What do you mean by Flight of Capital? Describe why & how capital flight from Bangladesh? What preventive steps you would suggest to stop capital flight?

 Flight of capital is the movement of money from one investment to another in search of greater stability or increased returns. Sometimes specifically refers to the movement of money from investments in one country to another in order to avoid country-specific risk (such as high inflation or political turmoil) or in search of higher returns. The outflows are sometimes large enough to affect a country's entire financial system

Why & how capital flight from Bangladesh:

1. Overvalued Exchange Rate: An anticipated depreciation erodes the value of the domestic currency, prompting the residents to convert domestic assets into foreign assts.

2. Financial Sector Inefficiencies: The services provided by the financial sector are not time-befitting and technology used is not sophisticated enough to meet the demand of the customers.

3. Monetization of Fiscal Deficits: Fiscal deficits are normally financed by printing money, which leads to monetary expansion, inflationary pressure, and finally

accentuates the inflation tax.

4. Tax Effects: Due to high income and corporate tax rates, taxpayers frequently avoid paying taxes by keeping money out of the country.

5. Political and Economic Uncertainty: The uncertainty factors associated with occasional political instability and important economic policy announcements motivate capital flight.

6. Rigidity  on  Capital  Movement: Legal  embargo  imposed  on  the  transfer  of foreign exchange from the country gives rise to the hundi business.

7. Weak Capital Market: One important point worth mentioning is that historically the capital market in Bangladesh did not play much prominent role. As result, the capital may be flight.

 

Preventive steps you would suggest to stop capital flight:

1. Reform the international monetary system: It ensures stability of exchange rates, and must build upon the principles of cooperation and solidarity.

2. Allow countries to introduce capital controls: The country should be allowed and

encouraged to use capital controls if they deem it necessary to manage their economies, prevent contagion, raise revenue, and reduce volatility.

3. Rethink  the  banking  system:  A  new  regulatory  system  should  include  an international supervisory and regulatory body. It prevents banks from becoming too big to fail without adequate public control.

4. Enforce binding social and environmental standards: It should be put in place in order to constrain banks & financial institutions to deploy capital in ways that

support the protection.

5. Introduce the speculator pays principle: Global taxes should be implemented both to address speculative behaviors and to finance global public goods that can prevent the capital flight.

6. Tackle tax havens and address tax evasion: Tax evasion can be reduced by relying more on consumption or sales taxes and less on taxes on interest and profits.

7. Reform accounting standards: It must be improved in order to prevent excessive

risk taking as well as tax avoidance and tax evasion practices.