ANALYSIS: Making black white?

At a time when the government is engaged in the difficult task of drafting the budget for what is looming as a recession year, a contentious debate is raging in the public domain about allowing black money to be whitened or legalised. Even business leaders are divided on the issue.

Those who support legalisation of black money are arguing that it would allow the money to be invested in productive sectors, and help the government effort to tide over the recession. Others are against such legalisation as being morally repugnant, conducive to tax evasion, and inherently unfair to taxpaying business people.

The finance minister has also publicly stated as much, but lamented that he might have to yield to the demand for whitening.

Interestingly, most economists are also neatly divided along these same lines. One group is strongly opposed to the whitening of the black money because of ethical/moral implications, while the other group supports it in the belief that it would raise productive investment.

But there has not so far been much effort to provide a rigorous economic analysis for or against whitening of black money, nor to demonstrate if and how it could raise investment.

Here is an attempt to analyse these issues in an objective manner and demonstrates that the arguments made in support of the whitening do not stand a rigorous scrutiny.

What makes 'black'?

Black money may be defined as the accumulated savings from legally or illegally earned income that was not declared to the taxman. When the undeclared income was earned, all of it was part of the nation's gross domestic product; thereafter the unconsumed part of it was added to the nation's financial or real wealth. It is important to understand that investment in the current year is done with current savings; past savings cannot be translated into current investment except in a special case explained below.

To demonstrate this more clearly it may be noted that black money could be held in the form of (a) financial or real assets in the country and/or (b) financial or real assets overseas.

When the black money is held in the country in the form of any real assets, the money is de facto already invested in the domestic economy. Legalisation of undisclosed real assets, such as real estate, would simply enable the holders to re-register the assets in their own names, or publicly claim ownership. This might help the black money holders sleep better, but it would not have any direct positive impact either on investment or on the economy.

As regards black money held in the form of domestic financial assets, some business people argue that legalisation will bring this money into circulation, and allow them to invest in new industries. In addition the government will also earn some revenue. When the economy is heading towards a slowdown and government revenue is shrinking, the additional investment due to the whitening will help stimulate the economy, increase revenue and raise employment.

This argument seems to have fairly wide acceptance, and oft repeated in the media. However, a careful analysis would reveal that this is an apocryphal argument.

'Just an illusion'

Financial assets in which the black money could be held are either stocks and bonds or bank deposits (i.e. money).

If the undisclosed assets are held (perhaps benami) in stocks and bonds, the holders are in reality part owners of some real capital, i.e. the money is already invested in the real economy and contributing to economic activity. Legalising the black money in this case simply gives legal ownership to the stocks and bonds, nothing new happens. If the holders of black money cash out once the amnesty is announced and invest the amount in new plants and machinery, it might seem that some new investment would take place.

However, this is illusory; in reality it would only be a substitution of one from of productive assets by another since the purchasers of the stocks would have reduced their investable funds by an equal amount. Hence, there would be no new addition to the capital stock of the economy. No new asset on a net basis would be created as a result of the tax amnesty.

If the black money is held in bank deposits, it is already contributing to domestic economic activity through financial intermediation by the banking system. Banks generally extend loans to investors against these deposits, thereby contributing to domestic economic activity.

The legalisation of black money does not increase the volume of bank deposits or the flow of credit, and therefore, does not increase business activity. What appears to be new investment by black money holders is offset by withdrawal of deposits/credit, or reduction of investment elsewhere.

Reverse flow?

If the black money is parked overseas, and it is liquidated and brought home as a result of an amnesty for black money, there will be a real resource transfer from overseas to Bangladesh. When the black money was taken overseas there was a real resource transfer to overseas; now the same will be being repatriated.

This would be very similar to a transfer of resources from overseas through foreign investment or aid, with the added advantage that there would be no associated profit or interest payments obligations. If this really happens, a tax amnesty would indeed add to current resources, and thereby raise current investment. However, the probability of this happening is slim.

If the holders of black money have successfully taken the money out of the country and parked it in some foreign financial institutions, or bought real assets, there is not much risk that it would be detected by the home government.

