South Asian econ­omy

The Pak Banker - - FRONT PAGE -

The South Asian re­gion ap­pears to be in a growth mode. Ac­cord­ing to the ' World Eco­nomic Sit­u­a­tion and Prospects 2018' pub­lished by the United Na­tions, pos­i­tive eco­nomic out­look is wide­spread across the South Asian re­gion, with most economies pro­jected to see stronger growth rates in 2018 as com­pared to 2017. The eco­nomic out­look re­mains steady, driven by ro­bust pri­vate con­sump­tion and sound macroe­co­nomic poli­cies. Ac­cord­ing to the UN re­port, mon­e­tary pol­icy stances are mod­er­ately ac­com­moda­tive, while fis­cal poli­cies in sev­eral economies main­tain a strong em­pha­sis on in­fra­struc­ture in­vest­ment. The re­cov­ery of ex­ter­nal de­mand is also but­tress­ing growth.

In the opin­ion of UN ex­perts, re­gional GDP growth is ex­pected to strengthen to 6.5 per cent in 2018 and 7.0pc in 2019, fol­low­ing an es­ti­mated ex­pan­sion of 6.3pc in 2017. Among the smaller economies in the re­gion, eco­nomic ac­tiv­ity in Pak­istan is ex­pected to re­main vig­or­ous, with GDP growth pro­jected to reach 5.5pc and 5.2pc in 2018 and 2019, re­spec­tively. Eco­nomic ac­tiv­ity will be sup­ported by a pickup in ex­ports and ris­ing in­vest­ment de­mand, which is ex­pected to ben­e­fit from an im­prov­ing busi­ness sen­ti­ment, the China-Pak­istan Eco­nomic Cor­ri­dor (CPEC) and other in­fra­struc­ture ini­tia­tives. How­ever, a ris­ing cur­rent ac­count deficit cou­pled with a re­cent de­te­ri­o­ra­tion of fis­cal ac­counts, poses risks to the base­line pro­jec­tion.

In a re­gional con­text, in­fla­tion is ex­pected to re­main sta­ble and at rel­a­tively low lev­els. The over­all in­fla­tion prospects re­main be­nign across the re­gion. Con­sumer price in­fla­tion reached a multi-year record low of 4.9pc in 2017, due to rel­a­tively low com­mod­ity prices, wan­ing de­pre­ci­a­tion pres­sures and good har­vest sea­sons in most coun­tries that have sup­ported lower food prices, no­tably in In­dia. Con­sumer price in­fla­tion in South Asia is ex­pected to rise mod­er­ately to 5.8pc in 2018 and 5.9pc in 2019, still well be­low his­tor­i­cal lev­els in the re­gion. The favourable prospects for in­fla­tion, cou­pled with mostly sus­tain­able cur­rent ac­count deficits, will fa­cil­i­tate macro-eco­nomic pol­icy man­age­ment across the re­gion in the near term. Over­all, this pos­i­tive out­look is a con­tin­u­a­tion of the im­prove­ment in eco­nomic con­di­tions in South Asia over the past sev­eral years, and will con­tribute to grad­ual progress in labour mar­ket in­di­ca­tors and a re­duc­tion in poverty rates.

How­ever, South Asian economies face sev­eral down­side risks and un­cer­tain­ties, which could sig­nif­i­cantly al­ter the pro­jected growth tra­jec­tory. On the do­mes­tic front, the re­form agenda, a cru­cial ele­ment of higher pro­duc­tiv­ity growth, could ex­pe­ri­ence set­backs in some coun­tries, while height­ened re­gional geopo­lit­i­cal ten­sions may re­strain in­vest­ment projects. On the ex­ter­nal front, the mon­e­tary nor­mal­i­sa­tion process in the United States poses risks to fi­nan­cial sta­bil­ity across the re­gion. Tighter global liq­uid­ity con­di­tions could sig­nif­i­cantly af­fect cap­i­tal flows into the re­gion, lead­ing to a spike in fi­nanc­ing costs, de­pre­ci­a­tion in ex­change rates and a de­cline in eq­uity prices.

This could ad­versely im­pact bank­ing and cor­po­rate sec­tor bal­ance sheets as well as the ca­pac­ity to roll over debt, es­pe­cially in coun­tries with rel­a­tively low fi­nan­cial buffers and high dol­lar de­nom­i­nated debt. Amid rel­a­tively high lev­els of pub­lic debt, fis­cal poli­cies are of­fi­cially in a mod­er­ately tight stance in most economies. On­go­ing fis­cal con­sol­i­da­tion ef­forts, how­ever, have yielded dif­fer­ent lev­els of progress, as pub­lic bud­gets have been more ex­pan­sion­ary. The UN re­port em­pha­sises that de­spite a favourable eco­nomic sit­u­a­tion, there are cru­cial ar­eas that South Asia needs to ad­dress to un­leash its growth po­ten­tial and to pro­mote a more sus­tained and in­clu­sive de­vel­op­ment path in the long term.

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