With growth topping 6.9 percent in 2018 and set to accelerate to 7.1 percent next year, South Asia is firming up its position as the world’s fastest-growing region, further extending its lead over East Asia and the Pacific, says the World Bank in its twice-a-year regional economic update.
The latest edition of the South Asia Economic Focus, Budget Crunch, finds however that the region’s growth performance is uneven across countries—with Afghanistan notably bucking the upward trend—and mainly driven by domestic demand.
Further, the report warns that a more turbulent external environment, manifested by trade wars and capital outflows from emerging markets, calls for prudent economic policy and fiscal discipline. Instead, most South Asian countries generate low tax revenue and run large budget deficits, often made worse by economic shocks and election cycles. At 4.4 percent of its gross domestic product (GDP), South Asia’s fiscal deficit is projected to be the second largest in the world this year after the Middle East and North Africa region. The average fiscal deficit over the last three years has been around 5.5 percent in Pakistan and above 6 percent in Maldives, India, and Sri Lanka.
“Budget deficits in South Asia are among the highest in the world, and this could be storing up trouble for the future,” said Hartwig Schafer, World Bank Vice President for the South Asia Region. “South Asia’s fiscal weaknesses reduce its ability to address external shocks or economic slowdowns. It would be wise to use these good economic times for countries to get their budgets in better shape.”
While fiscal challenges vary across the region, the report notes that tax revenue is consistently low across most South Asian countries and at rates below that of other developing countries with a similar income per capita, sometimes by a vast margin. Although some countries have expanded their tax bases and curbed tax exemptions and fraud, revenue remains lower than government expenditures, creating large fiscal deficits that need to be financed through public borrowing.
South Asian countries have also favored procyclical approaches to spending—with expenditures going up fast as their economies expand—that amplifies boom-and-bust cycles.
Together with public debt, hidden liabilities, arising from non-viable borrowing by state-owned enterprises, the failure of infrastructure projects involving the private sector, and non-performing loans in commercial banks, should be closely monitored.
While fiscal outcomes vary across the region, the fiscal situation in each country reveals more profound development challenges, which range from large security expenditures in conflict-affected countries, weak discipline by sub-national governments in federal states, to the high cost of service delivery in island nations.
“Substantial government spending is understandable, even beneficial if well-invested, given South Asia’s enormous development needs,” said Martin Rama, World Bank Chief Economist for the South Asia Region. “But South Asian economies need to address their fiscal challenges to give themselves room to maneuver and sustain their journey toward greater prosperity.”
Afghanistan. Growth is projected to pick up, but only to 3.2 percent by 2020. Importantly, this projection presumes a recovery of confidence after a temporary weakening due to security challenges and political uncertainty in the context of the upcoming parliamentary and presidential elections.
Bangladesh. Growth will be strong, driven by consumption and public investment, but it is projected to slow to an average of 6.9 percent over the forecast horizon. This is due to a projected slowdown of private investment and an increase of imports.
Bhutan. Growth will accelerate with the commissioning of two major hydropower projects, Mangdechhu and Punatsangchhu-II. The growth rate is projected to jump from 4.6 percent in this fiscal year to 7.6 percent in FY 2019/20, before moderating again to 6.4 percent in FY 2020/21.
India. Prompted by the adoption of the Goods and Services Tax and the recapitalization of banks, growth in India is firming up and it is projected to accelerate further. Growth is projected to rise to 7.3 percent in FY 2018/19, and to 7.5 percent in the following two years, with stronger private spending and export growth as the key drivers.
Maldives. Growth is projected at a strong 8.0 percent this year, based on the dynamism of the construction and tourism sectors. But is projected to decelerate in the next two years as new capital investment projects gradually begin to taper off.
Nepal. Economic activity is set to grow on average 6 percent over the medium term. However, performance could be less impressive if the challenging transition to a federalist system affects infrastructure provision and service delivery.
Pakistan. Macroeconomic stabilization policies will take a toll on growth this fiscal year. GDP growth is expected to fall to 4.8 percent in FY 2018/19, reflecting a tighter fiscal and monetary policy. However, with improved macroeconomic conditions, growth could reach 5.2 percent in FY 2019/20, provided that there is a firming of exports and continued implementation of CPEC.
