Investment in infrastructure, financial crisis and the Sri Lanka lesson

Large physical infrastructure projects, particularly in the communication sector, are hugely appealing to politicians. Voters see infrastructure development as synonymous with economic development and so this gives the politicians an edge in the vote market. They can use these visible projects to compare their capital city with Paris, Switzerland or Singapore. They can say those countries have MRT and expressways and so do we. And the biggest attraction of these projects is the seamless scope for corruption. After all, we silly citizens get all riled up over a 50 per cent of price hike in soybean oil or onions, but are all praise for the politicians even if the expenditure on the infrastructure projects goes up by 300 per cent. But as in the case of edible oil and onions, the people have to bear such abnormal increase in project costs in the form of toll and taxes.

The problem is that these activities create opportunity for exaggerated narratives of development. In the case of unproductive investment, initially the economy seems to be stimulated while the construction is underway, but later it slumps when the projected results are achieved and this slows down economic growth. Then again, if these investments are dependent on loans, then as a result of excessive investment in unproductive sectors, the loan burden grows, the increased cash flow leads to inflation, instability enters the financial market and a fragile economy emerges as we see in Sri Lanka.

It is not simply unproductive mega physical infrastructure projects that have led Sri Lanka to its present economic crisis. Its root cause was dynastic rule (Gotabaya's brother and nephews) taking erroneous state decisions in family interests, while the other pillar of state such as the administration, judiciary, the media and civil society, looked on as silent observers. The other reasons include unnecessary reduction of tax rates, printing currency to accelerate development, banning the use of fertiliser and pesticide to promote organic farming, and excessive dependence on remittance and services like tourism.

One of the major reasons of the crisis is implementing showy physical infrastructure projects. This resulted in a 102 per cent loan ratio with the GDP and the burden of repaying 7 billion dollars in loans. The travel restrictions due to the pandemic caused a slump in tourism and remittance. The reserves plummeted. With the devaluation of the Sri Lankan rupee (in 2021 its 198 rupees against a dollar, in March 2022 it was 290 rupees per dollar), import costs increased hugely. This created a crisis in diesel, cooking fuel, vegetables, food grain and essential drugs. It became impossible to meet the debt repayments. To make matters worse, there was a fall in power generation, leading to seven to eight hour blackouts. The entire economy was devastated and the country is now on the brink of bankruptcy.

This crisis did not happen overnight. In 2009, Sri Lanka was a competitor in eight export areas: coffee, tea, garments, agro-products, beverage, leather and shoes, wood products and non-electrical machinery. In 2020 these came down to five areas: coffee, tea, garments, agro-products, leather and shoes, and wood products. Another major problem was the failure to take up any programme in the so-called development drive, for the people who lagged behind.

The Sri Lankan development vision ran on the lines of "Eat, drink and be merry," even if it meant living on loan. And the loans did come in, from China. Take, for example, the Hambantota international deep sea port. Mahinda Rajapaksya, Sri Lanka's former president and brother of the president, ignored the opinion of critics who had said that this project was not commercially feasible and took up the project for the economic development of his district. Between 2007 and 2014, China provided 1.26 billion dollars in loans paid in five installments. In the beginning the interest rate was between 1 to 2 per cent, but later was hike 6.3 per cent and the repayment term was shortened.

When the port went into operation in 2010, it was seen that no vessels were berthing there. The shipping companies were using the nearby Colombo port instead. Then in 2017, the port was handed over to a Chinese company on a 99-year lease for 85 per cent ownership in exchange for 1.12 billion dollars. The Sri Lanka port authorities ran the port in collaboration with the Chinese company. After the Chinese company took over the port, facilities were doubled for containers, general goods, passengers, bunkering, LNG and so on. The Chinese company is endeavouring to establish an export-oriented industrial zone on 15,000 acres of the port.

