From Bangladesh to Sri Lanka, India's neighbours mired in economic crises

Some are discovering the virtues of deeper integration with the country

This summer, hardly any of India’s neighbours seem to have cheerful economic data to offer.

Bangladesh has done what cash-strapped economies often do. Since the end of March it has stopped publishing its foreign exchange reserves data. As of end March 2023, it reports a forex reserve of $31 billion, just enough to meet four months of imports but the IMF has asked it to reclassify the numbers, which will take it down another $8 billion.

Pakistan has changed its finance secretary this week, with its Budget due in less than a month. The IMF bailout package is still to be finalised and will depend on how the government tackles the difficult task of cutting energy subsidies.

Down south in Sri Lanka, IMF has released the first tranche of $330 million, part of the $3 billion, four-year reform programme. The bad news is that the next instalment will need the external creditors, India, Japan and the Paris Club, to also tailor their repayment from Sri Lanka. But China, the largest creditor with $8 billion outstanding, has chosen to take an observer status in the programme. 

At least Sri Lanka has begun to repair itself. It has become the IMF's first Asian country to subject itself to a “Governance Diagnostic Exercise”. The Exercise report will be on Sri Lanka President Ranil Wickremasinghe’s table in October, making public and official what the citizens of the country are already suspecting. Based on what the creditors decide about debt repayment and what Sri Lanka does with the report, the IMF will decide whether the country qualifies for the new instalment. 

While Nepal has girded itself up for another IMF loan, and despite what Sri Lanka has gone through and Pakistan is in the queue, it is Bangladesh, which seems in the worst spot. The poster child of economic reforms, the country is in a mess despite receiving the $4.7 billion aid from the IMF in January this year.

Each one of its economic indicators is moving south. Retail inflation in the country is not only over 9 per cent (point to point) it is also worsening every month according to the country’s central bank data. Export earnings have shrunk in both March and April. The global downturn is not helping matters as the country’s economy is a one-trick pony of textile exports.  

To shore up precious forex the central bank offers what it describes as a “phenomenal 2.50 per cent cash incentives” for sending remittances through the formal banking channels. The home page of the bank carries this advertisement cajoling Bangladesh expatriates to stick to this route instead of using <i> hawala <p> or what it calls <i> hundi <p> channels. Aggregate tax revenue during July-February of FY23 was 52.98 per cent of the target set for the year (the country follows a July to June financial year). 

Bangladesh seems to be suffering acute growing pains. At one level the economy has done impressively well over the past few years growing as the IMF noted this month. “Against a challenging economic backdrop, Bangladesh remains one of the fastest-growing economies in the Asia-Pacific region. However, persistent inflationary pressures, elevated volatility of global financial conditions, and slowdown in major advanced trading partners continue to weigh on growth, foreign currency reserves, and the Taka”.

As the economy has expanded the demand for imports has shot up. Due to its peculiar geography, the nation needs to import most of what it needs including even stones. It is the largest importer of crushed stones in the world, buying those from India, Bhutan and Turkey. The demand for other consumer goods has also shot up and these also need imports just at the time when the country is graduating out of the league of least developed nations — the deadline in FY26. The central bank, due to the foreign exchange crisis, has instituted strict controls on letters of credit for imports. Such letters for capital machinery were down by 54 per cent and 30 per cent for materials like stones, in the July to February period, hurting economic recovery. 

An IMF review team that was in Dhaka this month has essentially told Finance Minister A H M Mustafa Kamal who will place the national Budget in the country’s Parliament on June 1, to stick to the belt tightening programme. This is becoming hugely unpopular.

In Pakistan, of course all bets are off. While media reports this week noted that China is learnt to have ticked off the Pakistan government for asking for a larger economic bail out from the IMF, the prospects of that are itself in danger. IMF has held no structured conversations with Islamabad since February this year and none seems likely till the Budget is placed in Parliament. 

The challenges have a silver lining. It is making some of India’s neighbours discover the advantage of deeper economic integration with it. To be sure, Pakistan’s grant of Most Favoured Nation (MFN) status is unlikely to materialise in the current turmoil. But India’s first offer to Sri Lanka has been as debt relief. New Delhi has rolled over debt to Colombo, committing itself to a multilateral common platform for talks among creditors to address the debt structuring programme of the island. Hopefully, investment plans by companies like Adani in Colombo port will be revived. 

Similarly, another Adani venture, an additional 800 Mw of electricity supply to Bangladesh from its plant in Jharkhand has begun (Bangladesh consumes about 12 Gw of power). The country is in the middle of rolling power cuts and this supply on a long-term PPA will help a lot. Other ideas like making trade between Chittagong and Kolkata as coastal shipping ie stripping away customs formalities have been proposed by Bangladesh. Nepal’s new Prime Minister Pushpa Kamal Dahal “Prachanda”’s first foreign trip takes place to India this week, six months after assuming charge. There is little doubt that for the subcontinent to come out of this ring of fire, it will need a lot more hand holding measures like these.