SOUTH ASIA ECONOMIC FOCUS FALL 2018 2 SOUTH ASIA ECONOMIC FOCUS | FALL 2018
© 2018 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved 1 2 3 4 21 20 19 18 This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Nothing herein shall constitute or be considered to be a limitation upon or waiver of the privileges and immunities of The World Bank, all of which are specifically reserved.
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This work is available under the Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO) http://creativecommons.org/licenses/by/3.0/igo. Under the Creative Commons Attribution license, you are free to copy, distribute, transmit, and adapt this work, including for commercial purpos- es, under the following conditions: Attribution—Please cite the work as follows: World Bank. 2018. Budget Crunch. South Asia Economic Focus (October), Washington, DC: World Bank. Doi: 10.1596/978-1-4648-1369-6. License: Creative Commons Attribution CC BY 3.0 IGO Translations—If you create a translation of this work, please add the following disclaimer along with the attribution: This translation was not created by The World Bank and should not be considered an official World Bank translation. The World Bank shall not be liable for any content or error in this translation. Adaptations—If you create an adaptation of this work, please add the following disclaimer along with the attribution: This is an adaptation of an original work by The World Bank. Views and opinions expressed in the adaptation are the sole responsibility of the author or authors of the adaptation and are not endorsed by The World Bank. Third-party content—The World Bank does not necessarily own each component of the content contained within the work. The World Bank therefore does not warrant that the use of any third-party-owned individual component or part contained in the work will not infringe on the rights of those third parties. The risk of claims resulting from such infringement rests solely with you. If you wish to re-use a component of the work, it is your responsibility to determine whether permission is needed for that re-use and to obtain permission from the copyright owner. Examples of components can include, but are not limited to, tables, figures, or images. All queries on rights and licenses should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; e-mail: [email protected]. ISBN (electronic): 978-1-4648-1369-6 DOI: 10.1596/978-1-4648-1369-6 Cover photo: World Bank and JohnnyGreig/istock Design: Alejandro Espinosa/sonideas SOUTH ASIA ECONOMIC FOCUS | FALL 2018 3 Hari Mahidhar / Shutterstock.com 4 Hari Mahidhar / Shutterstock.com SOUTH ASIA ECONOMICFOCUS|FALL 2018 SOUTH ASIA ECONOMIC FOCUS | FALL 2018 5
his report is a joint product of the Office of the Chief Economist for the South Asia Region (SARCE) and the Macroeconomics, Trade and Investment Global Practice (MTI). Its preparation was led by Robert Beyer (Economist) under the oversight of Martin Rama (Chief Economist, South Asia Region) in close collaboration with Manuela Francisco T(Practice Manager, MTI). Substantive contributions were made by Milagros Chocce, Ishita Dugar, Lazar Milivojevic and Rucheta Singh (in alphabetical order, all SARCE). The report greatly benefitted from inputs from Temel Taskin and other colleagues in the Development Economics Prospects Group (DECPG) under the supervision of Ayhan Kose (Director DECPG). We are very grateful for comments and suggestions provided by Enrique Blanco Armas, Poonam Gupta, Zahid Hussain, Fernando Gabriel Im, Taehyun Lee, Mona Prasad, Aurelien Kruse, Florian Blum, and Adnan Ashraf Ghumman (all MTI), as well as to Prof. Ila Patnaik (National Institute of Public Finance and Policy, Delhi), Martin Melecky (Finance, Competitiveness and Innovation Global Practice), and to Fan Zhang (SARCE). Colleagues providing information for country briefs include Mona Prasad, Tobias Akhtar Haque, Taehyun Lee, Zahid Hussain, Shegufta Shahriar, Afroza Alam, Nazmus Sadat Khan, Yoichiro Ishihara, Aurelien Kruse, Rangeet Ghosh, Fernando Gabriel Im, Kishan Abeygunawardana, Roshan Darshan Bajracharya, Kene Ezemenari, Enrique Blanco Armas, Adnan Ashraf Ghumman under supervision of Manuela Francisco (Practice Manager, MTI). Alejandro Espinosa at Sonideas signed responsible for the layout, design and typesetting, Alexander Ferguson (Senior Manager, South Asia External Communications) and Yann Doignon coordinated the dissemination, Gonzalo Alberto Villamizar De La Rosa created accompanying videos, and Neelam Chowdhry provided valuable administrative support. South Asia as used in this report includes Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. The cutoff date for this report was October 1, 2018.
