South Asia Economic Focus

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http://hdl.handle.net/10986/11978

The South Asia Economic Focus is a biannual economic update presenting recent economic developments and a near-term economic outlook for South Asia. It includes a Focus section presenting more in-depth analysis of an economic topic of relevance for stability, growth, and prosperity in the region as well as country briefs covering Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka. It concludes with a data section providing key economic indicators for South Asia “at a glance." Overall, it aims at providing important background information and timely analysis of key indicators and economic and financial developments of relevance to World Bank Group operations and interaction with counterparts in the region, particularly during annual and spring meeting.\r + \r + This biannual series is prepared by the Office of the Chief Economist for the South Asia region.

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Expanding Opportunities: Toward Inclusive Growth

(World Bank, Washington, DC, 2023-04-04) World Bank

South Asia’s outlook is shaped by both good and bad news in the global economy. Lower commodity prices, a strong recovery in the services sector, and reduced disruptions in value chains are aiding South Asia’s recovery but rising interest rates and uncertainty in financial markets are putting downward pressure on the region’s economies. Countries in South Asia, especially those with large external debt, face difficult tradeoffs as they respond to these pressures. Growth prospects have weakened, with large downside risks in most countries given limited fiscal space and depleting foreign reserves. Going forward, broad reform programs, including a sustainable fiscal outlook, are needed to put South Asia on a more robust and inclusive growth path. Inequality of opportunity, which is higher in South Asia than in other regions of the world, is both unfair and inefficient. Reducing inequality of opportunity and increasing economic mobility will help broaden countries’ tax base and boost support from the population for the critical reforms.
Coping with Shocks: Migration and the Road to Resilience

(Washington, DC : World Bank, 2022-10-06) World Bank

South Asia is facing renewed challenges. The impact of the Russia-Ukraine war on food and energy prices on domestic inflation is long-lasting. Externally, countries’ current account balances deteriorate rapidly as imports rise on the back of economic recovery and rising inflation, remittances decline, and foreign capital flows out following monetary tightening in advanced economies. An economic slowdown in advanced economies and trading partners can also be a drag to the exports sector and remittances inflows, which many countries in the region depend on. These immediate challenges can translate to persistent deterrent to long-term growth and development. Higher energy prices already are changing the attitude of many countries outside the region about green transition and carbon reduction. The South Asia region is thus at a critical juncture. The theme chapter provides a deep dive into COVID-19 and migration. Migrant workers and remittances flows are important for South Asia as sources of income and means to smooth local income shocks for households, and as an important source of foreign reserves for the country. The pandemic changed the flows of migration, as some migrants had to return home and some had to stay in foreign countries due to COVID-related restrictions. The chapter studies the long-run trend of migration in the region, how COVID-19 impacted migration and remittance inflows, whether migration has (or has not) recovered, and proposes policies to address underlying problems.
Reshaping Norms: A New Way Forward

(Washington, DC: World Bank, 2022-04-13) World Bank

South Asia’s growth rate has returned to pre-pandemic levels. However, the uneven recovery from the pandemic has left countries in South Asia with multiple policy challenges, which are exacerbated by the impact of the war in Ukraine. While several countries are navigating rising inflation and growing difficulties to finance fiscal deficits and trade deficits, the region must also chart a new way forward to address rising inequality, unleash new growth potential, and accommodate an energy transition. To reshape their economies, the region cannot avoid redesigning tax systems, increasing competition, and challenging vested interests and existing gender norms. This issue of the South Asia Economic Focus, describes recent economic developments, analyzes the economic impact on South Asia of the war in Ukraine, presents growth forecasts, provides risk scenarios, and concludes that reshaping economies goes hand in hand with reshaping norms.
Shifting Gears: Digitization and Services-Led Development

