South Asia Development Update

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The South Asia Development Update, previously known as South Asia Economic Focus, presents the near-term economic outlook for South Asia as well as in-depth analysis on topical challenges and opportunities for policy makers in Afghanistan, Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan, and Sri Lanka. This series is prepared twice a year by the Office of the Chief Economist for the South Asia region.

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Now showing 1 - 8 of 8
  • Publication
    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.
  • Publication
    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.
  • Publication
    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.
  • Publication
    South Asia Economic Focus, Spring 2018: Jobless Growth?
    (Washington, DC: World Bank, 2018-04-15) World Bank
    South Asia is again the fastest growing region in the world. And growth should further strengthen to 7.1 percent on average in 2019-20, reflecting an improvement across most of the region. But are countries generating enough jobs? The demographic transition is swelling the ranks of the working-age population across most of South Asia. For this report, crucial information about employment in South Asia is extracted in a transparent and replicable way from over 60 surveys and censuses covering the period from 2001 onwards. The analysis of this information reveals that employment does respond to economic growth in the short term, implying that growth is not jobless. It also appears that countries in South Asia have created large numbers of jobs over the years. However, the nature of the jobs created is not fully encouraging, and the analysis shows that rapid growth alone will not be sufficient to bring South Asian employment rates to the levels observed elsewhere in the developing world. In addition to high growth, more and better jobs need to be created for every percentage point of growth. The results in this chapter call for better employment data, and for a focus on the economic policies that can boost job creation.
  • Publication
    South Asia Economic Focus, Fall 2017: Growth Out of the Blue
    (Washington, DC: World Bank, 2017-10-08) World Bank
    For eight consecutive quarters South Asia was the fastest-growing region in the world… but not anymore. Despite benign global conditions, regional growth has slowed down. This trend is the result of a deceleration in India, the region’s powerhouse. Short-term disruptions related to the introduction of the landmark Goods and Services Tax can explain the steep decline observed in the last quarter, but the deceleration has been going on for more than one year. Over this period imports increased sharply while private investment declined. Behind these trends lies a combination of large public sector borrowing (especially by the states), relatively sticky interest rates despite decreasing inflation, and an increasingly stressed financial sector. While growth has slightly accelerated elsewhere in the region, concerns remain. Bangladesh has seen an increase in financial sector risks and in Pakistan macroeconomic discipline has weakened. At 6.7 percent, growth is projected to remain strong in South Asia in 2017, albeit slightly lower than forecast in June. The growth rate is expected to stabilize around 7 percent over the medium term. Consumption should remain strong and private investment should regain momentum thanks to ongoing support from infrastructure development and economic reforms. Measuring GDP is especially challenging in developing countries, where the informal sector is large and institutional constraints can be severe. As a result, GDP growth estimates are often met with skepticism. But new technologies offer an opportunity to improve matters. Luminosity observed from satellites has been shown to be a good proxy for economic activity, and methodologies have been developed in recent years to predict GDP over time and across space based on nightlight intensity. In South Asia’s case, GDP predicted using these methodologies closely tracks National Accounts GDP at the aggregate level, and provides a granular picture of GDP at subnational levels. Nightlight intensity also yields new insights on recent economic developments.
  • Publication
    South Asia Economic Focus, Spring 2017: Globalization Backlash
    (World Bank, Washington, DC, 2017-04) World Bank
    South Asia remains the fastest growing region in the world. With a strong performance in the eastern part of the region – in particular in Bhutan, Bangladesh and India – the region defied disappointing world growth in 2016. Inflation slowed down in the second half of 2016, mainly due to lower food prices, but appears to be turning up again. Despite recent real exchange rate appreciation, current account balances are mostly in order throughout the region. After a sharp decline triggered by lower oil prices, remittance inflows are stabilizing in most countries and international reserves are mostly at comfortable levels. Progress on fiscal consolidation has been more gradual and public debt levels remain high. South Asia’s performance will maintain momentum, with the gap between its growth rate and that of East Asia slightly widening over time. Regional growth is expected to surpass 7 percent from 2018 onwards. Robust domestic demand, an uptick in exports, and steady FDI inflows underlie this positive outlook. But with financial sector risks remaining, creating financing opportunities for private investment remains a challenge. Pressures against international trade are mounting. The negotiation of mega-regional trade agreements stalled, the number of protectionist measures has increased, and existing agreements may be reconsidered. South Asia was already less integrated in global merchandise trade than other regions. In light of current pressures, a legitimate question is whether it should focus on exports as a driver of economic growth and job creation. However, the prospects for the region are better than it seems. The stalled mega-regional trade agreements, which did not include any South Asian country, were expected to reduce South Asia’s competitiveness. Simulations on the impact of hypothetical new trade barriers applied across the board suggest that the harm for the region would be limited. And in a scenario where hypothetical new trade barriers would be applied selectively, South Asia could actually benefit from trade diversion. The region also stands to gain from the observed growth recovery in advanced economies, because they are the main markets for its exports. The current globalization backlash should thus not dissuade South Asian countries from having a stronger outward orientation. But the gains for the region would be larger if its exports were more diversified and its supply response were more elastic.
  • Publication
    South Asia Economic Focus, Fall 2016: Investment Reality Check
    (Washington, DC: World Bank, 2016-10-03) World Bank
    South Asia defies a sluggish world economy and continues its path of gradual acceleration during 2016. Led by a solid India, the region remains a global growth hot spot. While South Asian economies proved resilient vis-à-vis external headwinds such as China’s slowdown or uncertainty surrounding monetary policy in advanced economies, some are beginning to feel the sting from slowing remittance flows or waning oil price dividends. Against this backdrop of relative stability but fading tailwinds, India is set to grow at 7.6 percent in 2016, the same speed as in 2015, but may increase its pace again in 2017 to 7.7 percent. The region will remain steadfast in the face of future volatility and is expected to grow at 7.1 percent in 2016, however, its medium term performance strongly hinges on investment and exports. Downside risks are concentrated around political uncertainty as well as fiscal and financial vulnerabilities. While export growth is set to return to positive territory, it will deliver only gradually as global demand picks up. A reality check reveals that private investment – the key future growth driver across South Asia – is yet to be ignited to sustain and further increase the pace of economic activity.
  • Publication
    South Asia Economic Focus, Spring 2016: Fading Tailwinds
    (2016-04-10) World Bank
    South Asia by now has consolidated its position as fastest growing developing region in the world. Against the backdrop of relative external stability and some monetary policy space, growth is expected to continue a gradual acceleration on the back of strong investment performance and a return to solid contributions from export growth. India remains the motor of the region and on its way closer to 8 percent real GDP growth, though on a relatively more gradual path than previously anticipated. At the same time, economies across the region will have to tackle fading tailwinds and face ever more binding domestic constraints in the form of persistently high fiscal deficits together with high debt levels as well as some vulnerabilities in the financial sector. The focus section of this report will delve deeper into evaluating the quality of fiscal consolidation and policy, trying to assess short and longer term impact across major South Asian economies.