Presumably the money was invested overseas under the laws of those countries and hence, it is unlikely that the foreign governments would penalize them. With the money securely parked overseas, there is little reason why the money would be brought home simply because of a tax amnesty. In any case if somebody really wants to bring back assets held abroad, he does not need any tax amnesty, there are other ways of doing that.

Thus, the argument that legalising black money raises investment at the macro level would appear to be based on faulty logic. However, such legalisation does cause real damage to the economy although it is not immediately evident. Any presumed benefit needs to be weighed against this damage by the decision makers.

Economies of black and white

From an economic point of view, the essential difference between black and white money is that the latter is earned after paying taxes while the former evades taxation altogether. The profitability of a business enterprise that pays tax will obviously be less than that which evades taxation.

The taxpaying business enterprises become less competitive compared with the non-tax paying business enterprises. The former may be then obliged to evade taxes in order to compete and survive. In the event they do not resort to such illegal practices, many of them would be forced out of business due to the unfair competition.

This will result in the economy having more non-taxpaying business enterprises and fewer tax-paying ones in the longer term. To paraphrase a famous saying: 'bad business will drive good business out of circulation'. The tax base of the government will decline, leading to a secular decline in tax revenue collection. The process may be already at work as indicated by the poor revenue collection, which is one of the lowest in the world.

If the government permits the holders of black money to legalise it at minimal cost repeatedly, it creates serious moral hazard for the law abiding taxpayers. Why should anyone pay high taxes when they know that they can later escape with their undeclared income by paying only a nominal penalty?

Empirical analyses done globally demonstrate that much more revenue is lost due to the disincentives created through repeated tax amnesties than the amount actually collected as pecuniary fines under amnesty programmes.

Every year the Bangladesh government loses thousands of crores of taka due to a lack of proper enforcement of lax laws, and wrong incentives engendered through expectations of future amnesty programs.

Never-ending game

Several governments during the last decades have legalised black money through some form of tax amnesty. The most recent one was in 2007 under the caretaker government. As always, at that time it was also announced to be the last opportunity to come clean. An ultimatum was served that after the expiration of the tax amnesty there would be a crackdown on the holders of undisclosed assets.

Before the ink on the ultimatum order has dried, there is fresh demand for further tax amnesty. Such demand simply validates the well-known empirical observation from around the world that this game is never ending.

The right thing to do for the popularly elected government is to bring this to a close by enforcing the existing tax laws. If there is to be any relaxation, it should apply to all. Such a determined approach would be both economically efficient and morally right. It will encourage the expansion of efficient business and also realise more revenue for the government.

Professor M A Taslim is currently the CEO of Bangladesh Foreign Trade Institute, and Dr. Ahsan H Mansur is the executive director of the Policy Research Institute.

Bailout package may be worth Tk 3000 crore

The prime minister will roll out a 'combined financial package' for recession-hit sectors before she tours Saudi Arabia on Apr 22, the finance minister said Wednesday while the commerce minister hinted that the bailout package could be worth Tk 2500-3000 crore.

Finance minister AMA Muhith, speaking to reporters almost at the same time, was tight-lipped about the figure when pressed.

Faruq Khan, the commerce minister, told reporters after a meeting with the Ireland's integration minister that the finance minister will speak about the financial package for the export-focused sectors hit by the global financial downturn.

"But the package is being considered in the region of Tk 2500-3000. On top of that, we are expecting assistance from the developed countries [for the export sectors] since the financial meltdown stemmed from them," Faruq said.

Muhith said after a meeting with the representatives of the Association of Development Agencies Bangladesh (ADAB) at the Secretariat that new legislation would also be put in place to ensure the affected sectors get the financial support as fast as possible.

"The special package is almost at the final stages. It will be announced before Sheikh Hasina's Saudi tour," he told reporters.

Asked what the package would be worth, the minister said, "That cannot be disclosed now."

A range of benefits will be included in the package for sectors being affected by the global recession, he said.

