South Asia grows strongly but fiscal, financial weaknesses remainOctober 4, 2015
Islamabad: Led by a resilient India, South Asia is expected to maintain its lead as the fastest-growing region in the world, with economic growth forecasted to accelerate from 7 percent in 2015 to 7.4 percent in 2016, a World Bank report said.
According to the twice-a-year South Asia Economic Focus, this positive performance hinges on solid growth in services, domestic consumption, and a gradual rise of investments. Limited exposure to the financial turmoil and an improved external position have given most South Asian countries important policy space.
Given India’s weight in the region, its performance greatly influences the projections for South Asia as a whole. Improved investor sentiment and resilience to external shocks are expected to increase India’s growth rate to 7.5 percent in fiscal year (FY) 2015 and further to 7.8 percent in FY2016.
Thanks to low food and commodity prices, as well as a slowdown in the growth of administered prices, inflationary pressures have eased markedly in South Asia. Yet the pace of disinflation varies depending on the price index considered. Revisions to national accounts, together with new comparable data on purchasing power around the world, also raise questions regarding the measurement of prices in the region. According to the report, South Asia could actually have cheaper prices, faster growth and bigger economies than previously thought.
“While the region is now in a position of strength, structural constraints holding back export and investment growth do persist. To keep the momentum and accelerate job creation, governments should enact reforms easing infrastructure bottlenecks and paving the way to greater competitiveness”, World Bank South Asia Chief Economist Martin Rama said. “Fiscal space remains limited while financial sector vulnerabilities persist.”
Rapid growth has not yet translated into significantly higher government revenue generation and improved fiscal balances. Budget deficits are expected to remain at 6.5 percent of Gross Domestic Product (GDP) in 2015, the highest among all developing regions. Tax collection remains well below estimates, and has even deteriorated across major South Asian economies.
“Mobilizing revenue is critical for the region to develop its infrastructure and deliver better social services, while creating a financial cushion to address potential shocks in the future,” said Annette Dixon, World Bank South Asia Vice President. “In some cases introducing and rolling out modern tax instruments holds the key to higher revenue, but containing exemptions and special regimes are crucial across most of the region”.
Many South Asian countries show potential for accelerated growth in the short to medium term. However, the transition in Afghanistan, the earthquakes in Nepal, and revisions to national accounts in Sri Lanka, have resulted in all three countries experiencing slower growth than previously expected.
In Afghanistan, the political and security transitions have led to a weaker outlook, with growth estimated at 1.9 percent for 2015. Fiscal vulnerabilities remain high and will require a large revenue effort and sustained levels of aid. Future prospects hinge critically on improvements in security and forceful implementation of reforms.
Bangladesh has seen an increase in domestic economic activity since April 2015. GDP is expected to grow by 6.5 percent in 2015 and next year, supported by healthy agricultural production along with a recovery in services and domestic demand. But instability, depressed export growth, an only modest rebound in remittances, and continued weakness in private sector credit growth, remain matters for concern.
Economic activity in Bhutan is expected to gain momentum with real GDP growing at 6.7 percent in 2015. This solid performance is driven by new hydropower construction and innovative tourism measures, such as “Visit Bhutan 2015.” Private sector development is key to reduce the country’s vulnerability to donor finance and address rising youth unemployment.
In India, GDP growth is expected to accelerate to 7.5 percent this year and 7.8 percent in 2016 lifted by cheap oil prices and limited exposure to the global financial turmoil. However, delays in the adoption and implementation of key reforms could affect investor sentiment. A weak trade performance and financial sector vulnerabilities could also hold back GDP growth.
In Maldives, economic growth continued its recovery from the 2012 dip, and inflation has slowed down, but the economy remains undiversified, primarily depending on tourism and fisheries. Growth is expected to be 5.0 percent in 2015 and 3.9 percent in 2016.
Nepal has begun to recover after the loss of life and economic devastation from the April and May earthquakes. From an expected 5 percent, GDP growth is expected to drop to 3.4 percent this year and to tick up to 3.7 percent in 2016. Although macroeconomic fundamentals remain strong, weak execution of public investment slows down both infrastructure development and post-disaster reconstruction.
In Pakistan, gradual recovery to around 4.5 percent growth by 2016 is aided by low inflation and fiscal consolidation. Increases in remittances and stable agricultural performance contribute to this outcome. But further acceleration requires tackling pervasive power cuts, a cumbersome business environment, and low access to finance.
In Sri Lanka, growth is expected to increase to 5.6 percent in 2016 due to higher public sector wages and higher disposable incomes. However, the looser fiscal stance behind this strong domestic demand is also putting pressure on the external balance. Maintaining the growth momentum will require higher tax revenue, rationalized public spending and greater competitiveness.