Bangladesh is no Sri Lanka, economically

Economists however caution the use of debt

Sri Lanka is in one of the biggest financial crises in history. Many are already worried about Bangladesh's foreign and domestic debt. But at this moment, economists do not want to compare the economies of the two countries. 

However, they also advised being cautious with debt and taking lessons from the situation in Sri Lanka.

Prof Mustafizur Rahman, a distinguished fellow at the Centre for Policy Dialogue (CPD), told Dhaka Tribune: “We can not compare Bangladesh’s economy with Sri Lanka. But we have to learn from their situation. Even 10-15 years ago, Sri Lanka was one of the strongest economic powers in Asia. But they undertook some big projects which I call white elephants. At that time, economists also gave many warnings but they did not hear them. And today, we can see their condition.”

“I think the policymakers of Bangladesh should also take lessons from Sri Lanka in adopting new plans or projects. They must think about what the loan service will look like, when will those projects be implemented, will there be any direct income from it or will it be used otherwise, how much will be the interest on the loan, how much will be the interest rate and how many years will we get to pay the loan,” he added.

However, the economist thinks that the main two indicators of Bangladesh's economy are still in a good position in comparison. 

“Bangladesh is still in a good position in two main indicators of debt management. One is the outstanding foreign debt-GDP ratio and the second is debt servicing liability as a percentage of foreign exchange from export. So, I don't think it is fair to judge the economy of Sri Lanka and Bangladesh on the same scale.”

Economist Zahid Hussain also thinks that Bangladesh's debt has not yet reached the level of danger.

Quoting a 2010 study by the International Monetary Fund (IMF), this former lead economist of the World Bank's Dhaka office said: “According to the report, the debt-to-GDP ratio is 90% for developed countries and 60% to 65% for developing countries. It still does not raise any concerns. Going beyond this may create fear or put us in a dangerous situation. International lenders or financing organizations provide loans on the basis of these calculations so that they can repay the loan installments from the earning of the project or after its implementation. The project can also enhance the national income.”

Referring to Sri Lanka's debt-to-GDP ratio of about 110%, Zahid Hussain said: “Sri Lanka, once the best economy in South Asia, has implemented mega projects in the political and personal interests of the country.”

When asked if a situation like Sri Lanka could happen to Bangladesh, the renowned economist Dr Debapriya Bhattacharya said that it would be irrational to compare Bangladesh with Sri Lanka. 

“I do not see the reason for such a situation as every country develops differently. So, it is not logical to compare one with the other.”

Regarding the percentage of debt in the context of Bangladesh's GDP set by the IMF, Debapriya Bhattacharya said: “It is a matter of concern that Bangladesh's total national debt is increasing at a faster rate than GDP.”

According to his research, in 2021, Bangladesh’s total debt was $131.14 billion. The broader estimate of Bangladesh's current debt is 46% of its total Gross Domestic Product (2005-2006 as a base year), which was 44.1% in FY21. 

On Tuesday, the Bangladesh Bureau of Statistics (BBS) said that the per capita income in Bangladesh rose by 9% year-on-year to $2,824 in 2021-22. Which was $2,591 in 2020-21.

According to Debapriya’s research, in FY20-21, Bangladesh’s per capita debt was $432 or Tk37,584. As a result of this, the share of debt in GDP will increase in the foreseeable future.

Centre for Policy Dialogue’s Distinguished Fellow and Convenor of Citizen’s Platform for SDGs, Bangladesh Dr Debapriya also said: “Although it is still less in the context of other South Asian countries, the amount of domestic and foreign debt is increasing at an unusual rate since 2018. If this situation goes on then this could move Bangladesh beyond the green and into the risk zone in FY2024-25.”

Economist Ahsan H Mansur, executive director of the Policy Research Institute (PRI), suggests that after seeing the current context of Sri Lanka, Bangladesh’s economic potential can be enhanced through the proper use of foreign debt. 

But like Debapriya, he is not in favour of comparing foreign debt with GDP in the context of Bangladesh. “Because our GDP is not working like the GDP of other countries in the world,” he argued earlier. 

For example, he added: “Neighboring India generates about 20% of GDP per fiscal year from revenue collection. In Pakistan, it is 18% of their GDP. Even African countries generate an average of 20% of their revenue. But Bangladesh can generate less than 10% of GDP.”

Keeping in mind the context of upcoming LDC graduation, the former IMF official said: “In 2026, we will move from a least developed country to a developing country. Then we have to take a place in the world economy with our qualifications. So, in the meantime, infrastructures need to be developed extensively. On the other hand, we still have a lot of mega projects going on. We need to create an investment-friendly environment with communication infrastructure by implementing many more big infrastructure projects in the future. As such, we will need more big loans.”

For these reasons, he urged building strong infrastructure with foreign loans. However, he advised taking maximum advantage of the foreign and internal debt with caution.

Syed Akhtar Mahmood, another economist said: "It appears that in addition to some important import items becoming costlier, especially as a fallout of the Russia-Ukraine war, there has been an increase in the volume of imports. It is possible that some investment plans were kept on hold during Covid-19, and investors are now feeling more confident about business prospects. This may be leading to increased investment in a new capacity as well as increased utilization of existing capacity. Since investment in Bangladesh is quite import-dependent (for both capital machinery as well as raw material) this may be reflected in increased imports."

As long as this investment is efficient, increases in imports may actually be a good sign. If a large part of such investment is in export-oriented industries, then the increased imports of today may translate into greater exports (and hence additions to the forex reserve stock) in the future, he also said.

“So, I shall not compare the situation with that in Pakistan or Nepal. However, there are concerns about increased debt-servicing requirements in the near future and also we can't be sure that remittance flows will remain steady. Hence, there is a need for caution,” Mahmood added.