Mohammad Sharif Sarker’s factory is in many ways a model. Spread over three spacious floors in Ashulia, a suburb of Bangladesh’s capital Dhaka, hundreds of young women and men sit in orderly assembly lines, sewing machines before them, ready to stitch trendy flat-brim caps for export.There’s only one problem: Sarker and his workers are sitting in the dark, their machines idle. Ashulia is currently in the middle of one of the daily mandatory power cuts that the government introduced in July, as Bangladesh grapples with a severe energy crunch. And with a recent government-mandated 50 per cent increase in fuel prices, Sarker has opted to keep the power off while his workers take a lunch break, rather than fire up an expensive diesel-powered generator. “The sector will be unsettled if the price of everything keeps going up,” Sarker says. “It is the workers who will ultimately carry the burden.”Factories like his have helped propel Bangladesh, previously one of the world’s poorest countries, to become the third-largest garment exporter after China and Vietnam according to World Trade Organization data — notching up significant gains in income, education and health along the way. In South Asia, a region of almost 2bn people across India, Pakistan and Sri Lanka, Bangladesh stood out for its development and success in fostering a globally competitive goods export sector. Bangladesh, previously one of the world’s poorest countries, has become the third-largest garment exporter © Mustasinur Rahman Alvi/ZUMA/ShutterstockBut now, along with most of its south Asian neighbours, the country of 160mn people is being rocked by soaring prices of energy and food following the Covid-19 pandemic and Russia’s invasion of Ukraine. These have led to energy shortages and rising import bills that are, in some cases, straining their ability to keep up with debt payments. The regional economic crisis in south Asia has been swingeing in its casualties, claiming countries whose governments pursued reckless spending policies, such as Sri Lanka, alongside model development economies. It now threatens to reverse hard-won, generational gains made in the world’s most populous emerging market region, which sits at the geopolitical junction where Indian and Chinese interests meet. Beijing is among the leading creditors of both Sri Lanka and Pakistan — and India, which is wary of China’s influence on its smaller neighbours, is watching for signs that the crisis might allow it to strengthen its hand.“The crisis is punishing countries with an array of different economic performances and models,” says Mark Malloch Brown, a former UN and World Bank official who now heads the George Soros-backed Open Society Foundations. “Bangladesh, a very internationally oriented economy known for its garment sector, is getting killed by economic conditions elsewhere in the world.”Better insulatedSri Lanka in May became the first Asia-Pacific country to default in two decades, with the economic mismanagement of President Gotabaya Rajapaksa triggering mass street protests in Colombo that forced him to flee the country on a military jet in July. Pakistan, where authorities have charged former leader Imran Khan on terrorism offences, also appears to be entering a period of enhanced political volatility, even as it seeks to nail down financing from the IMF and bilateral creditors that would allow it to avert default. Smaller Nepal and the Maldives are also vulnerable to the fallout from global inflation.
Bangladesh had until recently been better insulated from recent economic shocks, in part because of its successful export sector. But Prime Minister Sheikh Hasina’s government in July approached the IMF for a loan to try and shore up its foreign currency reserves and help the low-lying country build resilience against climate change. Bangladesh is seeking about $4.5bn from the fund, and as much as $4bn more from other lenders, including the World Bank and Asian Development Bank. In addition to raising fuel prices, which triggered protests, Bangladesh’s government has cut school and office hours to conserve energy and introduced import restrictions on luxury goods to protect its foreign reserves. South Asian countries share much in common with other emerging markets from Ghana and Ethiopia to Chile, where long-festering problems have been brought to a head in a year of the most acute sovereign debt crises seen since the 1980s. Many South Asian countries are heavily dependent on imports of energy resources, such as crude oil and coal and foodstuffs, including cooking oil. Bangladesh, for example, was forced to shut its diesel power plants in July due to import shortages. Some of these countries also owe money to China for projects pursued under Beijing’s Belt and Road Initiative, adding a layer of geopolitical risk to any coming debt workouts for regional economies in peril. AHM Mustafa Kamal, Bangladesh’s finance minister, insists that while “everybody is under pressure”, Bangladesh is not in danger of falling into the deep financial distress of its neighbours. “Bangladesh is in no way connected” to what is happening in countries like Sri Lanka, he says. Creditors “know our projects, know our balance sheet very well. [Bangladesh] is a good place to offer money”. He highlighted the inauguration in June of the $3.6bn Padma Bridge, a Chinese-built but domestically financed project near Dhaka that will drastically cut travel times for people and goods.A protest against prices of fuel oil, urea fertiliser, foodstuff and daily commodities and transport fares in Dhaka in August © Abu Sufian Jewel/ZUMA/ShutterstockThe IMF says that with a debt-to-GDP ratio of 39 per cent — lower than its neighbours — Bangladesh is “not in a crisis situation”, but warns the country is vulnerable to the “huge uncertainty surrounding global economic developments”. Yet the regional economic ructions have caused concern in India, which has itself steered clear of crisis but, as of late July, had committed $3.8bn of aid to its bankrupt neighbour, Sri Lanka, in loans and other assistance. Malloch Brown says the experience of South Asian countries shows how the pressures on emerging markets are part of a wider “systemic crisis which really endangers the global economy”. He has called for an international policy response akin to the Marshall Plan extended to war-ruined countries after the second world war. These strains are now resonating across the global south.Rashed al Mahmud Titumir, an economics professor at Dhaka University, argues that the international community should step in to protect the hard-won gains of Bangladeshi workers. “You see the working class has a kind of resilience,” he says. “The west and the [lending] institutions should really look at that . . . it should not be allowed to free fall.”Oil drums in a warehouse in Narayanganj, Bangladesh. In addition to raising fuel prices, the government has cut school and office hours to conserve energy © Joy Saha/ZUMA/ShutterstockBoom time Following the end of British colonial rule on the Indian subcontinent in 1947, Bangladesh became a province of Pakistan, before gaining independence in 1971 after a devastating civil war that left the new country stricken by famine.The economy made significant strides in the decades that followed. Low-skilled manufacturing took off, helped by tax breaks and duty-free access to wealthy markets, creating mass employment for women as well as men. Overseas remittances also provided much-needed capital.Poverty halved from 58.8 per cent in 1991 to 24.3 per cent in 2016, while education and health indicators such as literacy and infant mortality also improved. Bangladesh’s per-capita income of $2,500 is now higher than that of both India and Pakistan. The UN plans to reclassify Bangladesh from “least developed country” to developing-country status by 2026.