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. 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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 SOUTH ASIA ECONOMIC FOCUS | FALL 2018 Hari Mahidhar / Shutterstock.com 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 Banlades India Neal Pakistan 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.