(Washington, DC: World Bank, 2021-10-07) World Bank

South Asia region’s economies continue on a recovery path, with production and export having recovered to pre-COVID trend levels. But the recovery has been uneven across countries and sectors, and significant risks exist that could jeopardize short-term recovery and long-term growth. Over the short-term, low vaccination rates in most countries in the region make the population and economies vulnerable to future COVID waves and lockdowns; supply shortages due to global supply bottlenecks continue to put upward pressure on (food) inflation, especially after consumption recovers. Over the long-term, the region faces long-lasting scarring effects from the pandemic. The emergence of a new services economy creates an opportunity for the region to shift gears and to move towards a services-led development model. The importance of services has been increasing over time and got a further boost during the response to the COVID pandemic, when digital technologies became critical. This new services economy comprises not just the ICT sector, but also business and professional services that are increasingly critical inputs into manufacturing and other sectors, and digital platforms that are creating new markets. It can become the driver of development in South Asia because 1) Services are increasingly tradable and also represent a large part of value added incorporated in the exports of goods. 2) Services firms can drive productivity growth because of innovations that make their own products and other industries more efficient 3) The services sector also generates jobs and helps upgrading skills through on-the-job training. To unleash the potential of the new services economy, policy makers should rethink regulations and establish new institutions to enable 1) competition and innovation 2) increased labor mobility and up-skilling, through education and on-the job training; 3) the absorption of new services by firms and households. Governments in South Asia are addressing these new realities, but they face major challenges. With countries worldwide struggling to find an optimal institutional environment for the new services sectors, a good option for South Asia is to experiment with regulatory sandboxes.
South Asia Economic Focus, Spring 2021: South Asia Vaccinates

(Washington, DC: World Bank, 2021-03-31) World Bank

South Asia region’s economies are beginning to recover, though unevenly: economic activity in industry and export sectors have recovered to pre-COVID levels but some labor-intensive services sectors and tourism have not. Inequality has worsened on many dimensions. The process of vaccinating South Asia’s population is underway, with India taking a leading role in production. The socioeconomic benefits of vaccinating most South Asians as soon as possible outweighs the cost by multiple times, and thus justifies having public sector financing. Cracks in the primary health care system became evident since the pandemic began, and the vaccine rollout is likely to have other additional challenges such as delays in production, bottlenecks in supply chain logistics and vaccine hesitancy from some groups (which could delay the process of herd immunity). There are also tradeoffs in the priorities that should be established in deciding who gets the vaccine first.
South Asia Economic Focus, Fall 2020: Beaten or Broken? Informality and COVID-19

(Washington, DC: World Bank, 2020-10-08) World Bank

The COVID-19 pandemic, which is still impacting South Asia, has temporarily brought the region to a near standstill. Governments proactively stabilized activity through monetary easing, fiscal stimulus, and supportive financial regulation, but the situation is fragile amid weak buffers and exhausted policy tools. South Asia’s GDP is expected to contract 7.7 percent this year, by far the largest decline on record, but uncertainty around the forecast is substantial. The informal economy in South Asia has been hit hard. Many unorganized workers, self-employed people and microenterprises have experienced a large drop in earnings as the service sectors that were affected most by the lockdowns are dominated by informality. Informal workers and firms tend to have inadequate mechanisms for coping with short-term demand and supply interruptions due to limited savings and constrained access to finance. While the poor have suffered severely during the crisis, many informal workers in the middle of the income distribution have experienced the greatest drop in earnings. Most of them are not covered by social insurance. The crisis lays bare complicated structural problems in the informal sector that need to be addressed.
South Asia Economic Focus, Spring 2020: The Cursed Blessing of Public Banks

(Washington, DC: World Bank, 2020-04-12) World Bank

The unprecedented COVID-19 crisis comes with a dire economic outlook. South Asia might well experience its worst economic performance in 40 years. The harsh reality of inequality in South Asia is that poor people are more likely to become infected with the coronavirus, as social distancing is difficult to implement for them. They also have less access to health care or even soap, are more likely to have lost their job, and are more vulnerable to spikes in food prices. The unfolding economic crisis is unique in several ways. This report estimates that regional growth will fall to a range between 1.8 and 2.8 percent in 2020, down from 6.3 percent projected six months ago. The dire forecast is based on the analysis of several adverse impacts. South Asia finds itself in a perfect storm. Tourism has dried up, supply chains have been disrupted, demand for garments has collapsed, consumer and investor sentiments have deteriorated, international capital is being withdrawn and inflows of remittances are being disrupted. On top of the deterioration of the international environment, the lockdown in most countries has frozen large parts of the domestic economy. Public banks, discussed in the focus chapter of this edition, were at the center of weaknesses in financial sectors that accumulated during recent years. However, during this crisis, they might be part of the solution by providing countercyclical lending to the most vulnerable parts of the economy.
South Asia Economic Focus, Fall 2019: Making (De)centralization Work

