Bangladesh’s exposure to illicit financial flow very high: Unctad

Bangladesh lost a significant amount of tax owing to illicit outflow of funds that accounted for 36 percent of its total tax in 2015, said this year’s Least Developed Countries (LDC) Report released yesterday.

Bangladesh’s exposure to illicit financial flow is very high, said the report prepared by the United Nations Conference on Trade and Development (Unctad).

“Our tax collection would have increased and we could have used the tax for development works if we could stop this illegal outflow,” said Towfiqul Islam Khan, senior research fellow of the Centre for Policy Dialogue, while presenting the report at the Economic Reporters’ Forum in Dhaka.

The report said the ratio of illicit financial flows from Bangladesh was equal to the average for LDCs.

In fiscal 2014-15, the tax authority collected Tk 135,700 crore and the Unctad’s estimate showed that Tk 48,852 crore was sent out of the country illegally through various channels including trade.

Of the illicit outflow of funds, 80 percent is done through imports and exports, said Debapriya Bhattacharya, distinguished fellow of the CPD.

Bangladesh is one of the fastest growing economies within the LDC group and is expected to graduate from the group within 2024, said the report.

Seven countries including Bangladesh are meeting the 7 percent growth target and yet Bangladesh remains in the list of LDCs that has less than 10 percent tax revenue to GDP ratio.

The LDC average is 19 percent, according to the report.

Subsequently, it called for ramping up of tax effort, which is the ratio of actual tax collection to the predicted tax revenue. Bangladesh is one of the seven LDCs with relatively lower tax efforts: it has a score of 0.68 against the LDC average of 0.8.

The analysis of tax revenue potential shows that tax efforts in some countries including Bangladesh need to be improved, the report said.

Bangladesh had the highest share of loans in total official development assistance (ODA): it was about 65 percent in 2015-17, up from around 45 percent in 2010-2012.

In case of Bangladesh, ODA has been less concessional and in the last decade the loan to grant ratio increased drastically, the report said.

The country also ranks 4th among the top 20 beneficiary LDCs in terms of distribution of privately mobilised capital during 2012-2017, the report said. “Bangladesh has been listed among the LDCs that are facing an alarming increase in domestic and external public debt,” the report said.

CPD Distinguished Fellow Bhattacharya said Bangladesh has to depend on foreign finance as it cannot arrange all its required funds domestically. However, since the country is close to graduating from the LDC bracket financiers now deem Bangladesh to have the capacity to borrow at higher rates of interest, he said.

Bangladesh is gradually moving towards both aid and loans and its debt has increased in recent years, resulting in an increase in overall debt.

“On the other hand, we cannot use the finance efficiently,” he said.

Bhattacharya said 37 percent of the annual development programmes rely on foreign finance. Of the foreign finance, 47 percent is used for social sectors and 43 percent for financial infrastructure.

“That means dependence on foreign finance is high,” he said, while suggesting continued efforts towards exploring concessional finance.

At the same time, the rationale for the loans, the use of funds and repayment terms must be considered at length, he said, adding that many countries borrowed in a way that became unsustainable.

“There is also no alternative to collecting tax and we have to be cautious in preventing illegal fund outflow,” he said. CPD Executive Director Fahmida Khatun and Research Director Khondaker Golam Moazzem were present at the launch of the LDC report 2019.