As you sow, so you reap

| Update:
April 24, 2022 9:53:25 p.m.

The economic experiences of some Southeast Asian countries like South Korea, Singapore, Taiwan have long been taught in courses on economic development. In fact, developing countries like Bangladesh have been advised to follow in the footsteps of the so-called emerging tigers. However, the only country in South Asia that might attract attention due to high human development and a less unequal distribution of economic growth is the island nation of Sri Lanka. Amartya Sen’s attempt to glorify Sri Lanka’s achievements in his various writings is also no secret.

But Sri Lanka has now become a self-declared bankrupt country following its inability to repay its debts. It is unable to pay its debts in the face of declining foreign exchange reserves and the sharp drop in export earnings and domestic revenue. These developments such as soaring inflation, unemployment, fuel and electricity shortages sparked further political protests, worsening the situation. The reasons for such a deplorable state of the Sri Lankan economy can be attributed to several factors.

First, the current Sri Lankan government has opted for a dramatic reduction in personal and corporate taxes, which has resulted in lower revenues and a larger budget deficit. While the government should have raised interest rates and cut spending on all fronts, the reverse reigned supreme. Thus, the central bank printed banknotes despite the contrary opinion of international organizations. So too much money has driven too few goods. The lesson is that (a) a reduction in tax rates at all levels could be counterproductive if not accompanied by a reduction in spending and (b) printing notes is the last best solution .

Second, the country’s president said in April 2021 that the use of chemical fertilizers would be banned to pave the way for organic farming. When the environment was placed above the economy – not gradually but with “revolutionary zeal” – the ban cut production of major export products such as tea and rice by a fifth and thus forced a transition from self-sufficiency to dependence on imports within the country. six months. Thus, falling incomes and rising imports have added fuel to the fire.

Thirdly, Sri Lanka has undertaken some so-called mega projects, white elephants, unable to generate enough resources to repay the loan made for the projects. Coming mainly from China, very expensive supplier credit has appeared to be a curse rather than a boon. Fourth, the tourism sector on which the Sri Lankan economy survives the most has faced a severe downturn as a result of the corona crisis. Today, as a result of all this, including the war between Russia and Ukraine, the island nation has been deprived of much foreign currency and domestic economic activity marked by tourism. Finally, the “crony capitalism” developed by the ruling oligarchs to maximize their political gain at the expense of natural economic laws, proved to be the final nail in the coffin. After all, as you sow, you reap.

Fortunately, Bangladesh’s current situation is much better than Sri Lanka’s and it is unlikely to fall into this debt trap in the foreseeable future. But the advantage of a crisis is that it points out the shortcomings of existing policies and highlights the problems to be overcome, whether by the country itself or by its neighbours. Therefore, instead of being complacent, the country should immediately pay attention to weaknesses that could invite a crisis. Leaders must be careful and learn from the experiences of the island nation. Bangladesh’s strengths lie in its relatively stable macroeconomic indicators and in the fact that Bangladesh’s external debts amount to only about one-fifth of the country’s gross domestic product, which is called low by international comparison.

Most external debt is contracted with bilateral or multilateral institutions such as the World Bank and is concessional or bears low interest rates. So the debt situation offers some relief to Bangladesh, at least for now. Despite some increase in Bangladesh’s debt, it is still at a tolerable limit. More importantly perhaps, foreign exchange reserves in Bangladesh can cover more than six months of imports—a comfortable position.

But what can a country like Bangladesh learn from Sri Lanka’s experience?

It seems that the government of Bangladesh took it seriously. Already an increase in the L/C margin is there to discourage the import of “non-essential” goods. The objective is to stem the depletion of scarce foreign currencies. However, any policy is only as good as its implementation. Bangladesh has adequate reserves but “needs to be cautious about the monetary use of reserves to finance domestic investment and support the exchange rate”. The country should also speed up the realization of megaprojects and avoid playing more games with such projects at least during this time of global crisis. Again, it should pay more attention to increasing its revenue from domestic sources and bring the tax-to-GDP ratio to comparable conditions among Asian countries from the lowest position in the ranking. Expenditure policy is equally important. Public investment should more or less be compensated by private investment. Additionally, the government has many pockets of lavish spending that can easily be cut in the interest of wise spending.

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