Despite its natural advantages and potential, the Bay of Bengal region lags economically, in part due to insufficient connectivity between the member nations. Improving financial connectivity between countries of the region can be a first step to easing movement of goods, services and people. Greater financial collaboration also can help the region mitigate the impact of ongoing geopolitical upheavals that have caused food and energy prices to rise. A regional development bank to fund energy projects, a venture fund to enable new technology companies and greater trade in local currencies can bring significant improvements in many sectors across the region.
Countries in the Bay of Bengal region, as well as other emerging economies globally, have been hit hard by the ongoing conflict in Europe. Sanctions on Russia have disrupted supplies of petroleum, natural gas and food, pushing up prices. Record high energy and food prices have caused acute distress in many emerging countries. Many emerging economies are experiencing very high rates of inflation. Inflation in countries such as Egypt, Nigeria, Sudan, Pakistan and Sri Lanka[1] ranges from 20-50% (Refer Table 1). Several countries are also facing problems paying for imports. In the Bay of Bengal region, Sri Lanka has already defaulted on its external debt, Nepal imposed import restrictions,[2] while Bangladesh has approached the IMF for additional credit.[3] High food prices were one of the factors that catalyzed the ‘Arab-Spring’ – large scale public unrest in West Asia and North Africa in early 2010s. Unaffordable food prices can lead to social unrest.
| Table 1: Inflation in Selected Emerging Economies | |
| Annual Inflation Rate (Mar 2023) | |
| Egypt[4] | 32.7% |
| Nigeria[5] | 22% |
| Sudan | 71.6% |
| Pakistan[6] | 35.4% |
| Sri Lanka[7] | 50.3% |
| Source: Central Banks, IMF | |
The current crisis has been aggravated by the twin dependence on food and energy imports. Increases in oil and gas prices are usually followed by increases in food prices, as petroleum products are a key input for fertilizer manufacture. The events of 2022 again show that food and energy security are interlinked.
In normal circumstances, high prices are a signal for companies to invest more to bring a commodity to market. In the past, high prices of oil and gas led to greater investment in oil production and technology. Such investments enabled the technical advances that made shale oil a major energy source. But the current rise and fluctuations in energy prices are not driven by changes in underlying demand and supply, but by market distortions. First, Western investors, driven by climate agenda, have shunned traditional fuels, thereby reducing supply. Second, the 2022 sanctions on Russia threatened to remove a large part of global energy supply from the markets. The sanctions were just the trigger; the underlying supply shortage was created by sustained low investments.
Unfortunately, this stand has pushed millions of people into energy and food insecurity. It is unlikely that either the reduced investment in traditional forms of energy or the sanctions on Russia will be reversed in the foreseeable future. Instead, more price shocks likely lie ahead. Emerging economies are especially vulnerable to such shocks and will need to plan for new disruptions.
Greater cooperation within emerging economies can mitigate some of these problems. The emerging economies in the Bay of Bengal, a significant sub-region within the Indo-Pacific that is home to more than 1.5 billion people, are vulnerable to problems created by global crisis, and suffers from inadequate physical, digital and financial connectivity. But there are ways of promoting greater financial connectivity and leveraging that connectivity to build up cooperation in fields such as energy and startups.
Energy Collaboration: A New Funding Agency
A spike in natural gas prices during 2022 made the fuel unaffordable for many developing countries. Among countries in South Asia, Bangladesh and Pakistan have the greatest dependence on natural gas, on which they rely for 68% and 42% of their energy needs, respectively. Both these countries have faced electricity shortages as the fuel has become increasingly unaffordable.[8]–[9] India has been relatively less affected because it uses domestically produced coal, which is much cheaper than oil or gas, for electricity generation. While it is important to bring down carbon emissions, this burden has to be borne by those responsible for past emissions, and who continue to have a large carbon footprint. Expecting the world’s poorest to forego basic electricity access is neither fair nor sustainable.
