January 2023

Is Bangladesh Mirroring Sri Lanka & Pakistan?

Exploring Bangladesh’s Economic Resilience amid FX Reserve Depletion

UCB Asset Management

With Sri Lanka and Pakistan struggling to keep their heads above water due to a lack of foreign currency reserves to pay off debt and import bills, the recent dip in reserves in Bangladesh has many wondering if the country is next in line for an economic crisis.

Our study starts by delving into the reasons behind this decline in Sri Lanka and Pakistan reserves and assesses Bangladesh’s position in this context. As the depletion of foreign exchange (FX) reserves can have a notable impact on the public in terms of food and energy security, the study then aims to provide a clearer understanding of the food and energy situation in Bangladesh. In the final section, the study examines whether Bangladesh’s economic stability can sustain in 2023, allowing the country to generate significant foreign currency inflow without relying on foreign loans to meet the needs of its citizens.

Embark on this journey with us as we explore the questions that are critical to our present as well as our future – How the FX reserve was built and depleted? What differentiates Bangladesh from Sri Lanka and Pakistan in terms of avoiding a crisis?

Chapter 1 – Uncovering Why the FX Reserve Plummeted 

Sri Lanka’s economy crumbled under the weight of its foreign liabilities, with its FX reserve plummeting to a mere USD 1.7 billion and import coverage at a dire 1.0 month in Dec 2022. Pakistan’s FX reserve has been on a rollercoaster ride since 2013, reaching USD 5.6 billion in Dec 2022 with an import coverage of 1.6 months. Bangladesh’s FX reserve, however, had a period of high growth until FY 2021 but has since been on a downward trend, reaching USD 33.8 billion (USD 25.8 billion net) and an import coverage of 4.9 months in Dec 2022 – the lowest level since 2013.

In this chapter, we examine how the skyrocketing costs and prolonged delays in infrastructure projects have increased government spending and import costs, leading to a spiraling rise in debt, interest, and loan repayment in all three countries. A spike in global commodity prices further exacerbated the dire situation.

N.B. For comparison, FY 2022 corresponds to Jun 2022 for Bangladesh and Pakistan, Dec 2021 for Sri Lanka

Sri Lanka & Pakistan: How Infrastructure Dreams Turned into Economic Nightmare

Sri Lanka and Pakistan’s economic struggles stem from ill-conceived infrastructure projects where political motivations took precedence over economic feasibility, overlooking the unfavorable viability reports of these projects.

Bangladesh: Insufficient Infrastructure Led to Mega Plans

While Sri Lanka saw fruitful infrastructure investments reflected in the infrastructure score (=5 being the highest) of the World Bank’s Logistics Performance Index, Bangladesh and Pakistan did not. Even though Bangladesh continued to increase its development expenditure at a CAGR of 18.3% since FY 2013, the infrastructure score remained unchanged.

Since FY 2018, Bangladesh has been spending a higher amount than Pakistan in development projects.

The development expenditure-to-GDP ratio shows that since FY 2018, Bangladesh spent more aggressively than Sri Lanka and Pakistan on infrastructure projects.

Note that World Bank did not publish the Logistics Performance Index in 2020 due to COVID. The 2022 data are yet to be published. So, we could not compare the infrastructure score after 2018.

Bangladesh: Dense Population Added an Extra Layer of Complexity

In FY 2022, 31 infrastructure projects in Bangladesh faced cost and time overruns, with revised increase in costs totaling BDT 295 billion. Some of the projects are shown in the table below:

The construction costs per km of roads are higher in Bangladesh compared to other nations such as India, China and Europe. However, a significant portion of the construction cost in Bangladesh can be attributed to land acquisition in populous areas. On the other hand, other countries in comparison mostly had hilly areas, forests, or deserts where the infrastructures were built.

Pandemic & War: The Perfect Storm


A major reason why the cost of import increased was a hike in commodity prices in the international market. Due to COVID and the Russia-Ukraine war, production of some major commodities declined, and the global supply chain broke down. The Bloomberg Commodity Index surged 2.2x from April 2020 to May 2022. This put pressure on US dollar reserves of all three countries as imports became abruptly expensive.

Although a reversal was seen from May 2022, uncertainty regarding commodity prices still remains.

