send money home to their families living in rural areas.
As we can see, the hundi market has two aspects: demand for taka by the overseas workers who wish to send money to their homes, and the demand for dollars mentioned above – for tourism, medical care, study abroad and registration fees, as well as for illegitimate purposes such as money laundering and buying property in the proverbial Begum Para. As Professor Selim Raihan correctly mentioned in a recent op-ed in this daily, there is a misconception that the "remitters abroad are the ones who demand the services offered by the hundi business." One also needs to look into the domestic drivers of demand, and it would not be too far-fetched to assert that the market owes its lifeblood to the domestic cartels and oligarchs who sometimes need a safe harbour for their ill-gotten riches.
Eminent economists have blamed the hundi market for the sorry state of Bangladesh's forex reserves and the downward pressure on our exchange rate. Remitters get a higher rate for their dollars in the hundi market. And this, along with the legal regulations and delays of the formal channels, provides strong incentives for one to opt for hundi. The premium the buyer pays is often more than 15 percent during peak periods, and has been flagged as a "laundering charge" by Professor Rudi Dornbusch of MIT.
The higher rate is hardly affecting the demand for dollars in the hundi market, nor is there any shortage of $100 bills. In contrast, the importers find it difficult to open letters of credit (LCs) with commercial banks to get the merchandise they need ahead of Ramadan and Eid, and face a conundrum.
The demand for dollars comes from many sources, but money laundering is like the white elephant in the room. A former chief of the National Board of Revenue (NBR) openly asked, "Who is laundering out all the money? There must be someone in the know."
It is an open secret that the NBR and the Anti-Corruption Commission (ACC) have access to intelligence and other resources to initiate investigations. Bangladesh still has a long way to go before it can sit back and return to its old business-as-usual state, or the pre-pandemic modus operandi, and take off the import restrictions in place. And in light of the incoming national election, the government can use the opportunity to shake things up and put its house in order.
Dr Abdullah Shibli is an economist and works for Change Healthcare, Inc., an information technology company. He also serves as senior research fellow at the US-based International Sustainable Development Institute (ISDI).
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