(Washington, DC: World Bank, 2019-10-13) World Bank

Global GDP growth is decelerating, while trade and industrial production are stagnating. The slowdown has been severe in South Asia, which in recent quarters was no longer the fastest growing region in the world. In most South Asian countries, growth is expected to be below long-run averages this year but there is significant diversity evident in the high frequency data of industrial production. Current account deficits have declined, as is often the case during economic downturns. Inflation remains near target in most countries, but food price inflation is picking up. Growth forecasts for South Asia are revised downward considerably as uncertainty in global markets and a worsening global outlook have become more important drivers of the forecast. The expected modest recovery to 6.3 percent in 2020 and 6.7 percent in 2021 is tentative as forecasts under current circumstances, particularly for investment, are highly uncertain. In many countries across the region, further decentralization is a high policy priority. These policies are part of a global decentralization trend, which aims to improve local service delivery. Empirical evidence of the effectiveness of decentralization is mixed, a result which is often attributed to partial decentralization. Successful development requires both decentralization and centralization at the same time. In the interplay between central and local governments, the allocation of resources plays a crucial role. In South Asia, a lack of geospatial data on expenditure and development outcomes remains a major constraint.
South Asia Economic Focus, Spring 2019: Exports Wanted

(Washington, DC: World Bank, 2019-04-07) World Bank

South Asia remained the fastest growing region in the world last year, but growth remained driven by domestic demand – and not exports – which resulted in another year of double-digit volume growth of imports. The value of imports was further pushed up by rising oil prices. The widening current account deficits became more difficult to finance and these tensions triggered capital outflows, depreciation pressures, increases in credit default swap spreads, and falling stock prices. In recent months, however, the data shows a more positive picture. The growth outlook for South Asia assumes that the recent acceleration of export growth continues and that import growth slows. Under these conditions, GDP growth is expected to accelerate. Under current circumstances fiscal tightening is appropriate, not only to make government debt more sustainable, but also to bring the economy back into balance, and thus become less vulnerable to deteriorating conditions in international financial markets. Using a gravity model, we show that South Asian countries export only a third of their potential. If countries export closer to potential, not only would short-term adjustments be easier, but also the long-term growth potential would be higher. Closing the export gap is an essential step in addressing both short-term and long-term macroeconomic challenges in South Asia.
South Asia Economic Focus, Fall 2018: Budget Crunch

(World Bank, Washington, DC, 2018-10-06) World Bank

South Asia remains the fastest-growing region in the world and its performance has strengthened further. The external environment, while remaining conducive, has become more turbulent. Monetary policy is being adjusted accordingly, but fiscal policy is not equally responsive and fiscal deficits remain large. Despite strong demand from advanced economies and considerable depreciation of domestic currencies, imports are still growing stronger than exports in most countries. Rising oil prices add further pressure on South Asia’s high current account deficits. South Asia is expected to remain the fastest-growing region in the world and its performance could strengthen even further. Widening current account deficits and increased turbulence in international markets call for prudent economic policy, and fiscal discipline is at the core of prudent management. However, most South Asian countries generate low tax revenue. They also run large fiscal deficits, often amplified by economic shocks and political cycles, which limits their room to maneuver. Tax revenue increases with economic growth, but so does government expenditure. Since spending multipliers are positive, the procyclicality of spending amplifies boom-and-bust cycles instead of smoothening them. In several countries debt levels are high and hidden liabilities are a concern. Not all these patterns are present in all countries, but they combine into a specific set of challenges in each, putting fiscal matters at the core of development policy.