“Bangladesh was nowhere, not [even] on the map, as an economy,” Kamal says. That has changed “through our hard work”.Since the 1980s, Bangladesh’s garment industry has grown from 4 per cent to 80 per cent of the country’s exports, which total more than $50bn, according to the country’s garments exporters association. Most employees are women. “This sector has addressed the unemployment problem a lot,” says Sarker, himself a former assembly-line worker. “Before there were child marriages; now girls have jobs.”Yet this growth has been blighted by labour exploitation and dangerous working conditions, including the collapse of the Rana Plaza factory building in 2013 that killed more than 1,000 people. Sarwer Hossain, a union leader in Ashulia, says that working conditions have since improved but more progress is needed, with injuries and deadly accidents continuing. The minimum wage of 8,000 taka ($84) a month has also not increased since 2018, he adds. This has left workers vulnerable to inflation, which stood at 7.5 per cent year-on-year in July.Like many workers in Sarker’s cap factory, 18-year-old Rezwana Akhtar left the rural poverty of her village a year ago for a job in the city. While many of her school friends are now married and outside the workforce, even the minimum wage helps give workers like Akhtar an income and independence. But it remains a difficult life — her anxiety compounded by the recent inflation in her rent.“In the villages, we did not have jobs,” she says. “But life is harder here in the city. In the village I could go to school and I had food to eat. Here, everything is expensive.”
Her story underscores not only how marginal the gains from this global industry are, but how easily they can be swept away. The garments sector helped shield Bangladesh during the pandemic, with exports rising to a record as locked-down consumers overseas shopped for clothes online. But it is now starting to feel the strain. The IMF warns that demand for Bangladesh’s cornerstone industry’s products will suffer due to slowing growth in major buyers in the US and European countries. “This is definitely going to affect export performance going forward,” the fund says. The country’s garment makers import everything from raw materials to machinery. David Hasanat, chair of Dhaka-based manufacturer Viyellatex Groups, says the price of cotton had increased more than 50 per cent, but that his company was only able to pass on about 10 per cent of that cost to buyers. “Eventually [the higher costs] will give us more pain,” he says.The rising import bill has taken a toll on Bangladesh’s foreign reserves, which have fallen to less than $40bn, from more than $45bn last year. While this remains enough for about five months’ worth of imports, Dhaka university’s Titumir says he expects it to fall below three months’ import cover — the level economists often consider critical — by the end of the year. He argues that the situation is laying bare “cracks in the economy”, from Bangladesh’s slowing poverty reduction to its stagnating wages and rising debt. He argues that this has “exposed the [success] story that we hear as a kind of a mirage”. ‘Taking flight from riskier assets’ Steve Cochrane, chief Asia-Pacific economist for Moody’s Analytics, argues that because South Asian countries did not suffer as much as other regions during the 1997-98 Asian financial crisis, they were not compelled to undertake the economic reforms that would have insulated them from the worst of this year’s crisis.Unlike Bangladesh, Sri Lanka and Pakistan “have never really been forced to try to improve economic policymaking”, he says. “Rather, they are engaged in a seemingly endless rounds of negotiations with the IMF, with individual creditors and with internal constituencies, that never seem to come to an end and seldom result in permanent policy changes.” Kalabogi village in Khulna. Bangladesh had until recently been better insulated from recent economic shocks, in part because of its successful export sector © Sultan Mahmud Mukut/SOPA/ShutterstockSri Lanka, in particular, was storing up problems long before the pandemic, enacting sharp tax cuts in 2019 while borrowing heavily from bondholders and countries like China for infrastructure projects that failed to generate returns. Pakistan also struggled with a low tax base and a chronically weak export sector. “What makes Pakistan and Sri Lanka stand out is that a lot of their borrowing was done in foreign currency — this is what underpinned the issues that are coming to a head now,” says Shilan Shah, senior economist with Capital Economics. “Then the impact of the war in Ukraine caused investors globally to take flight from riskier assets.”
India, with its better economic management, strong services sector and lower debt-to-GDP ratio, has remained insulated from direct spillover from its neighbours’ financial distress. However, officials in New Delhi are worried the crisis might allow Beijing to flex its regional leverage.“Sri Lanka is deemed geopolitically pretty important, given Chinese investment into Sri Lanka and the default on the port [of Hambantota], which was taken over by China,” Shah says. “That is a huge concern for India.”While talks with Dhaka on a lending facility remain nascent, IMF staff will travel to Sri Lanka this week to continue talks on a bailout with Ranil Wickremesinghe, the new president. The IMF also reached a preliminary agreement with Pakistan in July to lend $1.2bn as part of an existing $7bn assistance package, but it remains subject to approval by the Washington lender’s executive board, which is due to meet on August 29. In Ashulia, Akhtar and the other young workers worry about how they’re going to continue paying for rent and food on top of supporting families in their villages. “How much more do we need to earn to keep paying?” she asks.“All [workers’] dreams involve money,” says Hossain, the union leader. “But they don’t have alternatives other than working here. What they want is to save enough money to have a house and a good life.”