Professional Documents
Culture Documents
I n t r o d u c t i o n :
Capital account convertibility (CAC) means freedom to convert currency in terms of both
outflows and inflows for capital transactions at market-determined exchange rates. Simply,
CAC means that it allows anyone to convert local currency into foreign currency or vice versa
always free. Controls are used by the countries to insulate the economy from erratic flows of
process in developing countries. External private capital is a very important source of funds
of investing in the developing economies. Fisher (1997) asserts that financial integration and
free capital mobility facilitate a more efficient global allocation of savings and help to channel
resources into the most productive uses, and therefore, increasing economic growth and welfare.
However, during the last three decades, a number of countries have opened-up their economies
for being integrated with world by loosening financial regulations to ensure capital movement
freely. While, number of countries have been much benefited by utilizing and managing the
flow of foreign capital successfully for their growth and development; on the other hand,
some countries had to face a severe financial crises due not to manage the flow of capital
efficiently. Experiences from both sides have put remarkable lessons for the countries like
Bangladesh.
Bangladesh has already been undertaken some measures in liberalizing capital flows together
with other reforms. Since 1990s, Bangladesh embarked on a path of stepped up reforms
for financial sector development and increasing openness with the global trade and
financial flows towards spurring investment and output growth. Adopting market based
1|Page
interest rate system, significant trade and tariff liberalization, of IMF Article VIII
obligation for full convertibility of Taka for current external transactions, and adopting
External capital account transactions have also been liberalized gradually to attract foreign
direct investment (FDI) and foreign portfolio investment (FPI) inflows. Bangladesh
permits full foreign ownership in enterprises. Foreign investors are free to invest in any
sector except the few reserve sectors. They are also allowed to buy and sell government
The amount received from the sales of equity, profits, disinvestment proceeds and capital
gains on FDI and FPI are freely repatriable abroad. In addition, to the liberalization move
towards CAC, short-term borrowings from abroad by local corporate bodies have also been
Given the importance of huge investment need to become an upper middle-income country
by 2030, greater inflows of foreign capital is imperative. Considering the need of capital
inflows for its growth path, it is likely that Bangladesh will be entering into greater liberalized
regime in future. However, before that some measures should be adopted, such as:
2|Page
should move towards CAC regime gradually to achieve resilience and protect
Over the last two decades, many countries h a v e liberalized t h e i r capital accounts.
Industrial countries adopted capital convertibility almost universally in the 970s and 1980s,
building on a process of international economic integration that was already well advanced
in the area of trade in goods and services. The trend was facilitated by the Code of
Development (OECD), which was introduced in a limited way in 1961 and later extended
in stages to encompass the full range of capital account transactions by 1989. The adoption
in 1988 by the European Union (EU) of the Second Directive on Liberalization of capital
movements was also instrumental. Many developing countries have lifted controls on capital
movements, most relatively recently. A major among them retain such controls dejures
bur de facto the controls are less prevalent. The group maintaining controls may be
expected over time to seek the benefits of full of integration into global markets through
more open capital accounts, although the transition to a liberalized capital account raises
(I) Whether a set of preconditions should be established before the capital account is
3|Page
difficulties might arise in the conduct of macroeconomic policies following
(II) In addition, separate issues arise when considering whether under particular
As described in Sections III and IV. recent experience tends to support the view that the
resource pressures from arising when private demands mount. The centerpiece of
financial sector reform would be to ensure that interest rates arc competitive, thus
reducing pressures on the balance of payments and the exchange rate. "Strengthening
a presumption that large banks will not be permitted to fail, there may be incentives
for banks to take on excessive risk, and capital account liberalization could open up
The type of exchange rate regime appears not to be a critical factor in successfully moving
to capital account convertibility. Notwithstanding a trend to- ward more flexible exchange
liberalized their capital accounts in the context of both flexible and fixed-rate regimes,
including currency board arrangements. What would appear to be paramount is, if necessary
4|Page
initial adjustment of the exchange rate to a realistic level lowed by the pursuit of an
appropriate policy that avoids abrupt adjustment in either interest rates or exchange rates. In
macroeconomic stability, most, but not all, countries liberalizing the capital account did so
reforms. clear-cut lessons arc difficult to draw. Liberalization in industrial countries tended
to follow the gradual and phased approach to economic reform suggested by the literature,
with capital account liberalization typically following relatively broad trade and
