December 13, 2006 -- In 2006, GDP in South Asia is estimated to have expanded at a very rapid pace of 8.2%.
Factors contributing to this trend:
Progress in promoting private sector–led growth
Greater integration with the global economy
Loose monetary and fiscal policies and strong remittance inflows have boosted domestic demand
Restrictions on Chinese exports of textiles and clothing, and strong external demand, kept export growth strong
South Asia Growth Projections for 2007 and 2008
GDP in South Asia is projected to slow gradually to a still robust 7.5% in 2007 and 7% in 2008.
Factors contributing to the expected slowdown are weaker external demand, reflecting slower growth in the United States in 2007, tighter domestic monetary and fiscal policies, and tighter international monetary conditions.
Should policy not tighten and demand continue to expand well in excess of supply, inflation outturns will be higher, current account deficits larger, and the subsequent slowdown more pronounced and disruptive. Further, widening inequality in the region will not only make growth less potent at reducing poverty, but it may lead to new social conflict or exacerbate existing ones.
Political tensions, both domestic and external, also pose risks. The simmering domestic conflict in Sri Lanka and the international tensions on Pakistan’s borders generate instability and reduce confidence, acting as drags on growth, particularly of investment. An escalation of these situations —or the emergence of political conflict elsewhere in the region — could lead to a fall in output, with potentially serious consequences for the most vulnerable members of society.
Fiscal Deficits in South Asia
Despite rapidly rising tax revenues, fiscal deficits remain elevated at 7.1% of GDP overall because of increased implicit subsidization of energy costs and major public-sector investment programs.
Higher government expenditures for reconstruction tied to natural disasters has contributed to government deficits, notably in Bangladesh, the Maldives, Pakistan, and Sri Lanka. These factors have contributed to very rapid investment growth - over 13% in India and 8% in Pakistan.
The largest deterioration was recorded in Sri Lanka, where the current account deficit is projected to reach about 4.9% of GDP in 2006 compared with 2.8% in 2005, owing to a sharp rise in import growth combined with weaker export growth.
Substantial remittance inflows and weak domestic demand are estimated to have supported Nepal’s current account surplus at more than 2% of GDP, while in Bangladesh, remittances and strong export growth are expected to bring the current account to a surplus of nearly 1% of GDP.
Inflation in South Asia
Reflecting very strong demand, inflation in the region has risen from an average of 3.8% in 2003 to 7.8% in September. In 2006, inflation was up in Bangladesh, India, and Nepal. Tighter monetary policies in Pakistan are expected to bring inflation down to about 8% from 9.1% in 2005.
Import - Export
The influence of excessive domestic demand was also reflected in the strength of import volumes, which are estimated to have grown by 24% in 2006. As a result, notwithstanding a record 22% increase in exports, the external sector made a - 1.7% contribution to regional growth.
Higher-than-anticipated international oil prices due to a significant interruption of supply also are an important risk for the region. Higher prices would have a direct impact on inflation, the current account deficit, and the government balance because of increased government spending on fuel subsidies.
A drought and increased fighting are expected to slow growth in Afghanistan to a still robust 12%.
India’s GDP to expand by an estimated 8.7% in 2006.
India, the largest economy in the region, led the way with GDP expanding by an estimated 8.7% in 2006—backed by nonagricultural growth in excess of 10%. Very low real interest rates combined with an improved business climate and rising household savings have enabled higher investment rates, helping to sustain stronger growth.
Slower investment growth in response to tighter financial conditions and weaker consumer and government consumption (as fiscal policy tightens) are expected to contribute to a moderation of GDP growth to about 7.2% over the forecast horizon (2008).
Output in Pakistan is estimated to have slowed from 7.8 to 6.6%, following a return to more normal agricultural production in the wake of a bumper harvest in 2005.
Neither fiscal nor monetary policy are likely to turn restrictive in the run up to the 2007 presidential election. As a result, GDP in Pakistan is expected to pick up to 7% in 2007 bolstered by an expansion in agricultural production and increased capacity following government infrastructure investments and private sector investments in the textile sector.
Sri Lanka’s GDP to expand by an estimated 7% in 2006.
In Sri Lanka growth picked up to an estimated 7%, thanks to a good harvest, post-tsunami recovery, and reconstruction activity (including tourism, despite increased political uncertainty).
Growth in Sri Lanka is projected to be sustained at current rates, supported by a number of post-tsunami infrastructure and reconstruction projects (ports, roads, buildings) and by an expected recovery in tourism.