Bangladesh and Sri Lanka are two friendly South Asian neighbors. Official diplomatic connections between these two countries began in 1972; however, their relationship dates back much further. Shared culture and colonial history have enriched the Bay of Bengal and Indian Ocean relationships. Both nations have maintained a mature association through numerous challenges. Bangladesh has consistently been a reliable friend, providing mutual support in achieving common goals.
Sri Lanka faced economic difficulties and sought financial assistance from its allies. In response, Bangladesh extended a loan of $200 million from its foreign reserves to Sri Lanka, aiding the struggling South Asian economy’s recovery from an economic shock in September 2021.
Why Sri Lanka Needed the Loan?
Sri Lanka encountered financial troubles due to extensive borrowing, particularly from foreign sources. After the end of its civil war in 2009, Sri Lanka experienced rapid economic growth, with its GDP expanding from 3.5% in 2009 to 8.4%, 9.1%, and 9.1% in the following years. However, unsustainable increases in government spending and the implementation of government-funded mega-projects, such as the Hambantota Port, which struggled to generate revenue, contributed to this growth.
Subsequently, Sri Lanka’s growth plummeted, reaching 2.3% in 2019 (pre-COVID) and an estimated -3.6% in 2020. External debt as a percentage of gross national income rose from 39% in 2010 to 55% in 2014, and further to 69% in 2019, primarily originating from the public sector. The Spring 2021 World Bank economic update indicated a high risk of debt sustainability for Sri Lanka, leading to credit rating downgrades.
In this challenging situation, Bangladesh stepped in to bolster Sri Lanka’s dwindling foreign reserves and alleviate pressure on its exchange rate. In August 2021, the central bank disbursed the loan to Sri Lanka through a currency swap. This marked Bangladesh’s first loan to another country, reflecting its commitment to strengthening commercial ties with its neighbors. As Bangladesh is set to graduate from its status as a Least Developed Country (LDC) in 2026, fostering economic connections with neighboring nations becomes crucial.
Sri Lanka Repays the Entire Debt
Initially agreed upon in 2021, the currency swap deal stipulated that Sri Lanka should repay the loan within three months at the London Interbank Offer Rate plus a 2 percent interest rate, with the repayment period set to conclude in May 2022. However, Sri Lanka struggled to repay the loan due to a worsening domestic economic crisis, ultimately declaring itself bankrupt. Consequently, the country requested multiple extensions to repay the debt.
While some analysts doubted Bangladesh’s ability to collect the loan promptly, given Sri Lanka’s ongoing economic challenges and the impending payment of other short-term loans, the island nation defied expectations. Remarkably, Sri Lanka repaid the entire $200 million loan to Bangladesh, along with $25.527 million in interest. The final installment of around $50 million was paid on September 21, following payments of USD 100 million on September 2 and $50 million in the first installment on August 17. This repayment occurred at a time when Bangladesh’s foreign exchange expenditure was outpacing its earnings.
Friendship Among Neighbors
Bangladesh’s decision to assist Sri Lanka was rooted in the spirit of friendship and good neighborly relations. Many perceived this as Bangladesh’s endeavor to transition from being a recipient of aid to becoming a helping nation, showcasing its growing economic strength by offering substantial support to Sri Lanka. This move was surprising to some, given the differing development levels of the two countries. Nevertheless, the loan aimed to alleviate Sri Lanka’s foreign exchange challenges despite its higher per capita income compared to Bangladesh.
While Bangladesh may not be a permanent lender at this moment, it remains open to small loan requests. “Due to geopolitical concerns, we felt compelled to offer Sri Lanka a loan as a friendly neighbor,” said Mansur, who also served as a senior official at the International Monetary Fund. “We have gained some strength. While we may not be able to provide billion-dollar loans, we can certainly offer million-dollar ones,” he added.
Sri Lanka highly values its friendly relationship with Bangladesh and is committed to further enhancing it. Bangladesh has facilitated Sri Lanka with currency swap facilities, and there is ample room for improved wealth management and international banking collaboration. Bangladesh welcomes investments from Sri Lanka and appreciates the contributions of Sri Lankan professionals who have made significant strides in enhancing Bangladesh’s garment, banking, and manufacturing sectors. The trade relationship between Bangladesh and Sri Lanka is developing, and tourism is on the rise. It is hoped that centuries of shared history will continue to unlock the potential of both countries in the future, as a friend in need is indeed a friend indeed.