Low-income countries need energy solutions that are appropriate and affordable for them. In this case, that would mean using cheaper and more abundant coal for basic electricity needs. An added benefit would be to free up natural gas for use in the fertilizer sector. But switching to coal will be a challenge because most global banks, and even multilateral banks like the World Bank and the Asian Development Bank, don’t fund construction of coal-based power plants. Smaller countries lack the technology and the finance to complete these projects on their own. However, India has a large base of indigenously built and locally financed coal-fired power-plants that could be built on the same model in other emerging economies at a similar level of development – including such countries in the Bay of Bengal region as Bangladesh, Nepal and Sri Lanka.
The other problem in the Bay of Bengal region is the lack of energy connectivity among the various countries. At this point, India has power links with Nepal, Bhutan and Bangladesh, but there isn’t a single project that connects three or more countries. Likewise, there are petroleum pipelines from India to Nepal[10] and Bangladesh,[11] but no projects with wider connectivity. The region is rich in hydropower resources, which are especially abundant in Myanmar, Nepal and Bhutan. But these countries don’t have the financial resources to build dams or enough local demand to justify the expense. India and Bhutan have strong energy ties, with the former funding multiple hydropower projects and buying most of the electricity. However, Myanmar and Nepal are constrained by a lack of funds and connectivity to markets.
These issues can be addressed partially by setting up a new financial institution, a BIMSTEC (Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation) Infrastructure Bank, focused on regional connectivity projects such as power grids and pipelines. Regional governments and private-sector participants can be shareholders to ensure that no single stakeholder enjoys an outsize influence. Apart from regional energy connectivity, such an institution also can help finance coal-based power generation projects to meet the basic energy needs of the host countries at an affordable cost. A more ambitious, longer-term goal can be to finance hydropower projects, which have higher capital costs and longer gestation periods. Bhutan already has a state-owned company that owns and operates such projects – the Druk Green Power Corporation. Governments in Myanmar and Nepal can be helped to set up similar firms, which supply electricity on long-term contracts to other countries in the region.
Enabling Tech via a Regional Venture Fund
The most valuable companies in the world today are tech companies – in the US (Amazon, Alphabet/Google, Facebook/Meta) and in China (Tencent, Alibaba, Byte dance). India too has seen a number of tech startups, many of which enabled significant creation of gig-economy jobs. There are now more than 100 Indian tech startups that are considered “unicorns”[12] (startups with a valuation of more than $1 billion). Some of these companies operate in sectors like fin-tech, health-tech and agri-tech, and can help bring services to hitherto unserved consumers. Because these companies deal with a lot of sensitive consumer data, there is an advantage to having tech ventures started, owned, and controlled by local entrepreneurs, subject to local laws and oversight, rather than global mega-corporations.
This boom in new economy companies has been enabled by easy availability of venture capital and private equity. This is important because most of these startups, despite their high valuations, incur heavy losses and require regular injections of capital. Most of this capital has come from US- based venture funds and tech majors hoping to corner a share of India’s promising market. In smaller economies, local companies have trouble getting such funding, making it difficult for them to scale up. Combining the Bay of Bengal region’s markets for technology companies and making it easier for startups in smaller economies to access funds can help mainstream promising ideas.
A BIMSTEC venture fund, with governments as a set of shareholders, can provide seed funding for technology startups operating in priority areas such as agri-tech and health-care. Ideas that have proven successful in one market can be replicated in other countries of the region as well, with help from the BIMSTEC Venture Fund. While governments can provide some of the capital needed for such a fund, the fund needs to be overseen by entrepreneurs and investors with a background in the tech/startup/venture space.
Trade in Local Currencies
One of the most significant economic developments of 2022 was the severe economic sanctions imposed on Russia by the US and its allies. Iran and Venezuela, both rich in oil and gas, are also under stringent sanctions. In the BIMSTEC region, Myanmar currently faces economic sanctions.
Many governments, including India, don’t recognize these sanctions, as they have been imposed by a single country, rather than the United Nations. But nevertheless, they work due to the central role the US dollar enjoys in the global financial markets. Even though governments don’t recognize them, businesses tend to abide by them, making them effective.