domestic financial reforms. Moreover. experience in the late 1970s and early 1980s,
especially in the Southern Cone countries, underlined the dangers of moving too rapidly
in opening the capital account without supporting policies. More recently, a number of
short time. It could be argued that an advantage of early removal of capital controls would
be to limit the ability of vested interests adversely affected by the reforms to marshal
political resistance to those re- forms. Such an approach may also promote efficiency
in the domestic financial sector by injecting competition for funds, improve global
intermediation of resources from savers to investors, and allow enterprises and individuals
to diversify activities and portfolios abroad. However, rapid liberalization may leave little
financial instruments and prudential arrangements. Several of the countries that have
liberalized rapidly experienced problems in the financial sector: In most cases, these
difficulties reflected underlying weak- nesses that were unrelated to the liberalization,
although in some cases the reforms may have exacerbated the existing problems. In the
5|Page
context of a strong overall balance of pay-ments position, the authorities may wish to
minimize exchange rate or monetary pressures that could arise from foreign capital inflows
by liberalizing capital outflows before inflows. There could also be a desire to limit short-
term inflows that may be regarded as potentially re-destabilizing but to liberalize long-
term inflows, such as inward direct investment. That may be viewed as being more stable
and productive may, however, be difficult to achieve such fine-tuning, except temporarily;
liberalization of one component of the capital account may create pressures for deregulation
of all capital transactions; moreover. There is some evidence that long-term capital flows
are not necessarily more stable than flows through instruments with nominally short
maturities.
An important issue in the transition to an open capital account is whether the capital
regulations can be enforced to the extent that they play a significant role. There is by now
considerable evidence particularly with regard to controls on capital out flows, that suggests
between domestic and international interest rates, the evidence accumulated now points to
situations where exchange rate pressures result from capital flight induced by poor policies,
mechanisms. Thereby diminishing the effectiveness of controls. It has been argued that
measures to deter capital inflows have been more effective than those on out- flows, because
of the differing circumstances under which the two types of flows emerge as well as because
of the choice of alternatives available in each case. Recent experience suggests that.
6|Page
Although controls or taxes on inflows should not be viewed as substitute for fundamental
policy measures. Especially in the area of fiscal policy, they might serve as temporary
supplementary tools that could provide policymakers with some additional times to react.
However, the experience relates yet to a relatively small and recent set of countries with
surges in inflows. Because quantitative restrictions on inflows are clearly less desirable than
those that retain an element of market incentives, in some countries a price-based approach
policies. The risk of large capital reversals requires that monetary policy be managed so
that interest rates and exchange rates are broadly consistent with underlying fundamentals
and market conditions. Under fixed exchange rate arrangements, large movements in
interest rates may be required to stern outflows in situations where markets question the
sustainability of the exchange rate, possibly posing a conflict between domestic and
external objectives or policy. Similarly, sharp and costly movements in ex- change rates
could result if monetary policy is out of line with market expectations where the exchange
monetary policy. In recent years several developing countries that have liberalized their
capital accounts, many from a position of capital outflows, have experienced sizable
net capital inflows. While generally a welcome development, flows that are large relative
7|Page
task of ensuring that excessive risk taking does not undermine the health of the financial
monetary and credit expansion in the context of large inflows, with potentially adverse
implications f o r inflation, the real exchange rate, and the external current account. The
threat of sudden reversal further underscores t h e need for careful adjustment t o such
inflows. Adjustment in fiscal policy is a key response that may dampen in- flows through
its effects on interest rates. In most countries, however, it is difficult to use fiscal policy
as a short-run response, and it may also exacerbate the problem of unsustainable inflows
In the year 1990, capital accounts were, on average, partly repressed in all regions with the
exception of East Asia, where the capital accounts were already largely liberalized by then.
During the 1990s, all regions showed some liberalization, but the extent differed. The
following table shows the degree of Capital Account Liberalization of some selected
Egypt PR L
Turkey LL LL
South Asia
Bangladesh PR PR
India PR LL
8|Page
Pakistan PR LL
19 20
Sri-Lanka PR PR
Latin America 90 03
East Asia
Argentina PR LL
China R PR
Brazil PR LL
Hong Kong L L
Chili LL LL
Indonesia LL LL
Mexico LL LL
Korea PR LL
Peru PR L
Malaysia LL LL
Sub Saharan Africa
Singapore L L
Kenya LL LL
Thailand LL LL
Morocco PR LL
Nigeria PR LL
Uganda LL L
9|Page
Note: Here PR: Partly repressed, R: Repressed, LL: Largely liberalized, L: Liberalized.
