Prospects of an economic rebound in South Asia are firming up as growth is set to increase by 7.2% in 2021 and 4.4% in 2022, the World Bank said in its latest regional report, but warned recovery would be uneven, calling on governments to ramp up vaccination programs and redouble focus on reforms.
In addition to being uneven, economic activity is projected to be well below pre-COVID-19 estimates. This is due to many businesses needing to make up for lost revenue and millions of workers, most of them in the informal sector, still reel from job losses, falling incomes, worsening inequalities, and human capital deficits, says the World Bank in its twice-a-year regional update.
The latest ‘South Asia Economic Focus: South Asia Vaccinates’ shows that the region is set to regain its historical growth rate by 2022. Electricity consumption and mobility data is a clear indication of recovering economic activity. India, which comprises the bulk of the region’s economy, is expected to grow more than 10% in the fiscal year 2021-22—a substantial upward revision of 4.7% points from January 2021 forecasts.
The outlook for Bangladesh, Nepal, and Pakistan has also been revised upward, supported by better than expected remittance inflows. Bangladesh’s gross domestic product (GDP) is expected to increase by 3.6% in 2021; Nepal’s GDP is projected to grow by 2.7% in the fiscal year 2021-22 and recover to 5.1% by 2023; Pakistan’s growth is expected to reach 1.3% in 2021, slightly above previous projections. Sri Lanka’s growth outlook however is unchanged at 3.3%, which is below the 5.5% targeted by the Sri Lankan Government.
The improved economic outlook reflects South Asian countries’ efforts to keep their COVID-19 caseload under control and swiftly roll out vaccine campaigns. Governments’ decisions to transition from widespread lockdowns to more targeted interventions, accommodating monetary policies and fiscal stimuli—through targeted cash transfers and employment compensation programs—have also propped up recovery, the report notes.
“We are encouraged to see clear signs of an economic rebound in South Asia, but the pandemic is not yet under control and the recovery remains fragile, calling for vigilance,” said World Bank Vice President for the South Asia Region Hartwig Schafer told reporters.
“Going forward, South Asian countries need to ramp up their vaccination programs and invest their scarce resources wisely to set a foundation for a more inclusive and resilient future.”
While laying bare South Asia’s deep-seated inequalities and vulnerabilities, the pandemic provides an opportunity to chart a path toward a more equitable and robust recovery. To that end, the report recommends that governments develop universal social insurance to protect informal workers, increase regional cooperation, and lift customs restrictions on key staples to prevent sudden spikes in food prices.
With economic activity bouncing back, manufacturing is leading the recovery. The Purchasing Managers’ Indices (PMI) available for India and Sri Lanka provide a good idea of this situation for sales in the leading sectors of the economies, the report said.
In both cases, the sharp falls were historic: India’s services suffered a much larger impact than manufacturing did, but manufacturing recovered faster toward the end of the year. Both sectors have been in an expansion phase for at least six months in India.
For Sri Lanka, the initial fall was similar for services and manufacturing, but manufacturing expanded faster (except for the impact of the strict October lockdown with curfews, which temporarily affected all activities).
Merchandise exports in both countries mirror closely the manufacturing PMI, with possibly a one-month lag. These dynamics are most likely due to manufacturing activity being linked to the strong recovery in China and the global recovery in goods trade, which show a very similar pattern.
Estimated deviations from pre-COVID forecasts of electricity demand suggest that economic activity for the four largest South Asian economies is close to pre-COVID levels.
“The key going forward will be credible monetary policies, and most central banks in the region have taken a cautionary approach to not stimulate too much in the six months ending mid-March. Policy rates were kept stable after June/July, as central banks tried to decipher how much inflation was supply bottlenecks and how much stemmed from pent-up demand.”
As food inflation finally fell starting around September, central banks became less concerned about inflation and more about engineering a steady recovery, considering broad-based cost-push pressures that could spill over into output prices as demand recovered.
The Reserve Bank of India, for example, is projecting inflation at 5.2% for the first quarter of 2021 as demand recovers, 5% in the following two quarters, and then 4.3% by the end of the year—slightly above its unchanged inflation target of 4%.
The difficulty was gauging how much of the drop in consumption was forced savings and how much was the result of more permanent income losses. Consumer confidence indicators in India and Pakistan were also in negative territory by mid-2019, suggesting some pessimism about the economy.
In India, this indicator continued falling throughout 2020, reflecting increasingly pessimistic consumer sentiment (In Pakistan, the majority of people surveyed in 2020 were pessimistic but not as drastically as in India). Imports in the region were already falling before the crisis, though barely, when the crisis led to an almost 50% drop.
By the end of 2020, import growth was still in negative territory. With repressed imports, relatively stable exchange rates, FDI inflows (in the case of India), and a sufficient international reserves buffer in most countries, concerns of short-term capital outflows diminished. Exchange rates against the dollar also retreated to pre-COVID levels, with end-year rates showing only a slight, nominal depreciation against the dollar.
As a result, major central banks have maintained policy rates steady since mid-2020. Moreover, stock prices in major South Asian equity markets continued to grow since the trough in April 2020, in line with other emerging markets.
Weak domestic import demand and private sector credit showed some reversion in Q3 2020, though this weak demand growth preceded the crisis. Until consumers become more optimistic and the financial sector can get back to full force, the recovery will take time.
With depressed household demand and subdued expectations, an additional concern will be the extent of the damage to the financial sector. There are concerns that financial vulnerabilities could resurface as moratoriums are gradually phased out. There has been a steady drop in domestic private sector credit growth in major economies, which was already evident in 2019.
“Some central banks have lent to governments. Financial sector weaknesses have worsened, and lending to the government has increased in Bangladesh, where 70% of the COVID-19 stimulus was provided as subsidised credit supplied by the financial sector. In Pakistan, the end of the moratorium on Government borrowing from commercial banks poses a risk to the financial sector. Sri Lanka’s Government has also relied heavily on lending from commercial banks.”
The rise in expenditure and shortfall in revenue have resulted in a sizeable increase in fiscal deficits across the region. The report said the situation was “problematic” in Sri Lanka, with a fiscal deficit of 12.6% of GDP in 2020 (after including arrears payments).
“Sri Lanka’s fiscal sustainability was challenging even before the pandemic and has been leading to significant foreign exchange shortages amid high debt service due. Public and publicly guaranteed debt is expected to reach 109.7% of GDP, exacerbating debt sustainability concerns.”
The impacts of COVID-19 are not gender-neutral and play out in South Asia along different channels. In terms of health impacts, similar to the global trend of higher fatalities for men, women in South Asia have been underrepresented in COVID-19 fatalities. This could be due to differences in the incidence of comorbidities, access to preventive measures, or possibly incomplete reporting of sex-disaggregated deaths and testing. Due to the novelty of the virus and consequent uncertainty, timely and reliable data are key for policymakers to respond effectively.
The preliminary evidence available suggests adverse economic and human capital impacts for women. Women are considered more vulnerable to job and earning losses due to the nature of their work—largely informal, service-sector jobs, especially in the care economy, which require in-person contact. Further, prolonged lockdowns to suppress the virus in South Asia have implied higher risks for domestic violence and reduced access to education for girls.
(FT)