Sri Lanka. Economic growth is projected to recover from the effects of last year’s weather disruptions, which negatively affected agriculture, and to remain around 4 percent in the next two years.
Critical Reforms Needed to Reduce Inflation and Accelerate the Recovery
While the government took measures to protect the economy against a much deeper recession, it would be essential to set policy foundations for a strong recovery, according to the latest World Bank Nigeria Development Update (NDU).
The NDU, titled “Resilience through Reforms”, notes that in 2020 the Nigerian economy experienced a shallower contraction of -1.8% than had been projected at the beginning of the pandemic (-3.2%). Although the economy started to grow again, prices are increasing rapidly, severely impacting Nigerian households. As of April 2021, the inflation rate was the highest in four years. Food prices accounted for over 60% of the total increase in inflation. Rising prices have pushed an estimated 7 million Nigerians below the poverty line in 2020 alone.
The report acknowledges notable government’s policy reforms aimed at mitigating the impact of the crisis and supporting the recovery; including steps taken towards reducing gasoline subsidies and adjusting electricity tariffs towards more cost-reflective levels, both aimed at expanding the fiscal space for pro-poor spending. In addition, the report highlights that both the Federal and State governments cut nonessential spending and redirected resources towards the COVID-19 response. At the same time, public-sector transparency has improved, in particular around the operations of the oil and gas sector.
The report however, notes that despite the more favorable external environment, with recovering oil prices and growth in advanced economies, a failure to sustain and deepen reforms would threaten both macroeconomic sustainability and policy credibility, thereby limiting the government’s ability to address gaps in human and physical capital which is needed to attract private investment.
“Nigeria faces interlinked challenges in relation to inflation, limited job opportunities, and insecurity”, said Shubham Chaudhuri, the World Bank Country Director for Nigeria. ”While the government has made efforts to reduce the effect of these by advancing long-delayed policy reforms, it is clear that these reforms will have to be sustained and deepened for Nigeria to realize its development potential.”
This edition of the Nigeria Development Update proposes near-term policy option organized around three priority objectives:
- Reduce inflation by implementing policies that support macroeconomic stability, inclusive growth, and job creation;
- Protect poor households from the impacts of inflation;
- Facilitate access to financing for small and medium enterprises in key sectors to mitigate the effects of inflation and accelerate the recovery.
“Given the urgency to reduce inflation amidst the pandemic, a policy consensus and expedite reform implementation on exchange-rate management, monetary policy, trade policy, fiscal policy, and social protection would help save lives, protect livelihoods, and ensure a faster and sustained recovery” said Marco Hernandez, the World Bank Lead Economist for Nigeria and co-author of the report.
In addition to assessing Nigeria’s economic situation, this edition of the NDU also discusses how the COVID-19 crisis has affected employment; how inflation is exacerbating poverty in Nigeria; how reforming the power sector can ignite economic growth; and how Nigeria can mobilize revenues in a time of crisis.
Indonesia: How to Boost the Economic Recovery
Indonesia’s economy is projected to rebound from the 2020 recession with 4.4 percent growth in 2021. The rebound is predicated on the pandemic being contained and the global economy continuing to strengthen, according to the World Bank’s latest Indonesia Economic Prospects report (“Boosting the Recovery”), released today.
The report highlights that although consumption and investment growth were subdued during the first quarter of 2021, consumer sentiment and retail sales started to improve during the second quarter suggesting stronger growth momentum. However, it also notes that pandemic related uncertainty remains elevated due to risks of higher viral transmission.
“Accelerating the vaccine rollout, ensuring adequate testing and other public health measures, and maintaining strong monetary and fiscal support in the near term are essential to boosting Indonesia’s recovery,” said Satu Kahkonen, World Bank Country Director for Indonesia and Timor-Leste. “Parallel reforms to strengthen the investment climate, deepen financial markets, and improve fiscal space for longer-term sustainability and growth will be important to further build consumer and investor confidence.”
