Outlook

The outlook for regional growth remains highly uncertain, given the synchronized nature of the slowdown in growth across the globe.
There are significant uncertainties tied to potential negative feedback loops between the real and financial sectors within and among countries and about how massive swings in commodity prices and exchange rate will ultimately affect different industries.

In the baseline scenario of a deep global recession followed by a slower-than-normal recovery, GDP growth in South Asia is projected to slow sharply to 5.5 percent in 2009, compared with 7.1 percent in 2008, on a calendar-year basis (see table below).
This compares favorably with the deceleration in growth of 4.7 percentage points projected for all developing countries and especially with Europe and Central Asia, Latin America and the Caribbean, and the OECD economies where output is projected to decline.

All components of demand are being hit, with investment growth in particular being compressed by a contraction in external demand—with world trade projected to contract 10 percent in 2009.

Private consumption is projected to decelerate in the wake of job losses, weaker remittance inflows, and heightened uncertainty.
Government consumption is also projected to ease significantly, as a result of falling revenues and higher borrowing costs.

The regional fiscal balance is projected to deteriorate in 2009 to a deficit of 10.9 percent of GDP from an estimated 8.9 percent in 2008.
On the expenditure side, higher borrowing costs will also come into play.

Interest payments represent over 20 percent of total outlays for South Asia, by far the highest share among developing regions.
India, Pakistan, and Sri Lanka are most vulnerable in this respect, with interest payments accounting for 20 percent, 26.3 percent, and nearly 29 percent of central government expenditures, respectively.

On the revenue side, the collapse in trade activity is disproportionately hitting the revenue stream because taxes on international trade represent nearly 15 percent of revenues for the region, more than double the share for developing countries as a group.
Bangladesh and the Maldives are particularly reliant on taxes on trade, which represent 33 percent and 30 percent of their total revenues, respectively. 

In response to the collapse in external demand, regional exports of goods and services are projected to contract in 2009.
All export categories are facing downward pressures; information technology industries (India) are considered especially vulnerable to the downturn in financial sector activity, and textile exports (Bangladesh, Pakistan, Sri Lanka) and tourism (Bhutan, Maldives, Nepal, and Sri Lanka) are vulnerable to cuts in discretionary spending.

However, the regional current account deficit is projected to shrink to 1.7 percent of GDP in 2009 from 3.9 percent in 2008 because import expenditures are projected to slow sharply with weaker domestic demand growth, given the projected improvement in the terms of trade.

Weak economic conditions in high-income countries are projected to reduce remittances in labor-exporting countries in 2009.
For example, foreign employment of Bangladeshi workers declined 27.4 percent in the eight months ending March 2009, compared with the same period in the preceding year.

Inevitably this decline will result in a significant downward adjustment in remittance inflows to the country over the coming period.
Although remittances are typically countercyclical—expatriates tend to send more money to their country of origin in times of need—the synchronized character of the global recession has made them procyclical.

They represent a key supply of foreign exchange for regional economies—equivalent to 18 percent of GDP in Nepal, and 9 percent in both Bangladesh and Sri Lanka (2007), 4 percent in Pakistan, and 3 percent in India.
In dollar terms, India received $27 billion in remittance inflows 2007, the highest level of inflows among developing countries.

In Pakistan, remittances are estimated to have covered 47 percent of the surging current account deficit in fiscal year 2007/08.

Given the region’s strong underlying growth dynamics, the negative impacts of the crisis are expected to begin to unwind in 2010 and 2011, with a projected rebound in GDP growth to 7.1 percent and 7.7 percent, respectively (see table below).
The relatively rapid recovery in regional activity to close to potential output growth comes despite the weak recovery projected elsewhere and reflects the lagged impact of recent monetary policy easing— with some potential for further interest rate cuts.

Fiscal stimulus measures, where they are being pursued, should also provide a boost to household income and spending.
Nevertheless, given the extent of the slowdown already absorbed, over the forecast period GDP growth will persist below the 8.3 percent average outturn in the five years through 2007.