Comparative Analysis of Remittance Inflows- International Reserves-External Debt Dyad: Exploring Bangladesh's Economic Resilience in Avoiding Sovereign Default Compared to Sri Lanka

TL;DR

This study compares Bangladesh and Sri Lanka to understand how remittance inflows, international reserves, and external debt interact, highlighting Bangladesh's resilience against sovereign default due to remittance and reserve management.

Contribution

It provides a comparative econometric analysis of remittance, reserves, and debt dynamics, revealing Bangladesh's unique strategies in avoiding default compared to Sri Lanka.

Findings

Remittance inflows influence external debt directly and via reserves in Bangladesh.

A Dutch Disease effect exists in Bangladesh's remittance-reserves relationship.

Bangladesh uses reserves as collateral for external borrowing, unlike Sri Lanka.

Abstract

External debt has been identified as the most liable to cause financial crises in developing countries in Asia and Latin America. One recent example of near bankruptcy in Sri Lanka has raised serious concerns among economists about how to anticipate and tackle external debt-related problems. Bangladesh also faced a decline in export income and a sharp rise in import prices amid the aforementioned global shocks. Nevertheless, the international reserves of Bangladesh have never fallen to the level they did in Sri Lanka. This paper examines the relationship between remittance inflows, international reserves, and external debt in Bangladesh and Sri Lanka. Econometric estimations reveal that remittance affects external debt both directly and through international reserves in Bangladesh. The existence of a Dutch Disease effect in the remittance inflows-international reserves relationship has also been confirmed in Bangladesh. We also show that Bangladesh uses international reserves as collateral to obtain more external borrowing, while Sri Lanka, like many other developing countries, accumulates international reserves to deplete in "bad times." Remittances can be seen as one of the significant factors preventing Bangladesh from becoming a sovereign defaulter, whereas Sri Lanka faced that fate.