Why Bangladesh Will Not Become Sri Lanka?

Sri Lanka – The country that once topped South Asia’s social and economic indicators, is now in dire financial straits. Sri Lanka has entered the list of defaulter countries as it has not been able to repay huge foreign loans on time that has been taken for various ambitious mega projects. Meanwhile, the country’s tourism industry collapsed due to militant attacks and the Corona epidemic. It also faced declining remittances, a food crisis caused by banning chemical fertilizers in agriculture without any pre-planning, and reduced taxes. Also, the trade deficit has reduced the country’s foreign reserves.

On the other hand, several infrastructural mega projects have been going in Bangladesh for the last ten years. For example, the Padma Bridge was built entirely with Bangladesh’s funding. Due to ongoing foreign loan projects like the Padma Rail Link, Dhaka Metrorail, Elevated Expressway, Rooppur Nuclear Power Station, and Matarbari Thermal Power Station, some people speculate that Bangladesh may face a similar situation in the future as Sri Lanka.

Overview 

Sri Lanka, a country of 65,610 sq km, gained independence on February 4, 1948, and has a population of over 23 million. Even after nearly 75 years of independence, Sri Lanka lags behind other South Asian countries regarding infrastructure development.

However, despite an extended 25-year civil war going until 2009, Srilanka was ahead of many countries in terms of few social development goals. After the end of the civil war in 2009, the country’s newly ousted Prime Minister and then-President Mahinda Rajapaksa launched several infrastructure development projects to boost the country’s GDP growth, including the development of the country’s internal communication system. These projects included airports, deep seaports, power plants, and road and highway development projects. But most of these mega-developments were financed by foreign countries at a high-interest rate loan. In addition, after completing several projects, those projects failed to bring the expected results. The Rajapaksa government undertook these projects to turn Sri Lanka into an international business, manufacturing, trading, and tourism-oriented country by harnessing its potential tourism sector. Due to the foreign loans taken for these ambitious projects, the country’s Debt-to-GDP ratio reached 104 percent in 2021. Based on the current situation in Sri Lanka, many people think that the future of Bangladesh may be the same as Sri Lanka. Many opinions have been spread on social media, especially due to the devaluation of the taka against the dollar.

Why Bangladesh Will Not Become Sri Lanka?

In the FY2020-21, Sri Lanka’s GDP was $94.28 billion, while in the same fiscal year, Bangladesh’s GDP was $417 billion, four times that of Sri Lanka. In FY 2020-21, the per capita income of Bangladesh was $2,723, and the per capita income of Sri Lanka was $3,682. In other words, Sri Lanka is ahead of Bangladesh in per capita income. But the current economic situation in Sri Lanka cannot be explained by GDP or national income per capita.

To understand the country’s economic situation, one must know about the current account of Sri Lanka, where the deficit in December 2021 was $1.13 billion. The current account is the difference between a country’s imports, foreign debt payments, other expenses, exports, remittances, foreign direct investment, foreign aid, and other income, including loans. A country’s current account deficit occurs when the amount of expenditure exceeds the foreign income. In fact, according to the Central Bank of Sri Lanka, the country’s current account has been in deficit every year since 2012.

Due to this, the foreign reserve of Sri Lanka is continuously declining. According to the central bank of Sri Lanka, the country’s foreign reserves fell below $50 million in May of FY 2021-22. Due to this, regular imports and export are being hampered. On the other hand, Bangladesh’s current account deficit stands at $15.32 billion from July to April of FY 2021-22. However, Bangladesh’s current account was in surplus for most of the last ten years. As a result, Bangladesh’s foreign reserves rose from $15.32 billion in FY 2012-13 to $46.02 billion for the first time in FY 2021-22. However, according to Bangladesh Bank, foreign reserves fell to $42.30 billion in May.

But why were Bangladesh and Sri Lanka facing current account deficits and both countries’ foreign exchange reserves decreased? One of the factors behind the current account deficit is the trade gap. Trade is the difference between a country’s total imports and exports. A trade deficit occurs when a country’s import earnings exceed its export earnings, affecting the current account balance. In addition, after the Corona epidemic in 2020 – 2021 and the global supply chain disruption by the Russia-Ukraine war disrupted the supply chain, global inflation worldwide began to rise, leading to higher import costs for all countries. Although the import cost was raised, the export income of Bangladesh and Sri Lanka wasn’t expected. For example, in the first nine months of FY 2021-22, Sri Lanka’s export earnings were $10.05 billion against the import cost of $16.27 billion. That means the country’s trade deficit was $6.23 ​​billion, 29.55% more than the previous fiscal year’s trade deficit, which was $4.81 billion.

On the other hand, Bangladesh’s trade deficit was $24.43 billion in the first nine months of FY 2020-21, which increased by 55.56% to about 36 billion in FY 2021-22.

Although the widening trade deficit may seem like a significant crisis for Bangladesh’s economy, Bangladesh has enough foreign reserves to meet the country’s import needs. Responding to a question from reporters, Foreign Minister AHM Mostafa Kamal said Bangladesh Bank has enough reserves for about five months to meet Bangladesh’s import demand. In other words, even if all kinds of foreign earnings, including exports and remittances, are stopped, the government can meet the country’s import needs for at least five months. To reduce Bangladesh’s trade deficit, the government has already devalued the currency several times and proposed to increase tariffs on several products and impose tariffs on products that were not previously taxed. These measures have been taken to reduce the trade deficit by discouraging the country’s people from importing. Bangladesh Bank has also raised the country’s policy rate for the first time in ten years to strengthen the currency against rising inflation.