Source: IMF annual report on exchange arrangements and exchange restrictions, 1991 and 2003
According to IMF scores (which, of course, should be treated with caution), Latin America
went the furthest towards full capital account convertibility. Sub-Saharan Africa and North
Africa & Middle-East also undertook major liberalization steps. The smallest change was
observed in South Asia, a region that in 2003 was still classified as partly repressed. East Asia,
while already fairly liberalized by the early 1990s, undertook modest additional
liberalization.
In Latin America, Chile, Mexico and Venezuela were already largely liberalized at the
beginning of the 1990s, but that contrasted strongly with all other countries, which were partly
repressed, with Argentina and Peru being the most heavily repressed. This reflected the
historical tradition of closed capital accounts and the debt crisis of the 1980s.
its capital account quite rapidly and intensively. In 1991, the adoption of the
convertibility plan created a currency board. This adoption of currency board was followed
portfolio inflows reached 11% of GDP in 1993, compared with less than 1% in 1990.
10 | P a g e
1995 and there was a large outflow of short-term capital. During the first half of 1995 the
central bank lost about one-third of its international reserves. The policy response to these
developments did not include an imposition of capital controls. Instead the authorities
under an IMF program adopted in March 1995. By the end of August 1995, more than
half of the deposit outflows had been revised; and by December 1996 deposits had reached
b) Peru: Like Argentina, Peru adopted deep and fast liberalization of the capital account, from
an initial position of very restrictive controls. The exchange rate was unified and a free-
floating regime adopted, FDI received equivalent treatment to domestic investment, capital
could be freely repatriated, non-residents could acquire domestic securities, and residents
and non-residents could open foreign-currency denominated accounts, although with high
c) Chile: Chile (which had already largely liberalized by 1990) has been a paradigmatic case
in the use of restrictions to reduce the volume of capital inflows and to influence their
composition. In the early 1990s, the country experienced excessive capital inflows. To
(URR) to reduce the volume of capital inflows and change their composition towards
flows with longer maturity. This created a simple, non-discretionary and prudential
11 | P a g e
3.2 East Asian Countries
East Asian countries experienced extensive liberalization in the 1990s. However, the standard
deviation in the region – IMF indicator of the degree of heterogeneity, or dispersion – both
for 1990 and 2001 is the largest among all regions. This means that the regional average
conceals sharp differences among the countries of the region. Four types of countries can be
A. China: During 1994-97, China’s international reserves increased sharply from 5.8 to
exchange rate of the currency against U.S dollar. China accepted the obligations of the
IMF‟s Article VIII in December 1996. While China was able to maintain the stability
of the currency throughout the Asian crisis, capital outflows became an increasing
problem in late 1997 and early 1998, driven by concerns of a devaluation of the
renminbi, the falling differential between domestic and foreign interest rates, and
increasing circumvention. The current account remained in surplus and foreign direct
investment remained strong, but the capital account deteriorated sharply. As a result
overall balance of payments surplus fell sharply, from $36 billion in 1997 to $6 billion
12 | P a g e
measures were implemented with a view to safeguard illegal capital outflows and
ultimately maintaining a stable exchange rate. These steps improved the BOP situation
of China. Now in China FDI allowed but volume above $1 million requires signing
contract with government. There are ceilings and minimum holding periods. Effective
from April 2001, all controls on outward FDI were abolished. Nonresident may
purchase local shares subject to a minimum holding period. Residents are also permitted
B. South Korea: Korea is the country that, started from an initial fairly restrictive
position, undertook the largest capital account liberalization during the decade to
reach a fairly open stance by 2001. The country started out gradually, with residents
being permitted to issue securities in abroad and foreigners being allowed to invest
directly in the Korean stock market (though limits existed on the latter). From 1993 until
1997, the process was accelerated with the lifting of barriers on short-term borrowing
residents in public bonds, and permission to issue equity-linked bonds and non-
inflows, due to concerns about surge of capital inflows, caused by interest rate
domestic equity securities and borrowing from abroad by non-banks. However, the
exceptions to these, which proved harmful, included the liberalization of trade related
13 | P a g e
short-term financing to domestic firms and short-term foreign currency borrowing by
C. Malaysia: Malaysia has been relatively open for years, and experienced a massive
surge of capital inflows in the early 1990s. Until then, the limits on capital inflows
consisted mainly of ceilings on foreign currency borrowing, beyond which approval was
required. To further limit such flows, especially short-term ones, in 1994 the authorities
commercial banks were forbidden to engage in swap and forward contracts with non-
residents. Ceilings were imposed on banks‟ net foreign exchange open positions, and
reserve requirements were decreed for foreign currency liabilities of commercial banks.
