Thiloththama Jayasinghe, Jadetimes Staff
T. Jayasinghe is a Jadetimes news reporter covering Political News
While different in many respects, the economic situations of Bangladesh and Sri Lanka are similar in that they too carry some useful lessons for future policy decisions in Bangladesh. Both countries have braved their economies through difficult situations. Recently, Sri Lanka faced an unprecedented economic crisis, its root causes highlighted to relate to over-dependence on a few sources of foreign exchange and fiscal management characterized by recklessness, especially with regard to servicing debts and diversification of exports. The case of Bangladesh, which is presently stable, is an example to show that there is a lesson to be learned from Sri Lanka's mistakes in order to avoid the same pitfalls.
The Economic Crisis of Sri Lanka: A Cautionary Tale
The economic crisis of Sri Lanka could be traced back to a few critical factors that precipitated its eventual fall. Generally, for the past years, Sri Lanka has remained dependent on two major sources of foreign currency: tourism and remittances. These were among the areas that felt the full brunt of the COVID-19 pandemic, which drastically cut the inflow of foreign currency. Unable to diversify either its economy or its exports, Sri Lanka became quite vulnerable to external shocks. The government had ignored warnings from economists to expand beyond tourism and traditional exports like tea and textiles.
The poor debt management of Sri Lanka was also one of the major contributors to its crisis. It embarked on a spate of large infrastructure projects, many of which were funded by foreign loans. Many did not provide considerable economic returns. As debt mounted, the inability of the government to keep up with repayment schedules triggered a liquidity crisis that caused devaluation of the currency, hyperinflation, and severe shortages of essential goods.
This was furthered by Sri Lanka's political environment. Members of the Rajapaksa family held important positions: the presidency, premiership, and the ministries of finance and labor, headed by President Gotabaya Rajapaksa, Prime Minister Mahinda Rajapaksa, Finance Minister Basil Rajapaksa, and Chamal Rajapaksa, respectively. This was a source of crony capitalism and issues in governance. As economists assert, political family-based control in the absence of accountability undermined Sri Lanka's decision-making and fiscal discipline and exacerbated the crisis.
Bangladesh's Current Economic State: Learning from Sri Lanka
On the other hand, Bangladesh's economy is doing relatively well now; this is largely due to its tremendously improving garment sector, which makes up more than 80% of the country's total exports. Experts have been warning about dependence on a single sector. Like Sri Lanka, Bangladesh too has not diversified its export basket despite frequent calls by economists. This over-dependency can easily expose Bangladesh to any fluctuation in the global market or even a specific disruption of the sector, similar to how dependency on tourism exposed the economy of Sri Lanka.
Economists, including Prof. Mustafizur Rahman of the CPD, place a high premium on export diversification. A wider range of exported commodities would help cushion Bangladesh against a shock from the outside and bring about more stability in its future economic progress. In this backdrop, data-driven policy decisions must be pursued credibly in a timely manner. Delays in heeding these warnings may cause stagnation of macroeconomic quality, which, in turn again, can slow down the pace of economic momentum in Bangladesh.
The other area where Bangladesh can draw lessons from Sri Lanka's failure has to do with debt management. It is increasingly important as Bangladesh moves into the status of a lower-middle-income country that the country undertakes projects which are economically viable and sequences its borrowings effectively. Sri Lanka's failure in managing its debt and its focus on large, unproductive infrastructure projects send a clear lesson for Bangladesh. Selim Raihan, executive director of the South Asian Network on Economic Modeling or SANEM, further cautioned that huge infrastructure projects in Bangladesh shall be undertaken when these conform to mainstream economic development and help enhance productivity.
The Sri Lankan crisis has been a grim and valuable lesson to Bangladesh regarding its decision not to depend on one economic sector alone and not to mismanage fiscal matters. Besides, it is also important for economic stability that export diversification, prudent borrowing, and evidence-based policymaking are pursued by the country. The case of Sri Lanka, with its family-based political control and crony capitalism, also underlines the need for transparent governance to protect a nation's economy. Bangladesh does have scope to make strategic and evidence-based decisions that focus on sustainable development and diversification to keep off the track of Sri Lanka.
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