Dual citizens, USD market volatility and external borrowing

The emigration of the population from the South to the North in recent decades has not only increased, but its characteristics also contrast with the emigration of earlier decades. The increase in emigration results from globalisation and immigration policies pursued at home and abroad. During the decades of the 1970s, 80s and 90s, those who emigrated settled (almost) permanently in the North, had infrequent contact with one's country of birth, and perhaps, visiting the origin occasionally. 

Poor communication networks did not allow day-to-day or frequent calls to family members still residing in the home country. The digital revolution changed all that. Daily phone and video calls allow constant contact and track the well-being of family members and assets owned or inherited. 

The "brain drain" of knowledge and skills associated with earlier emigration continued, but the recent emigrants, along with post-retirement job-seeking and the fortune-seeking early emigrants, have been able to negotiate jobs in the country of origin – in both public and private sectors. There are others in the South who are resident in their native land but also hold foreign citizenship. 

They are major business operators, professionals, politicians and civil servants, interconnected and integrated with the North as well as owning properties there. Such people are now in abundance in erstwhile colonies in Asia and Africa, holding dominant positions in the social, economic, and political life of the South.

Without attaching legal connotation, I use the term 'Dual Citizens' (DC) to capture all shades of the above-mentioned group, noting further that DC, in the case of Bangladesh, is a subset of a larger group of foreign citizens of Bangladesh origin (FCBO). It does not however, include the earlier brand of Non-Resident Bangladeshis (NRB), who are citizens of Bangladesh and reside in a foreign land to work on a temporary basis. 

The latter's identity of NRB, along with the brand value, was hijacked by the DC. The inclusion of DC in the analysis allows a better comprehension of the new forms (and instruments) of control and domination over the South the western power exerts. Bangladesh appears to be a major testing ground for this new form of governance and, therefore, may face events that were previously unanticipated. 

Political leadership and advisors need to understand the characteristics of DC to design policy and regulations for better governance of assets (financial and property) and foreign exchange markets. 

This analysis suggests that the short-term volatility in the value of Taka per US dollar, in spite of an increasing trend in reserve and a declining trend in the effective value of taka (exchange rate), is largely rooted in DC's (and the aspirant DCs') responses to shocks in several interlinked markets. It is also argued that the increased influence of the DC community is likely to bias Bangladesh's policy in favour of external borrowing (disregarding how those loans may impact the society and economy) and endorse the conditionalities that are attached to loans. 

In this analysis, it is suggested that regulation in the foreign currency (FC) market requires a more appropriate categorisation of DC (and FCBOs at large). (Efforts to engage in meaningful categorisation may commence only after the primary category gets a threshold level of acceptance.) 

Since many of the well-meaning DCs have the potential to contribute to the enhancement of their countries of origin, the paper recommends the political leadership in the home country renegotiate new forms of 'social contracts' for the betterment of the land and the people who reside on it.

Dual citizens and DCs-in-making 

Amendments to Citizenship Law, dual tax treaties to avoid double taxation, immigration policies, and the rise of DC as a force to reckon with appear to have evolved symbiotically. Ridwanul Hoque's 'Report on Citizenship Law: Bangladesh' (2016) provides insights into the historical evolution of the laws, which suggests that the changes in the laws applied almost equally to Bangladesh, India and Pakistan; the South Asian countries that were under the British colonial rule. Generally stating, citizens of these countries were not to be citizens of another country. 

Over decades of changes in Acts, often under pressure from the diaspora community (especially of Indian origin), allegedly backed up by the governments in the western countries, the idea of 'dual citizenship' was made in-road into all the three countries. 

Interestingly, it applied to emigrants to only a handful of western countries in North America and Europe and to Australia. India made the first move in 2005 by introducing a new category called the 'Overseas Citizens of India' (OCI), which many commentators consider as DC, though dual citizenship is not legally recognised in India. Bangladesh (in May 2008) introduced dual citizenship, failing to make it transparent. 

