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Bangladesh is not at risk of the crisis that Sri Lanka is currently facing, but the country needs to be cautious and learn from the experiences of the island nation, said Hans Timmer, chief economist of the World Bank for South Asia.
“The balance of payment crisis that we are seeing in Sri Lanka is not the main risk for Bangladesh at the moment,” he told The Daily Star in an online interview on Tuesday.
“Bangladesh still can learn from this experience.”
Sri Lanka has descended into its worst financial crisis since independence for fast-depleting foreign currency reserves, caused by the dragging pandemic and the Russia-Ukraine war.
As a result, the country can’t afford to pay for imports of staple foods and fuel, leading to acute shortages and very high prices. And it has already said it would temporarily default on its foreign debts.
Timmer considers Sri Lanka as a special case where it has a lot of foreign debts that it can’t service.
“It is a case where the country had to use central bank reserves to service the debts and buy essential imports. As a result, the reserves are decreasing. It is a difficult balance of payment crisis.”
The situation in Bangladesh is very different, says the economist.
This is because the foreign debts of Bangladesh account for only 17 per cent of the country’s gross domestic product, which is low in international comparison. And most of the external debts are with bilateral or multilateral institutions such as the WB and are concessional or carry low-interest rates.
“Although there has been some increase in the debt for Bangladesh, this is still at a very low level,” Timmer said.
Foreign currency reserves in Bangladesh can cover more than six months of imports, which is very solid, he said.
But every country can learn from Sri Lanka’s experience.
“Every country has to be careful in spending a lot more than they earn. You have to be careful how you use your foreign exchange reserves.”
“Bangladesh should be careful about the monetary use of the reserves to finance domestic investments and to support the exchange rate.”
Timmer, who joined the WB in 2000, assumed his current role in January 2019 after serving as the chief economist for the Europe and Central Asia region of the Washington-based lender.
Bangladesh is, however, feeling the impacts of the Russia-Ukraine war as the conflict is causing a food crisis around the world and has sent inflation to a higher level.
“Inflation is a matter of concern for Bangladesh,” Timmer said.
The economist also talked about the possible impact of the war on the budget.
There could be an increase in fiscal deficits if the government reacts to higher prices, which require subsidies or support measures for the population.
When asked about the policy measures the government should take to tackle the challenges, Timmer stressed the need to give importance to both the pandemic and the recent rise in oil prices in the international markets as these are negative supply shocks.
In such an environment, general fiscal stimulus is not the way to go because that would end up flaring inflation, he said.
He suggested the government be careful of the price subsidies because they are inefficient and go to richer people, not just the poor.
“Ultimately, it makes the fiscal situation unsustainable.”
Timmer, who previously worked at the European Commission, the Intergovernmental Panel on Climate Change, and the Organisation for Economic Co-operation and Development, thinks the current situation might be an opportunity for Bangladesh to accelerate its transition towards renewable energy.
Throughout the region, countries are vulnerable because of their reliance on fossil fuel imports. “When these markets are very volatile and the prices go up, it creates all kinds of problems,” he said, calling on the country to be very careful in subsidising energy prices.
He hinted at the vulnerability in the domestic financial sector and the banking sector stemming from the continued support measures from the government in response to the coronavirus outbreak.
Bangladesh has allowed businesses not to service their debts fully or immediately and not to be declared defaulters through the repayment of a small portion of loans.
At the same time, the government has allowed banks to report the interest payments as being paid.
“Those are forbearance support measures that we have seen in all countries in the region at the beginning of the pandemic just to make sure that the private sector survives. In Bangladesh, these measures have continued longer than in other countries,” Timmer observed.
“That creates vulnerability because you don’t know about the health of the companies that are being supported and you don’t know what the health of the banking sector is.”
“Extended support to private firms is also dangerous because then you are not creating a level playing field and you are not having the right mechanism in the private sector to create a competitive environment.”
The macro-economist praised Bangladesh’s current economic condition. “GDP growth is strong and you are at the top of the region.”
However, there is still a lot to wish for Bangladesh because export is concentrated in the garment industry.
“The country needs to diversify as well as explore opportunities in the services sector and the large informal sector.”
Timmer is optimistic about the opportunities for Bangladesh as a middle-income country as long as the country has prudent policies.
“There is an opportunity to attract more foreign direct investments and access international financial markets to borrow.”
“Conditions can be better to make the country attractive in the competitive international market,” he said, emphasising the need for more outward policies.
(TDS)