South Asia Chief Economist Office Macroeconomics, Trade and Investment Global Practice 6 SOUTH ASIA ECONOMIC FOCUS | FALL 2018 Dario Diament / Shutterstock.com SOUTH ASIA ECONOMIC FOCUS | FALL 2018 7
Table of Contents
Recent economic developments 8
A generally positive picture 10 Five tensions to watch 12 A turbulent external environment 19
South Asia economic outlook 24
Budget crunch 32
Limited room for maneuver 34 Amplification of boom-and-bust cycles 37 A build-up of liabilities 40 A fiscal “reading” of development challenges 43 Summing up 48
South Asia country briefs 52
South Asia at a glance 72 8 SOUTH ASIA ECONOMIC FOCUS | FALL 2018
Recent economic developments CRS PHOTO / Shutterstock.com CRS PHOTO Recent economic developments SOUTH ASIA ECONOMIC FOCUS | FALL 2018 10 Recent economic developments
outh Asia remains the fastest-growing region in the world and its performance has strengthened further, with growth rates exceeding 7 percent in Bangladesh, India and Maldives. Inflation remains near or below targets, but it has picked up in some countries. The external environment, while remaining conducive, has become more turbulent. Monetary Spolicy is being adjusted accordingly, but fiscal policy is not equally responsive and fiscal deficits remain large. Despite strong demand from advanced economies and considerable depreciation of domestic currencies, imports are still growing stronger than exports in most countries. International reserves remain comfortable in most cases, but they are generally declining. Rising oil prices add further pressure on South Asia’s high current account deficits.
growth has been decelerating since the third quarter of A generally positive picture 2017 and was only 2 percent in the second quarter of 2018. Developing countries grew by 5 percent during Global growth has stabilized at a relatively high level the first half of this year. and is particularly strong in the United States, a key export destination for the region. The world has been In a positive development for the region, remittances growing above 3 percent since the second quarter of are holding well or are even increasing. Remittances 2017. Growth in the United States accelerated to 2.6 per- are an important source of foreign reserves and a key cent in the first quarter of this year and further to 2.9 in contributor to domestic demand and poverty reduc- the second quarter, roughly twice the growth rate of two tion in several South Asian countries. With many South years ago. In other OECD countries, on the other hand, Asian migrants working in Gulf countries, remittances are
Figure 1: Growth has plateaued at the global level but is accelerating in the US. Real GDP growth Percent change, y-o-y 6
5
4
3
2
1
0 2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 2017 Q4 2018 Q1 2018 Q2 Developing countries United States World OECD (excluding United States)
Source: World Bank and staff calculations. SOUTH ASIA ECONOMIC FOCUS | FALL 2018 Recent economic developments 11
Figure 2: Remittances are holding well or are even increasing. Remittance flows Percent change, y-o-y 40
30
20
10
0
-10
-20
-30 2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 2017 Q4 2018 Q1 2018 Q2 Ban lades India Ne al akistan Sri anka Source: Haver Analytics and staff calculations. sensitive to international oil prices. Their amount had de- Asia increased for five consecutive quarters – from 5.5 creased substantially after oil prices dropped in 2015 and percent in the second quarter of 2017 to 8.1 percent in remained low throughout 2016, but it is now recovering. the second quarter of 2018. Meanwhile, growth in East Over the last year, the flow of remittances has increased Asia and the Pacific – the other leading region – slightly strongly in Bangladesh and India. In the second quarter decreased in the second quarter of 2018, to 6.4 percent. of this year, remittances to these two countries were 18 Elsewhere the moderation is sharper. Growth in Sub-Sa- percent and 28 percent higher than a year earlier, re- haran Africa decreased from 2.6 percent in the last quar- spectively. In Pakistan and Sri Lanka, on the other hand, ter of 2017 to 1.7 percent in the second quarter of 2018. remittances are nearly at the same level as one year ago. Growth in Latin America and the Caribbean decreased to 1.8 percent and 1.6 percent in the last two quarters. In this conducive environment, South Asia remains In the Middle East and North Africa, growth decreased the fastest-growing region in the world, and the gap from 5.1 percent in the third quarter of 2017 to 2.4 percent with East Asia has even widened. Growth in South in the second quarter of this year.
