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Is Bangladesh At Risk Of Becoming Another Sri Lanka? – OpEd

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Sri Lanka, a beautiful island nation in South Asia, is now facing the worst economic crisis in its history. The crisis also brought political and social instability to the country of 22 million people. The external debt crisis and insufficient Foreign Exchange reserve (Forex) have brought Sri Lanka to the brink of economic fallout. The soaring commodity price is affecting the everyday life of common Sri Lankans while their government is now reaching out to other countries and organizations to facilitate a smooth bailout program. Mentioning the plight of Sri Lanka, many Bangladeshis also raise a concern about whether Bangladesh is going to be another Sri Lanka soon? This skepticism has become a widely debated topic in Bangladesh in the past few days. It is high time to understand what a comparative political economy analysis suggests about Bangladesh’s chances to embrace Sri Lanka’s fate in the near future.

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Sri Lanka’s Main Problem

Sri Lanka’s main problem is its debt crisis and Forex shortage. Sri Lanka only has USD2.31 billion in its Forex reserve, while it needs at least USD4 billion this year to repay its external debt. Sri Lanka is using its domestic economy to fill up the shortage. As a result, inflation has skyrocketed, and the government is failing to stabilize the economy. 

So, how did things go wrong for Sri Lanka? It happened when the ‘Twin Deficit’ became acute due to a wrong policy of deep tax cut, bad agricultural policy, unrealistic foreign loans, and remittance drop due to Covid-19. Twin Deficit refers to a budget shortfall for the government and a deficit in the current account. Twin deficit is common for developing and least-developed economies. But when the severity increases beyond sustainability, it becomes a major problem for the country.

A Comparison between Bangladesh and Sri Lanka’s Economy

In a Post-Covid world, Bangladesh is also suffering from inflation like Sri Lanka. But, inflation is a global scenario, and Bangladesh is also a part of it. Again, Bangladesh also has a twin deficit problem like most developing and least developing countries. But unlike Sri Lanka, Bangladesh has a large Forex reserve of USD46 billion.

On the other hand, Sri Lanka has an average of USD44 billion external debts, with the highest of USD55 billion in 2019. Bangladesh’s average external debt is USD23 billion, with the largest USD44 billion in 2020. The aforementioned statistics reveal that considering both countries’ economical size and population, Sri Lanka’s external debt is much higher than that of Bangladesh.

Bangladesh is in a better position than Sri Lanka in Forex reserve. Bangladesh’s forex reserve also hit USD48 billion in August 2021, thanks to its migrant workers abroad. Even in the first seven months of the Fiscal Year 2021-22, Bangladesh earned USD11.95 billion in remittances. It is also worth mentioning that remittance has been the backbone of Bangladesh’s economy, providing financing for Bangladesh’s trade deficit. While Bangladesh’s remittance is keeping the economy afloat, Sri Lanka’s remittance inflow was severely impacted due to Covid-19. Tourism, another major source of Sri Lanka’s foreign currency, was also affected adversely.

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As we all know, capitalism is all about growth. Bangladesh also managed to maintain its steady GDP growth. The current GDP growth rate is around 7.5 percent at present, while the pandemic and short-sighted policies massively impacted Sri Lanka’s growth. Sri Lanka secured a negative (-3 percent) growth in 2020 with fluctuating GDP rate in the next two years. The forecast for 2023 is also not very pleasant for Sri Lanka.

However, Bangladesh is also no match for Sri Lanka in external debt. Bangladesh only has foreign debt worth 22 percent of GDP. At the same time, Sri Lanka’s foreign debt has already reached 106 percent of its GDP. The safe zone for Debt-to-GDP ratio is below 60 percent. Bangladesh is still at one-third of the level. Again, Bangladesh’s public debt is also at a healthy level with 40.7 percent only. While for Sri Lanka, public debt reached 101 percent and had risen to ‘unsustainable levels’ with insufficient Forex reserve for debt payment, according to the IMF.

While Bangladesh is still within debt sustainability, Sri Lanka failed to maintain it. According to the IMF, ” A country’s public debt is considered sustainable if the government is able to meet all its current and future payment obligations without exceptional financial assistance or going into default.” The IMF’s deputy chief of Strategy, Dalia Hakura, also argues that some debts are good for socio-economic development. The art is in maintaining sustainability where Bangladesh is still successful, and Sri Lanka has failed to maintain so. The World Bank- IMF joint debt sustainability analysis also ensures that Bangladesh is at a low risk of overall risk of debt distress. The assessment concludes such considering the Covid-19 situation. The analysis also expressed that Bangladesh’s foreign debt and public debt level is below threshold limits under the stress test scenarios.

Therefore, a comparative analysis of both countries’ economy suggests that Bangladesh’s continuous remittance inflow, strong Forex reserve, and maintaining debt sustainability has marked its economy safe at least for now. The skepticism of becoming Sri Lanka comes from soaring commodity prices, which is a different phenomenon to consider here as inflation is a global scenario.

However, Bangladesh must remain vigilant about the twin deficit problem, tax evasion, and money laundering. Foreign loans should be used wisely for meaningful purposes to avoid being another Sri Lanka in the future.

*The author is a doctoral researcher at University of Groningen. Her areas of interest are Comparative Politics, Globalization, South Asian Studies and Migration Studies. She can be reached at: [email protected]

2 thoughts on “Is Bangladesh At Risk Of Becoming Another Sri Lanka? – OpEd

  • April 16, 2022 at 6:25 am
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    Bangladesh’s foreign debt you quoted is incorrect. It is over USD 70 billion according to local media reports.

    Garments constitute for almost 85% of total of country’s total exports. However, garments as you know is an ultra low margin business with imports constituting 70% to 80% of price. Almost 60% of the country’s USD 40 foreign (in local currency) debt is in the apparel industry.

    Bangladesh’s primary foreign currency source is remittance by migrant workers. Bangladesh has about 12 million registered and probably another 6-8 million illegal migrants working around the world sending around USD25 billion annually through official channels. At least 1/3 of the population of Bangladesh are family members of these migrant workers and relies completely on their financial support.

    Almost 80% of GPD growth of Bangladesh is powered by few government mega projects that will never generate a dime of forex in paying off country’s USD 80 billion foreign debt.

    The present China backed government heavily relies on recently US sanctioned paramilitary force that is responsible for 100s of extrajudicial killings of opposing politicians. This is despite China not recognizing Bangladesh until the death of its founding father in 1975.

    The country’s only Nobelaurieiate is serving bail term on fictitious government instigated cases.

    Reply
  • April 16, 2022 at 6:27 am
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    Correcting

    60% of bad debt not foreign debt of the country is in apparel sector

    Reply

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