Bangladesh and Sri Lanka should not be compared
Dr. Fahmida Khatun, an eminent Economist and Executive Director of the Center for Policy Dialogue (CPD), affirmed during an enlightening discussion with Colors that there is no comparison between the economic conditions of Bangladesh and Sri Lanka. She has also suggested fiscal and monetary measures in view of the difficult times faced by Bangladesh’s economy in the current global context.
By Anila Rahman
Bangladesh is in a stronger position compared to Sri Lanka as well as the other South Asian countries, in terms of overall economic performance and social achievements. However, other countries must study and draw deductions based on the economic policies undertaken by Sri Lanka leading it to an economic collapse in order to fully comprehend the mistakes and take precautions to avoid such a fate.
Sri Lanka is an economy that relies on tourism as its major source of revenue. During the Covid-19 pandemic, Sri Lanka faced a massive downfall in this sector, resulting in a loss of income as there was a total shutdown of communication among countries in the face of the prohibition of travel. Exports also declined. Moreover, Sri Lanka became encumbered with large external debt as it made huge expenditures through external loans for its infrastructures such as the Humbantota port which they built with Chinese loans. Worse, the majority of this port remains unutilized. Additionally, the Sri Lankan government adopted wrong policies that harmed its economy. For example, they reduced both income and value-added tax by approximately half, which reduced its revenue generation drastically. The government’s debt repayment resources were limited. Furthermore, the government had adopted the policy of organic farming, which had affected farmers and agricultural production. Farmers had to change their farming methods, and many could not afford to purchase costly organic supplies. On top of these, the government machinery was run by a group of family members without any accountability. There was no check and balance in the dynastical regime that ruled the country.
Needless to say that Bangladesh’s situation is far better than that of Sri Lanka. However, there are a few lessons that the Sri Lankan case offers for Bangladesh and other South Asian countries. Given the current economic pressure worldwide, there is no scope to be complacent about the achievements made so far. We have seen how unforeseen external shocks can make economies vulnerable resulting in the reversal of achievements made over decades. Nobody knew that the COVID-19 pandemic would engulf the world and bring economies to a standstill. There was also no knowledge of the Russia-Ukraine war. Even the stronger and large economies with solid foundations are shattered at present. Such crises emphasize that the smaller and low-income economies will need to be more cautious and work harder to recover from such shocks and move forward.
For economic advancement, infrastructure plays a critical role. Least developed countries and developing countries have to rely on foreign loans for their infrastructural development. In order to avoid a Sri Lanka-like debt crisis, we have to improve upon the implementation of foreign-funded projects to avoid cost-overrun. Imprudent use of foreign resources can cause wastage of expensive foreign loans. Therefore, transparency and good governance should be an integral part of project implementation. Currently, the ratio of external debt and gross domestic product (GDP) is at a comfortable state in Bangladesh. However, when the loan-dependent projects will be nearing completion, the repayment of loans will start and the real pressure on the foreign exchange reserve will be felt at that time. The country will have to prepare for the coming days.
In the case of Sri Lanka, the foreign exchange reserve was depleted as it had to pay back its debt. Bangladesh has a comfortable exchange reserve at present. However, in the fiscal year (FY) 2021-22, the foreign exchange reserve dropped to USD 42 billion from USD48 billion. Due to high import costs and relatively low export growth and negative remittance growth, the forex reserve is under pressure and the current account is in deficit. Every year, about USD 4 to 5 billion must be added to the foreign exchange reserve so that the total amount does not fall sharply. Indeed, foreign exchanges is needed to import products, pay for services, and raw materials. Hence, use of forex reserve in a prudent manner is crucial. The attempt to maintain a comfortable level of forex reserve will depend on a few factors. First, Bangladesh has to diversify both its export items and markets in order to increase export earnings. Currently, the country’s export income is dependent mainly on readymade garments (RMG) and within RMG Bangladesh’s products are mostly for the low end markets. As a result, even though the volume of export is increasing the value is not. That is why; we are observing a volume driven growth of RMG. But for higher export earnings we need to enhance our capacity for value driven products. In the case of remittances, there was a fall in numbers of workers going abroad due to the pandemic. After the improvement of the pandemic situation when the markets started to open up, the number of Bangladeshi migrant workers has increased. However, there has been a negative remittance growth of (-)16% in FY2022. One of the reasons for low remittance inflow has been attached to the use of informal channels by remitters to send income to their families since there is a large difference in the official and kerb market exchange rates. The difference is high even though the government provides an incentive equivalent to 2.5% on the remittances. This calls for monetary policy measures for smooth operation of the forex market. The value of the USD was kept high against Bangladeshi Taka (BDT) for a long time even though many countries including China, India, and Vietnam had devalued their local currencies long ago. This made Bangladesh less competitive for its exports in the global market and also provided less incentives to the remitters to send money through formal channels. The central bank had injected a large amount of USD to keep the foreign exchange market stable. However, the appreciated value of BDT against USD has been discouraging for the exporters and remitters. Though in paper, Bangladesh Bank follows a floating exchange rate regime, in effect it has been a managed exchange rate regime. The market has not been allowed to play its role. Hence the monetary policy gets distorted. Recently, Bangladesh Bank has opened the foreign exchange market so that the rate is market determined. The market may take some time to stabilize.
