DHAKA – Bangladesh is offering Sri Lanka a $ 200 million loan, reshaping its image from helping the nation while flexing its newfound economic muscle.
In Bangladesh, once considered an economic disaster, annual economic growth has plummeted to 7% over the past decade, while exports and foreign exchange reserves have increased significantly thanks to stable remittance inflows.
“Last fiscal year [ended June 2020], we were able to achieve real [gross domestic product] growth of 5.2%, which is the highest in Asia, ”AHM Finance Minister Mustafa Kamal told parliament on Thursday, presenting the new budgetary budget.
“We have enough opportunities,” he said at a press conference on Friday, adding: “In 2019, we said that the days will come when we will offer loans to other countries. In the future, we will not take loans; rather, we will borrow. “
Bangladesh has $ 45 billion in foreign reserves, enough to finance imports for six months. It can now lend $ 200 million to debt-ridden Sri Lanka through a foreign exchange facility to bolster the island nation’s reserves by $ 4 billion.
By paying off the three-month loan, which is expected to be completed by the end of July, Bangladesh will benefit from the London Interbank Offered Rate (LIBOR) plus 2% per annum. Upon maturity within 6 months, the rate will rise to 2.5%. LIBOR is now 0.14% for a three month loan and 0.18% for a six month loan.
Against the swap, Sri Lanka, which currently borrows from various countries and lender partners to meet foreign exchange needs, will hold about $ 250 million in local currency.
“The decision to grant a loan to Sri Lanka was made based on the state of Bangladesh’s foreign exchange reserves,” Serajul Islam, a spokesman for Bangladesh Bank, told Nikkei Asia.
Bangladesh received more than $ 21 billion in remittances during the last fiscal year – a figure that the finance minister expects to grow to $ 25 billion this year. The country’s exports amount to almost $ 40 billion annually.
The situation is more complicated in Sri Lanka, which has experienced an “unprecedented economic downturn” after its tourism sector – its main source of income – was wiped out by the COVID-19 pandemic, according to the latest World Bank Development Report for Sri Lanka.
The update notes that Sri Lanka’s economy contracted 3.6% in 2020, and its public and publicly guaranteed debt is estimated to have increased to 109.7% of GDP.
Last December, Fitch assigned Sri Lanka a sovereign credit rating of CCC, while Moody’s assigned it a Caa1 rating, compared to Bangladesh’s BB- rating from Fitch and Ba3 from Moody’s.
However, Bangladesh still has concerns.
On June 3, the government presented its annual budget for fiscal year 2021-22 of $ 70.9 billion, most of which depends on external borrowing of about $ 13.8 billion. This happens at a time when the country’s external debt is already growing: in December 2020, the debt was $ 70.7 billion, which is 16% more than in March 2020.
Analysts say that despite the relatively small loan to Sri Lanka – compared to Bangladesh’s foreign exchange reserves – Bangladesh risks not getting a timely loan as Sri Lanka’s economy could continue to downturn.
In addition, there are a number of short-term loans that Sri Lanka will have to repay shortly, which could force Colombo to seek loans from other sources.
Salehuddin Ahmed, a former governor of Bangladesh’s central bank, says his country’s foreign exchange reserves are ample and the debt service obligations are relatively small. “We are giving Sri Lanka only $ 200 million,” he said. “It doesn’t really matter.”
Colombo pays the sovereign guarantee and the yield is good. The LIBOR plus 2% rate is much higher than Bangladesh gets by investing in foreign bonds, he said.
“We have achieved some economic resilience. Our macroeconomic indicators are good. Reserves are high, inflation is low, growth is acceptable, and per capita income is in good shape, ”said Ahmed, who is also a professor of the business. School of BRAC University in Dhaka.
“Bangladesh may not be a permanent creditor at the moment. But we have no problem with requests for small loans, ”he added.
Ahsan H. Mansour, executive director of the Bangladesh Institute for Policy Studies, said the country is still dependent on aid and not strong enough to be a major lender.
“But due to geopolitical concerns, we have to offer Sri Lanka a loan because we are a friendly neighbor,” said Mansour, who was also a senior official at the International Monetary Fund. “We have gained strength. We may not be able to provide billions of dollars in loans, but we can provide at least a few million dollars. ”
Mansour said that in terms of risks, Sri Lanka’s balance of payments situation is very weak and the country has other repayment obligations that exceed its foreign exchange reserves. “In all likelihood, Sri Lanka will not be able to pay [Bangladesh’s loan] soon, “he said.