Economic Recovery: If Sri Lanka Can, Can Bangladesh? – The Geopolitics

With a national debt of almost USD 83.6 billion, Sri Lanka filed for bankruptcy in June 2022. People were quite angry, mayhem ensued, and some political leaders were even deposed because of it. Sri Lanka needed to act quickly, so it modified its financial models in addition to accepting a bailout package from the IMF and negotiating with its creditor countries for debt restructuring and fresh loans. Finally, within less than one and a half years, there are signs that recuperation has begun in the country. From 73.7% in September 2022, inflation had been brought down to 4% by August 2023. The speed with which Sri Lanka’s economy has recovered has amused observers across the world. “If Sri Lanka can restore economic stability, why can’t Bangladesh?” is a question that can be answered by studying the case of Sri Lanka’s recovery.

Sri Lanka’s Success

Sri Lankas’ success can be witnessed from two primary parameters — inflation and foreign reserve performance. In order to address the issue of rapidly increasing inflation, Sri Lanka has implemented a contractionary monetary policy for an extended period of time. The country utilized the most conventional tool, which was the interest rate. The rate was increased to 10% with very little notice. A group of analysts has reported that the 4% inflation observed in August 2023 can be attributed to the relaxed impact of contractionary policies and drastic measures implemented approximately one year ago. In addition, Sri Lanka implemented fiscal austerity measures in order to address the issue of inflation. The government had decreased its expenditure while simultaneously increasing tax revenue. Reducing the budget deficit positively impacted Sri Lanka, as indicated by the results.

Sri Lanka not only implemented traditional economic theories to manage inflation but also extensively increased its foreign reserves. Sri Lanka had a foreign reserve of $3.6 billion in August’23 compared to a reserve of $1.6 billion in September’22. The country has doubled its reserve within only 1 year. Clearly, the $3 billion bailout package, from the IMF, had an immediate positive impact on the economy. In addition to the IMF, various countries contributed to the efforts to resolve Sri Lanka’s crisis. The debt of Sri Lanka was successfully restructured. Creditors have implemented measures to provide relief to borrowers, such as extending loan repayment schedules, allowing deferment of payments through the Asian Clearing Union, and offering additional loans. Bangladesh, despite facing its own challenges, extended a $200 million loan to the country which has been fully repaid this month. Sri Lanka’s efforts to strengthen its economy are undoubtedly making unprecedented history.

Bangladesh’s comparison with Sri Lanka

Sri Lanka’s tourism-based economy (due to travel restrictions during the COVID-19 pandemic, foreign currency from tourists did not return home) and foreign debt (extensive investment of loans in unprofitable sectors) were primarily responsible for its abrupt economic collapse. When the country resumed accepting visitors, the tourism industry regained its independence and the reserve began to grow. It was primarily the economy that self-corrected. The nation then restructured its debt and was able to postpone payments. This is essentially how the nation began to experience better fortune. Sri Lanka, however, was in a completely different situation than Bangladesh.

Bangladesh is primarily propelled by exports. RMG and remittances bring foreign reserves home, which the country uses to advance. During the Covid pandemic, the flow of remittances increased significantly. The RMG industry’s exports also persisted to some degree, whereas imports declined dramatically. This resulted in foreign reserves that were historically unprecedented. However, when things returned to normal, import pressure was observed, Hundi usage increased, and the reserve was inevitably reduced. Bangladesh’s economy had further deteriorated as a result of the Ukraine war and can hardly self-correct, in contrast to Sri Lanka’s.

Then again, Sri Lanka had no choice but to restructure its debt. To pull itself out of the bottomless abyss, it dramatically raised its interest rate. But things are very different in Bangladesh. neither did it default nor did it touch the base of the rock. Bangladesh makes timely loans and ACU repayments. Thus, to contain inflation, dramatic action like raising interest rates would have worsened the situation for Bangladesh. The Economic Intelligence Unit (EIU) in its report titled “No Return to Cheap Money has classified Bangladesh as one of the less economically susceptible nations. The report proves that the country is prudently managing its debt.

Bangladesh’s current status

Start by understanding that each economy is unique and grows in cycles. The business cycle has expansionary and contractive stages. Bangladesh has had consistent growth for a considerable amount of time. There had to be a size reduction eventually as a result. The fact that the nation is still growing, despite the difficulties it is currently facing, is astounding. However, if the nation ever experiences a contraction, it must take all necessary measures to lessen the effects it has on the populace and economy. Bangladesh’s economy is still in its infancy, so a protracted slump would undo years of advancement rather than just stall expansion.

One of the country’s biggest challenges stems from the inside. Bangladeshi media often portrays the economy negatively making the citizens depressed, which lowers productivity and makes them question the country’s progress. One example of such news is- Bangladesh must pay $12 billion within four months despite having $23 billion in reserves. This overlooks the fact within that time remittances and export profits will boost the reserve. But this side of the fact is often ignored. 

Another homegrown problem in Bangladesh is the sudden increase of commodity price. the commodity price rises in the country not solely because of inflation. Ill-business-minded people, and syndicates are largely responsible for the sky-rocketing commodity prices,

Lack of coordination is another problem in the country. Responsible parties and stakeholders rarely discuss all the facts before finding a solution. One example is the National Board of Revenue (NBR)’s new revenue collection law this year. NBR deserves credit for passing a law, but it ignored stakeholders and missed the big picture. BB has requested NBR to review the 20% foreign loan tax that impacted private borrowers. Private enterprises borrowed globally due to cheaper borrowing rates. Global borrowing costs have soared, and a 20% tax has raised them beyond tolerance. This inhibits foreign currency borrowing, preventing its inflow. The funds must exit the nation upon paying off the debt. It deepens the country’s reserve situation.

On the one hand, the failure to coordinate and plan ahead by policymakers is a contributing factor to Bangladesh’s problems. On the other hand, we can’t discount the efforts they’re making. The country is implementing a national debit card, restricting imports of luxury goods while permitting imports of basic commodities, monitoring the market, and even attempting to control the retail price of vital products in an effort to tame inflation and enhance foreign revenue. The government has placed an emphasis on reducing waste and limiting the number of international trips taken by its personnel. In addition to taking policies, BB should have an official forum to dispel the myths steaming from the media outlets decreasing information asymmetry to earn public trust. However, in reality, any policy or actions made to stabilize the economy, however, need time to bear fruit. It takes time for the policies to take effect. Until then, we need everyone’s full cooperation while we prepare and put into action as many backup plans as possible.

[Photo by Deneth17, via Wikimedia Commons]

Dr. Ashraful Alam Chowdhury is an Independent Researcher and Columnist. He has experience working in the USA, Bangladesh, Myanmar and India. The views and opinions expressed in this article are those of the author.