Sri Lanka an island nation off India’s southern coast is being disrupted with an economic crisis due to its enormous debt load, the pandemic and most recently the war in Europe have brought it to its knees.
In less than a decade, Sri Lanka recovered from the ravages of a civil war that ended in 2009, soaring to the status of an upper-middle-income nation. It built a tourism-based economy that brought billions of dollars, many jobs and middle class comforts: high-end eateries and cafes, imported Jeeps and Audis, and upscale malls. But its uncontrolled plans for infrastructure development with foreign loans and in the mean time depletion of forex reserves has created a mismatch in income-expenditure and in repayment of loans from abroad.
Currently the country’s central bank is printing rupees and hoarding dollars that is rising inflation to a record high of 17.5 per cent in February. The finance minister is begging neighbours for credit lines to buy diesel fuel and milk powder. In a barter arrangement, the central bank is paying for Iranian oil with tea leaves. They are rationing power and the saddest fact is that their students could not appear in academic exams due to scarcity of writing papers. The capital city Colombo remains in dark for a long time every day.
When Mr Rajapaksa won elections in 2019, just months after Easter Sunday terrorist attacks that killed more than 250 people on the island, he had campaigned on a platform of restoring security to the nation, relying in part on his reputation. As the economy is worsening the pressure on Mr Rajapaksa won elections in 2019 is mounting to ease the sufferings.
The Russian invasion of Ukraine and the coronavirus flare-up in China have disrupted supply chains and boosted the cost of goods globally. In Sri Lanka, however, the external turmoil has only exacerbated a problem that was years in the making.
Bangladesh is not in exception of feeling the pinch of Covid pandemic and Russia’s Ukraine invasion that is increasing costs of living. Besides, we do have many mega, large and medium developmental projects funded by foreign loans. Though our both reserves and inflow of foreign exchange is in quite a good shape, we must be aware of global slow economic growth that may affect in foreign direct investments, remittance and in export earnings.
A lesson must be kept in mind from Sri Lanka crises and there must be a review in taking new big projects with foreign funds. As per latest statistics Bangladesh’s foreign loan repayment has increased and it may rise further. Foreign debt servicing has swelled substantially, with 13.56 per cent higher payments in the first eight months of the current fiscal year (FY 2021-22) than that of the same period last in the last financial year.
Bangladesh has repaid US$1.34 billion in principal and interest against its outstanding medium-to long-term external loans during the July-February period of this FY as compared to $1.18 billion in the same period of the previous FY, Economic Relations Division (ERD) data showed.
The extent of foreign debt servicing will rise in the coming days as the grace period of many big loans will expire. Within the next 2-3 years, a big chunk of repayment will have to be made which means along with current repayments the country will be burdened for more foreign debts for new projects. Economists have been warning the government repeatedly but Bangladesh so far hasn’t taken any major stride toward diversification of its export basket. It still depends heavily on the garment sector.
The economic crisis in Sri Lanka caused by factors including a slump in foreign currency flow from two main sources –tourism and remittances –once again gives a reminder that diversification is a necessity, not an option. We take foreign loans it okay but in parallel with this dependency on remittance and RMG export for foreign currency should be reduced and must diversify to or her sectors along with building strong backward linkage in apparel sector and enhancing skills in manpower export.
Though Bangladesh’s economy is apparently doing well, the crisis in Sri Lanka sends clear messages to the policymakers: pay heed to cautions and suggestions by economists, avoid the temptation of undertaking large projects unless those are economically viable and sequence borrowing in a way that does not pile up repayment pressure. We must make big infrastructure projects economically viable and link these to our mainstream economic development process. Loans that Bangladesh takes should be used in a way that increases domestic productive capacity with respect to export diversification, skill development and enhancing private investment.
Until now we have been in a much better position (debt servicing). Our borrowing has increased in recent years. We have to remember that the scope for getting loans at a cheaper rate will not be available as we have become a lower-middle-income country.
Written By: Our Honourable Managing Director Nazmul Karim