With global inflation rising and the fear of fuel and food crises looming large, clouds are gathering on the economic horizon of South Asian countries. Sri Lanka in particular remains mired in a crisis driven by a mix of high indebtedness, soaring inflation and poor economic management.
Once projected to become the Singapore of South Asia, Sri Lanka in May became the first country in the Asia-Pacific region in 20 years to default on foreign debt. President Gotabaya Rajapaksa flew to Singapore to escape a popular uprising and subsequently resigned. Now his successor is trying to clean up the mess, but the World Bank has warned that no more money will be forthcoming unless the government carries out "deep structural reforms".
Sri Lanka may not be alone. Some economic analysts say the same global headwinds -- supply chain bottlenecks, inflation, currency depreciation and depletion of foreign currency reserves -- are pushing some other South Asian economies to the brink.
In Pakistan, foreign currency reserves have plunged to US$9.8 billion, hardly enough for five weeks of imports, while the Pakistani rupee recently reached a record low of about 233 to the dollar, compared with 160 a year ago. The most concerning issue is that the government of Prime Minister Shehbaz Sharif has decided to sell national assets to foreign countries without any checks to narrowly avert a debt default.
The government has struck a crucial deal with the International Monetary Fund (IMF) to resume a bailout programme. That will bring some economic pain relief but not a long-term cure, because true economic revival is threatened by the volatile political system.
If the pain becomes too much for the long-suffering public to bear, they may take to the streets and turn Pakistan into the next Sri Lanka.
Panic has also gripped Nepal amid a steep rise in import costs linked to rising food and fuel prices, shrinking foreign reserves to dangerous levels. Foreign debt has also escalated as the country has signed up for more Chinese-funded infrastructure projects.
The Himalayan nation is also facing a liquidity squeeze, making it hard for productive sectors like agriculture, tourism, manufacturing and energy to obtain loans. In short, Nepal too could face Sri Lanka's fate if the government continues to ignore the warning signs.
Like Sri Lanka, the Maldives is heavily reliant on tourism, which suffered a big blow from the pandemic. Its public debt is well above 100% of gross domestic product (GDP), leading the US investment bank JPMorgan to warn that it is at risk of debt default by the end of 2023.
In Bangladesh, the immediate challenge is to reduce inflationary pressures and keep reserves at a satisfactory level. Goods imports jumped by 39% year-on-year in the first 11 months of the 2021-22 fiscal year that ended on June 30, creating pressure on dollar reserves. This is alarming for an economy widely dependent on imports for both domestic consumption and export-oriented industries.
Bangladesh is also feeling the consequences of the Russia-Ukraine war and its impact on energy prices. Despite scepticism, Bangladesh's economic managers believe the country is still well-positioned to withstand external shocks based on their reading of macroeconomic indicators.
It's true that Bangladesh, like Sri Lanka, has failed to diversify its export base, but nonetheless its lucrative garment sector still has a lot of room to grow. It is now among the top three apparel exporters in the world and is gradually taking market share from China. Exports recently passed $50 billion for the first time despite global headwinds, which is very impressive.
Also encouraging is the fact that foreign direct investment (FDI) to Bangladesh hit a three-year high in 2021. According to a report by the UN Conference on Trade and Development (Unctad), the country is now the second most favoured investment destination in South Asia after India, thanks to the government's initiatives to create 100 special economic zones.
And while other South Asian countries are overwhelmed by foreign debt, Bangladesh is a model of prudence, with external debt at just 21.8% of GDP. A strong macroeconomic base, sound loan management and debt repayment capability have led the World Bank to continue lending more than $35 billion at the lowest interest rates.
A recent Bloomberg report sounded the alarm for 25 countries that are exposed to default risk but Bangladesh was not on the list.
And while Sri Lanka carried out unnecessary megaprojects using Chinese loans, the Bangladesh government under Prime Minister Sheikh Hasina has been careful to approve only projects that are economically and socially sound. Moreover, the political system has shown resilience without any major turmoil.
Under a conservative approach to deal with any upcoming potential crisis, Bangladesh has sought a $4.5-billion loan from the IMF for its balance of payment and budgetary needs. To save dollars and shore up reserves, the government has restricted civil servants' foreign travel, imposed higher import taxes on luxury items, relaxed restrictions to draw in remittances, boosted exports and introduced austerity measures related to power expenditure.
Although these may not be a long-term solution to economic woes, they are expected to save huge sums, positively influencing macroeconomic stability.
To conclude, although Bangladesh is in a much more comfortable position than other South Asian countries, it needs to refine its repayment strategy as debt repayment pressures are expected to grow in the coming years.
The lessons from Sri Lanka are clear. Leaders of other countries ought to show the farsightedness to create buffers and reject subversive economic policy in order to steer their countries' major economic drivers on the right course before it's too late.
Kamal Uddin Mazumder, a security and strategic affairs analyst, holds a Master's degree in Economics from Jahangirnagar University in Dhaka.