Sri Lanka, an island nation in South Asia, has been going through an unprecedented economic crisis in recent times. The country is on the verge of bankruptcy due to economic mismanagement and an acute shortage of foreign exchange. Since the beginning of the crisis, there has been a discussion going on whether Bangladesh will embrace a similar fate to Sri Lanka in the future. In this write-up, I have tried to explain why Bangladesh will not be like Sri Lanka from three perspectives: political, economic, and the Chinese debt trap conundrum.
Both Gotabaya Rajapaksa, the acting President, and his brother Mahinda Rajapaksa, the former President, have shown shortsightedness in maintaining a balanced relationship with two Asian giants, China and India. During the civil war that ended in 2009, Sri Lanka leaned more towards China while sidelining India. Many rights groups at that time alleged that Chinese arms and assistance to Sri Lanka facilitated the bloodbath and deaths of thousands of trapped civilians.
There is speculation that China is turning its back on Sri Lanka amid a massive economic crisis. According to media reports, while President Gotabaya has asked China, Sri Lanka’s biggest lender, to restructure its debt to the country, China has yet to come up with a concrete decision. On the other hand, India’s economic assistance to Sri Lanka this year totalled more than $3 billion and has been crucial in meeting the diverse needs of the Sri Lankan government and people. Sri Lanka appears to be receiving more Indian support than China during this disaster.
Bangladesh has been cautious in balancing its relationship with China and India. While China has increased its economic cooperation with Bangladesh by bankrolling development projects, India benefits from its shared history, values, culture, and geographic proximity to the country. Despite not making substantial investments like China, India has lately invested in several projects, including railway expansion, and boosted bilateral trade with Bangladesh. Bangladesh’s relationship with India has reached a new height which is a testament to its adroitness in the diplomatic arena.
From an economic perspective, Bangladesh is in a better position than Sri Lanka. Sri Lanka’s total debt is $33 billion. With a total population of 22 million, the country’s per capita debt is $1650. On the other hand, Bangladesh’s total debt is $49.45 billion. Considering the population of 168 million, Bangladesh’s per capita debt is $292.11. Sri Lanka’s per capita debt is almost six times higher than that of Bangladesh. Due to the Corona epidemic, Sri Lanka’s remittance flow has reached the bottom. In the 2020-21 fiscal year, while Sri Lanka received a remittance of $8.5 billion, Bangladesh achieved a record amount of $24.78 billion, which is almost three times more than that of Sri Lanka. Bangladesh earned $4.76 billion from exports in March, while Sri Lanka earned $1.1 billion in January. While Sri Lanka’s export earnings have plummeted, Bangladesh’s have risen. As of May 2022, Sri Lanka’s foreign exchange reserve dipped below $50 million, whereas Bangladesh has a reserve of $44.40 billion.
Another reason for Sri Lanka’s economic crisis is the failure to repay foreign loans. Bangladesh, which is very successful in this regard, has been regularly repaying the principal of the foreign debt. During the July-February period of the current fiscal year, the nation returned US$1.34 billion in principal and interest on its outstanding medium to long-term (MLT) external loans. According to the World Bank and the International Monetary Fund (IMF), a country would enter the danger zone if its external debt exceeds 40% of its GDP. Bangladesh is in the “safe zone” because its total external debt is less than 15% of its GDP. This starkly contrasts with the notion that Bangladesh is overburdened with external debts. Sri Lanka has recently undertaken several infrastructural development projects through foreign loans, which have not been of any use to the common people. In contrast, the Bangladesh government initiated several infrastructural development projects, such as the Padma bridge, Metrorail, Karnaphuli Tunnel, and Ruppur Nuclear Power Plant, which are believed to be beneficial to the common people and expected to provide a good return once they are launched.
CHINESE DEBT TRAP
American statesman John Adams, who served as president from 1797 to 1801, famously said, “There are two ways to conquer and enslave a country: One is by the sword; the other is by debt.” Choosing the second path, China has quickly risen to become the world’s largest official creditor. This Chinese strategy of securing a strong foothold in different countries not politically but through lending is called debt-trap diplomacy. Sri Lanka’s overall debt to China is $8 billion, accounting for about one-sixth of Sri Lanka’s total external debt of $45 billion. In 2017, Colombo was forced to lease the Hambantota port in southern Sri Lanka to China for 99 years after defaulting on a $1.4 billion debt. In contrast, The Chinese loan accounts for only 6 per cent of Bangladesh’s total loan. Bangladesh is still indebted among the countries or institutions to are World Bank- 38%, Asian Development Bank- 24.5%, JICA-17%, China-6.81%, Russia- 6.18%, and India- 1.3%. While many countries are overwhelmed by the Chinese debt, Bangladesh has been able to capitalize on the full benefits of Chinese loans without any major risk of being cash-strapped.
In light of the above discussion, Bangladesh needs to be careful about spending money on big projects, paying off liabilities, and taking advantage of macroeconomic opportunities. Once Bangladesh graduates into a developing nation from a Least Developed Country (LDC) in 2026, it will no longer enjoy getting loans at low-interest rates. If import costs increase further, the reserve will be strained, which will reduce the chances of spending the reserve money on infrastructure projects. However, despite all the concerning factors, considering Bangladesh’s GDP, export earnings, foreign exchange reserves, remittances and other indicators of the economy, it can be said with certainty that the situation in Bangladesh is unlikely to be like that of Sri Lanka.