Figure 3: South Asia is consolidating its position as the fastest-growing region. Regional real GDP growth Percent change, y-o-y 14
12
10
8
6
4
2
0
-2 2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 2017 Q4 2018 Q1 2018 Q2
East Asia and Pacific uro e and Central Asia iddle ast and Nort Africa Su Sa aran Africa atin A erica and t e Cari ean Sout Asia
Source: World Bank and staff calculations. SOUTH ASIA ECONOMIC FOCUS | FALL 2018 12 Recent economic developments
Figure 4: Except for Afghanistan, growth rates are relatively strong and stable. Real GDP growth Percent
8
6
4
2
0 Afghanistan (CY) Bangladesh (FY) Bhutan (FY) India (FY) Maldives (CY) Nepal (FY) Pakistan Sri Lanka (CY) (FY, factor prices) (f)
Note: (f) = forecast, CY = calendar year, FY = fiscal year. Afghanistan, Maldives and Sri Lanka are in calendar years. For Bangladesh, Nepal and Pakistan, year 2016 refers to fiscal year 2015/16. For Bhutan and India, year 2016 refers to fiscal year 2016/17. Source: World Bank.
Growth rates differ across South Asian countries, but stock market is below the level of one year ago, closer they are substantial in most cases and have been quite to the level of Spring 2017. But in Pakistan the Karachi stable over time. Due to its size, India drives regional per- Stock Exchange has been hovering around 40,000 formance. Its growth rate has been steadily increasing over the last year, despite concerns about the country’s since the second quarter of 2017, offsetting a decline that macroeconomic situation. And in India, the stock mar- had lasted for five quarters. From 5.6 percent back then, ket declined somewhat at the beginning of the year but the growth rate has climbed to 8.2 percent in the sec- started increasing again around April and remains high- ond quarter of this year. Growth performance improved er than one year ago. in other South Asian countries as well. In Bangladesh, the growth rate is officially reported to have reached 7.9 percent in FY 2017/18, driven by consumption and public Five tensions to watch investment. In Maldives, growth is projected to reach 8.0 percent this year thanks to strong dynamism in tourism Growth is strong, but not driven and construction. In Pakistan growth accelerated to 5.8 by exports or manufacturing percent during FY 2017/18, and in Sri Lanka it is project- ed to reach 3.9 percent this year. Elsewhere, economic Domestic consumption has been the main contributor growth has slowed down. In Nepal it had been excep- to economic growth across the region, with exports or tionally strong in FY 2016/17, due to reconstruction efforts investment being remarkably subdued. In Bangladesh, after the 2015 earthquakes, and moderated to 6.3 per- private and government consumption contributed 8.5 cent last fiscal year. In Bhutan, growth is decelerating as percentage points to growth in FY 2017/18, compared the investment into hydropower construction is decreas- to only 3.2 percentage points contributed by invest- ing due to major projects nearing completion. Growth in ment. The net effect of exports and imports decreased Afghanistan remains the lowest in South Asia, by far, and growth by over 4 percentage points. Similarly, in Paki- is projected to decrease to 2.4 percent this year. stan growth was overwhelmingly driven by domestic consumption last fiscal year. In India and Sri Lanka, the Stock markets have been relatively stable across contribution of investment is projected to be relatively South Asia, and especially strong in India. Across the more important in 2018, but even there the main driver developing world, the appreciation of the US dollar and remains domestic consumption. In both countries ex- concerns about the normalization of monetary policy ports contribute relatively little to growth. in advanced economies took a toll on share prices. But despite the growing turbulence in international markets, Industrial production is holding well, but it grows slow- declines have been more muted in South Asia. The er than GDP in most countries. South Asia’s industrial stock market in Bangladesh peaked at the beginning of production grew by only 5.4 percent in the second quar- 2018, and since then has decreased by over 10 percent. ter of 2018, slightly lower than a quarter before. In India Similarly, in Sri Lanka, the stock market index fell by 10 it grew by 5 percent, in Pakistan by 4.5 percent, and in percent from January to September. In both cases the Sri Lanka by only 0.6 percent. In Bangladesh industrial SOUTH ASIA ECONOMIC FOCUS | FALL 2018 Recent economic developments 13
Figure 5: Stock markets are performing relatively well.