The beneficiary groups were similar, and all three countries subsequently expanded the coverage. The Indian Law excluded other countries in South Asia from the OCI provision. Since not many years back, these entities in each country expanded their influence sufficiently to put claims on remittances sent by temporary overseas workers, the original non-residents (NRB in Bangladesh)! Given the similarity in the evolutionary path, in hindsight, such changes appear to be rooted in the same western initiatives, possibly once the roadmap for geographic reconfiguration was conceived around the turn of the century. 

Treaties to avoid double taxation, though expected to allow the local authority to tax people of all origins when they worked in that country, NRB has been lax about all these. Massive loopholes exist not just for individual income tax but also for legal entities. With lapses in monitoring work by foreign citizens (many of whom are DCs), both in cases of work permit and entity level reporting on employees and advance income tax, NBR often leans on residency status to figure out who to tax and who to let go. 

Temporary returnees (say FCBOs) that had to pay tax in one country only where she/he was a 'resident' during the income year and the holes in the tax system of the South permitted tax avoidance for part of the earnings. One wonders if Bangladesh's failure to automate income tax returns submission can be explained by such incentives. The United States had signed its treaty with India in 1989 and almost a similar one with Bangladesh in 2006 (effective from 2007). 

Facilitated by a newly emerging structure of governance in the South that depends on DCs and aspirant DCs, and riding on various multilateral treaties, governments and agencies in technologically advanced countries (TAC) secured increased access to country-level information, which enabled them to design policies to promote their interests. 

The latter was further assisted by putting in programmes to strengthen the AML/CFT (anti-money laundering and countering financing terrorism). In contrast, policymakers in Bangladesh, knowingly or unknowingly, failed to generate information and process those independently for the betterment of the land. The tax authorities as well as the central bank in Bangladesh, appear to be happy to let go with a foreign passport, 'no visa required' stamp and a NID. 

The Indian government is said to have a better grip on the enlistment of OCIs and PIOs (Persons of Indian Origin), which later got merged. Moreover, the tax authority is said to be making efforts to strictly define 'residency' and find ways to raise tax revenue from OCIs. Although the laws in all three countries in South Asia allow the government to exercise its power to decide on an individual's citizenship, the lack of initiatives to recognise the phenomenon and address related problems is less visible in Bangladesh. 

DCs in the making refers to a sizable segment of youth who are going abroad to study with the primary objective of emigration, that is, to be an FCBO. Once an FCBO, depending on the relative social and economic (in)stability in the country of origin (not discussed here), some of them may aspire to be a DC. The discussion on the subject will lead one to discuss regulatory failures in markets for education services. Leaving that for another occasion, let me only note that there is an urgent need to make those markets function in a 'socially responsible' manner. 

Educational institutions in the west are increasingly getting commercialised, particularly since the respective governments withdrew financial support from them. The DC regime in the South helps in recruitment for admissions. The commercial interests of those educational institutions will benefit if the desire for out-migration is hyped up among the youth, and education is the primary legal channel to realise such aspirations. All of these help in reproducing a pool of human resources that will sustain the (suggested) new global governance structure.

Foreign exchange market and policy biases under DC regime

Irrespective of the good or bad fallouts of a DC regime, it generally brings more woes during a crisis. While DCs are privileged to be conduits between the South and the TACs, their actions during prosperity and crises, though rational, may adversely affect institution building and encourage resource outflow. Movement between countries inherently is no different from movement between regions (rural to urban) within a country. Migrants to urban centres sell off their inherited properties in rural areas (or in small towns) and bring the money to cities to raise their children. 

Similarly, the better-off families in rural areas send their children for education in urban areas, many of whom never return. There are however, many who return to the roots for lucrative investments (say, infrastructure contracts, fishery, dairy and resorts), spend on social ceremonies, and finance philanthropic activities. When the same happens across borders, there are added implications – particularly for the financial market under discussion. 

Movements of financial resources and people across borders face different regulatory regimes in countries of origin and destinations, and the relatively more powerful one is likely to shape the rules that guide the direction and size of flows. 

Consider the recent volatility in the market for the US dollar in Bangladesh. 

Surely, the trend value of the Taka needed adjustments, the banks may have made gains due to shortfalls and widened the difference between official and kerb market rates, and the Ukraine war increased the cost of imports. Though the rise in import payments is often cited as the immediate cause of the decline in FE reserves, it is unclear if this was motivated by an urge to transfer foreign currency through over-invoicing or the importers bought ahead, anticipating inflation and taka devaluation. Clearly, the policy implications, including the charges against inventory build-up, would be different.

