EIU puts Bangladesh after Pakistan, Sri Lanka in financial risk

In Asia, Bangladesh is just behind Pakistan and Sri Lanka in terms of financial risk, signifying the potential for investment or business ventures to incur losses, according to the Economist Intelligence Unit (EIU).
In its latest assessment of global sovereign credit risk titled 'No Return To Cheap Money", the EIU predicts that while financial risk has alleviated in Asia, there are still several countries, notably Sri Lanka and Pakistan, that will remain susceptible in the current fiscal year 2023-24.
The EIU's report, published on Thursday, highlighted how stringent financing conditions will impact country risk. While the EIU report acknowledges some progress in Asia, it also notes that vulnerabilities hang on.
In the critical indicators for sovereign risk in selected emerging Asian markets, the research and analysis division of the Economist Group cautions that Bangladesh may confront a fiscal deficit exceeding 5 per cent of its GDP in FY24.
Regarding the assessment of external financing requirements, the London-based unit forecasts that Bangladesh's foreign exchange reserves may fall short by as much as 60 per cent in meeting these requirements.
Zahid Hussain, former chief economist of the World Bank's Dhaka office, supported the EIU's estimate on forex reserves, as he said that rapidly depleting reserves and a fiscal deficit are major contributors to inflation-leading to a crisis in the standard of living in Bangladesh.
In terms of financial risk in Asia, the report ranks Sri Lanka and Pakistan in the first and second positions, with no other countries facing such multitute of risk.
Bangladesh swiftly recovered from the Covid-19 pandemic and global economic challenges through the adoption of prudent policies.
However, the economy now encounters significant challenges, including high inflation, a fuel crisis, a fragile banking sector, a trade deficit, depleting foreign exchange reserves, a balance-of-payments deficit and a revenue shortfall.
The report says the country faces significant off-budget liabilities, amounting to up to 20 per cent of the GDP.
The revenue shortfall may exert major downward pressure in the coming days. Consequently, the government will need to increase its reliance on large amounts of loans from various sources, including foreign sources, to meet these liabilities.
Bangladesh's fiscal deficit, primarily the budget deficit, has been revised for FY23 to 5.1 per cent of the GDP, compared to the original target of 5.5 per cent.
According to the EIU report, Bangladesh's public debt to GDP ratio is forecasted to be moderately good, at less than 40 per cent in FY24.
The foreign currency-denominated public debt as a percentage of GDP is more favorable at 10 per cent, as per the report. currently, Bangladesh ranges between 10 and 30 per cent.
The total external debt service due as a percentage of exports of goods, primary income and remittances is projected to be less than 10 per cent, according to the report.
Interest payments on debt have already become the second-largest item in the government's operating expenditure. The additional revenue shortfall will further burden the government's debt-servicing liability.
Moody's downgrade has also eroded Bangladesh's creditworthiness.
Economist Zahid Hussain believes that adopting free-floating exchange rates and removing interest rate barriers can help mitigate the risks.
"Fiscal austerity measures should be implemented to address both high-risk factors," Hussain said.
"Financial support from multilateral institutions can boost foreign exchange inflow," he added.
Zahid Hussain said, "The government's current measures regarding remittances are not functioning effectively and should align with the actual ground realities. Remittances to our country have declined due to illicit informal money transactions, even as the outflow of migrant workers has surged."

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