High Development Expenditure Led to Increase in Related Imports

The development expenditure of these countries was largely import-driven. While the import of intermediate goods (iron and steel scrap, clinker, limestone, coal, cement, non-ferrous metal, BP Sheet, tin plate) to carry on development projects remained somewhat stable for Sri Lanka (3.0% CAGR), both Pakistan (9.8% CAGR) and Bangladesh (8.2% CAGR) saw rising import of such goods since FY 2013.

However, both the ratios of import of intermediate goods to total import and to GDP were high and increasing in Sri Lanka. The country might have already been spending too much foreign currencies on development expenditure. On the other hand, these remained steady for Pakistan and Bangladesh.


Skyrocketing External Debt was a Natural Consequence:
Bangladesh Relatively Better Positioned


In the face of rising import costs, Bangladesh, Pakistan, and Sri Lanka have had to turn to external debt in USD to finance their imports. While the external debt of Sri Lanka has increased at a steady 3.5% CAGR since 2013, and Pakistan’s at 8.8% CAGR, Bangladesh’s has been skyrocketing at 13.2% CAGR. In the last five years alone, Bangladesh’s external debt balance has shot up by 15.9% CAGR. However, while the external debt to GDP ratio of Sri Lanka and Pakistan have soared, Bangladesh’s has stayed relatively low. Bangladesh’s external debt to GDP ratio has increased by 330 bps in the last ten years. During the same period, the external debt to GDP ratio of Sri Lanka increased by 580 bps and that of Pakistan by 910 bps.


But What is the Price of Progress?


As countries take on more external debt, the cost of repayment rises. Pakistan saw a significant increase in debt starting in 2016, with repayments surging in 2019. Sri Lanka’s debt also rose in 2012, with repayments jumping in 2018 and 2019. Bangladesh has seen a rapid increase in debt in recent years, facing a potential challenge in servicing it in the future. The external debt servicing to government revenue ratio paints a clearer picture: while Pakistan’s ratio has risen from 32.2% in 2013 to 43.7% in 2022, Sri Lanka’s ratio soared to 63.4% before dropping to 32.7%. Bangladesh, with lower debt, had a better ratio than its peers and a decreasing trend over the last decade.

The maturity of several foreign loans, with their grace periods ending soon, will take Bangladesh’s external debt repayment to USD 5.2 billion in FY 2030.


Much of the decline of FX reserves of the three countries can be attributed to ambitious infrastructural plans. High development expenditure, coupled with an increase in commodity prices, led to an increase in their import cost. The countries had to borrow from external sources to finance their imports but later faced difficulty to service those debts. As a result, their balance of payments came under pressure. In the next chapter, we will explore how the diversity and quality of foreign currency sources played a role for balancing the books i.e., balance of payments.

Chapter 2 – Balancing the Books: Exploring the Diversity of Dollar Income


The economic crisis in Sri Lanka is often attributed to the country’s dependence on tourism for earning foreign currency. The April 2019 Easter bombings, followed by the COVID-19 pandemic in January 2020, dealt a devastating blow to Sri Lanka’s tourism industry and economy.


In this chapter, we will explore the diversity of foreign currency inflow for Bangladesh in comparison to Sri Lanka and Pakistan. We explore the composition of exports, remittances, FDI, and portfolio investments as well as the diversity of export items, destinations, and remittance sources.

In the last decade, Bangladesh gradually outshined Sri Lanka and Pakistan, generating USD 82.4 billion in foreign currency inflow in FY 2022, the highest among the three countries. Sri Lanka seemed to have more diversified inflow sources before the crisis. But when the country faced severe financial troubles in 2021, its foreign currency inflow took a hit as earnings from tourism, remittances, and other services decreased. While Pakistan improved its remittance inflow in the last ten years, receiving USD 31.3 billion in FY 2022, Bangladesh’s combination of soaring goods export to an impressive USD 52.1 billion and remittance at USD 21.0 billion in FY 2022 solidified its position as the top player.


Stacking Up the Foreign Currency Inflow: Bangladesh’s Winning Streak


As foreign direct investment is relatively low for all three countries, we now dig deeper into the two major components – goods export and remittance.


RMG Dominates Bangladesh’s Exports, but Diversification might be the Key to Avoid a Balance of Payments Hit


Limited Diversification Leaves Bangladesh’s Exports Vulnerable for Future

Remittance Relies Heavily on Middle-Eastern Oil Exporters, but Diversification from the US and UK Offers a Cushion against Potential Oil Price Collapse


Overall, Bangladesh has strong sources of foreign currency inflow, particularly in the form of RMG exports and remittances. However, this overreliance on these industries leaves the country slightly vulnerable to fluctuations in demand. Despite this, Bangladesh is in a relatively better position than Pakistan and Sri Lanka. In the next chapter, we discuss into how well-intended, but technically misguided exchange rate policies have exacerbated the pressure on FX reserves in these three countries.

