The implications of black money for the economy are many — some of these remain apparent, while the rest are hidden under the surface. Apart from obvious tax evasion, which reduces government’s revenue, the vines of black money have spread across a wider spectrum of the economy in many ways. Such a trend can have long-term implications for the economy. Let us have a look.
A finance ministry report prepared in 2011 on the underground economy implies that the amount of black money is within 45 percent to 81 percent of Bangladesh’s gross domestic product. A common practice is that a huge chunk of this untaxed money is sent abroad which deprives the country of the much-needed financial capital. A report of Global Financial Integrity published in December 2012 estimates that Bangladesh has had an illicit financial outflow of around $14 billion during 2001-2010.
Since 1976-77, all successive governments have provided opportunities to whiten black money. The main motive behind providing money whitening scopes has been to retain the money within the economy, which in turn could foster development in certain sectors. One such sector is the housing industry; it may not be unlikely that there is a link between the underground economy and the housing sector. It should be noted that whenever a huge amount of money is poured into a certain sector, it artificially increases its prices. The sharp rise in the prices of housing assets in recent years could depict the presence of an ‘asset bubble’. The leap in housing prices turns out to be an obstacle for many people as assets now go out of their financial reach.
The stockmarket is another terrain where the scope of whitening money is given. However, a possibility remains that this can lead to an artificial inflation in the market as black money holders would invest in the market and leave as soon as their money is whitened. Providing such opportunities time and again may encourage many to remain submerged into the underground economy. This may also create a disincentive for honest taxpayers. Currently black money holders pay a tax of 10 percent to whiten money, if they invest in the stockmarket and infrastructure bonds. An honest taxpayer, on the other hand, pays 10-25 percent tax. This not only reduces their relative ‘after-tax’ income but also attributes to further income inequality. This can translate into a disincentive for many to linger within the formal economy.
Long-term economic implications of black money are, however, concealed under the surface. In recent years, the government’s tax collection has been commendable. Bangladesh Bank data suggest that the tax-GDP ratio has increased from 8.4 percent to 10.5 percent within fiscal 2007 to fiscal 2012. However, we still have a long way to go. According to the Perspective Plan of Bangladesh, the government will be targeting a public expenditure of 20.5 percent of GDP in fiscal 2015. The country needs significant tax revenues to offset the rise in expenditures. If not, the deficit in budgets will rise and accumulate which can affect the economy in undesirable ways. Whenever the government expenditures exceed revenues, the government finances the difference by borrowing from domestic (mostly) and international financial institutions. As a result, fewer funds are now available in the domestic banks for the private sector to take loans from.
A shortage in money supply in banks may also increase the interest rates. Budget deficits can also increase future debt burden on the economy. Higher loans imply higher interest payments by the government. The money spent on interest payments could have been used in other much-needed sectors. Now, if the government decides to finance the deficit through international financial institutions, this can lead to a surge in foreign currencies in the country. This in turn, can appreciate the local currency. The economic ramifications of this may include fewer export orders as exports will become more expensive due to the appreciation of the local currency.
The Perspective Plan of Bangladesh 2010-2021 clearly depicts higher targets for government expenditures in future years. To offset a rise in budget deficits, the government must increase government revenues as well. This unquestionably points to the tax collection efforts from the informal economy. If this is not kept under check, future problems will invariably hatch from this source.
Source: The Daily Star
