Recently, Nomura Holdings, the leading brokerage and investment bank in Japan has published a report that 7 countries are at high risk of a currency crisis. Of those 7 countries, Pakistan and Sri Lanka in south and southeast Asia, has been mentioned as high-risk countries. Despite the fact that terms like “currency crisis,” “dollar crisis,” and others have nearly become buzzwords in the tea stalls and discussion programs of Bangladesh, the country was not designated as being in the risk zone. Is Bangladesh truly free of a currency crisis? A comparison of the nations may provide the answer.
Nomura uses the Damocles model that ranks nations according to 8 important metrics. It was able to predict 64% of the past 61 crises using factors including foreign currency reserves, exchange rate, financial health, and interest rates. According to a Nomura report, Sri Lanka and Pakistan are high-risk nations, while India is a low-risk nation. Nomura’s findings can be applied as benchmarks to determine the likelihood of currency crises in Bangladesh.
Before applying the Damocles model in Bangladesh, lets delve into the basic tenets of currency crisis. Scholars list currency crisis as a type of financial crisis characterized by a sudden and unexpected decline in a currency’s value. Examples of such crises are Latin American crisis of 1994, Asian crisis of 1998 etc. Whereas the first crisis is more associated with foreign reserves and government policy, the second provides a good illustration of the impact of exchange rates.
Coming back to Bangladesh, although some netizens worry about the nation’s diminishing foreign reserves, it still has more foreign reserves than Sri Lanka, Pakistan, and Myanmar combined. Along with having a larger foreign exchange reserve, Bangladesh also ranks third in terms of its gold holdings, with 13.97 tons, above Myanmar’s 7.27 tons and Sri Lanka’s 6.7 tons.
Currency strength and exchange rate both play important roles in protecting an economy from disaster such that when the exchange rate market becomes unstable, Nations economy falls in the red zone. Though Bangladesh’s currency rate has fluctuated during the past three months, it is still lower than Myanmar’s. However, according to figures for a full year, Bangladesh’s variations were much smaller than those of Pakistan and Sri Lanka. Additionally, it ranks second in the region for its currency strength.
Being financially sound is one of the fundamental requirements for being a low-risk nation for currency crises. When viewed from a risk standpoint, Bangladesh has performed better than Myanmar, Pakistan, and Sri Lanka across the board, but particularly in the areas of currency risk and economic structure Risk.
Interestingly, the above-mentioned fact speaks against the rumors that Bangladesh would face the similar fate of Sri Lanka in economic crisis.
According to the fiscal account, Sri Lanka had a deficit of 12.2% of its GDP, whereas Bangladesh had only 5.2%. Notably, Sri Lanka’s current account deficit is 4%, about 4 times greater than Bangladesh’s, placing it second from a current account standpoint, with a deficit of just 1.1% of GDP.
Then again, to save an economy from catastrophe, interest rate or the policy rate of central bank is used as one of the crucial cards. The average policy rate of Bangladesh is 6.75% which is the closest to India, the low risk country with an average policy rate of 6.5%. Other countries have higher policy rates. For example, in Pakistan, the rate has even rose to 16% recently.
Thus, Evidence points out that in almost every economic parameter, Bangladesh is a fiscally sound Bangladesh that outperforms high-risk economies.
However, there is a catch, analysts may argue that, all these economic data reflect past performance. What about the future? Will Bangladesh be able to maintain its current rate of growth? The answer may be derived from international organizations’ expectations of the country.
According to the recent report of the esteemed Boston Corporation Group (BCG), Bangladesh is on its way to become a $1 trillion economy by 2040. in its report “The Trillion-Dollar Prize” it has mentioned Bangladesh as the “Local Champion”. The report didn’t only consider historical growth but also took into account the recent policies of government, number of digital firms, structural change in business and other micro-economic variables. As per the findings of BCGs analysis, Bangladesh is currently growing at 6.4% rate and even if the growth slows down to 5%, the country is set to cross $1 Trillion mark by 2040.
Historical events tend to warn that excessive foreign debt can curve out the growth of a nation. So, the people of our country sometimes tend to fear the collapse of the economy. However, in the recent report of United Nations Development Program (UNDP), “Avoiding ‘Too Little Too Late’ on International Debt Relief“, Bangladesh was not listed among the 54 most debt vulnerable low- and middle-income countries. This is an indication that the growth of Bangladesh will not be curve out by debt and the country have the potentiality to develop further.
More recently, Martin Raiser, the World Bank’s vice president for South Asia, buoyed Bangladesh in achieving its growth goals by stating that “Bangladesh is a development success story in South Asia.“
Thus, based on the evidence and expectations, it can be assumed that Bangladesh’s economy is still strong enough to withstand the current economic downturn. However, there is no denying that flawed policy can alter the course of the economy. As a result, policymakers must delicately craft the policies to address the coming challenges.