The government was extending financial assistance to several export-oriented sectors including frozen food and textile. At present, the amount of outstanding money is more than Tk 1000 crore. However, the finance ministry waived Tk 243 crore in outstanding with the exporters several weeks ago.

The new law will make sure that the exporters receive the money as soon as possible or there remains no outstanding amount, the minister added.

The poultry industry will be given special priority in 2009-10 fiscal year, he said to the reporters after a meeting with Bangladesh Poultry Industries Association.

Faruq Khan told reporters at his ministry the Trading Corporation of Bangladesh will be made more active to rein in the price of essentials on the eve of Ramadan.

Asked about the sudden price hike of edible oil, he said, "I believe the businessmen would not do that. We will tell them to keep the price reasonable. If they don't then government will take steps because we would not let people taken hostage by businessmen."

About the BDR mutiny, the minister, who coordinates the investigation committees, said, "The investigation is going on very well. We want a thorough investigation. There is no point carrying out an investigation like the one of 'Judge Mia'. Otherwise this type of incidents will increase."

Questioned if it was possible to submit investigation report within the deadline, he said, "The matter is being looked after by the home ministry. Meanwhile a draft report has been made. New information will be added to this report."

Banks go SME-focused

The banking industry has increased focus on loans to small and medium enterprises (SMEs), which have been remained ignored for years despite the sector's huge contribution to the economy, as banks would set up 139 SME service centres by this year.

Bankers believe the move would help banks cope with the declining demand from big corporate clients mainly due to the global financial turmoil.

Besides four state-owned commercial banks, nearly half a dozen private banks have planned to boost lending to the SMEs this year through setting up separate divisions, officials said.

These private banks are Prime, The City, Eastern, United Commercial and Pubali banks. BRAC Bank is the pioneer and by far the market leader in SME lending in the country.

“Prime Bank has decided to develop a quality and dedicated team this year to serve the SME clients,” said the bank's Managing Director M Ehsanul Haque.

Prime Bank has planned to more than double its SME loan portfolio to Tk 1,000 crore this year from around Tk 400 crore in 2008.

“SME financing can give a thrust to the banks at the moment when there is a declining demand from big investors,” said Helal Ahmed Chowdhury, managing director of Pubali Bank.

United Commercial Bank is also considering setting up a separate division for SME credit.

Officials said other banks including AB, Bank Asia, Dhaka, Dutch-Bangla, Islami, National and Standard banks would also boost SME credit this year.
Bangladesh's banking industry has long been ignoring the much-needed credit to the SMEs despite the sector's enormous contribution to the national economy. Data show that industrial sector contributed around one-fourth of the country's gross domestic product worth $80 billion. Of the industrial contribution, SMEs alone account for around 90 percent.

Banks disregarded lending to the SMEs terming it an informal sector that is even unable to maintain the books of account. Higher management cost and risk have also discouraged the banks not to lend to the SMEs.
But the global financial crisis and its impacts on the local economy have made the banking industry think about giving large loans.

“SMEs are the future of Bangladesh. Although there is a high risk there, the return is better than other areas,” said AEA Muhaimen, managing director of BRAC Bank that has lent nearly Tk 8,000 crore to the SMEs since its inception in 2001.

The bankers however said the lending rate for SMEs must be higher than the corporate ones.

“Lending to SMEs at 10-12 percent is not viable,” the Prime Bank boss said.
On an average BRAC Bank lends some 8,000 SME customers annually.

“Over 90 percent of our SME loans are collateral-free. We cannot take the risk at 13 percent,” said AEA Muhaimen.

The Bangladesh Bank (BB) has recently made a highest limit of lending rate at 13 percent to help businesses survive following the impacts of the global financial crisis.

“SME loan is predominantly supervisory credit and requires more manpower to conduct supervision, monitoring and recovery works,” Helal Ahmed Chowdhury said.

Meanwhile, the BB has approved opening of 139 SME service centres by the banking sector in 2009. Last year some 88 centres were opened by different banks to help the SMEs with easy disbursement, recovery of loan and quicker delivery of remittances.