Index Bangladesh, Dhaka Stock Exchange DSE 6500
6000
5500
5000
4500
4000 Jul-17 Jul-18 Jul-16 Oct-17 Apr-17 Feb-18 Jan-17 Jun-17 Jun-18 Sep-18 Sep-16 Dec-17 Dec-16 Aug-17 Aug-16 Mar-18 Mar-17 Nov-17 Nov-16 May-18
Index India, Bombay Stock Exchange SENSE 40000
35000
30000
25000 Jul-18 Jul-17 Jul-16 Oct-17 Apr-17 Feb-18 Jan-17 Jun-18 Jun-17 Sep-18 Sep-16 Dec-17 Dec-16 Aug-17 Aug-16 Mar-18 Mar-17 Nov-17 Nov-16 May-18
Index Pakistan, arachi Stock Exchange 100
55000
50000
45000
40000
35000 Jul-17 Jul-18 Jul-16 Oct-17 Apr-17 Feb-18 Jan-17 Jun-17 Jun-18 Sep-18 Sep-16 Dec-17 Dec-16 Aug-17 Aug-16 Mar-17 Mar-18 Nov-17 Nov-16 May-18
Index Sri Lanka, Colombo Stock Exchange ASPI
7000
6500
6000
5500 Jul-18 Jul-17 Jul-16 Oct-17 Apr-17 Feb-18 Jan-17 Jun-18 Jun-17 Sep-18 Sep-16 Dec-17 Dec-16 Aug-17 Aug-16 Mar-18 Mar-17 Nov-17 Nov-16 May-18
Source: Haver Analytics. SOUTH ASIA ECONOMIC FOCUS | FALL 2018 14 Recent economic developments
Figure 6: Strong growth, but not driven by exports … Contributions to growth forecasts in 2018 Percentage points
15
10
5
0
-5
-10 Bangladesh (FY) India (FY) Pakistan (FY) Sri Lanka (CY) overn ent consu tion rivate consu tion I orts Gross fixed investment orts Real ro t ( ercent)
Source: World Bank and staff calculations.
Figure 7: … while industrial production is generally lagging aggregate growth. Industrial production growth Percent, y-o-y
8
6
4
2
0
-2
-4 2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 2017 Q4 2018 Q1 2018 Q2
Sout Asia Ban lades India Sri anka akistan Source: World Bank and staff calculations.
production growth moderated for three consecutive benchmark to assess inflationary pressures is to compare quarters but is at over 10 percent still very strong. Ad- actual inflation rates with inflation targets. This comparison mittedly, industrial production is a volatile indicator and reveals whether policy makers are confronting unexpect- changes need to be interpreted with caution, especially ed developments on the price front and allows assessing for individual countries. But it is safe to say that the region how successful stabilization policies have been. In this re- is not experiencing a broad-based manufacturing boom, spect, it is reassuring that inflation rates remain in line with as could be hoped for given its development level. the explicit or implicit inflation targets of the authorities in most South Asian countries. Across South Asia, actual in- Inflation is close to target, but it is flation has been minimally below the target in September. accelerating in some countries In some countries, however, consumer prices are in- The strong growth performance of the region has not creasing faster than in previous years. Consumer prices been accompanied by inflationary pressures so far. A in the region as a whole grew by 3.7 percent in March 2018, SOUTH ASIA ECONOMIC FOCUS | FALL 2018 Recent economic developments 15
Figure 8: Headline inflation is generally close to target… Inflation and distance to policy target Percentage points
7
6
5
4
3
2
1
0
-1
-2 Bangladesh India Pakistan Sri Lanka China Japan Euro Area US ifference fro inflation tar et Inflation (Se t )
Note: Sri Lanka has not yet moved to explicit inflation targeting; the target used is the center point of the Monetary Policy Consultation Clause (MPCC) of 4.7 percent. For Bangladesh inflation is from August 2018. Sources: Inflation target data is from Haver Analytics (National Authorities). Current inflation data is from Trading Economics. Distance to inflation is based on staff calculations.
