Describe capital flight. What are the factors and channels responsible for capital flight from Bangladesh?

Capital Flight

Capital flight means the large-scale transfer of money or financial assets from a country to foreign countries. It usually occurs when individuals or businesses lose confidence in the domestic economy, fear currency depreciation, political or economic instability, or want to avoid taxes and regulatory restrictions. Capital flight may take place through both legal and illegal channels, but illegal transfers can cause serious loss of foreign exchange and put pressure on the country’s foreign exchange reserves.

Factors responsible

(1) Economic Uncertainty: Lack of confidence in the domestic economy or fear of further depreciation of BDT can encourage people to move money abroad.

(2) Limited Investment Opportunities: Low returns or limited attractive investment opportunities at home may encourage investors to invest abroad.

(3) Political Uncertainty: Political instability or governance concerns can make people feel that their money is safer in another country.

(4) Tax Evasion: Some people may transfer money abroad to avoid tax or hide their actual wealth.

(5) Exchange Control: Restrictions on capital outflows may encourage some people to use unofficial channels to transfer money abroad.

Channels responsible:

(1) Trade-Based Money Laundering: Under-invoicing of exports and over-invoicing of imports can be used to transfer money abroad through trade transactions.

(2) Hundi: Informal channels can move money across borders without using the formal banking system.

(3) Misuse of Back-to-Back LC: Back-to-Back LC or advance payment arrangements may be misused to show higher trade requirements than actually needed.

(4) Misuse of Outward Remittance: Legitimate facilities for business travel, education, or medical purposes may be misused to transfer money abroad beyond genuine requirements.

(5) Illegal Cash Transfer: Money may also be moved by carrying undeclared foreign currency or cash across borders.