Where does the Bangladeshi economy stand after Covid-19 and the Russia-Ukraine War?

In the past few years, Bangladesh, like many other nations, has faced the twin challenges of the Covid-19 pandemic and the Russia-Ukraine war. These crises disrupted economies worldwide, but their impact on developing nations has been particularly severe. 

While some nations, like Vietnam and Morocco, managed to recover swiftly, others, such as Sri Lanka and Pakistan, continue to struggle critically. Bangladesh has shown resilience, and its path to recovery offers both lessons and contrasts when compared with seven other MSCI group nations—Vietnam, Sri Lanka, Jordan, Morocco, Kenya, and Romania—all with populations exceeding 10 million.

How Covid-19 pandemic impacted developing nations

With the onset of Covid in 2020, the global economy came to a standstill. Lockdowns and social distancing measures surprisingly slowed economic production while consumer spending dropped sharply. Oil prices dropped by 32.8% to an average of $41.3 per barrel, their lowest in 16 years, clearly indicating a decline in economic activity. Global trade shrank by 8.5%, while international travel bans hit the tourism sector hard, leading to a 72% drop in international arrivals. This global disruption of trade and travel stalled economies that relied on exports and tourism for growth.

Bangladesh, like other nations, was heavily impacted by the pandemic. Before Covid-19, Bangladesh's economy was on an accelerated growth path. However, the pandemic struck one of the main pillars of Bangladesh's economy: the ready-made garment (RMG) sector, which accounted for over 80% of the country's export earnings. Global lockdowns and cancelled export orders led to a loss of around $3.18 billion in RMG exports.

Like Bangladesh, Vietnam and Romania were also experiencing strong economic growth before the pandemic. Romania, whose services sector forms 58.5% of its GDP, saw its tourism, hospitality, and trade industries suffer significantly. Meanwhile, Vietnam's tourism and hospitality sectors were also hit hard, but its strong manufacturing base kept its economy stable with a GDP growth rate of 3% in 2020.In contrast, countries like Jordan, Pakistan, and Sri Lanka were already dealing with major economic challenges before the pandemic, which only worsened their situations.

Jordan, burdened with high government debt and unemployment, along with regional conflicts and a large influx of Syrian refugees, strained its economy by slowing growth and leading to a public debt crisis. The arrival of Covid-19 pushed Jordan into its first economic contraction in over 30 years, shrinking the economy by 1.6%. 

Pakistan was facing similar difficulties like Jordan and had sought a $6 billion IMF bailout to deal with rising debt and a weakening currency in early 2019. Just as the economy began to show signs of stabilising, the pandemic hit, severely affecting the export sector—particularly textiles—due to cancelled orders. This led to a sharp increase in debt and unemployment. 

Sri Lanka's economic freefall began in 2019 with reckless government decisions, including tax cuts and a sudden ban on chemical fertilizers. That same year, the country was hit by the Easter Sunday bombings in April, which targeted churches and luxury hotels, killing 269 people and injuring over 500.

This tragedy, together with the pandemic, dealt a heavy blow to the tourism sector, leading to a sharp drop of 1.5 million visitors in 2020. As tourism and tax revenues plunged, and nearly 90% of new loans taken between 2015 and 2019 were used to repay old debts, Sri Lanka became trapped in a cycle of borrowing and decaying foreign reserves. The Covid-19 pandemic further compounded these issues, pushing the country deeper into financial ruin.

For Morocco and Kenya, economic strain began with severe drought, only to be intensified by the pandemic. In Morocco, where agriculture forms 10% of GDP, crop yields suffered significantly, while in Kenya, with farming comprising nearly 30% of the economy, harvests declined sharply. Covid-19 then stalled exports to Europe, severing crucial income streams. Morocco's GDP contracted by 6.3%, and Kenya's farmers and exporters experienced decline in demand. 

By late 2021, many global economies were beginning to show signs of a V-shaped recovery, thanks to government Covid-19 protections, IMF assistance, and widespread vaccine rollouts. Key sectors like tourism, foreign direct investment (FDI), and exports started to recover, and tax revenues were again on the rise. But the most impressive journey throughout the pandemic was Vietnam's. 

Vietnam being an export-driven economy, with manufacturing making up 20% of its GDP and contributing 95% of its total exports, enabled the country to continue attracting foreign investment throughout the pandemic. Low labour costs, strong export infrastructure, and its strategic position as a key player in global supply chain diversification allowed Vietnam to not only fight the crisis but also expand its share of the U.S. import market since 2019. 

How developing economies responded to the Russia-Ukraine crisis

Sri Lanka and Pakistan were hit especially hard, suffering from both political instability and economic hardship. By 2022, Sri Lanka's foreign reserves had dropped to less than $2 billion, leading to defaults and severe shortages of basic goods. with inflation soaring to 60%. Pakistan faced similar struggles, with inflation peaking at 38% by 2023, compounded by ongoing political unrest. Both countries turned to the IMF for financial relief—$2.9 billion for Sri Lanka and $3 billion for Pakistan—under strict restructuring programs.

Elsewhere in Asia, Vietnam responded to the rising coal prices with its first electricity rate hike in four years by rebuilding their Soviet-era equipment, advancing local arms production, and leveraging its "bamboo diplomacy" to strengthen foreign relations and attract investment. Similarly, Jordan, despite regional unrest, managed 2.5% economic growth, largely driven by tourism and exports.

In contrast, Romania in Eastern Europe tackled inflation with a different approach. Despite a 12% inflation rate, it achieved 5% economic growth by focusing on domestic oil and gas production, reducing its dependence on imports, and boosting exports to Europe. Meanwhile, Morocco and Kenya, both dealing with drought and high food and energy prices, introduced subsidies to shield their citizens from the worst impacts of inflation. 

Why Bangladesh's economic resilience could not sustain

Although Bangladesh posted the second-highest GDP growth rate in 2022 among the mentioned countries, after one year of the crisis, the structural issues started to surface, with inflation surpassing 9%. High import dependency, a fragile banking sector, capital flight, shrinking reserves, and reliance on informal remittance channels like hundi have slowly pushed the economy to the edge. 

While the situation in Bangladesh was not as severe as in Sri Lanka or Pakistan, the country's rising trade deficit, soaring external debt, limited export diversification, and fluctuating foreign reserves exposed deep vulnerabilities. In contrast, both Sri Lanka and Pakistan, despite their earlier economic crises, have begun to stabilise their economies by improving tax collection, managing debt, and addressing fiscal deficits. This progress is reflected in their inflation rates in September 2024, with Pakistan's inflation at 6.5% and Sri Lanka achieving a rate of -0.5%. 

Meanwhile, Bangladesh, which initially performed better than many countries during the crisis, has been trapped in high inflation for the past 27 months, with inflation rates remaining above 9%. This highlights the disconnect between Bangladesh's impressive GDP figures and the lack of tangible economic improvements for its population. 

True sustainable growth isn't just about improving numbers on paper; it requires addressing underlying weaknesses and ensuring real economic improvements by strengthening key sectors like manufacturing, improving the quality of education and healthcare, and enhancing infrastructure efficiency. Without tackling these core issues, Bangladesh's economic foundation will remain vulnerable, leaving it unprepared for future global shocks and making it difficult to achieve meaningful, long-term development.

Sketch: TBS

Sadia Binta Jalal is an Investment Analyst at  UCB Asset Management Limited

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