Pakistan and Sri Lanka, according to the World Bank, have the highest foreign debt repayment ratio to exports and remittances in the South Asian region.
The World Bank has raised Pakistan’s GDP growth forecasts to 4.3 percent from 3.4 percent for the current fiscal year and 4 percent for fiscal year 2022-23, up from 3.4 percent previously.
“Pakistan and Sri Lanka have the greatest indicators of ability to pay, such as the ratio of public external debt servicing to exports and remittances. The situation is particularly concerning in Sri Lanka, where increased fiscal and external risks have resulted in a series of sovereign credit rating downgrades, preventing market-based refinancing,” according to the World Bank’s report “The South Asia Economic Focus, Reshaping Norms: A New Way Forward,” released on Wednesday.
In an online conference, Hans Timmer, the World Bank’s Chief Economist for South Asia, told reporters that for the economy to be stabilised, Pakistan would have to reduce its massive budget and current account deficits. Pakistan’s debt repayment capabilities is not in jeopardy, but in the medium to long term, Islamabad will need to reduce its twin deficits, according to Hans Timmer.
According to the World Bank research, GDP growth in Pakistan is likely to decelerate to 4.3 percent in FY2021/22 (ending June 2022) and 4.0 percent in FY2022/23. This occurs in the context of monetary tightening measures that began in September 2021, significant base effects from the previous year, and persistently high inflation, which is eroding real private consumption growth. Beyond that, growth is expected to steadily improve as structural changes aimed at supporting macroeconomic stability, increasing domestic revenue collections, improving the financial viability of the energy industry, and improving export competitiveness acquire traction.
Although the region’s economy is rising again, the recovery has been unequal among sectors, countries, and population groups, according to the World Bank. While digital service production and exports have increased, other sectors such as construction, transportation, and tourism have yet to fully recover in most nations.
While some nations are seeing robust GDP growth, Afghanistan is experiencing a humanitarian catastrophe, Pakistan is experiencing a political crisis, and Sri Lanka is experiencing a balance-of-payments problem. While high-skilled workers kept their jobs or sought new ones during the pandemic, just a few unskilled migrant workers returned to the cities. Men have also been able to find new work opportunities faster than women.
“Pakistan has the greatest energy subsidies as a percentage of GDP, implying that a price hike in international markets could pose a serious fiscal problem,” according to the World Bank report.
Pakistan had the region’s mildest export drop in 2020, with the textile sector leading the way to a quick recovery. At the height of the epidemic in April 2020, Pakistani products exports were down 54% year on year. The textile sector, which accounts for more than 60% of total products exports, has led the rebound since late 2020. Pakistan was the first Asian country to ease Covid restrictions. This allowed Pakistan to redirect orders away from competitors, resulting in a 40 percent increase in goods exports in January 2019. Knitwear, cotton textiles, and bed-wear are among the commodity groupings that have benefited from export subsidies, as well as a significant reduction in import duties on textile intermediates and a favourable exchange rate in recent years.
Other sectors are also receiving subsidies and incentives from the government in order to diversify exports and lessen reliance on textiles. Additional regulations were implemented to encourage firms to expand into new markets, particularly in the pharmaceutical, engineering, and chemical industries. Going forward, the country must diversify its exports and increase its low export-to-GDP ratio (now about 10%), for example, by tariff reductions to encourage manufacturers to export and compete in global markets.
The total effects of increasing commodity prices on domestic pricing are unknown, because they are dependent on local economic pass-throughs. In March, the first full month since the war began, inflation in Pakistan remained consistent with past trends, with higher inflation in food oils and fuel-related categories, but lower inflation in wheat at 5%.
On the budgetary side, increased government debt under Covid may necessitate fiscal consolidation measures, which may face political opposition. Pakistan’s general government debt has surpassed 70% of GDP, India’s has beyond 80%, while Sri Lanka and the Maldives have surpassed 100% of GDP (World Bank Macro Poverty Outlook).
Bhutan’s general government debt had already surpassed 100% of GDP in FY2018/19, and it is expected to reach 135 percent of GDP in FY2020/21, owing to greater gross financing needs from hydropower projects during the epidemic. India has pursued revenue-led consolidation to lower its debt burden, depending on increases in goods and services tax and fuel-based tax revenues while attempting to reign in current spending in FY2021/22.
Pakistan had already followed through on its agreement with the IMF to eliminate tax loopholes and raise fuel taxes. However, growing domestic energy prices and political resistance have compelled the government to provide power and fuel price relief. The cost of financing price cuts or subsidies could add to the fiscal budget’s burden, jeopardise the IMF’s ongoing programme, and limit the fiscal budget’s usage for other, more productive programmes.
Due to the effects of the crisis in Ukraine and chronic economic issues, growth in South Asia, which is already unequal and weak, will be slower than originally expected, according to the World Bank’s twice-yearly regional assessment.
The newest South Asia Economic Focus Reshaping Norms: A New Way Forward, released on Wednesday, forecasts 6.6 percent growth in 2022 and 6.3 percent growth in 2023 for the area. In comparison to the January prognosis, the 2022 forecast has been revised downward by 1.0 percentage point.
South Asian countries are already dealing with rising commodity costs, supply shortages, and banking sector risks. The war in Ukraine will exacerbate these problems, contributing to higher inflation, larger fiscal deficits, and worsening current account balances.
“In the last two years, South Asia has been hit by a slew of shocks, including the devastating impacts of the Covid-19 outbreak. The World Bank’s Vice President for South Asia, Hartwig Schafer, stated that “high oil and food prices induced by the war in Ukraine will have a significant detrimental impact on people’s real incomes.” “In light of these challenges, governments must carefully prepare monetary and fiscal policies to mitigate external shocks and protect the most vulnerable while building the groundwork for green, resilient, and inclusive growth.”
Despite the fact that GDP growth has been stable during the recovery, all nations in the area will confront problems in the future. Household consumption in India will be restrained by the labour market’s incomplete recovery and inflationary pressures. The Maldives is vulnerable due to its high fossil fuel imports as a percentage of GDP and a drop in tourists from Russia and Ukraine. Due to fiscal and external imbalances, Sri Lanka’s economic outlook is severely unpredictable.
Higher food costs in Afghanistan will worsen food insecurity. Pakistan’s energy subsidies, which are the highest in the area, are one of the country’s current issues. Bangladesh’s exports will be less in demand in Europe. On a more positive note, service exports from the region are increasing.
The war and its impact on gasoline prices can give the area the incentive it needs to lessen dependency on imported fuels and shift to a more sustainable, resilient, and inclusive growth path. The research advises countries to avoid inefficient fuel subsidies, which disproportionately favour wealthy people while draining public funds. South Asian countries should also make strides toward a cleaner economy by gradually putting levies on products that harm the environment.
Hans Timmer stated, “The introduction of green taxation can have numerous quantitative benefits for South Asia, including better energy security, environmental gains, and increased fiscal revenues.”
“These funds might be used to prepare for and respond to climate-related calamities, as well as to bolster social safety net institutions.”
Another issue confronting the region is the pandemic’s disproportionate economic impact on women. The research provides an in-depth analysis of gender discrepancies in the region and their links to deeply ingrained societal norms, as well as policy recommendations to enhance women’s economic opportunities, combat discriminatory attitudes, and improve gender outcomes for inclusive growth.
