Turmoil in Bangladesh

Bangladesh is facing unprecedented economic challenges. Will it go down like Sri Lanka? A perspective…

 

The 2022 monsoon in Bangladesh may have provided some relief from the scorching summer heat. But the $465 billion economy (one of the fastest growing in south-east Asia) has been facing the heat on the economic front.

Let’s take a quick look: A steep hike of (almost 51%) in fuel (petrol and diesel) prices in Bangladesh saw protests erupting across the country. It is the second country (after Sri Lanka) in the Indian subcontinent that such a countrywide demonstration has hit.

While the nation seems to be in the middle of an energy crisis, ordinary citizens face a double-whammy situation of coping with the rising cost of daily necessities. Angry citizens took their protests to the refuelling stations and demanded immediate price reversal. As reported by Bangladeshi media, it is the highest ever fuel price hike since independence in 1971.

Although the rise in oil prices is inevitable in the current global market condition and beyond the control of any government. BPC – Bangladesh Petroleum Corporation was compelled to go for a price hike after incurring a total loss of $ 85 million in the past six months (Source NDTV, August 08, 2022).

On top of that, the inflation rate has hit an all-time high of 6% plus in the last nine months, adding to the woes of the common man struggling hard, leading to speculation if another Sri Lanka is in the making in the Indian subcontinent.

Although the economic slowdown due to the global lockdown since COVID 19 pandemic and the ongoing Russia– Ukraine war are a few reasons for the current economic plight to a certain extent, it is not the entire story. Few grey areas have had a multiplier effect on the current crisis. The national government needs to look at them more objectively without any bias.

Escalating cost in Infrastructure Investment

Sheikh Hasina’s Awami League Government, which has been the ruling party in power since 2009, has undertaken mega infrastructural projects that include Bridge over Padma river, Cooper nuclear power plant, Dhaka Metro Rail, and Karnaphuli Tunnel etc.

The investment runs into billions of dollars today, which earlier was estimated lesser and later escalated much more, thus putting tremendous pressure on the government’s exchequer. The cost overrun is mainly because of overpricing of materials, corruption, and long delays in project execution.

Poor Performance of Central Bank

The banks in Bangladesh are always in the media spotlight, and there have been several scams in the past. Central Bank acknowledged that loan defaults touched a whopping $11.11 billion in 2019 ( Atlantic Council South Asia Source). Still, the grapevine says it is much more. “Immense political pressure and illegal intervention by some large business groups” are the causes of an unabated increase in loan defaults”, an observation made by the Corruption watchdog Transparency International Bangladesh said.

Then there has been rampant corruption in the power sector, too, and a handful of beneficiaries with access to corridors of power successfully milked the systems and exploited policy loopholes to their advantage. In the last decade, a small group of influential people managed to amass large sums of money. Bangladesh also witnessed widespread money laundering, observed by watchdog Global Financial Integrity.

Government’s Crisis Management Initiative

Understanding the gravity of the situation, the government responded quickly and implemented harsh austerity measures, including power cuts, restricted use of foreign currency, and fuel rationing. However, it has not made any significant impact on the crisis.

The dwindling foreign exchange reserve is also a significant concern, compelling the government to restrict imports of luxury goods, LNG (Liquified natural gas ) and even shutting down diesel-run power plants.

It has also compelled the national government to look at international institutions and other multilateral agencies, request budget support, and use the loan for pre-emptive economic measures to ease the current crisis.

International Borrowings during 2019-22: An Analytical Perspective

Recently, the Bangladesh government has received a loan of US$ 5.8 billion from multilateral agencies, US$ 732 million in the balance of payment support from IMF, and US$ 1.4 billion from the World Bank. (Data Source:  Atlantic Council South Asia Source August 5, 2022)

In addition, the country also received a donation of sixty-one million doses of COVID-19 vaccines from the United States.

And this offset the pandemic theory as a significant reason for the current economic crisis. On the other hand, Russia–the Ukraine war has adversely impacted foodgrains supply and fuel price hikes globally, and Bangladesh is no exception.

Bangladesh Negotiating Further loans from IMF and other Agencies

To help Bangladesh during its financial crisis, the IMF has expressed willingness to discuss the Bangladesh government budget support recent request for a US 4.5-billion loan at a low-interest rate.

