The New Year looks decidedly gloomy in India's political neighbourhood

Three key countries with which India has economic ties - Sri Lanka, Bangladesh and Nepal - are facing risks that appear to be worsening

Subhomoy Bhattacharjee New Delhi

5 min read Last Updated : Jan 02 2023 | 10:28 PM IST

The New Year looks decidedly gloomy in India’s political neighbourhood. Three key countries with which India has economic ties — Sri Lanka, Bangladesh and Nepal — are facing risks that appear to be worsening. Political headwinds have intensified in Dhaka; Kathmandu has finally got a government almost two months after general elections but Sri Lanka’s crisis continues.

Pakistan has intensified its problems, having its sovereign rating reduced to CCC-plus last week by Standard & Poor’s, which puts it deep in junk grade. But leaving Islamabad aside for the moment, locked as it remains in a politico-religious struggle, the travails of Colombo, Dhaka and Kathmandu seem more the fallout of development bets gone awry. Covid-19, Ukraine war and the oil prices have dealt a near-fatal blow to the development trajectory of these countries early last year.

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Sri Lanka was the first to be hit in June 2022, and it was expected that by the end of the calendar year, the much-needed International Monetary Fund (IMF) loans — a combination of Extended Credit Facility (ECF) and the Extended Fund Facility (EFF) — will materialise. But there was a condition attached. Sri Lanka will have to reach a deal with its bilateral creditors, principally, India, Japan and China that the terms of their loans do not work at cross purposes with the IMF loan. This conditionality has proven difficult to sort out. Last week, Shehan Semasinghe, finance minister of Sri Lanka, acknowledged that the IMF approval for a $2.9-billion loan was going to be delayed deep into 2023. He said he was hoping to get the deal “by the first quarter of next year”. China accounts for 19.6 per cent of the island’s external debt, Japan 9 per cent and India 2 per cent.

On the relatively brighter side, consumer price inflation is expected to come down from the back-breaking 70 per cent recorded in October. Nandalal Weerasinghe, the central bank governor, has become confident enough to hope that it will ease to a stable range of 5 per cent by the end of 2023, a Bloomberg news report noted. All of these will, however, need the IMF loan to materialise quickly for a country that was once already seen as a middle-income economy in South Asia several years ago.

Joining company with Sri Lanka in economic trouble is Bangladesh. The country has just signed a 42-month arrangement in November to secure a $3.2-billion IMF loan under ECF and EFF, with another $1.3 billion under the climate-linked Resilience and Sustainability Facility (RSF).

For months this year, AHM Mustafa Kamal, the Bangladesh finance minister, debated whether a loan from the IMF was necessary. He had reason to hesitate, since the country, earlier viewed as a basket case of poverty, had worked its way up to an astonishing level of growth on the back of the textile export industry. All the country’s social indicators have surged ahead — sometimes bettering India — giving hopes that Bangladesh will drop its tag of least developed nation by financial year FY26.

The collapse of global trade, on which the economy is acutely dependent, and stratospheric oil prices have hit the economy hard. With every passing month, the news has become dire. The IMF staff assessment issued in November notes there is “sharp widening of the current account deficit, rapid decline of foreign exchange reserves, rising inflation and slowing growth”.

Fortunately, consumer price inflation has eased sharply to 8.85 per cent in November, from almost double digits a month ago. This is very necessary as political disturbances on the streets have begun to gather steam. Sri Lanka has demonstrated how sustained shortages can transform into a crippling political challenge. Ironically, at the height of the crisis in Sri Lanka in June, Bangladesh had sent a potato consignment as relief supplies. There could be more twists to this tale in 2023, with Opposition parties mobilising huge rallies to protest against the three-term spell of Sheikh Hasina Wazed.

Bangladesh is lucky that the incumbent government was in place as the IMF loan was negotiated. One of the reasons Sri Lanka had problems was there was no acknowledged leadership through most of 2022, a problem that has now come upon Nepal.

While the IMF has already provided a 38-month duration ECF of $395.9 million in January 2022, Nepal’s cause has not been helped by the political difficulties from November. The general elections had led to no clear verdict. In Christmas, the country finally got a new government in place with a left-wing orientation.

The reasons why the outgoing Nepali Congress did badly was the state of the economy and the repair work made necessary by the IMF loan. The immediate problem for a new government of Pushpa Kamal Dahal, leading the Communist Party of Nepal (Maoist Centre) is that the electorate will want all those repairs rolled back. The IMF prescription always insists on cutting back on government expenditure. Also, in a poor economy, the current inflation rate of 8.08 per cent is not good news at all but the population will read the reasons differently from what shall be expected from the government.

2022 was a year of a supply shock-led crisis in South Asia, harshly highlighting the policy missteps of different governments. Those missteps have led to IMF support programmes, which will force a difficult period of adjustment in the economies. How far the population in these countries will accept these as inevitable will determine how 2023 pans out for the region.

Topics :Economic Crisissri lankaBangladeshNepalIndia Foreign Policy

First Published: Jan 02 2023 | 5:36 PM IST

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