Remittances are another contributing factor in increasing the current account deficit. Sri Lanka’s remittances have been declining yearly since FY 2016-17. However, in the FY 2020-21 alone, the country’s remittance inflows increased by about 16 percent (15.9%) compared to the previous fiscal year due to the Corona epidemic. But in the first eight months of FY 2021-22, the country’s remittance inflows were $2.63 billion, down 51.1 percent from the same period a year earlier.

In comparison, remittance inflows in Bangladesh have been increasing over the last few years, and in the fiscal year 2020-21, remittance inflows reached $24.6 billion, the highest in the country’s history. However, as of April 2021-22, Bangladesh’s remittance inflows were $16.31 billion, down 17.3 percent from the same period last year.

Bangladesh’s current account deficit has also increased due to the widening trade gap and declining remittance earnings. However, Bangladesh Bank is already offering several benefits, including a 2.5 percent incentive to increase remittance inflows, which will likely increase remittance inflows and reduce Bangladesh’s current account deficit.

In the case of Sri Lanka, tourism is one of the major sectors. Therefore, from trade deficit and remittances, tourism also plays a vital role in the country’s current account deficit. Before Corona, Sri Lanka earned about $4.1 billion from tourism in FY 2018-19. But due to the epidemic, the country earned $2.4 billion and $44 million from tourism in 2019-20 and 2020-21, respectively.

This has created a massive deficit in the country’s current account. Some of the reasons behind the current situation in Sri Lanka are that the Rajapaksa government has reduced VAT from 15% to 8%, which has reduced the government revenue. In addition, repealing the 2% “National Development Tax” and the “Tax as much as income” has dramatically impacted revenue. Furthermore, the Sri Lankan government stopped importing chemical fertilizers in May 2021 to reduce pressure on reserves, increase organic farming, and set up organic fertilizer plants in the country. As a result, the country’s agricultural self-sufficiency in food production capacity has been reduced by 20 percent compared to the past.

On the other hand, Bangladesh is self-sufficient in food production. Despite rising prices due to global inflation, Bangladesh had no food shortage. The government is also importing essential food items like wheat from India in the G2G model to maintain food safety in the country.

Sri Lanka’s government has undertaken several infrastructure development projects over the past decade to enrich its potential tourism sector further and establish the country as an economic hub. But these projects were continued by the government through foreign loans. However, as the amount of debt has increased, it has surpassed the country’s GDP. According to an IMF press release, the country’s total public debt will rise from 94 percent of the country’s GDP in 2019 to 119 percent by 2021. On the other hand, according to the country’s central bank, Sri Lanka’s external debt in 2021 was about $51 billion, 60 percent of the country’s GDP. The IMF’s recommended debt-to-GDP ratio for a country’s debt is 60 percent for a total outstanding debt and 55 percent for external or foreign debt. Therefore, the total debt and foreign debt ratio of Sri Lanka’s GDP has exceeded the IMF’s recommendation.

On the other hand, in FY 2020-21, the total outstanding debt of Bangladesh was $131.14 billion, which is 38 percent of GDP. And the external debt amounted to $60.15 billion, only 13 percent of GDP. In other words, the overall debt situation of Bangladesh and the foreign debt situation is less than the recommendation of the IMF than Sri Lanka.

Sri Lanka has not been able to benefit financially from the mega projects that the country has spent on so much debt. For example, the Mattala Rajapaksa International Airport was built in 2013 on a 2,000-hectare site at $61.97 million to attract tourists, but the air transportation hub remains empty. In fact, a Forbes article called the airport the ‘Emptiest International Airport’ in the world. Again, the Magampura Mahinda Rajapaksa Port, built with five loans of $1.3 billion from Exim Bank in China, was mostly empty after construction. Unable to generate significant revenue, the port, known as the Hambantota Port, became difficult for Sri Lanka to bear the loan repayment, forcing the country to hand over the control for the 99-year-old port to China Merchants Port Holdings Company Limited or CM Port for $1.12 billion. In addition to these two mega projects, several other projects, such as stadiums, parks, power plants, and expressways, have been completed, but none have created much value for the country.

Several infrastructural development mega projects have been going on in Bangladesh for over a decade. Except for the Padma Bridge, which cost over Tk 30,000 crore (Tk 30,193 crore), almost all these mega projects are being carried out through public-private partnerships and foreign loans. But among the projects completed so far in Bangladesh are the Jatrabari-Gulistan flyover, 4-lane expansion on the Dhaka-Chittagong highway, and Matikata-Mirpur flyover. Besides, Padma Bridge Rail Link, Dhaka Metrorail Project, Kornfuli Tunnel, and Dhaka Elevated Expressway will be opened by 2022. If these mega projects are launched, there will be a significant change in the economy of different regions of the country. For example, before the launch of the Padma Bridge, various industries started to develop in the southern part of the country, and manufacturing activities in the southern region will continue to increase in the next few years. Similarly, Metrorail will save a lot of time for traffic congestion in Dhaka. The government will generate revenue through tolls and tickets for these projects, from which the government will not have to be under such pressure to repay the loans taken for these projects.

Considering all this, economists believe that Bangladesh can become one of the top 30 economic powers in the world if it successfully completes important mega projects through loan utilization and maintains productive activities.