With rising global inflation and fears of an energy and food crisis looming, clouds are gathering on the economic horizon for South Asian countries. The Russian-Ukrainian war, followed by the COVID pandemic has disrupted the global economy and trade which is rocking Europe as well as South Asia. Meanwhile, Sri Lanka’s financial and political crisis has reached a crisis point, driven by the country’s mix of high debt, runaway inflation and economic mismanagement. Worryingly, global headwinds – rising inflation and rising interest rates, currency depreciation, high debt levels and dwindling foreign exchange reserves – have pushed many other countries to the brink of economic collapse and crisis experts are now raising an important question: which South Asian country is headed for Sri Lanka, increasingly vulnerable to debt risk and headed for Sri Lanka? Or is Bangladesh in danger of defaulting?

The tragedy of the Lankan disaster

In recent days, inflation has soared by around 54%, with food prices 80% higher than a year ago in Sri Lanka. The island nation’s 22 million people face severe shortages of fuel, food and medicine as it battles a currency crisis. The Lankan rupee has lost value against the US dollar. Schools, public transport and shops are closed.

Last weekend, hundreds of thousands of anti-government protesters occupied/stormed/seized the presidential palace and burned down the prime minister’s house. President Gotabaya Rajapaksa flew to the Maldives and then to Singapore to escape a popular uprising against his government and was forced to resign as president. A state of emergency has been declared across the country and a curfew in Western Province has been imposed to stabilize the situation. In Rajapaksa’s letter of resignation, he pointed to years of economic mismanagement in Sri Lanka caused by the launch of large-scale mega-projects based on foreign loans, reduction in remittances through legal channels, negative impact of the Covid-19 pandemic on tourism and a plethora of other factors. who contributed to this bad fate.

Once slated to become the Singapore of South Asia, Sri Lanka has become the first country in the Asia-Pacific region in 20 years to default on its external debt.

A cautionary tale for South Asia

Once slated to become the Singapore of South Asia, Sri Lanka has become the first country in the Asia-Pacific region in 20 years to default on its external debt. After observing supply chain bottlenecks, resulting inflation, high debt levels and dwindling foreign exchange reserves, several other South Asian economies, according to some economic analysts, are showing the early signs of Sri Lankan Syndrome.

Pakistan is on the brink of a balance of payments crisis, with billions owed to international creditors. The country faces huge debt amid depleted foreign currency reserves and runaway inflation. Its foreign currency reserves plunged to just $9.8 billion, barely enough for five weeks of imports, while the Pakistani rupee hit a record high of around 233 to the dollar. On the other hand, amid Pakistan’s severe energy crisis and subsequent suspension of gas supply, 400 textile factories were shut down, leading to export shocks.

The most concerning issue is that the Shehbaz Sharif government has decided to sell national assets to foreign countries without any control in a desperate attempt to prevent the country from defaulting, which raises many transparency issues. Pakistan’s new government, which narrowly avoided a default, also reached a crucial agreement with the IMF to resume a bailout program, a means that offers economic relief but no panacea. Because real economic recovery is threatened by bad political decisions as well as the volatile political system, like the Indian Ocean island nation.

Thus, the public is likely to get angry and take to the streets at any time against the government’s unpopular measures, leading the country to the next Sri Lanka.

Like that of Sri Lanka, the Maldivian economy is heavily dependent on tourism, which has suffered a severe blow following the outbreak of the COVID pandemic. Like Sri Lanka and Pakistan, the Maldives is indebted with heavy borrowing and investment from foreign countries, particularly China, and faces low foreign currency reserves. Its public debt is already on the red line and is now well over 100% of its GDP. US investment bank JPMorgan has warned that the country risks defaulting on its debt by the end of 2023. Economic rationality, rather than political interests, should take priority to avoid any potential economic meltdown like in Sri Lanka.

Panic gripped Nepal over the growing likelihood of a Sri Lanka-style economic meltdown after the country saw a surge in imports even as the country’s foreign exchange reserves shrank sharply and inflation spiked. skyrocketed with rising food and fuel prices. Additionally, external debt has increased as the country continues to underwrite more and more Chinese-funded infrastructure projects and the Covid pandemic hits the economy.