Figure 9: …but headline inflation has picked up in the largest countries in the region.
South Asia consumer price inflation Percent change, y-o-y 12
10
8
6
4
2
0
-2 Jul-18 Jul-17 Jul-16 Oct-17 Oct-16 Apr-18 Apr-17 Feb-18 Feb-17 Jan-18 Jan-17 Jun-18 Jun-17 Sep-18 Sep-17 Sep-16 Dec-17 Dec-16 Aug-18 Aug-17 Aug-16 Mar-18 Mar-17 Nov-17 Nov-16 May-18 May-17 Sout Asia Af anistan Ban lades B utan India aldives Ne al akistan Sri anka
Source: World Bank and staff calculations.
1.2 percentage points less than a year earlier. Regional External demand has improved, but inflation rates mask the trend because they give equal trade balances remain weak weight to all countries, and the smaller ones have been on a different trajectory. Since May 2017, the inflation rate Import demand in South Asia’s key markets has been has fallen considerably in Afghanistan and the Maldives, strong, and South Asian currencies have generally with both countries experiencing deflation lately. But the depreciated, even more than those of other emerging acceleration is visible in some of the larger countries. In economies. Total imports in the US grew by 4.0 percent Sri Lanka and Pakistan, inflation rates went up from below last year and import growth is projected to strengthen to 4 percent in April to 5.9 percent in August. In September, 5.3 percent this year. In the Euro Area, imports grew by however, inflation in Sri Lanka fell back to 4.3 percent driv- 5.4 percent last year and are expected to continue on en by slower growth in food prices. And in India, inflation the same trend this year. The potential boost to South reached 4.9 percent in May and June but then decreased Asian exports has been amplified by currency deprecia- again to 3.7 percent in August and September. tion. Over the course of 2018, all South Asian currencies SOUTH ASIA ECONOMIC FOCUS | FALL 2018 16 Recent economic developments
Figure 10: South Asian currencies are depreciating… US Dollar per national currency Percent change, January to September 2018 2
0 -2
-4
-6 -8
-10
-12 -14
-16 Pakistan Bhutan India Nepal Afghanistan Sri Lanka Bangladesh Indonesia China Thailand Vietnam Fro anuary to uly
Sources: Haver Analytics and staff calculations.
Figure 11: …but the growth of exports remains lower than the growth of imports. Growth of exports Growth of imports Percent, y-o-y Percent, y-o-y 35 35
25 25
15 15
5 5
-5 -5
-15 -15
-25 -25 2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 2017 Q4 2018 Q1 2018 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 2017 Q4 2018 Q1 2018 Q2 Ban lades India akistan Sri anka Ban lades India akistan Sri anka
Note: The figures refer to merchandise exports and imports only. Source: World Bank and staff calculations.
