Domino Effect of Sri Lanka: Are other South Asian Economies Vulnerable?


Considering assessment of economic prospects by the Asian Development Bank April Outlook, the Debt servicing percentage assessed by the World Bank and Forex reserves, it is estimated that India, Nepal and Bangladesh have adequate cushion for now and a domino effect of Sri Lanka is not anticipated in the near future


The acute economic crisis in Sri Lanka has led to concerns emerging in other South Asian countries of a similar situation that may lead to rising food prices, long power cuts, queuing for fuel and widespread protests.


There have been several reports in South Asian media in India, Bangladesh and Nepal of possibility of a similar economic crisis in their respective countries.


How real is the threat of a meltdown in these three economies based on what happened in Sri Lanka?


Essentially several cumulative factors are seen to be responsible for the present fears of a meltdown not just in economies but in the crucial area of food security.


Firstly two years of COVID 19 has been disastrous for smaller economies particularly those dependent on tourism and remittances as Nepal just as Sri Lanka has been.


This is followed by the geopolitical and economic impact of the Ukraine crisis which has led to rising fuel prices amongst other factors.


While South Asian economies are not dependent on Russia for energy rise in global oil price following the Ukraine war and sanctions on Russia has led to spiraling costs of fuel and the consequent impact on related vectors.


While Sri Lanka had a preceding event that had led to economic downturn the Eastern Sunday terrorist attack in April 2019 in Nepal the political crisis in 2021 has had a similar impact.


Yet despite these factors there is a reasonable chance that the other economies under consideration in South Asia – India Nepal and Bangladesh are not likely to face a Sri Lanka like situation.


Here is an assessment based on a number of vectors and sources.


ADB Forecast April 2022


Asian Development Bank (ADB) in the latest report of outlook on Asian economies has the following predictions for the three countries –


Bangladesh - GDP growth in FY2023 is expected to edge up to 7.1%. The headline inflation rate rose to 6.1% in December 2021 from 5.3% in December 2020, food inflation increased to 5.5% from 5.3%, and nonfood inflation to 7.0% from 5.2%. The main uncertainty is the fallout on the global economy from the Russian invasion of Ukraine Higher prices for oil and imports and the loss of export sales beyond those built in the present forecasts are the key risks to the outlook And as ever extreme weather events are always a possibility as per the ADB.


India GDP is forecast to grow by 7.5 % in FY 2022 and 8.0 % in FY 2023 driven by strong investment growth with public investment helping crowd-in private investment as per the ADB.


The main risks are uncertain global economic conditions renewed COVID- outbreaks and new variants monetary policy tightening in the USA and unexpected and sharp rises in commodity prices.


The Russian invasion of Ukraine could lead to even higher oil prices and supply disruptions pushing up prices of commodities and further raising the inflation rate as per the ADB.


Aas per the ADB Nepal GDP growth is forecast to increase to 3.9 percent as the economy further normalizes on increasing COVID vaccine coverage setting a path to steadily higher growth. Growth over the forecast horizon will be supported by accommodative macroeconomic policies even though the recovery in tourism will be delayed by slowing growth in advanced economies


To underpin durable economic growth the government in January 2022 has entered into an International Monetary Fund support program that is aligned to its relief restructuring and resilience plan with three main objectives creating the financial room for increased expenditure on health, social assistance and job growth to mitigate the economic impact of the COVID-19 pandemic. preserving macroeconomic and financial stability. and supporting a reform agenda for sustained growth and reducing poverty over the medium term as per the ADB.


On the other hand Sri Lanka Growth is expected to slow to 2.4 % in 2022 and 2.5 % in 2023.

The ADB states that the outlook is clouded by Sri Lanka’s debt overhang and large fiscal and external financing needs GDP growth will be constrained by low foreign exchange reserves and macroeconomic imbalances. including double-digit inflation.


The other aspects are lower harvest and tighter food supply, lower agriculture and industrial production and COVID 19 combined with geopolitical fallout from the Russian invasion of Ukraine will add to external pressure on Sri Lanka through reduced exports to these

countries and higher oil prices


Debt Servicing


On Debt servicing World Bank Data on Total debt service (% of exports of goods, services and primary income) which Total debt service to exports of goods, services and primary income. Total debt service is the sum of principal repayments and interest actually paid in currency, goods, or services on long-term debt, interest paid on short-term debt, and repayments (repurchases and charges) to the IMF is also dismal for Sri Lanka for the year 2020.


While Bangladesh has a value of 9.9 percent, Nepal 12 percent, India 15 percent Sri Lanka has a value of 39.3 percent indicating the challenge which is expected to have grown in the last two years up to 2022.


FOREX


In terms of Forex as per Wikipedia recorded during the first quarter of 2022, Bangladesh has reseres f $ 44.95 Billion, Nepal 10.47 Billion, India $ 603 Billion but Sri Lanka just $ 2 Billion.


Conclusion


Considering the factors as indicated above to include the assessment of economic trajectory by the Asian Development Bank, the Debt servicing percentage by the World Bank and the Forex reserves, it is estimated that India, Nepal and Bangladesh have adequate cushion for now and a domino effect of Sri Lanka is not anticipated in the near future.

Moreover in anticipation of a possible crisis countries as Nepal have already gone to the IMF, whereas Sri Lanka is only now looking at this option.

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