The Himalayan nation is also facing a shortage of liquidity and as a result, banks and other financial institutions find it difficult to extend loans to productive sectors such as agriculture, tourism, manufacturing and energy sectors. . The country’s trade deficit keeps increasing and at present it stands at 1.72 trillion rupees, resulting in import shocks. Therefore, there is no reason to ignore outright suspicions that Nepal will not meet the fate of Sri Lanka if the government continues to ignore the warning signs.

After observing the depletion of foreign exchange reserves, the fall of the taka against the US dollar, as well as the widening of trade and current account deficits, it is fair to say that the situation in Bangladesh is alarming. The most immediate challenge for Bangladesh on the economic front is to reduce inflationary pressures and maintain the foreign exchange reserve at a satisfactory level. Imports of goods jumped 39% in the first 11 months of the previous fiscal year (FY22) compared to the same period of FY21, putting pressure on the dollar reserve. This is undoubtedly an alarming sign for the economy of Bangladesh, as the country relies heavily on imports for domestic consumption and export-oriented industries.

Another worrying issue is that Bangladesh is feeling the consequences of the Russian-Ukrainian war which is causing an energy crisis across the world, limiting global growth, manufacturing activity and job prospects. Bangladesh’s economic managers, however, despite some warning signs, continued to give assurances that Bangladesh’s economy is far from becoming Sri Lanka’s, analyzing the overall macroeconomic parameters.

It is true that like Sri Lanka, Bangladesh has not succeeded in diversifying its export basket but nevertheless, it has a lot of room to continue growing in the clothing sector. It is now one of the top three garment exporters in the world and is gradually taking market share from China. The export story of Bangladesh, which recently achieved a milestone of crossing $50 billion for the first time despite the blowing headwinds of the global crisis, is very impressive. FDI reached a three-year high in 2021 and according to an UNCTAD report, Bangladesh has become the second most preferred investment destination in South Asia after India, thanks to Bangladesh’s initiatives to set up 100 economic zones to attract FDI.

Moreover, the majority of external debts are held by bilateral or multilateral organizations such as the WB. Bangladesh’s strong macroeconomic base, loan management and debt repayment capacity have led the World Bank’s International Development Association (IDA) to continue lending more than $35 billion with interest rates lowest – the highest amount given to a single country.

Needless to say, while Sri Lanka has implemented many unnecessary mega-projects using Chinese loans – for example the Hambantota seaport, Rajapakse International Airport, Lotus Square and the Chinese city of Colombo, to serve political and private interests, Bangladeshi Prime Minister Sheikh Hasina was careful not to embark on projects without a high economic and social rate. Moreover, in recent years, the political system of Bangladesh has shown resilience without any major political unrest.

Additionally, the government has taken a conservative approach to dealing with the early signs of Lankan syndrome. Bangladesh has requested a $4.5 billion loan from the International Monetary Fund for its balance of payments and fiscal needs amid mounting pressure on their economies. In order to save money and increase foreign exchange reserves, the government has restricted the travel of officials abroad, imposed a higher import tax on luxury items, eased restrictions for attracting remittances from millions of migrants, boosting exports, reducing development budget spending, introducing austerity measures in energy spending, etc. Although this does not seem to be the long-term solution to economic problems, it should avoid wasting huge sums of money, positively influencing macro-economic stability.

Bangladesh needs to be careful and learn from the experiences of the island nation, noted Hans Timmer, regional economist for South Asia at the World Bank. According to a report based on International Monetary Fund (IMF) data, Bangladesh is the 41st largest economy in the world with a GDP of $397 billion and its position is second in South Asia after India.

To conclude, however, Bangladesh is in a much more comfortable position than other South Asian countries at the moment, there is a need to define a repayment strategy, including the rescheduling of impending payments, as an economic shock is coming. profile because of the pressure of debt repayment in the years to come. The Sri Lankan episode, however, presents an alarming case study compared to other South Asian countries, with disturbing echoes of the crisis that has gripped Sri Lanka. Thus, leaders in power should use the foresight to create buffers and reject the subversive economic policies that are needed to steer the key economic drivers of countries on the right path before it is too late.

The author is a freelance columnist.