Trade needs to be freed from the shadow of sanctions and other coercive measures. One way to do this is to avoid the US financial system by trading in local currencies for regional trade. India has set up the Unified Payments Interface, a payment system that can be used not just in India, but also in Singapore, the UAE, Mauritius, Nepal and Bhutan.[13]. India is a significant trading partner for other countries in the Bay of Bengal region, and wider use of the Indian rupee as a regional currency can help reduce the dependence on the US dollar as well as vulnerability to unilateral sanctions.
Conclusion
The Bay of Bengal region needs improved connectivity across multiple fields – including trade in goods, trade in services, and movement of people. The goal is not fully achievable in a short time frame given current realities. But barriers to financial connectivity may be the simplest barrier to overcome. And freer finance, via a funding bank or a venture fund, can enable other forms of cooperation over time.
Amit Bhandari is Senior Fellow for Energy, Investment and Connectivity, Gateway House.
This paper is part of a compendium published by the 6th Indian Ocean Conference: Peace, Prosperity & Partnership for a Resilient Future.
References
[1] ‘Consumer Price Inflation’, Central Bank of Sri Lanka, https://www.cbsl.gov.lk/en/measures-of-consumer-price-inflation.
[2]‘Nepal continues import ban on 10 goods items as foreign exchange,’ The Kathmandu Post, July 17, 2022, https://kathmandupost.com/money/2022/07/17/nepal-continues-import-ban-on-10-goods-items-as-foreign-exchange-reserves-dwindle.
[3]“IMF Executive Board Approves US$3.3 Billion under the Extended Credit Facility/Extended Fund Facility and Us.4 Billion under the Resilience and Sustainability Facility for Bangladesh.” IMF, January 30, 2023. https://www.imf.org/en/News/Articles/2023/01/30/pr2325-bangladesh-imf-executive-board-approves-usd-ecf-eff-and-usd-under-rsf#:~:text=to%20Copy%20Link-,IMF%20Executive%20Board%20Approves%20US%243.3%20Billion%20Under%20the%20Extended,and%20Sustainability%20Facility%20for%20Bangladesh.
[4] ‘Inflation for Last Month: Mar 2023,’ Central Bank of Egypt, last updated April 10, 2023, https://www.cbe.org.eg/en/economic-research/statistics/inflation-rates
[5] ‘Inflation Rates (Percent),’ Central Bank of Nigeria, https://www.cbn.gov.ng/rates/inflrates.asp.
[6] ‘Inflation Monitor: March 2023,’ State Bank of Pakistan: Data Services and Innovations Department, https://www.sbp.org.pk/publications/Inflation_Monitor/2023/Mar/IM_Mar_2023.pdf
[7] ‘Inflation for Last Month: Mar 2023,’ Central Bank of Egypt, https://www.cbe.org.eg/en/economic-research/statistics/inflation-rates
[8]Md. Tahmid Zami, ‘Analysis – Fuel crisis cuts electricity in Bangladesh, sparking energy debate,’ Reuters, August 1, 2022, https://www.reuters.com/article/bangladesh-energy-politics-idUSL8N2YZ1A2.
[9]Stephen Stapczynski, ‘Pakistan Faces Deeper Power Crisis as LNG Becomes Too Expensive,’ Bloomberg, June 24, 2022, https://www.bloomberg.com/news/articles/2022-06-24/pakistan-faces-deeper-power-crisis-as-lng-becomes-too-expensive.
[10]Prime Minister’s Office, Government of India, ‘Inauguration of Motihari-Amlekhganj (Nepal) pipeline by PM and PM Oli of Nepal,’ Press Information Bureau, September 10, 2019, https://pib.gov.in/newsite/PrintRelease.aspx?relid=193109.
[11]Prime Minister’s Office, Government of India, ‘PM Narendra Modi and Bangladesh Prime Minister Sheikh Hasina jointly inaugurated the India-Bangladesh Friendship Pipeline,’ Press Information Bureau, March 18, 2023, https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1908377.
[12] ‘The Indian Unicorn Landscape,’ Invest India, last updated September 7, 2022, https://www.investindia.gov.in/indian-unicorn-landscape