Chapter 3 – The Consequence of Artificially Inflated Exchange Rate Policies

Keeping the exchange rate artificially inflated may seem like a good idea for import-dependent countries, but as we have seen in Pakistan and Sri Lanka, this policy can lead to some serious consequences. Particularly in Sri Lanka, when the central bank adjusted its exchange rate policy to a free float mechanism, it led to massive inflation in 2022. This inflationary pressure was driven by the high cost of imports as well as increased pressure on domestic prices once the overvalued currency was no longer viable.


In FY 2022, Sri Lanka’s government found itself unable to maintain the artificially inflated exchange rate, leading to a depletion of FX reserves and subsequent inflation. The Sri Lankan Rupee saw a massive depreciation of 78.9%, reaching its relative PPP-implied value.

Similarly, Pakistan’s managed floating rate system from FY 2009 resulted in an overvaluation of 22.6%, but in FY 2019, the government failed to maintain the artificial rate, resulting in a depreciation of 33.8% and reaching its relative PPP-implied value. Bangladesh, which had been using a managed floating exchange rate system since FY 2013, also faced difficulties in maintaining the artificial rate of its currency, with the Taka depreciating by 23.3% in 2022.


Maintaining an Artificial Level of Exchange Rate is Unsustainable


The overvaluation of currencies made exports less competitive and encouraged capital flight to developed nations. But at the time of economic distress, the three central banks were unable to hold the artificially inflated exchange rates. As a result, their balance of payments suddenly came under huge pressure and FX reserves depleted further. Imports suddenly became more expensive, leading to a widening trade deficit and declining foreign currency inflow.

In the next two chapters, we examine the economic resilience of Bangladesh, Pakistan, and Sri Lanka in terms of food and energy security in the face of declining FX reserves.

Chapter 4 – Bangladesh’s Food Sufficiency Makes the Country More Resilient than Sri Lanka and Pakistan


Sri Lanka’s dependence on imports for basic food supplies aggravated their overall crisis. Commodity price hikes and global supply chain disruption escalated food inflation to a level where Sri Lankan citizens were making conscious choices to let go of many nutrient intakes. In August 2022, Sri Lanka experienced record-high food inflation of 84.6%, while Pakistan and Bangladesh saw rates of 35.5% and 7.91% in December 2022, respectively. Rice is the staple food in all three countries, with wheat, pulses, sugar, and sweeteners also commonly consumed. In times of economic crisis and foreign reserve shortage, it’s crucial to consider the potential impact on citizens’ access to staple food.


The last decade has seen a staggering increase in the cost of living for citizens of all three countries, greatly impacting the purchasing power and standard of living for the low and medium-income populations.

This chapter delves into the self-sufficiency of Bangladesh, Sri Lanka, and Pakistan in producing essential food items such as rice, wheat, pulses, eggs, meat, edible oil etc. We also examine the crucial role of fertilizer in food production and whether these countries can rely on their internal resources for smooth production.


Rice & Wheat: Self-Sufficient in Rice, Import Dependent on Wheat except Pakistan

Bangladesh is self-sufficient in terms of producing rice and meeting its citizens’ needs. While Pakistan always imports a negligible amount of rice, Bangladesh and Sri Lanka have increased import dependency on rice with 3% and 15% of the total consumption respectively in 2022.


Sri Lanka heavily relies on importing wheat to meet the needs of its citizens. Pakistan can produce enough wheat to meet its own needs. In the last two years, Bangladesh made significant strides in reducing its dependency on wheat imports, going from 87% in 2020 to a more manageable 61% in the first eight months of 2022. Ramping up local production diluted the impact of the wheat crisis followed by the Russia-Ukraine war. In 2021, Russia (21% of total wheat import) and Ukraine (17%) were the two leading wheat import sources along with India (24%) and Canada (23%).