China also invested 1.4 billion dollars in the Colombo port city project where land is being reclaimed from the sea and resorts, casinos, conference halls and such are being constructed. These projects have pushed Sri Lanka's debts to China up to 8 billion dollars in 2020, though the revenue from these projects is not enough to repay the loans. Meanwhile, the Sri Lankan president and other leaders claimed that the Chinese debt was not that much.

China provided Sri Lanka with foreign trade balance assistance and 1.4 billion dollars swap currency facilities. China Development Bank provided 500 million dollars foreign exchange loan facilities. Asian Infrastructure Investment Bank, based in China, gave 180 million dollars assistance. That is how Sri Lanka became shackled in Chinese debt. Other than the Chinese debt, Sri Lanka has taken huge foreign loans in the form of international bonds and from other investment institutions.

Sri Lanka had also been a lower middle income country at one time and so its predicament has also been a cause of concern for Bangladesh. In this backdrop, ministers, the media and even the ADB have been highlighting the dissimilarities between the two countries. These include: the GDP growth rate of Bangladesh and Sri Lanka is 4.5 and 1.3 per cent respectively, the foreign exchange reserves are enough to cover 6 months and 1.3 months' import costs respectively, the ratio between Bangladesh and Sri Lanka's GDP and loans are 40 and 103 per cent respectively. So Bangladesh is ahead in all indicators and is presently in a secure position.

But then the similarities should not be overlooked either. The governance structure in both countries is centralised and the government have a monopoly of power. Taking commercial loans for infrastructural investment is a development strategy in both countries. In Sri Lanka, China is the main source of credit. For us it is China, India and Russia. Both countries, in implementing development projects, have the propensity to increase costs and time excessively and also to project inflated benefits of the projects. While the loan GDP ratio is less in Bangladesh, it is on a steady rise. Already the net annual foreign credit has gone up from the Tk 4,910 crore in 2014-15 to around Tk 1 lakh crore taka. And the repayment has gone up from Tk 780 crore to Tk 14,450 crore . The list of export products of both countries is short and there is dependence on overseas remittance. Both countries have invested in unnecessary and wrong projects. For example, in the case of additional capacity and LNG import for power production, Bangladesh turned to FSREU (Floating Storage Regasification Unit) rather than setting up plants on land.

Does that mean that there should be no investment in mega projects? No, it is not that, but when investing in physical infrastructure projects, investment must be made in low cost high quality projects. Many small and medium projects have been dropped for the sake of investing in mega projects. Investment in those projects could have had more contribution to increasing local resources. The Dhaka-Ashulia-Gazipur commuter train and also commute by sea route from Chattogram to Sandwip development projects are examples.

I'll end with reference to an article of 2016 by four Oxford University professors, Ansar, Flyvbjerg, Budzier and Lunn. Their article was 'Does Infrastructure Investment Lead to Economic Growth or Economic Fragility? Evidence from China.' After studying 95 communication sector projects, they came to the conclusion that more investment in unnecessary physical infrastructure brings fragility rather than growth to the economy. They pointed out that in order to get physical infrastructure projects approved, costs are shown as low and the revenue and benefit projects are inflated. The adverse environment and social impact of the projects are projected to be less and the economic development benefits are exaggerated. As a result, the most unsuitable projects are approved. They recommend three ways to avoid such a predicament: 1. In the case of infrastructure projects, investment should be made in low cost high quality projects; 2. Investment is to be made in limited resource infrastructure projects, keeping in mind increase in project expenditure and decrease in benefits; 3. Taking into account the risks of increased project cost and time, as well as decrease in benefits, investment should be made in the projects which have present positive net value.

Bangladesh will benefit from following the conclusions and recommendations made by these writers. The recent Sri Lanka experience also is a lesson for us to learn.

* Muhammad Fouzul Kabir Khan is a former secretary and economist

*The article, originally published in the print and online editions of Prothom Alo, has been rewritten for English edition by Ayesha Kabir.