The BB also launched an SME Refinancing Scheme worth Tk 100 crore in 2004. In 2008-09 fiscal year, the fund was increased to Tk 500 crore to help the sector, which contributes more to employment generation.

Thursday, April 16, 2009

Dollar weaker in Asia

The dollar fell against the yen in Asia on Wednesday as the market waited for another batch of US data following fresh signs of weakness in the world's largest economy.

The dollar dropped to 98.84 yen in Tokyo morning trade from 98.97 in New York late Tuesday. The euro slipped to 1.3234 dollars from 1.3257 and to 130.86 yen from 131.24.

Thursday, April 16, 2009

Panchagarh tea on a roll

The picture shows a tea garden in Bangladesh. Tea farming in the country
has peaked in Panchagarh, leading the sector to boom.

Tea cultivation in the country has peaked in Panchagarh, leading the sector to further bloom and creating employment for thousands, especially women, across the district.

Panchagarh is now recognised as the third largest tea estate in the country after Sylhet and Chittagong. It produced 5,37,000 kilograms of tea last fiscal year.

In addition, the entry of Kazi and Kazi Tea Estates (KKTE) organic tea into the global market created opportunities for them.

According to the Panchagarh Tea Board officials, there are about 19 tea estates in Panchagarh.

There are about 16,000 hectares of land in the district, which is suitable for tea cultivation. The Tentulia Tea Company Ltd (TTCL), Karotoa Tea Garden, Karotoa Tea Associates Ltd (KTAL) and KKTE have set up tea gardens in Panchagarh.

About three tea-processing units collect tealeaves from growers in the district.

However, several setbacks, including low prices offered for the leaves and high tariffs on inputs, are hindering the entry of new tea growers in the sector. Farmers said tea growers are selling leaves at Tk 12 per kilogram.
Md Motiar Rahman, a tea grower in Bhitargarh village under Panchagarh, said at least Tk 30,000 is required to cultivate tea on an acre of land. Input prices shot up in the last two years. Rahman urged the government to extend loan facilities to the small-scale tea growers.

"I am selling tea leaves at Tk 12 per kilogram to the tea processing factory and earning almost no profit because of the low price," he told The Daily Star.

Chairman of Sallylun Tea Estate Md Reza Humayun Faruque (Shamim) said they have tea gardens over 140 acres in Bhitargarh and Shukhdevpur, under Tetulia Upazila of Panchagarh. He said they sold Tk 4 lakh tea leaves at a rate of Tk 12 per kg.

He observed that small and large-scale tea growers are struggling with the present rate of Tk 12 a kilogram. He suggested the government raise the rate to Tk 16 per kg in addition to interest-free loans for tea growers.

Local tea growers, chamber leaders and officials said more tea processing industries should be set up, competitive markets established, and problems associated with the gas supply and power crisis need to be eliminated to boost the tea sector.

The neglected areas in Panchagarh house thousands of families that are involved with growing tea. Growth of the sector has been boosting the economic condition of the area since 2000.

According to locals, the tea gardens created employment for hundreds of women in the locality and made them self-reliant.

Over 7,000 skilled and unskilled workers, mostly women, work in the gardens scattered over 2,200 acres of land in Tentulia and its surrounding areas.

Monday, April 13, 2009

WB suggests 1 million extra jobs during recession

The World Bank has suggested Bangladesh create an additional one million jobs for the people likely to lose jobs at home and abroad because of the global economic recession.

"Thus, at least 2 to 2.5 million new local jobs will be needed until the global economy recovers fully, compared with 1 to 1.1 million local job creation needed prior to the global economic crisis," the World Bank said in a report.
The report titled "Bangladesh: State of the Economy and Policy Response to the Global Economic Crisis" was launched today.

At a press conference at the WB office on the occasion, Country Director Xian Zhu said, "The government needs to think about precautionary measures to mitigate the impact of the crisis, especially on Bangladesh's poor. It is the poor who are hardest hit in times of such crisis."

According to the report, the global meltdown may lead to shedding 50,000 jobs in jute sector alone by the end of the FY09 in Bangladesh.