Most of these controls were subsequently lifted, with only the prudential ones remaining
in place. The assessment of Ariyoshi et al. (2000) is that such controls were effective
both in reducing the volume and changing the maturity of flows. During 1997 and early
1998 Malaysia suffered massive capital outflows. In response to that, in September 1998
(Ariyoshi et al. 2000). Controls were later relaxed and then totally eliminated. Residents
are now permitted to obtain financial credit facilities in foreign currency up to the
requires approval.
14 | P a g e
D. Thailand: Thailand’s liberalization w a s the most aggressive during the 1990s,
Particularly in the early 1990s with the creation of the Bangkok International Banking
Facility (BIBF), which through tax privileges greatly encouraged external flows,
especially short-term ones (Johnston et al., 1997). Outflow of capital exceeding $10
million a year required approval. Foreign capital may be brought into the country
without restriction. Because of rapid capital account liberalization, Thai baht came
under severe speculative pressure in May 1995. Therefore, in 1995, restrictions were
imposed to reduce the volume of (mainly short-term) capital inflows, which became
excessive in the first half of the 1990s. These restrictions included a 7 percent reserve
requirement on non-resident accounts with a maturity of less than one year and on short-
term borrowing of finance companies; limits for open short and long foreign currency
positions (with lower limits for short positions); and reporting requirements by banks
on risk control measures regarding foreign exchange and derivatives (Ariyoshi et al.,
2000). However, capital continued to flow in large amounts by taking different forms
(Siamwalla, Vajragupta and Vichyanond, 2003). In response to that, in1996 the reserve
reducing the volume of inflows, lengthening their maturity, reducing the short-term debt
to total debt ratio, and reducing the growth of non-resident baht accounts. However,
these developments were not sufficient to avoid the reversal of capital flows the country
capital locally, but purchase or issue abroad requires approval. Same rule apply for
money market instruments. Authorized banks are allowed to grant loans up to $10
15 | P a g e
million.
E. Indonesia: Indonesia greatly encouraged capital flows, especially FDI, from the start
of the decade. Bank lending to the domestic corporate sector also became prominent
in the 1990s. In the mid-1990s, there was an effort to prioritize FDI over other types
of flows, with ceilings on foreign lending being used as an instrument, but with poor
effectiveness (Gottschalk and Griffith-Jones, 2003). Finally, Hong Kong and Singapore
are among the few developing countries with almost totally liberalized capital accounts
as early as 1990. Both countries remained open, though a few restrictions are in
place. For example, in Hong Kong, the disclosure and position limits on derivative
positions and on certain forms of capital outflows. In the case of Singapore, there
are upper limits for foreign lending from residents to non-residents in Singapore dollars,
and an obligation for non-residents to convert proceeds in Singapore dollars into foreign
currency. These measures are aimed at discouraging the international use of the
domestic currency. Also, there are certain prudential limits and restrictions on capital
outflows.
South Asian countries have adopted a cautious approach to capital account liberalization.
balance of payments position. As the balance of payment position of south Asian countries
are not so good, so they have taken cautious approach to capital account liberalization.
16 | P a g e
A. India: Since the external crisis of 1991, India has undertaken economic reforms,
Portfolio equity flows were selectively liberalized during the 1990s, and the
liberalization of external borrowing was very limited. The country relied extensively
maturity of foreign liabilities, and end-use restrictions. Strong limits were imposed on
short-term debt. In June 1997 – thus just before the East Asian crisis broke out – the
included both capital inflows and outflows; liberalization was to be progressive, in three
phases, over three years. However, these liberalization steps were conditional on the
country meeting certain pre-conditions. By 2001, India‟s capital account was still only
outflows by residents. Apparently due to this more cautious approach, and to its high
level of foreign reserves, the country managed to escape the financial crises of the 1990s
and even to avoid contagion effects during the East Asian crisis. With the reorientation
investment external indebtedness has declined markedly. However, there are indications
that India‟s wide-ranging capital and other economic controls may have reduced
17 | P a g e
economic growth compared with other Asian economies with a more open economic
system.
