Time to formalise Bangladesh’s hidden economy

Bangladesh has two economies. The first is regulated and therefore subject to taxation. The second economy generates income, employs people, transfers money, and builds wealth; however, no one oversees it. This has become a major challenge for a developing country such as Bangladesh, where increasing public revenue, cleaning up the financial sector, and funding development with less borrowing are critical.

I researched this problem nearly 30 years ago when I wrote "The Estimation and Policy Implications of the Underground Economy: The Case of Bangladesh," which was published in The Bangladesh Development Studies in 1997. Using a monetary approach, I estimated that underground activities comprised about 23.5 percent of the formal economy on average during 1972-1995. However, my concern then was not only about lost tax revenue. Hidden economies also distort statistics, weaken policies, reward non-compliance, and affect resource allocation. Bangladesh is significantly richer, more urbanised, and more digital today. However, a basic problem has also evolved into a more complex one now.

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Formal employment and an underground economy are not synonymous. Black money is not the same as money laundering. Trade misinvoicing does not represent all underground economic activity. These definitions are important. A street vendor who has never registered a business is part of the informal economy; however, he is not the same as a wealthy individual who hides his assets, an enterprise that underreports sales, or an importer who manipulates invoices to move money abroad.

However, the scale of informality is quite significant. According to the Labour Force Survey 2024 conducted by the Bangladesh Bureau of Statistics, 58.04 million people (approximately 84 percent of total employment) work in the informal sector. This does not mean 84 percent of GDP is underground, but it clearly shows that formalisation is rare for many workers.

Some of the well-known international estimates of the underground economy in Bangladesh are outdated. These older estimates expose another policy failure. An International Monetary Fund (IMF) study that covered the period from 1991 to 2015 found the underground economy to be an average of 33.59 percent of GDP. For decades, a large portion of economic activity has been excluded from measurable tax collection and regulation. Meanwhile, Bangladesh has failed to provide a reliable, regularly updated national estimate of its underground economy.

The fiscal evidence supporting these findings is even more difficult to dispute. According to the IMF's most recent review, tax revenue constituted only 6.9 percent of GDP in FY2025 and is projected to reach 7.2 percent of GDP in FY2026. Bangladesh’s desire for improved education, healthcare, social protections, and infrastructure seems far-fetched, as the country currently collects taxes at levels that do not support these objectives. Repeatedly relying on compliant taxpayers while ignoring large portions of income, transactions, and wealth that are either poorly taxed or completely invisible is unfair to salaried employees and formal firms. Those with cash-based businesses, unclear ownership structures, distorted property value assessments, or political influence have significantly greater ability to evade detection. When compliance results in penalties and concealment provides advantages, tax morale deteriorates.

Both domestic and foreign dimensions of the underground economy are problematic. Global Financial Integrity said in March 2026 that Bangladesh had reported approximately $68.3 billion in trade-value discrepancies over the period from 2013 to 2022—or roughly $6.8 billion per year. Discrepancies among partner countries suggest potential misinvoicing risks rather than absolute proof that each dollar was improperly transferred out of the country. However, a discrepancy of this magnitude cannot be dismissed as statistically insignificant. Addressing this anomaly will require better customs intelligence capabilities, international data-matching practices, and routine scrutiny of unusual trade values.

Bangladesh has spent many years providing opportunities for those with unreported monies to legitimise them. The proposed provision related to money whitening associated with real estate was withdrawn from the last Finance Bill 2026. That decision should become permanent policy.

A clear differentiation must exist between casual and intentional avoidance of compliance. To pursue small vendors with inspectors would be counterproductive. Benefits of formalisation include easy registration procedures; simple, low-cost taxation for micro-enterprises and small businesses; access to financing; electronic payment options; and social protections. The state should make it easier to register formally than to avoid registering altogether.

Formalising larger companies and high-net-worth individuals requires a higher standard. Bangladesh now possesses tools that did not previously exist. Tax records, value-added taxes (VAT), banking transactions, customs filings, corporate ownership structure, and land registry data can now be linked. E-invoicing, electronic payments, artificial intelligence (AI), and risk-based analytics can detect anomalies.

What is lacking is institutional coordination and credible enforcement. The National Board of Revenue (NBR), Bangladesh Bank, the Bangladesh Financial Intelligence Unit (BFIU), Bangladesh Customs, land registration authorities, and corporate registry offices must coordinate their efforts to systematically verify cross-checked information. Beneficial ownership must be transparent; strong reporting requirements must apply to large cash transactions; property valuations must reflect actual economic values; customs authorities must regularly compare declared prices with international price benchmarks; and visible consequences must be imposed on major evaders, including possible negotiated settlements.

Non-compliance, corruption, and weak institutional relationships help sustain the shadow economy. But the cost associated with failing to recognise the significance of this issue is always increasing.

Bangladesh's underground economy represents a hidden tax base, a source of inequality, a distortion of competition, and an indicator of weak government capacity. The fundamental principle for reform is straightforward: make formalisation easier, make evasion harder, and enforce regulations credibly.

In 1997, Bangladesh could reasonably have argued that limitations existed within its administrative capacity. In 2026, that argument is substantially weakened by advances in digital finance, electronic recordkeeping, and enhanced computing capability. Allowing a substantial portion of economic life to continue outside the purview of regulatory oversight is no longer a technical problem—it is a governance decision. The failure to address the hidden economy is becoming more and more evident.

Dr M Kabir Hassan is professor and Moffett chair in finance at the University of New Orleans in the US, recipient of the 2016 IsDB Prize in Islamic banking and finance, and member of the AAOIFI Ethics and Governance Board.

Views expressed in this article are the author's own.

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