Sweeteners: Bangladesh doing better than Sri Lanka


Sweeteners are key ingredients for producing food in Bangladesh, Sri Lanka, and Pakistan. Bangladesh relies heavily on imports for these ingredients, with around 56% of its sugar components coming from outside the country. Sri Lanka’s dependency on imports for sugar is even higher, sitting at a staggering 81%. On the other hand, Pakistan is practically self-sufficient in sugar components, with a mere 0.5% dependency on imports.


Pulses: Bangladesh in a Better Position than its Neighbors


While Pakistan and Sri Lanka are highly dependent on the imports of pulses, Bangladesh produces relatively more pulses with a self-sufficiency ratio of 31% in 2021.


Edible Oil: All Three Countries are Still Import-Dependent

Edible oil is a staple for many South Asian households. Sri Lanka saw a decrease in local production, going from 50% of total consumption in 2012 to 28% in 2020. On the other hand, Bangladesh has seen an increase in production, rising from 14% in 2012 to 26% in 2020. Despite these changes, all three countries are still heavily dependent on imports to meet their edible oil needs, with local production only accounting for an average of 30% of total consumption.


Fish Production: Bangladesh – the South Asian Powerhouse


In fish and seafood production, Bangladesh stands out among its neighboring countries, Sri Lanka and Pakistan. In 2020, Bangladesh’s fish production was a staggering 4.5 million metric tons, at least seven times more than what was produced in Sri Lanka and Pakistan combined. While the average fish consumption per capita is around 20 kg annually in Sri Lanka and Bangladesh, it’s significantly lower in Pakistan, with per capita consumption at only 2 kg.


Meat, Eggs & Milk: Pakistan and Bangladesh are Well-Equipped


Eggs, milk and dairy products, and meat are important sources of nutrition. Pakistan is well-supplied with livestock and the production of meat, egg, and dairy products. Bangladesh posits itself in a better situation than Sri Lanka in meeting citizens’ nutrition needs.


Fertilizers: Local Urea Production Keeps Bangladesh in a Better Position


Fertilizer is a vital component in ensuring a steady supply of crops. Bangladesh is a major producer of urea, which makes up 80% of the country’s total fertilizer production. Around 1.0 million metric tons of urea are produced in Bangladesh annually, and around 30% of the total fertilizer consumption is met by local production. Sri Lanka, on the other hand, heavily relies on imports, specifically urea, which accounts for 55% of total fertilizer imports. The country only produces phosphate rock and only 6% of total fertilizer consumption is met by local production. Pakistan is even more dependent on fertilizer imports, with only 1.8% of the total consumption met by locally produced fertilizers.


Overall, Bangladesh has strong sources of foreign currency inflow, particularly in the form of RMG exports and remittances. However, this overreliance on these industries leaves the country slightly vulnerable to fluctuations in demand. Despite this, Bangladesh is in a relatively better position than Pakistan and Sri Lanka. In the next chapter, we discuss into how well-intended, but technically misguided exchange rate policies have exacerbated the pressure on FX reserves in these three countries.

Chapter 5 – Powering the Present


As we look back on the tumultuous events of 2022, one of the most devastating was the Russia-Ukraine war, which sent shockwaves to the global energy market and caused severe disruptions to supply chains. Bangladesh, along with Sri Lanka and Pakistan, heavily relies on imported petroleum and crude oil to fuel the economy and power their homes and businesses. While Bangladesh’s dependency on petroleum import is lowest among the three countries, petroleum import as a % of Total Import has increased to 13% from 8% YoY in FY2021-22. Both Bangladesh and Sri Lanka have increased their dependency on these imports over the past decade, while Pakistan has been able to decrease its dependence on imported petroleum.


In this chapter, we delve into the energy landscape of Bangladesh, Pakistan, and Sri Lanka, comparing their energy demands, generation methods, and the diversity of sources they rely on.


Energy Consumption: Low Per Capita Energy Consumption in Bangladesh Can be a Blessing in Disguise

Energy consumption encompasses electricity, transportation, and heating. In 2021, Pakistan had the highest total energy consumption at 1,071 Terawatt-hours (TWh), while Bangladesh consumed 459 TWh and Sri Lanka 106 TWh. In average per capita energy consumption, Sri Lanka, due to its low population, takes the lead with 4,878 kilowatt-hours (kWh) per person, followed by Pakistan with 4,630 kWh and Bangladesh with 2,712 kWh.


