It is right that senior government officials have started to push back on the bubble of speculation that Bangladesh is in imminent danger of slipping into the same hole as Sri Lanka, the friendly South Asian neighbour. Much like stock market bubbles represent a speculative frenzy when stock prices vastly exceed the fundamental value of the companies underlying them, this fear is not accompanied by corresponding factors - the fundamentals - to support it.
To start with, it feeds off the original myth of the 'Chinese debt trap' as some common factor between the two countries. Yet that itself is much exaggerated in the case of Sri Lanka, and frankly non-existent in our case. The Chinese ambassador in Dhaka, Li Jiming, had taken the trouble to point this out himself last June, during a webinar hosted by Cosmos Foundation on the future course of Bangladesh-China relations. Ambassador Li informed his audience that day that of Sri Lanka' total foreign debt, only 8 percent was actually owed to China. According to the latest figures, this is still less than 10 percent. And in fact, a greater portion of its debt is owed to Japan.
Although Sri Lanka's debt certainly has ballooned over the course of the COVID-19 pandemic, it is important to understand its crisis is mainly one driven by its cataclysmic drop in foreign exchange reserves. As a tourism-dependent island economy, they have been hit particularly hard by the pandemic, which of course brought the worldwide tourism sector to a standstill. And standstill means standstill - virtually nothing moved. One year was bad enough. Two years, and beyond proved abysmal. Since tourism counts as an export industry in the national accounts, the impact on forex reserves was particularly serious. In March, it counted a measly $1.7 billion in foreign currency reserves, causing the shortage in imported items mainly, because it just doesn't have the dollars to pay for them. Note the assistance it sought from Bangladesh was not a loan, but rather a currency swap - the two central banks exchanged dollars and rupees - because Colombo was in dire need of foreign currency.
Structurally, the two economies are vastly different. Bangladesh, a labour-intensive manufacturing hub, has weathered the economic crisis associated with the pandemic rather well, by most accounts. Its main export industry, RMG, has been noted for bouncing back strongly after suffering a fall in orders during the first year of Covid, and bolstered by consistently strong inward remittances, its forex reserves have remained comfortably north of $40 billion for almost two years now.
During the course of the pandemic, Sri Lanka's debt-to-GDP ratio, the proportion of a country's GDP that is equal to its debt, ballooned out beyond 100 percent. From 88 percent in 2020, it has now reached almost 120 percent of GDP. Once you cross 100 percent, that means a country owes more than its total output. It's an obvious danger zone, although many economies, particularly with very mature credit markets, can manage it. The World Bank, rather with an abundance of caution, advises countries to maintain this below 70 percent however. Whatever the danger mark may be, Bangladesh is far from it. Its debt-to-GDP ratio is as low as 36 percent, according to the government's latest figures.
So the next time someone mentions 'the Chinese debt trap', or how Bangladesh and Sri Lanka may meet the same fate in the foreseeable future, let us make sure we burst that bubble.
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