Economic tales of South Asia

A glance at the World Banks report on Global Economic Prospects, issued earlier this week, shows that the economic difficulties facing Pakistan are common to the South Asian region as a whole. The menace of resilient inflationary pressures afflicts the region as much as it affects Pakistan, and the causes for this are quite similar too -unrelenting fiscal deficits, high food inflation, hefty oil prices and currency devaluation. Most of the South Asian countries, including India, Bangladesh, Pakistan and Sri Lanka, have tried to pull the reins on these inflationary pressures through a tight monetary policy stance for most of 2011 and former part of 2012. For the rest of 2012, inflationary expectations remain high for the region, with only a modest, short-lived decline expected at best. Pass-through of higher international oil prices and increase in electricity prices in countries like Pakistan, Bangladesh and Sri Lanka; along with expectations of the same in India continue to fuel inflationary pressures. Hefty fiscal deficits are another Achilles heel of the South Asian region. Fuel and fertiliser subsidies, significant government borrowing, and fiscal slippages continued to mire the South Asian economies on the fiscal side for most of 2011-12. The region has also been a laggard as far as tax revenues in terms of GDP is concerned. "South Asia on an average has the highest fiscal deficits among the six developing regions," said the WBs report. Trade and current account balances, another key economic indicator, left a lot to be desired for the region as a whole. Weak demand in key export markets, together with high oil prices had kept the trade balances of countries in the region subdued for most of 2011-12. With the exception of remittances, private capital flows in the region have been dwindling. No respite is expected, going forward, as the report says, "Net private capital flows to South Asia are projected to fall a further 24 percent in 2012, with bank lending and bond inflows declining sharply by more than 70 percent. Portfolio equity flows are expected to also weaken by a third in 2012 from a low base in 2011, while net FDI inflows are also likely to weaken by more than 10 percent." Going forward, growth in the region is expected to be slow for most of 2012. Growth in India has decelerated sharply of late, while uncertainties in domestic policies in most countries and a fragile external environment will also take a toll on the economies. "The already loose stance of fiscal policy and high inflation rates in South Asia imply that there is limited space for demand stimulus in the event of a negative external or domestic shock," warns the WBs Global Economic Prospects report. Weakening global demand and declining international commodity prices could ease pressure on the current account positions of South Asian countries. Reducing intra-regional trade barriers, alleviating energy constraints and fiscal discipline could help the region with its economic woes.