Could Bangladesh be the next Sri Lanka?

Public demonstrations, political protests calling for the federal government to resign, and lengthy queues at fuel stations and grocery shops have been an everyday characteristic in Sri Lanka for the previous few weeks. Sri Lanka’s finance ministry mentioned on April 12 that the federal government approached the Worldwide Financial Fund for emergency monetary help. It claimed that the pandemic and the battle in Ukraine eroded the nation’s funds to the purpose it could possibly not service its money owed and sought complete restructuring of its excellent foreign-denominated debt.

What are among the classes that Bangladesh can soak up from its South Asian neighbour? You might brush this query apart in a single sentence: “Bangladesh is just not Sri Lanka!” However such dismissal begs the query: Does bother all the time include a warning?

Within the case of Bangladesh, if one have been to make use of the identical yardsticks, in sharp distinction to Sri Lanka, the previous will come out with flying colors. The overseas change reserves and capital accounts are sturdy. Nonetheless, there are different pink flags. Simply to say a couple of, the price overruns for megaprojects, the endemic stress to devalue the forex, the banking sector with excessive non-performing loans (NPLs), and the overflow of assets by means of the black market are all draining the financial system and its power. Bangladesh is an import-dependent nation and unstable change price or provide chain issues might have an effect on its overseas reserves inside a brief span of time.

A recap of the Sri Lankan catastrophe

To recap, it can’t be gainsaid that the latest flare-ups in Sri Lanka have been a few years within the making, stemming from an amalgam of issues. An accumulation of debt on infrastructure spending, sweeping tax cuts that decimated authorities income, and political missteps, to call a couple of.

For a few years, significantly since 2019, Sri Lanka has stumbled from one financial disaster into one other with none let-up, compounded by financial mismanagement, an increase in exterior debt, depleting overseas change reserves, a weakened forex, and rising costs.

The nation declared chapter earlier this month and expressed its lack of ability to fulfill its debt service obligations to its collectors. Whereas the Sri Lankan authorities declared it was solely a “short-term” default, it’s unprecedented within the nation’s historical past. 

Bangladesh, which has had its personal skirmishes with human rights our bodies in recent times and confronted occasional flare-ups of socio-economic discontent, can also be combating the after-effects of worldwide inflation and provide chain disruptions. The battle in Ukraine, rising oil costs, and better value of imports are main the civil society in Bangladesh to ask: Are we additionally going through a future which may push us on the trail to an analogous financial and social upheaval?

What about Bangladesh?

Allow us to all recognise that there’s a distinction between financial downswings and the catastrophic calamity that’s taking place in Sri Lanka and the one that would come down in Bangladesh. Bangladesh has a bigger financial system and a inhabitants which is way greater and an financial system which is extra sturdy than Sri Lanka. The per capita debt of the folks of Bangladesh is one-fifth of Sri Lanka. Equally, the regular influx of remittances from the expatriates working overseas offers Bangladesh an edge. All our different worldwide financial metrics point out a more healthy present state of affairs.

Bangladesh financial system, alternatively, and its stability of funds are overly depending on RMG exports and remittances—making them weak to world market fluctuations in demand and costs. Bangladesh has additionally incurred an undisclosed quantity of debt to Chinese language lenders principally within the type of suppliers’ debt. The federal government has different main challenges. As per research achieved by BUILD, a assume tank of DCCI, underneath and over-invoicing in import and export invoice is amounting USD 12-13 billion every year on a median. One other type of monetary rigmarole is “entrance loading” of infrastructure tasks which now quantities to 20-25 p.c of the projected value.

A specialised mission of the IMF’s Financial and Capital Markets division visited Bangladesh twice earlier than the pandemic for a diagnostic evaluate of Bangladesh’s banking sector and got here up with 43 measures to reform the creaky system. As of at this time, all of those are in a state of limbo.

Whereas Bangladesh acquired a “BB-” score in an evaluation of its credit-worthiness by Fitch Scores Inc., due to Bangladesh’s resilient exterior funds, comparatively robust progress regardless of the pandemic, and authorities debt ranges that stay beneath the peer median, it cautioned the preponderance of low authorities revenues, weak governance indicators, and the problem-ridden banking sector. A World Financial institution report “Bangladesh Growth Replace” (April 2022) summarises the scenario as follows: “A sturdy financial restoration in Bangladesh faces new headwinds, as larger world commodity costs exacerbate the present account deficit and inflationary stress.”

Within the last evaluation, our overseas change reserves might come underneath stress because the Bangladesh Financial institution continues to intervene aggressively to help the change price within the occasion of an exterior or confidence shock. The change price will proceed to slip as home demand improves and imports of capital items related to massive infrastructure tasks resume selecting up. However the extra worrisome points are delays and price overruns in mission implementation, monetary sector weaknesses, and the non-economic—social and political—comfortable underbelly.

Dr Abdullah Shibli is an economist and serves as a Senior Analysis Fellow on the US-based Worldwide Sustainable Growth Institute (ISDI).