TOKYO, JAPAN - South Asia's economic growth is expected to moderate to 7.7% in 2007 and rise slightly to 8% in 2008. Tight monetary policy measures taken by several countries in the region in 2006 are expected to dampen consumption while investment and growth in developed countries ease, according to a major ADB report released today.
The services sector is expected to drive economic growth in South Asia, supported by accelerated growth in manufacturing, according to ADB's flagship annual economic publication, Asian Development Outlook (ADO).
South Asia's economy expanded by 8.7% in 2006, supported by growth in consumption and investment. The region has averaged more than 7.5% growth since 2003, allowing it to reduce poverty levels in India, Pakistan, and Bangladesh. Every economy in the region posted growth of more than 6% in 2006, except Nepal, which suffered in the wake of political unrest.
India clocked the highest growth of 9.2% among the large economies and Maldives grew at 18.2%, fastest among the small economies.
Tight monetary policies taken by several countries in 2006 and improved fiscal balances will help the region rein in inflation at about 5% in 2007 and 2008. High growth rates in the region with elevated interest rates will continue to attract large capital inflows.
"South Asia's recent economic performance shows it has emerged as a new growth pole in Asia", says Ifzal Ali, Chief Economist of the Manila-based multilateral bank. "The region can match East Asia's exemplary growth rates, albeit from a lower base."
ADO 2007 forecasts overall growth for the 43 countries of developing Asia at 7.6% in 2007 and 7.7% in 2008.
Afghanistan's growth rate slowed to 8% in 2006 from 14% in 2005 as the drought dragged down agricultural growth, which accounts for about one-third of the country's economy. Inflows of foreign aid continue to support the country's rapid growth with construction and services being the main drivers.
Pakistan and Bangladesh are projected to post a growth rate of about 6.5% to 7% in 2007 and 2008.
Economic expansion in Bangladesh has been underpinned by private consumption and investment, spurred by substantial workers' remittances from abroad. While it is still early to pass judgment on Bangladesh's economic performance, conditions for doing business could improve if the anticorruption and reform initiatives taken by the caretaker government continue.
Pakistan's growth rate slowed in 2006 to a still brisk 6.6% from an average of 8% in the preceding two years as adverse weather conditions hit key agro-industries and dragged down the growth of the agriculture sector. The robust expansion of the services sector failed to offset the sluggish performance of the agriculture and manufacturing sectors.
India's economic growth is expected to moderate to 8% in 2007 and rise marginally to 8.3% in 2008. Domestic inflationary pressures are expected to wane as the impact of credit tightening measures implemented by the central bank takes hold. ADO 2007 cautions that the pace of economic reforms in India is slowing.
Nepal's economy turned in a sluggish performance, growing at 2.3% in 2005 and 2006. The insurgency adversely affected manufacturing, transport, communication and tourism while inclement weather depressed agricultural performance. The rate of inflation increased to 8% in 2006. The central bank took steps to curb inflation, but the impact has not yet been felt.
The Sri Lankan economy grew at 7.2% in 2006, lifted by the agriculture sector that was spurred by post-tsunami recovery of the fisheries sub-sector and sturdy growth in the service and industrial sectors. But higher government spending, partly due to post-tsunami reconstruction, pushed up the budget deficit to 8.7% of GDP. Demand pressures and rising food and fuel prices pushed the Colombo consumer price inflation rate up to 13.7% in 2006.
Political uncertainty and security concerns in many countries in the region continue to cast a shadow on the outlook and resolution of these critical issues remains key for the region's economic success.
ADO 2007 says the structural policy reforms undertaken by governments in the region that spurred private sector led growth should continue with focus on reducing barriers to employment growth that would reduce poverty.
A pick-up in agricultural productivity, improvement in business climate and infrastructure are key to keeping South Asia on the high growth track. While prescriptions need to be country specific, fiscal prudence, reform of the financial sector, second generation reforms aimed at developing markets and institutions that may be missing or incomplete, and sound energy policies, are key to sustaining accelerated growth in the region, ADO 2007 says.
As India accounts for about 80% of South Asia's GDP, its rapid growth can benefit the region by policies to integrate regional economies. Expansion of intraregional trade and cooperation can help in sustaining fast growth and reducing poverty.