lost ground against the USD. The trend was especially exports. In India and Pakistan recent nominal exchange pronounced in India. The Indian Rupee fell by 14 percent rate depreciations have led to a depreciation of the real since the beginning of the year. The Reserve Bank of effective exchange rates. And indeed, in Pakistan import India has smoothed out the trend, but it has not funda- growth came down quite dramatically from its peak of mentally opposed it. After a period of strong foreign ex- over 30 percent in the first quarter of last year. But at 9.1 change intervention, also Pakistan has allowed its cur- percent it is only marginally lower than the 10.4 percent rency to depreciate substantially. The lowest value was growth in exports. In India, import growth moderated from reached by end-July, at 129 Rupees per USD. Despite a over 30 percent a year ago to 6.9 percent now, and ex- modest rebound subsequently, there was a 10 percent ports are growing faster than imports. But overall, South depreciation compared to the beginning of the year and Asia does not look like an export powerhouse at this point. a 14 percent depreciation compared to one year before. External buffers are generally solid, Despite strong import demand and currency deprecia- but current account deficits are large tion, export performance remains disappointing while imports are still growing rapidly. In Bangladesh and Sri With a few exceptions, the level of international re- Lanka, import growth accelerated in the second quarter serves is relatively high in the region. Reserves in India of 2018, relative to the same period a year before. The and Bangladesh are at comfortable level and can cover 10.1 percent growth in imports experienced by Sri Lanka 9.3 and 7.6 months of imports respectively. Compared stands in sharp contrast with its 2.4 percent growth in to the beginning of the year, this is 0.8 months lower SOUTH ASIA ECONOMIC FOCUS | FALL 2018 Recent economic developments 17
Figure 12: The level of international reserves is comfortable in most cases… Foreign exchange reserves Months of imports
14
12
10
8
6
4
2
0 Jul-18 Jul-17 Jul-16 Oct-17 Oct-16 Apr-18 Apr-17 Feb-18 Feb-17 Jan-18 Jan-17 Jun-18 Jun-17 Sep-17 Sep-16 Dec-17 Dec-16 Aug-18 Aug-17 Aug-16 Mar-18 Mar-17 Nov-17 Nov-16 May-18 May-17
Ban lades India aldives akistan Sri anka
Source: World Bank.
Figure 13: … but current account deficits are sizeable. Current account balance Percent of GDP
2
1
0
-1
-2
-3
-4
-5
-6
-7
-8 2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 2017 Q4 2018 Q1 2018 Q2
Ban lades India Ne al akistan Sri anka
Note: Quarterly GDP for Bangladesh, Pakistan, Nepal, Afghanistan is derived from annual GDP and assumed to be constant for all four quarters. Sources: Quarterly current account data is from Trading Economics. Quarterly GDP data for India and Sri Lanka is from Haver Analytics. for India and 0.5 months higher for Bangladesh. In Sri however. In Maldives reserves are increasing but cover Lanka reserves increased by over USD 1 billion due to less than 3 months of imports. And in Pakistan a weaker the issuance of a USD 2.5 billion bond that marked the macroeconomic situation and a delayed adjustment of country’s return to the US capital market. With a cover- the exchange rate led to considerable loss of reserves, age of 5.0 months of imports, the level of reserves is now bringing coverage down to 1.5 months of imports by prudent. Not all countries have such substantial buffers, end-September 2018. SOUTH ASIA ECONOMIC FOCUS | FALL 2018 18 Recent economic developments
However, current account deficits have been grow- 5.80 billion in the second quarter of 2018. The growth ing across most of South Asia and buffers are being of imports is partly the result of capital goods imports eroded in some cases. In Sri Lanka, the deficit bottomed for the China Pakistan Economic Corridor (CPEC), but out at the end of 2016, but the balance has remained it is also the consequence of growing macroeconomic negative since then and was still 1.9 percent of GDP in imbalances. the third quarter of 2017. In India, the current account has been in a deficit since 2004 and amounted to 2.2 Monetary policy is responsive, percent of GDP in the second quarter of this year. In Ban- but fiscal policy less so gladesh, the current account was in surplus during most of 2016, but it declined from plus 1.0 percent of GDP in Monetary authorities are responding to the infla- the third quarter of 2016 to minus 3.9 percent of GDP in tionary signs, as well as to growing exchange rate the second quarter of 2018. The sharpest deterioration pressures. Nepal is the only South Asian country that was in Pakistan, with the current account deficit worsen- has left the policy rate unchanged for the last cou- ing from USD 220 million the first quarter of 2016 to USD ple of years, at 7 percent. Pakistan began to raise its
Figure 14: Monetary policy is adjusting to rising inflation and external pressure… Official interest rate (policy instrument/base rate) Repo rate (EOP, percent) 10
9
8
7
6
5
4 Jul-18 Jul-17 Jul-16 Oct-17 Oct-16 Apr-18 Apr-17 Feb-18 Feb-17 Jan-18 Jan-17 Jun-18 Jun-17 Sep-18 Sep-17 Sep-16 Dec-17 Dec-16 Aug-18 Aug-17 Aug-16 Mar-18 Mar-17 Nov-17 Nov-16 May-18 May-17 Ban lades India Ne al akistan Sri anka
Sources: Haver Analytics and Reuters.
