Bangladesh’s balance of payments faces moderate risks among four South Asian countries due to a sharp decline in foreign exchange reserves, according to global credit rating agency Moody’s Investors Services.
The American company said in its report: “Bangladesh has a moderate vulnerability to balance of payments crises.”
The report said that Pakistan and Sri Lanka are the most vulnerable to balance of payments crises among the four South Asian countries, including India.
The BoP summarizes an economy’s economic transactions with the rest of the world. A balance of payments crisis occurs when a country struggles to make international payments due to a lack of reserves.
Bangladesh’s foreign exchange reserves fell to $19.5 billion on Tuesday from a record high of about $40.7 billion in August 2021 due to higher import payments driven by rising commodity prices against lower remittances and export earnings in the past 18 months.
There are no signs that the reserve will recover in the short term as the factors behind the decline remain in place.
India’s reserves reached $595 billion in the second quarter of 2023, while they reached $13.03 billion in October for Pakistan, and $3.5 billion on November 3 for Sri Lanka.
Moody’s said countries’ low trade openness and weak diversified export baskets, coupled with weak macroeconomic policy management and high political risks, contributed to lower foreign exchange reserves to buffer against shocks.
India is the least vulnerable, a reflection of its larger and more diversified export sector, as well as better management of macroeconomic policy that supports its access to adequate foreign exchange reserves.
“Pakistan, Sri Lanka and Bangladesh will remain more vulnerable to balance of payments crises due to their small and concentrated export sectors.”
He added that India will be more resilient to external shocks, but in the absence of higher trade openness, it is likely to continue to face challenges in increasing its long-term growth potential and creating sufficient employment opportunities for the youth and growing population.
Moody’s said Bangladesh’s well-established ready-to-wear sector means its export performance is stronger than Sri Lanka and Pakistan.
The country has recorded current account surpluses in some years, allowing it to accumulate modest foreign exchange reserves.
Bangladesh also has better fiscal policy effectiveness and lower domestic political risks, the credit rating agency said.
“However, a small and concentrated export sector, coupled with declining foreign direct investment, is likely to erode the competitiveness of its exports. As a result, Bangladesh may record a structural current account deficit in the near to medium term.”
According to the report, falling exports as a share of GDP means that the devaluation of South Asian countries’ currencies is unlikely to raise their freight receipts significantly enough to mitigate the balance of payments shock.
Pakistan and Bangladesh have the lowest level of exports at 10.5 percent and 12.9 percent of GDP respectively. Sri Lanka and India’s exports amount to 21.5 percent and 22.4 percent of GDP.
Referring to UNCTAD’s diversification index, Moody’s said Bangladesh has the least diversified exports dominated by the ready-made garment sector, which accounts for about 85 percent of the country’s revenue from shipping goods.
High import tariffs discourage the integration of the four countries into the global value chain because these tax measures protect domestic companies from competition and discourage exports.
Bangladesh, Pakistan and Sri Lanka have much weaker infrastructure compared to India, which contributes to higher trade costs.
“Inefficient customs procedures, burdensome documentary requirements, time delays and high costs of trade operations further restrict economic ties,” the report said.
South Asian countries have fewer free trade agreements, which limits their access to other countries’ markets. In the long term, reduced trade openness will affect growth potential and job creation capacity, increasing social risks.
“This will affect the four countries,” she added.
In the overall comparison, Moody’s said, Bangladesh, Pakistan and Sri Lanka fell further in several areas, including political stability, governance, infrastructure, trade policies and labor quality.
“Their much weaker attributes will hamper their ability to reliably develop and diversify export sectors.”
In addition, the three countries face macroeconomic imbalances to varying degrees, which will further constrain the ability to invest in the infrastructure and education needed to support external sector development.
Moody’s kept its credit ratings unchanged for the four countries: Bangladesh’s rating was B1 stable, India’s Baa3 stable, Pakistan’s Caa3 stable, and Sri Lanka’s Ca stable.
In May, the agency downgraded Bangladesh by one notch to B1 from Ba3 for the first time since the agency began rating the country in 2010.