WASHINGTON, D.C. — South Asia is regaining its economic momentum, but the recovery in the world’s region with the largest number of poor people could falter in the absence of a stronger investment climate, said the latest South Asia Economic Focus report of the World Bank.
According to the report, the combined growth of Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka was just 4.7% in 2012, substantially below pre-crisis levels. A pick-up to 5.5% can be expected in 2013 with ongoing efforts to regain fiscal space and boost private investment. But given the uncertain global environment, it will be important to strengthen the investment climate.
“How countries manage their economies in the face of uncertainties in the global environment will be critical not only for addressing near-term current account and fiscal deficits but also for tackling South Asia’s long-term challenges,” said Martin Rama, chief economist for the South Asia Region at the World Bank.
The report, a twice-yearly look at South Asia’s economic prospects, said that the region is now more vulnerable because current account balances have widened, foreign direct investment has slowed, and persistently high inflation has limited the ability for central banks to use monetary policy to counter any economic downturn. Because of rising imports, countries in South Asia are also more vulnerable to increases in commodity prices.
Some countries, notably the Maldives and Pakistan, have seen their reserves dwindle to critical levels. And in India, Sri Lanka and Bhutan, fiscal deficits remain high. Fiscal buffers are beginning to be rebuilt in several South Asian countries, most recently in India. Further progress will require improving tax revenue collection and curbing energy subsidies, among other measures.
Much of the recent slowdown in economic growth can be attributed to stagnating investment. Total fixed investment grew by 2.6% in 2012, down from a high of 16.7% in 2010. The performance varies widely across the region. For example, total investment in Pakistan during the 2011/12 fiscal year hit a historic low of 12.5% of GDP, while India is projected to register investment at 30.6% for fiscal year 2012/13, only slightly down from the previous year.
In common with global trends, most countries in South Asia have increased their levels of foreign direct investment (FDI) over the last decade. But much of this is skewed toward the services sectors, such as construction, financial and business services, with less going toward agriculture or manufacturing. This, to a large degree reflects a lack of attractive investment opportunities. Some countries, notably Bangladesh and Pakistan, have recently suffered significant declines in overall FDI.
“Exports and domestic consumption are expected to contribute only modestly to growth, and so a revival in investment will be critical for South Asia to regain momentum,” said Rama. “Over the next 20 years, more than 1 million new workers will be entering the South Asian labor force each month. Countries will need to improve their business climate to attract the private sector investment needed for these new entrants to find productive jobs, thereby reducing poverty and boosting shared prosperity.”