In a narrow canvas, ignoring demands by registered businesses, private demand for foreign currencies may arise on accounts of tourism, treatments abroad, and education in foreign institutions – all of which are generally predictable. There is, however, the demand from the previously discussed DC, which is less predictable and more susceptible to speculative behaviour. 

During normal times, when bank deposit rates and exchange rates are stable and when property values are expected to increase from the Covid-19 time depression, one would expect the demand for FC to remain stable along a trend path. The series of shocks – increased uncertainty in the post-Russia/Ukraine war, depleted reserves, and partial realisation of long-awaited devaluation – disrupted the expectations.

Not long ago, DCs were benefiting from high deposit rates in Sanchay Patra (National Savings Certificates). With reduced bank deposit rates in Bangladesh (along with increases in US bank rates) and the expectation of further devaluation, many are likely to have converted their financial assets as well as their properties into US dollars and transferred those back to where they are. It is suspected that due to the sticky property (sell and buy) market, further spikes in dollar demand could not be realised. 

In addition, the July-August seasons experience increased FC demand for education abroad. With delayed decisions on granting visas and the uncertainty in obtaining dollars from BB's education fund, many parents had to rely on the kerb market to ensure financial support for their children's education.

DC and external borrowing 

Dominant role of DCs in policymaking may be hypothetically argued to have a close relation to increasing demand for external borrowing, defaults in bank loans, capital flight, erosion of institutions and making the economy (and the society) more vulnerable during periods of crises. I'll confine myself to the first only. 

An agency (DC) that has legal obligations to a powerful technologically developed country (or to an ally of a powerful country), has only moral obligations to the country of origin, has the legal protection to work and cash-in properties, are able to position themselves above their counterpart 'locals' in most spheres, and sees the future of progenies in countries of new citizenship, are likely to find increasing external debt attractive for several reasons. 

First, the liability of repaying the debt does not lie on them nor on their progeny.

Second, external debt increases the pool of foreign exchange resources, which will enable them to transfer resources.

Third, the projects that come with such debts provide opportunities to transfer resources without being on record, as well as, to make frequent trips to families residing in the developed country using the foreign currencies received by incurring external debt.

In conclusion, the narrative put forward here draws from many minds and prints. It is essentially a confrontation with the self. Reconstructing that self appears to be the first step toward the management of the economy and society. Thus, I return to the strategist (political leader and advisors) with a doable set of recommendations.

First, unless there is a need for external funds to complete the projects where huge investments have already been incurred, it is desirable to avoid borrowing. Instead, the focus needs to be on cutting expenditure, particularly in the public sector and in private consumption of energy and food-dependent services. 

Second, upon further assessments of the various categories of dual citizens, update the Citizenship Law in a manner that upholds the interests of the land and people 'residing' on it. 

Third, follow up the second with appropriate tax policies that ought to clearly define residency and apply it in defining various groups of citizenship. 

Fourth, since FCBOs are not expected to enjoy the annual quota of foreign currency that native citizens enjoy, carrying cash foreign currency by out-bound FCBOs, beyond the declared amount they brought in, should be strictly prohibited.

Fifth, avoid dependence on fortune-seekers where institution-building is important. Finally, if we can argue on protecting manufacturing, protecting (and developing) local education services and culture deserve a lot more attention. Given the long neglect, a cautious first step may be to empower an agency with whom all outside institutions (including diplomatic missions promoting enrolment in their countries) ought to register to inform all promotional activities.

It is important that the exercises on identifying groups and on negotiating new social contracts between all groups (including the 'natives'), keen on promoting sovereignty and wellbeing of the people, should be undertaken simultaneously. 

The alternative has all the likelihood of degenerating into a state where no role remains for a strategist.

Dr Sajjad Zohir is the Executive Director of Economic Research Group (ERG). He was a Senior Research Fellow at BIDS until he resigned to set up, with others, ERG as a private initiative for public good. He had also been a Professor of Economics at BRAC University.