The spectacular unravelling of the Sri Lankan economy over the last few years and its eventual collapse very recently have attracted wide attention. The miseries wrought by the ensuing economic crisis on the ordinary Lankans have alarmed some observers that Bangladesh could also slide into such a crisis in future. The government promptly rebutted the claim by pointing out that the relevant economic fundamentals of Bangladesh are robust, and much better than that of Sri Lanka. Hence, there is little chance that it could face the same situation that the Lankans are in.
Some of the important economic fundamentals to look at to understand the health of an economy in this respect are the external debt-GDP ratio, the Gross Domestic Product (GDP) growth rate, the current account balance, that is, the balance of export and import of goods, services and factor incomes, the stock of international reserves, and the budget balance, that is, the balance between government revenue and spending. There is no generally accepted cut-off value for any of these metrics that defines a safe limit; it varies with the nature of the economy. Thus, a 3-4 per cent GDP growth rate would be considered very ordinary, or even low, for a poor developing country, but high for a rich developed country. Many rich countries have the luxury of running very high external debt-GDP ratio exceeding 100 per cent indefinitely without any adverse consequences. But a poor developing country could find itself heading into an economic crisis if this ratio exceeds 50 per cent or so. Whatever be the cut-off rate chosen, Bangladesh is currently far removed from it with an external debt-GDP ratio of about 20 per cent. The ratio for Sri Lanka was about 60 per cent before the crisis. Bangladesh is certainly not in the same league as Sri Lanka, and not in imminent danger of falling into debt default unless some massive self-inflicted or natural disaster strikes.
A very important fundamental in this context is the GDP growth rate that reflects the health of the economy and the capacity to service debt. A fast growing economy exudes confidence not only within the economy but also outside, especially among foreign investors, such that adequate external fund inflow could continue reducing the probability of a financial crisis. Bangladesh had a very robust GDP growth for almost two decades and there is no obvious sign yet of any let up. But Sri Lanka had experienced quite poor growth over the last decade, which was not enough to convince foreign agencies to invest more in the country, or to pay the debt liabilities from domestic sources. On the contrary, Bangladesh has attracted increasingly large foreign fund inflow to finance expensive infrastructure projects during the same period without any visible stress.
The stock of international reserves has a calming influence on the external debt and exchange market. The rapid fall in the international reserves of Sri Lanka was an important indicator of the onset of the crisis. The general perception is that the stock of international reserves should be at least three months of import payments. It should be larger if the country has substantial debt repayment obligations. Sri Lanka's reserves fell to less than a month's import payments indicating severe financial stress. On the other hand, the stock of international reserves of Bangladesh was adequate to cover eight month's import payments in 2020-21. Bangladesh is certainly not yet in any financial stress.
Another important fundamental is the current account balance which indicates the excess of spending over income of the country. A current account deficit has to be offset by either a drawdown of reserves or an increase in the external capital inflow comprising foreign direct and portfolio investment, and external debt or a combination of these. Since Bangladesh receives only a small amount of foreign direct or portfolio investment, and it is shy about reducing the reserves, much of the deficit is usually financed by external debt. The international reserve position of a country is basically a reflection of its current account balance and the change in external debt. A moderate current account deficit over several years, or a large deficit for a short period can be managed without much adverse repercussions; but a significant deficit over many years can undermine the financial credibility and stability of the country.
Sri Lanka's current account was mostly in the red from well before the twenty first century, which simultaneously reduced its reserves to about a fortnight's import payments (at the time of default on foreign debt) and swelled up the external debt stock to an unmanageable level of 63 per cent of GDP. On the contrary, Bangladesh ran current account surplus over much of this century which helped to build up a robust stock of international reserves. But in recent years the surplus has turned into a deficit as the external debt stock surged quickly to about one-fifth of GDP. (It should be noted that the rate of deterioration over time is difficult to tease out from BBS data because of the massive upvaluation of GDP due to changes in the base year which either understates the current ratio, or overstates the ratios of the earlier years.) The external debt is still easily manageable as evident from a falling debt service liabilities to export ratio, but the upsurge should be regarded as a warning sign, and steps should be taken to reverse, or at the least, slow down the trend. It does not take long to turn a comfortable debt situation to an unmanageable one, which is amply demonstrated by the fact that at the current pace the current account deficit will approach US$20 billion this year although it never exceeded double digit in its entire history.
The government budget balance is also an important metric since it is also a determinant of the current account balance, and in some situations it is simply a mirror image of the latter (the twin deficit hypothesis). Sri Lanka has run very large budget deficits for more than three decades. The simple average of its deficit since 1990 is 7.6 per cent of GDP. This is far above the maximum of 5 per cent as suggested by the World Bank. Worse still, the deficit has raced to double digit figures recently. The inevitable consequence was the upsurge in the external debt feeding this yawning deficit, which tipped the fragile balance.
In contrast, the budget deficit of Bangladesh has seldom exceeded 5 per cent of GDP since 2005-06. The simple average of the deficits during this period is a comfortable 4.3 per cent, which is below the maximum. In respect of this metric, too, the performance of Bangladesh is far better than that of Sri Lanka. However, the deficit has risen during the last two years to 6.5 per cent which does call for caution.
It should be obvious from the discussion above that Sri Lanka and Bangladesh are not yet comparable in terms of the fundamentals. In fact, Bangladesh currently has the best numbers among the South Asian countries. But what it should be really worried about is the striking similarity between Sri Lanka and Bangladesh in respect of addiction to expensive foreign loan funded grandiose projects, some of which are of questionable net productivity, and the rapid acceleration in the stock of external debt in the last few years.
It is no secret that Sri Lanka was sunk mainly by excessive foreign debts owed to the western credit market, Asian Development Bank (ADB), World Bank (WB), Japan, China and India. Incidentally these are also the principal credit suppliers to Bangladesh. The table below shows how the external debt has accelerated since 2016-17. The debt-GDP ratio took four years to increase by 2 per cent, but then it increased by 2 per cent in just one year. Ominously, it could increase by 3 per cent in the current year.
An economic crisis is not made in a year or two; it often takes a decade or longer. A crisis is also frequently intricately related to the politics of the country. Bangladesh is not in any imminent danger, but if the current trend is not reversed, Bangladesh could head Sri Lanka's way in a few years. It is advisable to emphasise that this dire outcome is not inevitable; it is avoidable by reining in unsustainable ambition and appropriate policy changes..
M A Taslim is Professor of Economics, Independent University, Bangladesh.