Electricity Generation: Bangladesh Made Strides in Access to Electricity, Per Capita Electricity Generation is Still Lower than Pakistan and Sri Lanka


In 2020, 96.2% of the total population in Bangladesh had access to electricity, a sharp increase from 59.6% in 2011. While 100% of the total population in Sri Lanka had already gained access to electricity, Pakistan witnessed only 75.4% of its population with access to electricity in 2020.


Pakistan consumes a larger amount of electricity compared to Bangladesh and Sri Lanka. In 2021, the total amount of electricity consumption was 150.2 TWh in Pakistan, 80.6 TWh in Bangladesh and only 16.4 TWh in Sri Lanka. Per capita, electricity generation was 751 kWh in Sri Lanka in 2021, much higher than the amount of electricity generation per person in Bangladesh and Pakistan with 476 kWh and 649 kWh, respectively.


Energy Sources: Bangladesh Reliant on Natural Gas; Sri Lanka & Pakistan More Diversified


Sri Lanka is a melting pot of energy sources, with a diverse mix of bioenergy, oil, solar, wind, hydropower, and coal powering the nation. In 2021, 36% of the electricity production was sourced from oil, 31% from hydropower, and 26% from coal. Sri Lanka has been heavily dependent on oil and hydropower in the last decade. However, Sri Lanka does not produce any electricity from natural gas.


The fuel mix in Bangladesh is primarily dependent on natural gas. 68% of the total electricity generated originated from gas in 2021, while 22% and 13% of the electricity produced is sourced from oil and coal, respectively.


Crude oil, hydropower, coal, and gas are the four leading sources from which Pakistan acquires its energy consumption. In the past decade, Pakistan has reduced its dependency on natural gas and oil and increased heavily on nuclear and coal.


Over the years, Bangladesh’s reliance on various energy sources has increased. With its own natural gas reserves and a large portion of its electricity generated from gas, the nation is less affected by high import costs brought on by rising oil prices. Moreover, the average energy consumption per capita is lowest in Bangladesh compared to Sri Lanka and Pakistan, increasing its chance to better sustain economic uncertainty in the future.

Navigating the FX Crisis: Bangladesh’s Remittance Lifeline Makes it Better-Equipped Compared to its Neighbors


In the last two chapters, the paper has discussed food and energy security in times of FX reserve crisis in Bangladesh, Pakistan, and Sri Lanka. The question is whether Bangladesh can sustain providing its citizens with necessities during the depleting FX reserve in 2023. 


* The private sector has USD 17 bn of short-term external debt outstanding as on Sep 2022. If 25-30% of this amount has to be settled in the 2023 cycle, it will put additional pressure on the FX reserve.

** Fertilizer import was USD 2.9 bn in FY 2022 and we assume a 10% increase for 2023. The price may however increase.

*** Crude oil and POL was USD 12.1 bn in FY 2022. We assume import of 70 mn barrels of oil and petroleum products in 2023 to meet our necessities. Gov. import of LNG was 215 BCF in FY 2021. We assume while the number will decline in 2023, there will still be some demand for LNG import.


We hypothesize that Bangladesh needs to import fertilizer and oil to perform operations in the agricultural, power, transportation, and industry sectors. The country will be considerably affected if it fails to import these crucial intermediate goods. Furthermore, Bangladesh will have to repay USD 2.7 billion in 2023 to foreign lenders. 

In assessing Bangladesh’s ability to generate enough foreign currency to pay for fertilizer and oil import and foreign loan repayment, it stands out that Bangladesh’s remittance inflow through legal channels was USD 21.4 billion in 2022, which provides ample room for the country to import the items that are needed to meet the necessities of its citizens. Additionally, with 1.1 million workers going abroad for employment in 2022, we expect the remittance inflow to grow by at least 3.0% in 2023 to ~USD 22.0 billion.

Our study shows that Bangladesh is in a better situation than Sri Lanka and Pakistan to avoid the crisis assuming there will not be a major deviation in commodity and fertilizer prices and short-term FX debt obligation from our estimation. However, there is no scope for complacency. Properly aligned FX policies and timely measures can benefit the entire nation as well as the government.

Doing the right things in anticipation of a crisis is far superior to doing those things during a crisis.


Disclaimer: This material contains opinions of UCB Asset Management and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular sector, security, and strategy or investment product. If any person takes any action relying on this document, he/she shall be responsible solely by himself/herself for the consequences thereof and any claim or demand for such consequences shall be rejected by UCB Asset Management or by any court of law. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without written permission of UCB Asset Management.