Figure 15: … but fiscal policy is not being equally responsive.
Fiscal balance Percent of GDP
2
0
-2
-4
-6
-8
-10
-12 2016 2017 2018 (f) Af anistan (CY) Ban lades (FY) B utan (FY) India (FY) aldives (CY) Ne al (FY) akistan (FY) Sri anka (CY) Note: (f) = forecast, CY = calendar year, FY = fiscal year. Afghanistan, Maldives and Sri Lanka are in calendar years. For Bangladesh, Nepal and Pakistan, year 2016 refers to fiscal year 2015/16. For Bhutan and India, year 2016 refers to fiscal year 2016/17. Source: World Bank. SOUTH ASIA ECONOMIC FOCUS | FALL 2018 Recent economic developments 19 policy rate in January and India in June of this year. of GDP a year earlier and the deficit of the center be- The policy rate in Pakistan was increased from 6.3 ing stable at 3.5 percent of GDP. Fiscal discipline is not percent in January to 8.5 percent in September to equally strong across all Indian states. contain pressures on the exchange rate. In India, the policy rate increased from 6.0 percent in May 2018 to 6.5 percent in August 2018, in response to a pick-up A turbulent external in inflation. The Central Bank of Sri Lanka has left the policy rate unchanged due to the fragility of economic environment growth but injected liquidity in the domestic market and intervened in the foreign exchange market during The international price of oil has been on an upward September. trend, and this matters to South Asia because the re- gion is a net oil importer. Oil prices started increasing In contrast with the responsiveness of monetary poli- again since January 2016, after having reached a low cy, fiscal policy remains expansionary across most of of 28 USD per barrel. At the beginning of this year, the the region. Fiscal deficits have been traditionally large price stood at 67 USD per barrel and it went up further in South Asia, especially when considering the deficits to above 85 USD in the beginning of October. This is still of sub-national levels of government. In recent years, much lower than before the oil price collapse of 2014 – public expenditures grew much faster than revenue generation in several of the countries. While some coun- the average price of oil during the first half of 2014 was tries used to display a positive budget balance, all of 109 USD per barrel. Nevertheless, the upward trend puts them have been running deficits since 2017. In Sri Lanka, further pressure on South Asian economies. the fiscal deficit is projected to reach 5.2 percent of GDP in 2018, despite a primary surplus, due to heavy interest Higher oil prices put further pressure on current ac- payments. Maldives saw substantial fiscal consolida- counts but may also have an indirect impact on fiscal tion, but its deficit is still expected to stand at 5.3 percent deficits.On the positive side, with many South Asian mi- of GDP this year. In Nepal and Bangladesh, the fiscal grants working in Gulf countries, higher oil prices raise deficit rose to 5.8 percent and an estimated 4.1 percent the prospect of a sustained growth in remittances. But respectively in FY 2017/18. In Pakistan it reached 6.5 all countries in the region are oil importers, raising the percent, up from 5.8 percent in the previous fiscal year. prospect that trade balances may deteriorate further. In And in India it attained 6.6 percent, with state deficits the past, the impacts of higher oil prices on economic improving slightly to 3.1 percent of GDP from 3.5 percent activity have been relatively muted, mainly because
Figure 16: International oil prices are increasing again. Crude oil prices: Brent - Europe USD/Bbl
120
100
80
60
40
20
0 Jul-18 Jul-17 Jul-16 Jul-15 Jul-14 Jul-13 Jan-18 Jan-17 Jan-16 Jan-15 Jan-14 Sep-18 Sep-17 Sep-16 Sep-15 Sep-14 Sep-13 Mar-18 Mar-17 Mar-16 Mar-15 Nov-17 Mar-14 Nov-16 Mar-13 Nov-15 Nov-14 Nov-13 May-18 May-17 May-16 May-15 May-14 May-13
Source: Haver Analytics. SOUTH ASIA ECONOMIC FOCUS | FALL 2018 20 Recent economic developments
Figure 17: Emerging markets have become more vulnerable… External vulnerability 50
AR 40
30