B. Pakistan: Alongside India, Pakistan is the other South Asian country that pursued
significant liberalization steps during the 1990s. In fact, it went further than India, with
most types of capital inflow liberalized. Most of the remaining restrictions are on
capital outflows by residents, though lately some initial steps have been taken to
liberalize outflows.
C. Sri Lanka: Although having undertaken some liberalization steps, the capital account
in Sri Lanka remains quite repressed. These two countries have maintained capital
restrictions in the form of outright prohibitions (for example in the case of money
market instruments and derivatives) and central bank approval (for example for
A. Kenya: Kenya was another fast liberalizing country in the region. In a context of
shortage of foreign reserves and large fiscal deficit, in 1991 the country embarked on
a program of reforms that included rapid current and capital account liberalization.
certificates of deposit, which could be traded by residents and non-residents, used for
any foreign exchange transaction, and reclaimed at the Central Bank at face value. In
addition, some companies could hold foreign currency denominated bank accounts
abroad and domestically (Ayiroshyi et al, 2000). In 1994, the domestic currency became
18 | P a g e
fully convertible, and in 1995 most of the remaining controls on foreign exchange
securities). Among the few exceptions, foreigners could hold portfolio equities up to
and increased capital flight (Ayiroshyi et al., 2000). As of June 1995, all industrial
countries had eliminated exchange controls on both capital inflows and outflows.
This follows the unique period in the history o f international financial relations after
the Second World War in which most countries maintained substantial restrictions
influences and to retain national savings for use in domestic reconstruction and
environment for most types of capital movement throughout the period, although
other industrial countries was relatively slow in t he early stages and did not gain
full momentum until the late 19805. Germany made an early start in 1958, when
toward an appreciation of the deursche mark and threatened its exchange rate parity
under the Bretton Woods sys- tem. Controls on inflows were removed in 1969 but
1981. Although the floating of exchange rates following the breakdown of the Bretton
Woods system in the early 1970s provided a degree of freedom to national monetary
19 | P a g e
policies, this action did not by itself cause industrial countries 10 liberalize capital
controls immediately. The shift was instead largely infl uenced by the increasingly
controls on financial and capital markets. The controls were also removed in part as
a response to the pressure from corporations in the home countries to permit financing
opportunities for evasion of restrictions imposed by home governments and also for
exit from the home market. As the globalization p r o c e e d e d and the sophistication
increasingly recognized the ineffectiveness of the remaining controls and their costs
acriviries. The process of liberalization accelerated in the 1980s and early 1990s
liberalization was initiated with the rapid removal of capital controls by the United
Kingdom (1979) and the completion of liberalization by Japan (1980). Next came
the quick removal of all c apital controls by Australia (1983) and New Zealand
EU, where capital account liberalization was viewed as another step in the
Ireland, Italy, and Luxembourg (1990). Several members of the European Free
20 | P a g e
Trade Association (EFTA)-Sweden (1989). Austria, Finland, and Norway (1990)-
followed suit. The final set of liberalizations took place in those EU members for
whom more distant deadlines had been set; thus, Portugal and Spain liberalized on
January I, 1993 and Greece on July 1,1994. On January 1,1995. Iceland became the
Though it is difficult to assess the quantum and magnitude of capital flight for a country like
Bangladesh, the maintenance of low inflation and prudent financial sector management,
including institutional reforms, are necessary to combat the economic crimes that generated
huge illegal incomes, whether from the willful default of bank loans, corruption in tax
The following policy measures may be considered as part of reform processes of the on-going
The existing tax laws may be changed. Tax holiday in investment declared by the government
should be curtailed. The rate of income tax and VAT should be reduced.
There should be provisions for heavy penalties, including jail sentence, for tax evasion by large
21 | P a g e
Good governance system should be established at every stage of administration. Administrative
and political transparency should be ensured. At the time of appointment the statement of wealth
and assets of the ministers, members of the Parliament, and others should be made public and on
the expiry of their assignment the final statement will need to be made for comparing the
The banking activities, which are involved in transaction of foreign currency, should be brought
under active surveillance of the central bank. Bank loan defaulters should not be allowed to
participate in the elections and issued passport to go outside the country. Bank loan defaulters
should be given 5-10 years of rigorous imprisonment through summary trial. The competent
authority should publish the list of the loan defaulters on a periodic basis in the national dailies.
