Rising foreign debt and balance of payments deficit: Does Bangladesh need to worry?

With global inflation rising and the fear of fuel and food crises looming large, clouds are gathering on the economic horizon of South Asian countries. The Russia-Ukraine war, followed by the Covid pandemic, disrupted the global economy and trade. In the meantime, Sri Lanka's economic and political crisis has reached a critical point, driven by the country's mix of high indebtedness, soaring inflation, and poor economic management.

A cautionary tale for South Asia

Once projected to become the Singapore of South Asia, Sri Lanka became the first country in the Asia- Pacific region in 20 years to default on foreign debt. President Gotabaya Rajapaksa flew to Singapore to escape a popular uprising against his government and was forced to resign as president. Rajapaksa's resignation letter indicated that Sri Lanka's years of poor economic management contributed to this ill fate.

According to some economic analysts, the global headwinds—the supply chain bottlenecks, subsequent inflation, currency depreciation, and depletion of foreign currency reserves—have been pushing several other South Asian economies to the brink of an economic collapse, similar to the island country in the Indian Ocean.

Pakistan is on the brink of a balance of payments crisis. Its foreign currency reserves have plunged to only $9.8 billion, hardly enough for five weeks of imports, while the Pakistani rupee touched a record of about 233 to the dollar.  The most concerning issue is that the Shehbaz Sharif government has decided to sell national assets to foreign countries without any checks in a desperate attempt to prevent the country from a debt default. 

Pakistan's new government, which narrowly averted a debt default, also struck a crucial IMF deal to resume a bailout programme, a move that offers economic pain relief but no panacea Because the volatile political system threatens true economic revival. Thus, the public may lose its temper and take to the streets at any time against the government's unpopular steps, leading the country to the next Sri Lanka.

Panic has gripped Nepal over the growing likelihood of a Sri Lanka-like economic meltdown as the country is seeing a rise in imports even as the country's foreign exchange reserves have shrunk sharply with rising food and fuel prices. Moreover, foreign debt has escalated as the country continues to sign up for more and more Chinese-funded infrastructure projects, while the Covid pandemic has battered the economy.

Infograph: TBS

The Himalayan nation is also facing a liquidity crunch and struggling to extend loans to productive sectors like agriculture, tourism, manufacturing, and energy. Therefore, there is no reason to disregard the suspicions outright that Nepal would not meet Sri Lanka's fate if the government continued to ignore the warning signs.

Like Sri Lanka's, the Maldivian economy is heavily reliant on tourism– which suffered a big blow after the outbreak of the Covid pandemic. Its public debt is already on the red line and is now well above 100% of its GDP. US investment bank JPMorgan has warned that the country is at risk of debt defaulting by the end of 2023. 

The Bangladesh Case

Having observed the depleting foreign exchange reserves, falling Taka against the US dollar, plus widening trade and current account deficits; it is fair to say that the situation is alarming. The most immediate challenge for Bangladesh is to reduce inflationary pressures and keep the foreign exchange reserve at a satisfactory level. The goods imports jumped by 39% in the first 11 months of the past fiscal year (FY22) over the same period of FY21, creating pressure on the dollar reserve. It is undoubtedly an alarming sign for Bangladesh's economy as the country is widely dependent on imports for both domestic consumption and export-oriented industries. 

Another, concerning issue is that Bangladesh is feeling the consequences of the Russo-Ukraine war that is causing an energy crisis. Despite scepticism, Bangladesh's economic managers believe the country is still well-positioned to withstand any external shocks by analysing overall macroeconomic parameters.

It's true, like Sri Lanka, Bangladesh has failed to diversify its export basket, but it has a lot of room to continue growing in the garments sector. It is now among the top three apparel exporters in the world and is gradually taking market share from China. Bangladesh's export story, which recently touched a landmark by crossing $50 billion for the first time despite global headwinds, is very impressive. Bangladesh's FDI hit a three-year high in 2021. According to a UNCTAD report, Bangladesh has become the second-favoured investment destination in South Asia after India, thanks to Bangladesh's initiatives to implement 100 economic zones to attract FDI.

It is important to note that, while other South Asian countries are overwhelmed by foreign debts, Bangladesh has nothing to worry about because its external debt is only 21.8% of GDP. Bangladesh's strong macro-economic base, loan management, and debt repayment capability have led the World Bank to continue lending more than $35 billion with the lowest interest rates – the highest amount given to a single country. 

Needless to say, while Sri Lanka implemented lots of unnecessary megaprojects using Chinese loans – for example, the Hambantota Sea Port and Rajapaksa International Airport, to serve political interests, Bangladesh PM Sheikh Hasina has been careful to not take up projects without a high economic and social rate. Moreover, Bangladesh's political system has shown resilience in recent years without any major political turmoil. 

Moreover, the government adopted a conservative approach to deal with any upcoming potential crisis. Bangladesh has sought a $4.5 billion loan from the IMF for its balance of payment and budgetary needs. So as to save dollars and increase foreign currency reserves, the government has restricted civil servants' foreign tours, imposed higher import tax on luxury items, relaxed restrictions to draw in remittances, boosted exports, and introduced austerity measures in power expenditure. Although these don't seem to be the long-term solution to economic woes, it's expected to save huge money, positively influencing macro-economic stability.

According to a report based on IMF data, Bangladesh is the 41st largest economy in the world with a GDP of $397 billion, and its position is second in South Asia after India. Even a recent Bloomberg report pressed alarm bells for 25 countries that are exposed to the default risk, excluding Bangladesh from the list.

To conclude, though Bangladesh is in a much more comfortable position than other South Asian countries, there is a need to define a repayment strategy as an economic shock is looming from debt repayment pressure in the upcoming years. The Sri Lankan episode presents an alarming case study to other South Asian ones. Thus, the leaders in power ought to show the farsightedness to make buffers and reject subversive economic policy essential to steer the countries' major economic drivers on the right course before it's too late.

Kamal Uddin Mazumder is a political-economy analyst.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.