Besides IMF, the government is in high-level talks with World Bank for a US$ I billion loan and another $ 2.5 billion loan alongside other agencies like JICA. (Source Atlantic Council South Asia Source dated 5th Aug22)

While money may come in, there’s a cautionary note. The country’s national administration must remember that external borrowings have long-term adverse repercussions. It may render some immediate relief by softening the impact of the current crisis but managing the debts also calls for managing the national economy well through continuous reforms, removing corruption and ensuring just distribution of resources and wealth.

We have lately seen the debt crisis in neighbouring Sri Lanka and its outcome, although Bangladesh is not in the debt danger zone of the dozen countries list. Countries like Argentina, Ukraine, Ghana, Tunisia, Egypt, Ethiopia and Pakistan are already in a tight spot and fear economic collapse due to gross mismanagement and other issues. (Source: REUTERS July 15, 2022).

One never knows the bumpy path ahead that may bring a nation on the brink of an unforeseen economic collapse and political instability.

Will Bangladesh go the Sri Lanka way?

That’s the biggest question that observers and analysts would want to know.

Bangladesh was one of the few south-east Asian nations that made a fast and robust economic recovery from the pandemic. There has been a rebound in the country’s manufacturing and service sector activities, resulting in substantial economic growth in the financial year 2021 and the first half of the Financial year 2022.

World Bank-IMF Debt Sustainability Analysis assessed and concluded that Bangladesh remained at low risk of external and public debt distress. As per the world bank report ( source April 13 2022 ), the GDP growth is projected to be strong enough in the medium run, although the current inflation rate is approx. 6.2% and above is a bit worrisome, along with the price rise in food and other necessities.

Bangladesh and Sri Lankan Economy – A Comparative Study

Economic Foundation

The island nation Sri Lanka’s economy primarily depends on tourism, which collapsed worldwide because of COVID 19 and the subsequent lockdown.

Bangladesh has a rock-solid foundation in garment manufacturing, a part of the global supply chain in the domain. Blue collar Bangladeshi workforces are employed worldwide, and the foreign exchange they remitted monthly has given the country’s forex reserve a healthy outlook.

Corruptions

Although economic and political corruptions are present in most developing economies, in Sri Lanka, the rampant corruption among critical members of the top leadership – the Rajapaksa family, was a major cause of public anger and protest.

Comparatively, corruption is an issue in Bangladesh too, but it’s within the system. But till now, not even a single complaint has been levelled against the top leadership.

BRI Initiative Partner

Sri Lanka, Zambia, Djibouti, Laos, Maldives, Republic of Congo, Tonga, Pakistan and Kyrgyzstan are the countries where China has invested through its ambitious Belt and Road Initiative (BRI). As a strategic partner to China, Bangladesh was a party to the Chinese Belt and Road Initiative (BRI), and so was Sri Lanka. The fallout is that all these countries ( except Bangladesh) have run into severe financial problems with a debt trap hanging like Damocles sword on them.

These countries believed that the BRI initiative would help their employment generation programmes and fuel economic growth, which never happened in real-time. But Bangladesh was smart enough to read between the lines and played its cards in such a way that it became a win-win situation for both.

This aspect of shrewd negotiation shows the fine astuteness of Bangladesh’s leadership and think tanks while handling mega economic projects like BRI with a strong and influencing partner like China.

Recently, Bangladesh finance minister AHM Mustafa Kamal has warned developing economies about the risks of taking additional loans through China’s Belt and Road (BRI) Initiative. The minister cited the   Sri Lankan example, where infrastructure projects sponsored by China failed to produce returns, which has led to a catastrophic economic crisis in the island nation. Because the pressure on heavily indebted emerging markets is increasing due to global inflation and sluggish growth.

Debt Management

Sri Lanka’s current debt liability is US$ 51 billion. In contrast, in Bangladesh, the Domestic Debt to GDP ratio of Bangladesh stands at 19.55%, taking the total Debt to GDP ratio to 31.42% as of March 31, 2022. It is a reasonable but comfortable statistic to look at.

At the end of fiscal 2020-21, Bangladesh’s external debt stood at $60.15 billion. It picked up much between fiscal 2018-19 and 2020-21, increasing by $9.02 billion in the last fiscal year alone.

Bangladesh’s economy has already shown much-needed resilience and recovered well from the last pandemic. With a stable political leadership and robust business infrastructure, Bangladesh is unlikely to go the Sri Lankan way.

However, going forward, the government should carefully plan all monetary and fiscal reforms, tactfully handle the inflation and price rise and counter unforeseen future shocks, thus laying the foundation for inclusive growth.

 

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