South Asia's Growth to Moderate but Remain Strong in 2006-2007, Says ADB

News Release | 6 April 2006

HONG KONG, CHINA - South Asia's growth is expected to moderate to 7.3% in 2006 as a result of some slowing in India and Pakistan, but then rise slightly to 7.5% in 2007, according to a major ADB report released today. The region grew 7.8% in 2005.

Average inflation for the region in 2006 is expected to increase to 6.1% as removal of subsidies on some petroleum products in a number of countries boosts domestic prices. Most countries are projected to see somewhat larger current account deficits with the regional average projected at 3% of GDP.

"Evidence is growing that South Asia is moving on to a higher growth path. But future growth will require progress on reforms across the region," said ADB Chief Economist Ifzal Ali in launching the 2006 edition of ADB's flagship annual economic publication, Asian Development Outlook (ADO).

"Focused investment aimed at breaking infrastructure bottlenecks in key economies would also open the door to stronger growth in the medium-term," he said.

ADO 2006 forecasts overall growth for the 43 countries of developing Asia of 7.2% in 2006 and 7% in 2007.

Afghanistan continued its solid track record of macroeconomic and structural reforms in 2005 and elections were held without major disruptions. Growth is projected to remain strong at 11.7% in fiscal year (FY) 2006 and 10.6% in FY2007. Inflation is forecast to moderate to 8% this year and 5% in 2007, while the budget and balance of payments lessen their heavy dependence on grant assistance. Though insecurity and the opium trade hinder nation building, medium-term growth prospects are favorable. Transforming the economy to a sustainable footing will require the Government's continued commitment to its reform agenda and greater effort to promote private sector activity.

GDP growth in Bangladesh is forecast at 6.5% in FY2006, reflecting a steady increase in domestic and external demand, with a moderation to 6% in FY2007. In this period inflation should remain in the 6%-7.5% range as subsidies in domestic prices of petroleum products are reduced. Continued large worker remittances will help keep the current account deficit at 1% of GDP. Major development challenges need to be tackled if investment is to rise and move the country onto the higher growth path required for rapid poverty reduction - including substantial improvements to infrastructure, public policy, and governance.

Bhutan has established a record of sustained solid growth based on utilization of its vast hydropower resources for export, sound policies, and strong support from development partners. GDP growth is expected to rise about 2 percentage points each year to 10% in 2006 and 12% in 2007, as production from the 1,020 megawatt Tala hydropower project is phased online.

India's growth has averaged more than 8% over the past three years driven by broad-based domestic demand and expansive business dynamics. GDP is projected to grow 7.6% in FY2006 and 7.8% in FY 2007 as consumption and investment demand are slightly held back by price adjustments to reduce domestic petroleum subsidies and somewhat higher interest rates. India faces two key policy challenges as it continues its structural transformation. First, it must maintain consolidation of its fiscal position while ensuring spending on infrastructure improvements to support industry and services development, and investment to advance rural productivity and human development. Second, it needs to improve the investment environment by lowering the cost of doing business.

The Maldives was hit hard by the 2004 tsunami and GDP is estimated to have fallen 5.5% in 2005. This followed a strong performance in 2004 with robust growth, increasing per capita income, and macroeconomic indicators that reflected prudent policies. GDP is expected to grow 9% in 2006, moderating to 6% in 2007.

In Nepal the economy faltered in 2005, reflecting a weather-related decline in paddy production, disruption caused by insurgency, a downturn in tourism, and continued weak growth in industry. GDP growth is forecast to slow to 2% in FY2006 because of poor weather affecting production of both winter and summer crops. Growth is projected to pick up to 3.4% in FY2007, assuming normal weather and greater public and private investment. The outlook is hostage to the insurgency and political instability.

Pakistan grew 8.4% in 2005, its fastest rate of growth in the past two decades, but inflation also pushed higher and the current account slipped from surplus to deficit. Growth is projected to soften to 6.5% in FY2006, mainly due to slower agricultural output, and to pick up to 7.3% in FY2007. A tightening of monetary policy is expected to bring inflation down to 8.5% this year and to 7.6% in 2007. The medium-term outlook is favorable for growth in the range of 6%-8%, assuming continued robust performance in economic management, greater investment to ease infrastructure bottlenecks, continued security and political stability.

The economic impact of the tsunami on Sri Lanka was muted, despite its devastating human cost. Talks between the Government and the Liberation Tigers of Tamil Eelam in February 2006 have improved the overall climate on the status of the ceasefire. Accordingly, GDP growth is forecast at 5.3% in 2006 and 5.2% in 2007; performance in line with the long-term trend. Inflation is projected to remain high at 8%-9% as administered prices for petroleum products and power are increased to reduce subsidies.