Could Bangladesh be the next Sri Lanka?

Public demonstrations, political protests calling for the government to resign, and long queues at gas stations and grocery stores have been a regular feature in Sri Lanka for the last few weeks. Sri Lanka's finance ministry said on April 12 that the government approached the International Monetary Fund for emergency financial assistance. It claimed that the pandemic and the war in Ukraine eroded the country's finances to the point it can no longer service its debts and sought comprehensive restructuring of its outstanding foreign-denominated debt.

What are some of the lessons that Bangladesh can take in from its South Asian neighbour? You could brush this question aside in one sentence: "Bangladesh is not Sri Lanka!" But such dismissal begs the question: Does trouble always come with a warning?

In the case of Bangladesh, if one were to use the same yardsticks, in sharp contrast to Sri Lanka, the former will come out with flying colours. The foreign exchange reserves and capital accounts are robust. However, there are other red flags. Just to mention a few, the cost overruns for megaprojects, the endemic pressure to devalue the currency, the banking sector with high non-performing loans (NPLs), and the overflow of resources through the black market are all draining the economy and its energy. Bangladesh is an import-dependent country and volatile exchange rate or supply chain problems could affect its foreign reserves within a short span of time.

A recap of the Sri Lankan disaster

To recap, it cannot be gainsaid that the recent flare-ups in Sri Lanka were many years in the making, stemming from an amalgam of problems. An accumulation of debt on infrastructure spending, sweeping tax cuts that decimated government revenue, and political missteps, to name a few.

For many years, particularly since 2019, Sri Lanka has stumbled from one economic crisis into another without any let-up, compounded by economic mismanagement, a rise in external debt, depleting foreign exchange reserves, a weakened currency, and rising prices.

The country declared bankruptcy earlier this month and expressed its inability to meet its debt service obligations to its creditors. While the Sri Lankan government declared it was only a "temporary" default, it is unprecedented in the country's history. 

Bangladesh, which has had its own skirmishes with human rights bodies in recent years and faced occasional flare-ups of socio-economic discontent, is also struggling with the after-effects of global inflation and supply chain disruptions. The war in Ukraine, rising oil prices, and higher cost of imports are leading the civil society in Bangladesh to ask: Are we also facing a future that might push us on the path to a similar economic and social upheaval?

What about Bangladesh?

Let us all recognise that there is a difference between economic downswings and the catastrophic calamity that is happening in Sri Lanka and the one that could come down in Bangladesh. Bangladesh has a larger economy and a population which is far bigger and an economy which is more robust than Sri Lanka. The per capita debt of the people of Bangladesh is one-fifth of Sri Lanka. Similarly, the steady inflow of remittances from the expatriates working abroad gives Bangladesh an edge. All our other international economic metrics indicate a healthier current state of affairs.

Bangladesh economy, on the other hand, and its balance of payments are overly dependent on RMG exports and remittances—making them vulnerable to global market fluctuations in demand and prices. Bangladesh has also incurred an undisclosed amount of debt to Chinese lenders mostly in the form of suppliers' debt. The government has other major challenges. As per studies done by BUILD, a think tank of DCCI, under and over-invoicing in import and export bill is amounting USD 12-13 billion per annum on an average. Another form of financial rigmarole is "front loading" of infrastructure projects which now amounts to 20-25 percent of the projected cost.

A specialised mission of the IMF's Monetary and Capital Markets department visited Bangladesh twice before the pandemic for a diagnostic review of Bangladesh's banking sector and came up with 43 measures to reform the creaky system. As of today, all of these are in a state of limbo.

While Bangladesh received a "BB-" rating in an assessment of its credit-worthiness by Fitch Ratings Inc., thanks to Bangladesh's resilient external finances, relatively strong growth despite the pandemic, and government debt levels that remain below the peer median, it cautioned the preponderance of low government revenues, weak governance indicators, and the problem-ridden banking sector. A World Bank report "Bangladesh Development Update" (April 2022) summarises the situation as follows: "A robust economic recovery in Bangladesh faces new headwinds, as higher global commodity prices exacerbate the current account deficit and inflationary pressure."

In the final analysis, our foreign exchange reserves could come under pressure as the Bangladesh Bank continues to intervene aggressively to support the exchange rate in the event of an external or confidence shock. The exchange rate will continue to slide as domestic demand improves and imports of capital goods associated with large infrastructure projects resume picking up. But the more worrisome issues are delays and cost overruns in project implementation, financial sector weaknesses, and the non-economic—social and political—soft underbelly.

Dr Abdullah Shibli is an economist and serves as a Senior Research Fellow at the US-based International Sustainable Development Institute (ISDI).