Thursday | 16 January 2025 | Reg No- 06
বাংলা
   
Thursday | 16 January 2025 | Epaper

Is shadow economy booming in the country?

Published : Monday, 29 July, 2024 at 12:00 AM  Count : 307
Noore Alam Siddiqui
Uncompromising, honest and knowledgeable regulatory body is a vital requirement for disciplined and incorruptible financial institutions (FIs). This is also very sensitive and important for the smooth and steady growth of a country's economy. So monitoring, supervision and disciplinary action taken by the central bank on the FIs must be kept out of all sorts of undue influence, political pressure, bias, nepotism and favoritism for making the asset quality better, safeguarding depositors' money, building confidence among investors and ordinary depositors and above all for maintaining overall discipline in the economy.

Most importantly, compliance with financial regulatory issues is crucial for a country's economy. We know that banks and many non-bank financial institutions accept money from depositors through various mechanisms and invest it in businesses as their assets. Keeping the depositors' money safe, making the lending process proper, secured, and managing liquidity and profitability skillfully are key matters to be considered by every financial institution.

Because even a single bad investment or small irregularities could lead a financial institution to a state of bankruptcy and could also make the capital base vulnerable. As a by-product of a bad investment, there comes provisioning, effect on capital base, less profit, fall of share value, damage to business reputation, and beyond.

The informal sector or informal economy is a phenomenon that is an integral part of the economy as a whole. This sector is also termed as the shadow economy. This sector is neither taxed nor monitored by any government agency. Various activities that are engaged in the informal economy are not reflected in the accounting of the Gross Domestic Product (GDP) of a country. 

The informal sector contributes more than 40 percent to the total economy in developing countries like Bangladesh. This sector is pretty much troublesome and unmanageable by regulatory bodies. However, the informal sector provides the poor with attractive economic opportunities, and instant financial benefits and has been expanding rapidly since the 1960s.

Factors booming shadow economy in the country: Any kind of instability in the banking sector as well as in the economy can indeed contribute to the growth of the underground or shadow economy of a country like Bangladesh. Good governance and strong enforcement of lawscan discourage and refrain individuals and businesses from operating outside the legal framework to avoid taxes, regulations, and scrutiny.

Currently, the instability and indiscipline within the banking sector haveled to a loss of confidence among the public in formal financial institutions in Bangladesh. As a result, individuals might prefer to engage in cash transactions and informal financial practices, which are harder for authorities to monitor and tax. Corruption is also leading to the misallocation of financial resources, where loans and investments are not based on merit but on bribery and favoritism. This can stifle legitimate businesses while promoting shadowy operations that can bypass these corrupt practices.

Unpredictable or poorly implemented economic policies lead to economic instability in the country. This uncertainty can drive businesses and individuals to seek stability through informal economic activities that are less exposed to policy changes and economic shocks.

On the contrary, in response to economic challenges, governments might increase taxes or impose stricter regulations to stabilize the economy. However, this can push businesses to the underground economy to avoid these burdens.

On the contrary, in response to economic challenges, governments might increase taxes or impose stricter regulations to stabilize the economy. However, this can push businesses to the underground economy to avoid these burdens.

Indicators of the Growing Underground Economy: During the last couple of months, we havewitnessed a sharp rise in cash transactions and a reduction in the use of banking services. This indicates a growing underground economy.We are also witnessing an increase in employment and business activities in sectors not regulated or monitored by the government which is the reflection of the expansion of the underground economy.
Similarly, a large gap between reported economic activity and actual observed economic behavior in the country indicates a significant underground economic activity. Country is facing a severe shortages of foreign currency reserve and the condition is deteriorating day by day. Large volumes of imports are being discouraged due to shortages in foreign reserves. This scenario should have brought endless miseries into the lives of ordinary people. However, overall observed economic behavior is surprisingly normal. It indicates the significant growth of the shadow economy in the country.

More than ten million people of Bangladesh live in different countries of the world and send billions of dollars each year as remittance. However, due to turmoil in the banking sector and lack of strict regulations against money exchange houses and other invisible networks, a substantial volume of remittances are entering the country through other than banking channels. Thus a huge amount of foreign currency is not deposited as a reserve but enters into the pocket of beneficiaries

Implications: A growing shadow economy reduces the tax base, impacting government revenue and its ability to provide public services. It could also lead to market distortions where businesses operating legally are at a disadvantage compared to those evading taxes and regulations.The benefits of underground economic activities often accrue to those who can navigate and exploit the informal system, potentially increasing economic inequality.

Addressing these issues would require a multi-faceted approach, including strengthening governance and the rule of law, reducing corruption, especially in the banking sector, stabilizing the economy, and creating incentives for businesses to operate within the formal economy. Above all, all of us must uphold the interests of the country at any cost rather than enriching our individual fortunes by any means.

The writer is a contributor



LATEST NEWS
MOST READ
Also read
This is right time to dismantle RAB
Beware of fireworks on the eve of new year 
Peace in Myanmar, region depends on lasting solution to Rohingya issue
What to do for physical and mental health 
Goodbye 2024: A year marked by new escalated conflicts
Accountability is a must-but how?
Comrade Moni Singh: A legend of sacrifice in politics
A better tomorrow with the awakening of 2024
Editor : Iqbal Sobhan Chowdhury
Published by the Editor on behalf of the Observer Ltd. from Globe Printers, 24/A, New Eskaton Road, Ramna, Dhaka.
Editorial, News and Commercial Offices : Aziz Bhaban (2nd floor), 93, Motijheel C/A, Dhaka-1000.
Phone: PABX- 41053001-06; Online: 41053014; Advertisement: 41053012.
E-mail: district@dailyobserverbd.com, news©dailyobserverbd.com, advertisement©dailyobserverbd.com, For Online Edition: mailobserverbd©gmail.com
🔝
close