World Bank on South Asia’s Economies October 2018
The World Bank has published a Report entitled “Budget Crunch. South Asia Economic Focus,” [i] covering the economic stability trends in the region generally as well as country wise.
The World Bank Comments that growth is strong, but not driven by exports or manufacturing
Domestic consumption has been the main contributor to economic growth across the region, with exports or investment being remarkably subdued Industrial production is holding well, but it grows slow- er than GDP in most countries. South Asia’s industrial production grew by only 5.4 percent in the second quar- ter of 2018, slightly lower than a quarter before says the World Bank.
Inflation is close to target, but it is accelerating in some countries The strong growth performance of the region has not been accompanied by inflationary pressures so far. A benchmark to assess inflationary pressures is to compare actual inflation rates with inflation targets
Import demand in South Asia’s key markets has been strong, and South Asian currencies have generally depreciated, even more than those of other emerging economies. Despite strong import demand and currency depreciation, export performance remains disappointing while imports are still growing rapidly.
With a few exceptions, the level of international reserves is relatively high in the region. Reserves in India and Bangladesh are at comfortable level and can cover 9.3 and 7.6 months of imports respectively However, current account deficits have been growing across most of South Asia and buffers are being eroded in some cases.
Monetary policy is responsive, but fiscal policy less so Monetary authorities are responding to the inflationary signs, as well as to growing exchange rate pressures. Nepal is the only South Asian country that has left the policy rate unchanged for the last cou- ple of years, at 7 percent says the World Bank.
In contrast with the responsiveness of monetary policy, fiscal policy remains expansionary across most of the region. Fiscal deficits have been traditionally large in South Asia, especially when considering the deficits of sub-national levels of government. In recent years, public expenditures grew much faster than revenue generation in several of the countries. While some coun- tries used to display a positive budget balance, all of them have been running deficits since 2017
A turbulent external environment The international price of oil has been on an upward trend, and this matters to South Asia because the region is a net oil importer. Higher oil prices put further pressure on current ac- counts but may also have an indirect impact on fiscal deficits.
Contagion is another source of risk, as external vulnerabilities have increased in important emerging markets across the world. The economic situation of Argentina, Turkey, and South Africa
Experience shows that economic shocks abroad can increase bond spreads in South Asia, lead to capital outflows and cause currency depreciation.
The World Bank states that in May 2013, the US Federal Reserve announced that it would start reducing the quantitative easing program established after the Global Financial Crisis. This ‘tapering talk’ led to a broad-based surge in bond spreads across emerg- ing markets. Bond spreads increased more in South Asia than in other regions.
[i] Reference World Bank. 2018. Budget Crunch. South Asia Economic Focus (October), Washington, DC: World Bank. Doi: 10.1596/978-1-4648-1369-6. License: Creative Commons Attribution CC BY 3.0 IGO