Demonstration of Bangladesh Economic Emergence in South Asia by Bailing out Sri Lanka

BangladeshGlobalisationSouth AsiaSri Lanka

August 28th, 2021

Bangladesh economic emergence caught the world’s attention when it has joined South Korea and China by approving a currency swap of worth $250 million to bail out Sri Lanka.

 

By Harpreet Kaur


 

Amid the days of pandemic-induced global economic suffering, the news broke that the per capita income of Bangladesh has now increased from $2,064 to $2,227 (for the fiscal year 2020-21). What caused the world, especially India, to stand up and take notice was that Bangladesh had outpaced India’s per capita income by $280. This came as a shock to many who had the image of Dhaka as overpopulated, malnourished with a fragile and extremely poor economy.

 

In 2007, the per capita income of Bangladesh was half of that of India. Once dubbed as a “bottomless basket” by former US secretary of state Henry Kissinger, Bangladesh matches India on many fiscal, economic and social indicators. The breakout nation is strengthened by a stable civilian government and foreign aid is less than 2% of its GDP.

 

In 1971, when Bangladesh was declared independent from Pakistan, its captor was 70% richer than Bangladesh. 50 years later, today Bangladesh is 45% richer than Pakistan. One Pakistani economist glumly pointed out that “it is in the realm of possibility that we could be seeking aid from Bangladesh in 2030.”

 

Figure 1: Bangladesh GDP per capita in current prices from 1986 to 2026

Source: Statista

 

According to the analysis from New York-based research firm Wealth-X, Bangladesh topped the list of countries with the fastest growth in the number of ultra-wealthy persons between 2012 and 2017. According to the World Ultra Wealth Report 2018, the number of Ultra-High Net Worth (UHNW) individuals in Bangladesh has increased by 17.3% over this time. (Figure 2).

 

Figure 2: Top 10 fastest-growing UHN countries (2012-2017)

Source: The Daily Star

 

Bangladesh’s exports, foreign remittances, and the private sector have assisted its economic growth. The reason behind the economic progress of Bangladesh is the country’s garment sector, which accounts for 80% of its exports.

 

According to Prabir De, professor at the Research and Information System for Developing Countries (RIS), it continues to gain benefits from the European Union’s Generalised Scheme of Preferences (GSP) program as well as other trade preferences.

 

Dhaka has been able to generate significant earnings from strategic exports as a result of the EU’s GSP scheme’s ongoing support. Bangladesh also receives a significant quantity of remittances. It believes in treating its neighbors with respect and reaching out to those who require assistance.

 

What we observe is that the South Asian countries’ foreign policies have changed significantly over time. At the time of the crisis, Bangladesh demonstrated economic emergence as a regional power when it extended its support to Sri Lanka by clearing a currency swap facility of $200 Million. This move by Bangladesh made it clear that India is not the only south Asian country with deep pockets.

 

Contrary to its neighbors, Bangladesh has maintained its growth trajectory during the pandemic

 

The Covid-19 pandemic has caused simultaneous supply and demand disruptions in an interconnected global economy. As governments wrestled with the new lockdown measures to combat the spread of the virus, several economies and businesses around the world suffered huge losses.

 

Bangladesh however, was able to quickly bounce back from Covid’s economic setback. Despite the uncertainty caused by COVID-19, the economy of Bangladesh is projected to grow. It not only kept its economy running but it saw a 5% growth (Figure 3) in the second year of the pandemic (2021).

 

Figure 3: Projected Economic Growth rate of Bangladesh till 2026

Source: Statista

 

According to the International Monetary Fund (IMF), Bangladesh’s economy will grow at a rate of 7.5% in 2022. Accordingly, Bangladesh’s GDP is projected to rise from USD 329 billion in 2020 to USD 352 billion in 2021. Bangladesh’s per capita GDP, which was at USD 1,998 in 2020, is currently at USD 2,122 in 2021 and will rise to USD 2,330 in 2022.

 

Bangladesh: A New Face of Emerging Economies

 

From a south Asian perspective, Bangladesh’s emergence is a welcome development for various reasons. Bangladesh helps South Asian countries in moving away from their dependency on India. As Bangladesh’s economy grows, Sri Lanka realizes that India isn’t its only wealthy neighbor.

 

Bangladesh bailed out Sri Lanka that showcased its economic emergence in South Asia as Sri Lanka’s foreign debts troubles were pushing the country towards a critical phase in 2021.

 

Since the Easter bombings in 2019, Sri Lanka’s economy has been in deep trouble and Sri Lanka’s key foreign exchange sectors such as tourism, tea, and garment exports have suffered major setbacks due to the coronavirus pandemic.

 

The country has been battling to maintain the reserves for paying back the external loan. Sri Lanka’s foreign reserves stood at $ 4.5 billion in April 2021, which is the same amount that the country owes in external loan repayments this year.

 

Bangladesh extended its support by clearing a currency swap facility of $200 Million that will help Colombo tide over its foreign exchange crisis.

 

What is Currency Swap and How Does it Help Sri Lanka?

 

A currency swap is when one currency’s interest and sometimes principal is exchanged for another currency’s equivalent. Bangladesh’s $200 Million currency swap is a loan in dollars that will be repaid with interest in Sri Lankan rupees.

 

A currency swap is frequently used by entities conducting business abroad to obtain better loan rates in the local currency than if they borrowed money from a local bank. In this case, this has come as a respite for Sri Lanka as it is cheaper than borrowing from the market.

 

Currency swap helps in boosting the economy of any country. This also assists Colombo to tide over their massive foreign debt crisis as Bangladesh cleared the currency swap facility. The agreement was finalized in March 2021, when Sri Lanka’s Prime Minister, Mahinda Rajapaksa visited Bangladesh.

 

Even so, the last 50 years have demonstrated how unwise it is to bet against Bangladesh. Today with more than 150 million citizens Bangladesh accelerated its recovery from the economic downturn with the right policies and timely action. Back in 2017, a PwC (PricewaterhouseCoopers) report predicted that Bangladesh would become the largest economy and economic powerhouse in South Asia by 2030 that demonstrates Bangladesh’s economic emergence.

 

Besides the advances it has made, Bangladesh faces several challenges.

 

Bangladesh is facing several critical challenges in the coming years. In contrast to the issues surrounding bringing the economy out of the pandemic’s slowdown and managing the end of Covid-19, the challenges have critical long-term implications.

 

Economic Growth and Income Inequality

Most commentators appear to conclude that these two goals are not mutually exclusive or are not in contradiction to each other. That is, if one aims for maximum economic growth, one can still achieve an acceptable level of income inequality; alternatively, if policy choices are made to reduce income inequality, the growth rate does not slow.

 

Current Education System

At the present time, school attendance is high, but most people consider the quality of education to be very poor. The true literacy rates are much lower than those claimed; primary and lower secondary education is inefficient and ineffective.

 

Trade-Related Issues

Trade is a key development tool that has resulted in globalization. However, Bangladesh will face some challenges in this area. In the future, it will no longer be able to export duty-free and quota-free, and will instead face duties and reduced benefits from exporting to European Union countries due to reforms in the trading rules by trade-related intellectual property rights (TRIPS).

 

The views expressed in this article are those of the author alone and not the WorldRef.


 

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