The hidden wealth of the corrupt should be uncovered and invested in the industrial sectors.
Effective measures should be taken against corruption in both private and public sectors. An
Proper national policy should be adopted to stop the smuggling. The overall action of the law
enforcing agencies should be properly monitored. Strict maintenance of law and order situation
should be ensured.
Practical steps should be taken to increase the real interest rate, reduce large fiscal deficit, and
adjust the exchange rate of the currency at least to the neighboring country's level for reversing
capital flight from the country. For ensuring a stable macroeconomic environment in the country,
policies should be adopted to make exchange rate stable, keep the fiscal deficit at a tolerable
22 | P a g e
The government should pursue austerity measures at all levels of current purchase and
Developed with the availability of risk free instruments, which will induce domestic as well as
Along with the modernization of financial and capital markets, a bond market should be foreign
investors to invest their capital through diversifying their portfolio investment in the country.
To combat the money laundering activities through the financial channel, the Anti-Money
Laundering Department (AMLD) was established in the Bangladesh Bank in 2002. Some success
has already been achieved. To make this Department fully active and operative, the anti-money
laundering measures adopted should be strengthened in line with other countries’ experiences in
restraining the capital flight. Co-ordination among the Bangladesh Bank, commercial banks, non-
bank financial institutions, the Anti Corruption Commission, and law enforcement agencies is
very much crucial. A central data warehouse may also be set up in the Bangladesh Bank with all
Necessary steps should be taken to amend the Bangladesh Bank's "Guidelines for Foreign
Exchange Transactions"i, to ease the present capital control measures, to raise the long run
economic efficiency, and to attract the domestic as well as foreign direct investment. Government
may actively consider gradual movement toward capital account convertibility. In this regard, a
timetable for convertibility may be fixed on suitability basis and necessary institutional and
making process with regard to foreign borrowing and the management of borrowed funds. Since
in the absence of debt cancellation or repudiation, the burden of debt repayment ultimately lies
23 | P a g e
with the population of the country, it is appropriate to provide full information to the public as
well as to the creditors, and to ensure public representation in the management of public debt.
This process will ensure greater accountability on the part of both borrowers and creditors and
prevent repeated cycles and inappropriate use of external borrowing and capital flight.
In order to combat the capital flight, the following policies may be considered by the central
bank:
upon gradual shifting to capital account convertibility, which may have a positive impact
3) Adequate regulation and supervision are necessary for guiding the banking system to
work in a more efficient way. In this regard, Bangladesh Bank may consider transferring
independent agency to ensure transparency and uphold public confidence, keeping the
24 | P a g e
4) Bangladesh Bank may also actively consider influencing the illegal foreign exchange
Recommendations:
For the strategies to harmonize the liberalization of external sector and financial system and
keeping in mind the present economic performance of Bangladesh, the following issues may
be considered:
1) There is no alternative way for Bangladesh but to open up the trade and financial
Sector. Therefore, before liberalizing the country must prepare her for the associated
the most serious concern for Bangladesh. Some prudential measures have been adopted
in recent days; however, only strict execution and application of the adopted policies
3) Bangladesh’s tiny stock market and government bond market need a big push for
4) Based on experiences of other countries, it is now widely accepted that external financial
25 | P a g e
liberalization should follow internal financial liberalization (Choudhury and Raihan,
stability on its macro-economic factors. The already fragile banking sector should
6) Steps must be taken to attract more foreign investment by responding appropriately with
corruption and red-tapism in the bureaucratic systems, inadequate legal system and
7) At present Bangladesh needs the type of FDI that will have significant impact on
incremental exports in order to offset rising payment liabilities overtime and to pull up
ensured, fiscal deficit should be brought down to a reasonable level, lower rate of inflation
should be maintained and ensuring political stability are required with regard to the non
performing advances of banks. The contractionary policy, (very high level of statutory
reserve requirements to limit the credit) may not be a good option in the presence of a
number of problem banks in the economy. With regard to the recovery drive of the
defaulted loan the result is impressive, but the speed is slower. More emphasis should be
given with regard to the recovery of the defaulted loan and the screening procedure should
9) Some sort of control over the capital mobility is necessary to safeguard financial crisis.