Twelve spinning mills out 341 mills have been closed in the textile sector. Demand for labour in frozen food and leather sectors also weakened, it added.

Senior economist Zahid Hossain presented the report.

The report said the economy of Bangladesh averted the first round effects of the global financial crisis so far. But recession in developed countries and the collapse in global trade posed major risks to export and remittances.

"Bangladesh has started seeing the impact of the global economic crisis and the scale may worsen quickly," the report said.

Manpower export has slowed while number of migrant returnees has increased.

In the first nine months of FY09 (July-March), 537 thousand migrant workers found employment abroad compared to 720 thousand in the same period last year.

The outflow to Gulf Cooperation Council (GCC) member countries has declined by 16 per cent, from 407 thousand in FY08 (July-Feb) to 342 thousand in FY09 (July-Feb).

Monday, April 13, 2009

Retirement age 60 years for workers: PM asks officials to reopen closed mills

Prime Minister Sheikh Hasina on Sunday directed officials concerned to revive closed and sick mills, factories and industries making them profitable to contribute in the government's ongoing development activities.

Laying importance on public and private partnership in this regard, Sheikh Hasina said, this partnership is complementary to each other to greatly help in contributing towards progress and prosperity of the country.

She made the directives while addressing the officials of the Industries Ministry at its conference room at the Motijheel here yesterday morning.

Referring to G-20 summit that given priority on private- public partnership, the Prime Minister said, all over the globe one thing is now being thought of that public sector could have a role in every sectors including industrialisation so that it could serve as a safety-bulb of the economy.

"We want to infuse dynamism in the country's economy to help change the lot of the common people as the majority of them living under poverty line. We are attaching priority to private sectors side by side with public sectors," she told the industries ministry officials.

Underscoring the need for reducing import of cement, fertiliser and sugar, the Prime Minister said, "We don't want to depend on import. Rather, we want self-reliance by reopening the closed mills and factories".

Sheikh Hasina emphasised on industrialisation as industries could play a significant role in strengthening the country's economic footings. If private sector can make profit, why not the public sector enterprises turn themselves into profitable ones, she posed the question.

Referring to different welfare measures for the workers, she Favoured the 60-year age limit for the workers given the rise in life expectancy in the country.

Describing her vision-2021, the Prime Minister said, "We want to make a developed, prosperous and healthy digital Bangladesh based on knowledge and science.Sheikh Hasina said,"We don't want to depend to others. We want to develop the country's industrial sector. We want that industries should be established through public-private partnership."

The Prime Minister said, her government would continue to support this industrialisation process.

Sheikh Hasina said, her government had given priority on Information Technology (IT) and Agro based Industries in Agricultural sector and allocated Taka 100 crore during our previous tenure but that process was thwarted as we couldn't return to power in 2001.

Industries Minister Dilip Barua gave a detailed picture of the state of industries across the country and how to revive the closed and sick units to help boost national economic development.

Cabinet Secretary M Abdul Aziz, Prime Minister's Press Secretary Abul Kalam Azad, Industries Secretary Dewan Zakir Hosain and PM's Special Assistant Abdus Sobhan Golap were present.

Sheikh Hasina welcomed the industries ministry's decision on reopening the Chittagong Chemical Complex (CCC) as part of the government's initiatives to revive the closed industries.

She said her government wants to make the port city of Chittagong as a real commercial hub by bringing dynamism to different development sectors, including industrial one.

Referring to the past busiest industrial city of Khulna, the Prime Minister said the government would dredge the Pashur river to remove siltation for ensuring its navigability to enrich the capability of the Mongla Port. It would help set up industrial units on raised earth, she added.

Using the port facilities, Sheikh Hasina said the country could earn more foreign currencies as Nepal will use the Mongla Port for easy transportation of goods.

She said a number of profitable mills and factories, including Machine Tools Factory run by the Bangladesh Army, Khulna Dockyard run by the Bangladesh Navy, nine textiles mills run by workers ownership, were supposed to be closed due to losses in the past.

