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Economy

Bangladesh helps out cash-strapped Sri Lanka with $200m loan

Former recipient of major foreign aid, Dhaka now has money to lend

Bangladesh's image has drastically changed after a decade of strong economic growth.   © Getty Images

DHAKA -- Bangladesh is offering $200 million worth of credit to Sri Lanka, changing its image from helped to helper nation while flexing newfound economic muscle.

Once thought of as an economic disaster, Bangladesh has seen annual economic growth over the past decade rumbling along at a robust 7% while significantly increasing exports and building foreign currency reserves thanks to steady remittance earnings.

"In the last fiscal year [ended June 2020], we have been able to achieve real [gross domestic product] growth of 5.2%, which is the highest in Asia," Finance Minister AHM Mustafa Kamal told parliament on Thursday when submitting a new fiscal budget.

"We are capable enough," he said at a Friday news conference, adding: "In 2019, we said the days are coming when we will offer loans to other countries. In the future we won't take out loans; rather we will lend."

Bangladesh has $45 billion in foreign reserves, an amount large enough to fund imports for six months. It now finds itself able to loan debt-burdened Sri Lanka $200 million through a currency swap mechanism to shore up the island nation's $4 billion reserves.

By paying the three-month loan, which is expected to be completed by the end of July, Bangladesh will be able to avail itself of the London Interbank Offered Rate (LIBOR) plus 2% interest. The rate will rise to 2.5% if repayment takes up to 6 months. LIBOR is now at 0.14% for a three-month loan and 0.18% for six months.

Against the swap, Sri Lanka, which is now borrowing from different countries and lending partners to meet foreign currency needs, will hold around $250 million in local currency.

"The decision to provide the loan to Sri Lanka is taken based on Bangladesh's foreign currency reserve position," Bangladesh Bank spokesperson Serajul Islam told Nikkei Asia.

Bangladesh received over $21 billion in remittances during the last fiscal year -- a figure that the finance minister expects to rise to $25 billion this year. The country's exports rake in nearly $40 billion annually.

Things are tougher in Sri Lanka, whose economy experienced an "unprecedented economic downturn" after its tourism sector -- a major source of revenue -- was decimated by the COVID-19 pandemic, according to the latest World Bank's Sri Lanka Development Update.

Sri Lanka's economy contracted 3.6% in 2020 and its public and publicly guaranteed debt are estimated to have increased to 109.7% of GDP, the update noted.

Fitch rated Sri Lankan sovereign credit at CCC in December last year while Moody's gave it Caa1, compared with Bangladesh's BB- by Fitch and Ba3 by Moody's.

However, Bangladesh still has concerns.

On June 3, the government submitted its annual budget for fiscal 2021-22 for $70.9 billion, much of which is dependent on foreign borrowing of about $13.8 billion. It comes at a time when the country's external debt is already growing: Debt stood at $70.7 billion in December 2020, a 16% hike from March 2020.

Analysts say that despite the relatively small loan to Sri Lanka -- compared to the size of Bangladesh's foreign reserves -- Bangladesh risks not collecting on the loan in a timely fashion, as Sri Lanka's economy may continue to slump.

Besides, there are a number of short-term loans that Sri Lanka will have to pay off soon, potentially forcing Colombo to seek credit from other sources.

Salehuddin Ahmed, former governor of Bangladesh's central bank, says his country's foreign reserves are quite adequate and the debt service liability is comparatively small. "We are providing Sri Lanka only $200 million," he said. "It's not a big deal."

Colombo is paying a sovereign guarantee and the return is quite good. LIBOR plus 2% interest is much higher than Bangladesh receives by investing in foreign bonds, he said.

"We have gained some economic resilience. Our macroeconomic indicators are good. Reserves are high, the inflation rate is low, growth is reasonable, and per capita income is in a good position," said Ahmed, who is also a professor at the business school of BRAC University in Dhaka.

"Bangladesh may not be a permanent lender at this moment. But we have no problems with small loan requests," he added.

Ahsan H. Mansur, executive director of Policy Research Institute of Bangladesh, said the country is still aid-dependent and not strong enough to be a major creditor.

"But due to geopolitical concerns we have to offer Sri Lanka a loan, as we are a friendly neighbor," said Mansur, who also served as a senior official at the International Monetary Fund. "We have gained some strength. We may not be able to provide billion dollar loans but we can at least give some million dollar ones."

Mansur said that as far as risks go, the balance of payment situation of Sri Lanka is very weak and the country has other repayment obligations, which exceed its foreign exchange reserves. "In all likelihood, Sri Lanka may not be able to repay [Bangladesh's loan] soon," he said.

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