Will Bangladesh fall into a Sri Lanka-like crisis?

Over the last few months, Sri Lanka has been stuck in its worst economic crisis since independence. The island nation is battling severe shortages of critical items, as well as a severe lack of patrol, medicines, and foreign reserves amid an acute balance of payments crisis.

The financial crisis has led to public outrages and violent protests against the ruling government, compelling Prime Minister Mahinda Rajapaksa and his Cabinet to resign and a new Prime Minister to be appointed.

Though Bangladesh is in a much more comfortable position than Sri Lanka in terms of all economic indicators, some economists speculated that Bangladesh’s increasing trade deficit and foreign debt could lead to a similar crisis in the upcoming years. However, most international and local observers have debated the possibility of such a situation and addressed why the case of Bangladesh is different from Sri Lanka.

The economic turmoil of Sri Lanka is not a mere accident rather it is the outcome of a series of disastrous economic policies of the government. During the last decade, the Sri Lankan government implemented a lot of unnecessary mega-projects like the Hambantota Sea Port, Rajapakse International Airport, Chinese Colombo City, and some unviable highways which are called “white elephant” projects by critics. While most of these projects are not profitable, they have been implemented with high-interest loans from China. The government also collected $9 billion from the international market in exchange for debt bonds which are short-term in nature and comes with higher interest rates of almost 8%. As a result, the island nation’s total foreign debt reached $51 billion, whereas its GDP was only $80 billion. Therefore, Sri Lanka failed to repay the loan installment which was valued at almost $8 billion, and was compelled to declare itself bankrupt.

In contrast, the situation in Bangladesh is mostly different. The government has taken some well-calculated and viable mega projects like the Padma Bridge, Karnafuli Tunnel, Metro Rail, Dhaka Elevated Expressway, Rooppur Nuclear Power Plant, and the Payra Sea Port which are all infrastructure oriented and set to attract more investment. The signature project “The Padma Bridge” is set to be opened this June which will help increase the annual GDP of the southern part of Bangladesh by 2.0 percent and the overall GDP of the country by more than 1.0 percent. Consequently, the completion of the other infrastructural projects will also boost the economy and bring further investment to Bangladesh. Moreover, the bulk of foreign loans to these projects was from multilateral lenders like the World Bank, ADB, IDB, and JICA. And the interest rates of such loans are also very low (1.4%) with grace periods and long repayment systems.

It is also to be noted that Bangladesh has no commercial or sovereign bonds like Sri Lanka. The 2020 World Bank report points out that Bangladesh has a GDP of 324.2 billion USD which is bigger than the GDP of Pakistan and Sri Lanka combined. While Sri Lanka’s foreign debts account for almost 50 percent of its GDP, the foreign debts of Bangladesh account for only 17 percent of its GDP. As a result, the per capita debt of the people of Bangladesh is only one-fifth of Sri Lanka. According to Prof Mustafizur Rahman, a distinguished fellow at the Centre for Policy Dialogue (CPD), “Bangladesh is still in a good position in two main indicators of debt management. One is the outstanding foreign debt-GDP ratio and the second is debt servicing liability as a percentage of foreign exchange from export.”

In recent years, Sri Lanka has largely failed to earn revenues from the key pillars of its economy. In 2019, the Sri Lankan President Gotabaya Rajapaksa took the erroneous decision of reducing VAT to eight percent from fifteen percent and also withdrew the rebuilding tax. As a result, the Sri Lankan economy lost its one-third of revenue overnight. In the following year, the government made another blunder by banning imports of chemical fertilizers and pesticides to promote organic agricultural production. That flawed policy led to the collapse of agricultural production of the island nation and prompted severe food shortages. In addition, the Russia-Ukraine war and its impact on the global food shortages have fueled the already dire situation in Sri Lanka.

On the other hand, Bangladesh has enjoyed 15% revenue growth in the last eight months, private sector credit growth has been almost 11% – including a promising growth in the exports. As private sector credit growth continues to surge, exports and reserves will increase more in the upcoming years. In terms of food, Bangladesh is not dependent on staple food imports and it is heading towards sustainable food security.

The final nail in the Sri Lankan coffin was the Covid 19 pandemic as it hit hard the tourism sector – the largest source of income for Sri Lanka. The two years long covid-induced travel ban almost paralyzed its economy. Afterward, the simultaneous decline of remittances coming through legal channels left the government with no alternative to earn foreign reserves. As a result, Sri Lanka ended up in a severe financial crisis with almost no viable foreign reserves to import its essential needs.

Bangladesh’s economy, on the contrary, has withstood the Covid 19 chocks pretty well. The largest source of foreign reserve i.e., the RMG sector was also active during the lockdown period. In the meantime, Bangladesh received record $22B remittances in 2021 through legal channels due to its smart policy and the hard work of the labor migrants which has braced its robust foreign currency reserve.

In a recent interview, Hans Timmer, the chief economist of the World Bank for South Asia, said that Bangladesh is not at risk of the crisis that Sri Lanka is currently facing and the situation in Bangladesh is very different. Foreign currency reserves in Bangladesh can cover more than six months of imports, which is very solid, he said. However, the economist also stressed that the government should be cautious about its domestic fiscal policies as there is a worldwide impact of the Russia-Ukraine war on inflation and food crisis.

The decades-long political instability of Sri Lanka and its poor leadership to manage geopolitical implications have also helped shape the ongoing crisis. Meanwhile, Bangladesh has enjoyed uninterrupted political stability in the last decade, and with prudent leadership, it has benefitted from the new geopolitical environment.

Against the backdrop of the Sri Lankan crisis, the Bangladesh government has already taken several steps to slash spending and save foreign reserves. It has decided to suspend overseas trips of government officials in a bid to cut government expenditure and postponed some less important projects that require imports from other countries.

In conclusion, challenges like the increasing inflation rates and the fiscal deficits should be addressed by careful fiscal policies of the government. In terms of expanding the export market, Bangladesh needs to diversify its export industries as it is highly concentrated in the Ready-Made Garment (RMG) sector. While the Sri Lankan crisis is not comparable to Bangladesh, it has worked as a cautionary lesson for the rising nation to further embolden its politico-economic milieu.

Kazi Fahim Ahmed
Kazi Fahim Ahmed
Department of International Relations, University of Dhaka.