Seven of the textiles mills are making profits and the rest two fail to make profits due to non-cooperation by the previous government.

Referring to the Adamjee Jute Mills and the BRTC, the Prime Minister said there was tremendous pressure on her previous government to privatise these organisations.

"We wanted to privatise the mills with our own model protecting our own interests, but not comply with donors' formula," she said.

Keeping the Adamjee and the Khulna Textiles Mills operational, she said, her government had a plan to establish complementary or supplementary industries in the fallow land within the mills in the private sector.

In the regime of the BNP-led four-party alliance government, Sheikh Hasina said thousands of workers and employees lost their jobs and became unemployed following the closure of the Adamjee and several other mills and industries across the country.

The Prime Minister emphasised the need for setting up agro-based industries, saying there are a huge demand of Bangladeshi foods abroad. "If we can export processed foods, it would boost foreign currency earnings," she said.

She said the country's economy is based on agriculture but industrialisation is the key for overall and sustainable development. Citing an example, on how Japan, an agro-based nation, was turned into an industrial one, Sheikh Hasina said, "We have a huge potentiality to turn the country's agro-based economy into an industrialised one."

Bangladesh to become commercially important like Singapore: Shipping Minister

Shipping Minister Dr Afsarul Amin on Sunday said Bangladesh could be turned into a commercially important country like Singapore with the implementation of the proposed deep seaport project.

"If we can implement the deep seaport project at Sonadia Island in time and maintain the standard of service we may expect a new Singapore within Bangladesh," he said, adding that the deep seaport might be a major vehicle of economic development of Bangladesh.

The minister made the remarks while speaking as chief guest at a workshop titled 'Techno-Economic Feasibility Study of a deep Seaport in Bangladesh' held at Sonargaon Hotel in the city. Prime Minister's Adviser on Economic Affairs Dr Mashiur Rahman was the special guest at the inaugural session of the workshop, chaired by acting Shipping Secretary M Masud Elahi.

Joint Secretary (Commercial) of the Shipping Ministry M Abdul Quddus, private sector expert of Pacific Consultants International, Japan Dr Eddy Declercq and its team leader Nobuaki Nagao, among others, also addressed the session. The Shipping Minister said the government would go ahead with the project after reviewing the feasibility study report, which will be implemented in three phases -- short term (2009-2020), medium term (2021-2035) and long term (2036-2055).

He hoped that the current inability of welcoming mother vessels and bulk container vessels in the anchorage by Chittagong and Mongla port would be removed if the deep seaport is finally implemented.

Dr Afsarul Amin said it would attract mother vessels, reduce cost of transportation by at least 15 percent, facilitate Foreign Direct Investment and ensure smooth trade in the whole country.

Since there is no operational deep seaport in Myanmar and also on the east coast of India, he said there is possibility that a deep seaport in Bangladesh can provide services to these areas in addition to supporting Chittagong and Mongla ports in handling increased volume of export and import cargoes.

PM's Economic Adviser Dr Mashiur Rahman said the deep seaport project should be implemented urgently to bring a radical change in country's economy.

Emphasizing on public-private partnership to implement the project, he said individual investment must be encouraged which will help to bring foreign investment in bulk volume for the earlyimplementation of the project.

He said the government would give priority to waterways communication, which is the cheapest means of transportation.

Dr Eddy Declercq said Chittagong port would get 30 percent share of the deep seaport while the remaining 70 percent share would go to public-private investors. He proposed a management for the deep seaport with directors from both public and private sectors.

During the short-term period, he said all cargoes except clinker and liquid bulk cargoes would be handled. The deep seaport in its first phase will have five international container berths.

Later, four reports on the draft of the final feasibility study were presented in the workshop analyzing various aspects of the project.

Acting Shipping Secretary M Masud Elahi, joint secretary (commercial) of Shipping Ministry M Abdul Quddus, Chittagong Port Authority (CPA) chairman Commodore RU Ahmed and Captain AKM Shafiqullah of Department of Shipping presented the reports.

April 13, 2009,
BDT 12:00 AM