Growth in South Asia expected to moderate in 2023 – WB

The World Bank says that against the balance of positive terms of trade average growth in South Asia is expected to moderate in 2023.

Apart from Bhutan, the growth outlook in the current fiscal year has been adjusted downward for all countries. The largest downward adjustment (1.6 %) is projected for Maldives and Pakistan.

The latter is now expected to grow at a mere 0.4 % in the current fiscal year, implying negative per-capita GDP growth. The contraction of Sri Lanka’s economy is expected to continue this year, with a negative GDP growth of 4.3 % this year after a contraction of 7.8 % last year. India’s growth has been adjusted downward by 0.7 percentage point to 6.3 %, as rising borrowing costs and the consolidation of current fiscal spending dampen consumption.

In Bangladesh, real GDP growth is expected to decelerate to 5.2 %, a downward adjustment of 0.9 percentage point since our last forecast in October 2022. Lower commodity prices, a strong recovery in the services sector, and reduced disruptions in value chains are aiding South Asia’s recovery but rising interest rates and uncertainty in financial markets are putting downward pressure on the region’s economies.

Countries in South Asia, especially those with large external debt, face difficult tradeoffs as they respond to these pressures. Growth prospects have weakened, with large downside risks in most countries given limited fiscal space and depleting foreign reserves. Loan moratorium programs during the pandemic have delayed the recognition of distressed assets. But non-performing loan ratios have started rising, for example in Bangladesh due to high import costs and weak regulatory enforcement, and in Sri Lanka due to rising rates and increased macroeconomic uncertainties. Increased borrowing by the government from domestic banks has crowded out private credit in Pakistan while rising sovereign-bank linkages in Maldives, Pakistan and Sri Lanka have further increased the financial sector’s vulnerability

The report adds that most South Asian countries have finally started fiscal consolidation by reducing inefficient subsidies, raising tax revenues, and tightening expenditures. In Bangladesh and Sri Lanka, fiscal consolidation is supported by recently agreed IMF programs, while negotiations in Pakistan are ongoing. The report also says that South Asia’s production potential is not being fully utilized.

The analysis shows that inequality of opportunity is significantly higher than in other regions of the world. This means that education and labour-market outcomes in South Asia are more determined by factors outside the control of individuals than in other parts of the world.

Going forward, broad reform programs, including a sustainable fiscal outlook, are needed to put South Asia on a more robust and inclusive growth path.