For maintaining a comfortable forex reserve, particularly during this critical time, the import of unproductive luxury tems has to be restrained. Only those items which are essential for production should be allowed. The government of Bangladesh has taken such a measure which is a welcome move. For this measure to be effective, there should be increased monitoring.
The government needs to pursue an austerity measure which should put a ban on unnecessary and unproductive government expenditures. The operational cost should be downsized drastically to save public resources which can save thousands of lives
Due to the global price hikes of fuel oil and essential commodities, Bangladesh is facing inflationary pressure. Of course, the reason for such high inflation is not fully external. Prices of several commodities which are not imported are also seeing an upward trend. Moreover, some essential items such as edible oil are sold at a high price even after import duty on this has been reduced. A few market players control the market and manipulate the prices. Weak market monitoring and management allowing the hoarders to set prices has been the main reason for uncontrolled prices. The poor, the low income households and the middle class are the worst sufferers due to such high prices. Their purchasing power has eroded significantly since they can buy less with a large amount of money. During the pandemic, these families have spent their savings to pay for their day to day expenses since many people had lost their jobs. In the absence of adequate support from the government in terms of larger social protection programmes entailing higher cash allowances and open market sales (OMS) of essential commodities, the poor, and the low income and middle class families are feeling the brunt of unprecedented price hike. The poverty-ridden people have changed their consumption behavior and reconfigured expenditure patterns in response to the emerging economic upheavals. They have such limited funds that it barely keeps them afloat. They make compromises on essential diets. We, at the Centre for Policy Dialogue (CPD) have done an estimate of the cost of living for a modest life. A family of four needs at least BDT 8000 per month for a compromised diet which does not include fish, chicken, and mutton. With these proteins added in the diet, the cost increases to BDT 21,358 per month for a family of four members. Adding the other essential expenses to this, such as one bedroom apartment outside the city center of Dhaka, utility, transportation, health, hygiene, education, mobile phone and internet, the cost is BDT 29,206 per month with a compromised diet and BDT 42,548 per month with a regular diet. How many industries offer their workers a wage rate that can meet their bare minimum expenditures? Therefore, the raise of minimum wages of workers is critical given the current hardship of the low income families. This has to be accompanied by government initiatives such as expanded OMS and introduction of rationing for the low and middle income groups. This is a tough job for a country like Bangladesh which has limited fiscal space. Therefore, the government also needs to pursue an austerity measure which should put a ban on unnecessary and unproductive government expenditures. The operational cost should be downsized drastically to save public resources which can save thousands of lives.
While taming of inflationary measures requires lowering of demand, there should be higher public expenditures for development programmes which generate employment. Of course the biggest source of employment is the private sector. However, investment by the private sector is stuck at 23% of GDP. The government budget can enable the country to incentivize investment owing to fiscal measures, but the investment is not only dependent on taxes and interest rates. It also relies on the quality of governance, infrastructure, human resources, and ethical bureaucratic system. Most importantly, private investment plays a dominant role in offering jobs. However, it has been stuck at around 23% of GDP for the past couple of years. In the budget for FY2023, the government has set the target of private investment-GDP ratio at 24.8%. In a bid to attract higher private and foreign investment, the budget has reduced corporate tax at various rates. However, without an enabling environment such as greater ease of doing business, good governance, skilled human resources, and technological accessibility investment cannot be encouraged. Therefore, the employment opportunities continue to remain limited.
The overall outlook for the global economy is that several countries may experience stagflation and recession given their low economic growth and high inflationary pressure. This is a trying time which the world has not experienced since the decade of the 1970s. As Bangladesh economy is integrated with the global economy, it cannot avoid the heat of such difficulties.