The report recommends the government to develop a well sequenced medium-term fiscal strategy, including clear plans to improve tax revenues and fiscal space for priority spending. It also highlights the importance of maintaining accommodative monetary policy and stimulating private credit to support the real sector while monitoring external and financial vulnerabilities.
The report highlights the critical role of adequate social assistance in mitigating rising poverty risks. It finds that maintaining the 2020 social assistance package in 2021 could potentially keep 4.7 million Indonesians out of poverty.
This edition of the report also looks at the possibilities for Indonesia to boost higher productivity jobs and women’s economic participation.
“Indonesia has reduced poverty through job creation and rising labor incomes over the past decade. The next stage is to create middle-class jobs that are more productive, earn higher incomes, and provide social benefits,” said Habib Rab, World Bank Lead Economist for Indonesia. “While the crisis risks have exacerbated Indonesia’s employment challenges, it is also an opportunity to address the competitiveness and inclusion bottlenecks to creating middle-class jobs and strengthening women’s participation in the economy.”
The report recommends a four-pronged reform strategy to address these jobs-related challenges:
- Mitigate employment losses by maintaining adequate job retention programs, social assistance, training, and reskilling programs until the recovery is stronger.
- Boost productivity and middle-class jobs by promoting competition, investment, and trade.
- Equip the Indonesian workforce to hold middle-class jobs by investing in education and training systems and programs to improve workers’ skills.
- Bring more women into the labor force and reduce earning gaps between men and women by investing in child and elderly care and promoting private sector development in the care economy.
The Indonesia Economic Prospects Report is supported by the Australian Department of Foreign Affairs and Trade.
Inequality Has Likely Increased in PNG, with Bottom 40% Hit Hardest by Latest Outbreak
A joint World Bank and UNICEF report based on mobile phone surveys of Papua New Guinean families has found that while there was a slight recovery in employment between June and December 2020, people in the bottom 40% of wealth distribution remain the hardest hit by the Coronavirus pandemic.
Conducted in December 2020, this second World Bank survey (the first was conducted in June 2020), shows that inequality has likely increased in PNG in the year since the pandemic began, and that the current COVID-19 outbreak is expected to deepen inequalities even further.
“According to the report, there were positive signs that PNG was starting to recover from the initial shocks of the pandemic between June and December 2020,” explained Stefano Mocci, World Bank Country Manager for Papua New Guinea. “However, it was largely wealthier households who were experiencing the fastest recovery in employment and income. In contrast, in areas with above average poverty, there were still high job losses.”
“Given a possible third wave of COVID-19 infections has strong potential to cause further declines in employment and income, social and economic support needs to be targeted to those most vulnerable – the bottom 40% – to try and lessen the widening inequality gap.”
“Little is known about how COVID-19 affects children in PNG,” expressed Judith Bruno, acting UNICEF PNG Representative. “Overwhelmingly, households with children under the age of 15 considered COVID-19 as a major threat to household finances and reported decreases in access to basic services, including water supply, sanitation, health care, and mental health and psychosocial support.”
“This World Bank and UNICEF collaboration will help policy makers and responders to better protect children from the virus, promote safe and continued access to services, and prevent children and their families from further economic hardship.”
Other key findings from the second of five planned World Bank surveys include:
· For those still working, more than 75% of respondents reported receiving the same income as usual in the past week, compared to less than 50% in June (the strongest gains were for those in the top 40% of wealth distribution);
· Rural households, and those in the bottom 40% of wealth distribution, were most likely to see decreases in money sent by friends or family.
· 77% of households were somewhat worried, or very worried, about their household finances in the next month.
· 33% of households in the bottom 40% of wealth distribution were unable to buy their preferred protein, compared to just four percent of households in the top 40%.
· Less than 10% of primary and elementary school students participated in distance learning while schools were closed, but there were no significant differences between boys and girls returning to school and no evidence that the pandemic has widened the education gender gap.
· Compared to the rest of the country, households in the National Capital District (NCD) were more likely to report deteriorations in theft, alcohol and drug abuse, violence by police and domestic abuse since June 2020 – all indicators of rising tensions in the capital, Port Moresby.
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