26 | P a g e
In this regard the country could manage the asset, liability and duration management
accordingly.
10) Making Taka convertible on capital account transactions does not necessarily mean
full removal of restrictions on capital mobility. The country should have some control
11) If the government in able to develop their policies and implement them properly then the
real investors will come to Bangladesh, with capital and technology, and then actual
financial development will take place that will lead to overall economic growth.
5. Conclusions:
Opening of the trade and financial sector is becoming a compelling reality for the developing
countries. Opening of external sector is necessary for the countries that wish to take benefit
of the open world economic system by raising investment and foster economic growth.
Empirical study (Klein and Olivie, 99) shows that opening of financial sector increases the
New reform measures have already been taken to boost export and attract foreign investment.
Foreign investors in Bangladesh are already got a package of facilities including tax holiday,
profit remittance, EPZ and other facilities. This reform resulted in higher foreign investment
and international trade. But the growth of foreign investment is not significant yet comparing
27 | P a g e
to the neighboring countries.
Bangladesh Taka is already awarded IMF Status of Article VIII in 1994. This is one of the
major financial reform measures country has taken so far. It effected positively to the
reform measure taken by Bangladesh. Now the market forces determine the exchange rate of
Taka. This step is vital for improving the foreign exchange market in Bangladesh, especially
when the country is lagged behind the terms of well functioning money and capital market.
By deregulating the exchange rate, the country moved further towards financial liberalization.
Balance of payment (BOP) situation is one of the vital factors regarding a country’s
tendency in its trade and current account balances. A relatively weaker BOP may create
financial crisis if the country opens up its capital account. The Asian crisis in 1996 also
suggests that countries with BOP problems suffered most at that time. Thus before opening
the capital account, Bangladesh first is required to improve its macroeconomic accounts
Now a day’s one country cannot open its trade sector without going for convertibility.
Convertibility is positively related with country’s international trade and the financial deepness
(Klein and Olivei, 1999). Therefore, Bangladesh has to integrate trade and financial
28 | P a g e
The overall economy of Bangladesh suggested that the country has to improve its
transactions. Today FDI has contributed significantly less to net resource flow to Bangladesh
than that of the most of the developing countries of Asia and there is still substantial scope
context of Bangladesh as its capital market is underdeveloped. FDI provides far more than
just capital, it provides benefits in the form of managerial know how and modern technology.
Moreover, at the current economic condition in Bangladesh, higher growth rate can be
achieved by supplementing the countries lower domestic saving by foreign capital inflows.
FDI has typically proven to be least volatile item and a strong resilience of FDI reduces the
risk of contagion. Therefore, the country should aim at higher level of FDI in external
However, experience suggests that capital outflow has to be permitted to increase the net
inflows in the long run, because controls on outflows effectively reduce inflows also.
Moreover, high inflow of capital has not always proved to be a positive factor in the economic
growth. Its destabilizing side effects in the form of rise in inflation, adverse effect on the
to get the positive contribution of higher level of inflows. Thus, relaxing control on capital
entity to issue local currency bonds in domestic market etc.) would be necessary to stabilize
29 | P a g e
capital inflows in near future in Bangladesh. However, the most important point to be noted
that, only removal of restrictions from outflow of capital would rather make the situation
worse if supportive measures are not ensured. Steps must be taken with regard to the
bureaucratic system, inadequate legal system and political confrontation that are very
6. References:
Fitzgerald, Valpy and Alex Cobham. 'Capital Flight: Causes, Effects, Magnitude and
Implications’ for the DFID White Paper. Eliminating World Poverty Making
Loungani, Prakash and Paolo Mauro. Capital Flight from Russia. IMF Policy Discussion
Ariyoshi, A.et al. (2000). Capital Controls: Country Experiences with Their Use
92 to 1999-2000.
30 | P a g e
Chaudhuri, B. K. (1988). Finance of Foreign Trade And Foreign Exchange
BIBM, Dhaka.
Choudhury, T. A., & A. Raihan. June, (1999). Implications of WTO on the Banking
and Financial Sector in Bangladesh. Bank Parikrama, BIBM, Volume XVIV, No. 1.
University, Dhaka.
Choudhury, Toufic Ahmad, & Ananya Raihan. Globalization and Finance for
Review of Bangladesh‟s Development 2001, The Centre for Policy Dialogue and The
31 | P a g e
32 | P a g e