A government committee has advised Bangladesh Bank to review whether Bangladesh could adopt full capital account convertibility (CAC) allowing local businesses to make overseas investment.
If the system is adopted fully, any business entity of the country would be able to convert its capital (takas) into foreign currencies and make investment abroad without taking prior approval from the authorities concerned.
In Bangladesh, capital accounts are not convertible in line with the foreign exchange regulation act, but some foreign investment from the exporter retention quota is considered on a case-by-case basis.
The committee, led by Banking Division additional secretary Arijit Chowdhury, made the recommendation for a review of CAC rules at a recent meeting on ‘encouraging investment of Bangladesh in Saudi Arabia’, said officials of the finance ministry.
Following the meeting in November, the Banking Division sent a letter to the BB seeking its opinion on whether it would be justified to adopt full CAC opening up foreign investment by Bangladeshi businesses.
The central bank is now working on the matter to give its opinion, said officials.
Representatives of BB, Bangladesh Investment Development Authority, foreign ministry and agencies concerned were present at the meeting.
Senior BB officials, however, are sceptical about whether the country would allow full CAC at present as countries like India which has liberal foreign investment regulations are yet to go for full rupee convertibility.
‘If full CAC is introduced, country’s businesspeople would get chances to make investment abroad from their companies’ equity without taking any prior permission from the central bank,’ a BB official told New Age on February 20.
Some businesspeople have long been demanding that capital accounts be made convertible to boost their business, he said.
The central bank granted permission to six companies to invest abroad till date from their export retention quota.
The six companies, three of which hail from the health sector, have invested $9.1 million in six countries between 2013 and March 2016, according to the BB.
The six companies are ACI Healthcare, Incepta Pharmaceuticals, Square Pharmaceuticals, MJL Bangladesh, BSRM and DBL Group.
Former interim government adviser AB Mirza Azizul Islam told New Age on February 20 that if Bangladesh adopted CAC, it would increase capital flight from the country.
The government should take decision in this regard cautiously as opening up of the capital accounts was one of the reasons for the Asian financial crisis in 1997, he said.
According to a recent report in Indian newspaper Hindu, the India’s government would take few more years to go for full CAC, although the International Monetary Fund has been advocating such convertibility for decades.
Capital controls are used by the state to protect the economy from potential shocks caused by unpredictable capital flows.
The IMF also advised Bangladesh government to open up capital accounts.
The government committee asked the BB to submit a report on CAC by gathering experiences from the countries which earlier opened up their capital accounts.
Even if the government does not adopt full CAC, it might liberalise investment by local businesses in foreign countries, BB officials said.
Finance ministry officials said that the government formed the Arijit-led committee following a proposal put forward by Saber Hossain Chowdhury, a member of parliament from Dhaka and president of Inter Parliamentary Union, who advised for opening up investment by Bangladeshi businesses in Saudi Arabia.
Saber, following a visit to Saudi Arabia in 2016, submitted the proposal to the Prime Minister’s Office saying that Bangladeshi businesses could make investment in construction and engineering sectors in Saudi Arabia.
The committee recommended that the BB should consider with importance the applications for Bangladeshi investment in Saudi Arabia on a case-by-case basis.
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