South Asia weathered the global recessions better than expected and better than any other region in the world, according to the World Bank (WB).
In its recently released ‘South Asia Economic Update’ for 2010, the report states that there was a good policy response in the major South Asian economies with resilient remittance inflows, foreign direct investment (FDI) and external support and the nature of the region’s global integration.
At a presentation this week in Colombo, Acting Chief Economist for South Asia Andrew D. Steer said the world that the region faces after the crisis is different in terms of slower growth in high-income countries, faster growth in emerging countries and if the peace dividend is exploited where possible, it could increase the growth rate by 2%.
Mr. Steer said the region has new opportunities in manufacturing and services in a tougher competitive environment. He added that it is important to create fiscal space, control inflation and invest on the supply side of the economy by boosting agriculture, accelerating infrastructure provisions and supporting faster manufacturing growth.
The report forecasts the region to grow by about 7% in 2010 and nearly 8% in 2011 although if India is taken out of the equation, growth projections are much lower at around 5% to 6%. Sri Lanka is expected to record over 6% growth in 2010 while there has been a strong recovery in India where projections are 8.5% growth for this year and 9% growth for 2011. Comparatively, Pakistan which grew at 2% in 2009 is expected to grow at around 4% this year.
Lead Economist and Principal Author for South Asia Dipak Dasgupta said remittances, manufacturing and services exports and FDI inflows, important factors to the growth and recovery of the region, have been resilient.
He also said the region has been protected from the global financial markets due to the type of integration it has.
Mr. Dasgupta said prospective growth in South Asia is close to pre-crisis peak levels in which 6.5% growth rates were recorded annually from 2000 to 2007. There is also greater optimism which is the result of the effects of the stimulus packages, capital flows and the revival of trade. However, he said not all countries are doing well, particularly those with weak fundamentals such as large fiscal deficits and debts, insecurity and conflict and difficult post conflict settings.
Mr. Dasgupta also said world growth is uncertain. Commodity prices, to which South Asia has strong links to, are volatile with oil expected at around US$80 per barrel. Sector Director for Economic Policy for South Asia Ernesto May said managing the immediate recovery from the demand side requires creating fiscal space which is one of the most challenging aspects. The South Asian region has a 8.8% fiscal deficit which is the highest from all regions coupled with high levels of public debt.
The region also needs to contain inflation. Core inflation for the region is between 7% and 10% which is in the higher range. Domestic resources must be mobilized and improved while also improving taxes.
Sector Manager for Economic Policy for South Asia Miria Pigato said the private sector is key to regional trade cooperation while there is future potential in energy trade which could result in US$12 million to US$15 million in annual benefits. She also said the region should intensify a ‘look East’ strategy and integrate faster with East Asia, a region with GDP of US$6 trillion.
Ms. Pigato added that high income markets are still vital with the US still accounting for over half of India’s service exports but other emerging markets which are becoming increasingly important partners include the Middle East, Africa and Latin America.