Asian Development Outlook (ADO) September 2022 - Country Outlook
Tuk Tuk drivers waiting for customers in Phnom Penh, Cambodia.

Asian Development Outlook (ADO) 2022 Update: Country Outlook

  • East Asia’s growth is revised down as growth in the People’s Republic of China will be much weaker than expected earlier.
  • Growth in South Asia reflects modest downward revisions to India’s forecast on higher-than-anticipated inflation and monetary tightening, and Sri Lanka’s sharp contraction caused by its sovereign debt and balance-of-payment crises.
  • Growth forecasts are raised for the Caucasus and Central Asia, and the Pacific.
  • The forecast for Southeast Asia remains largely unchanged.

Caucasus and Central Asia

The Russian invasion of Ukraine materially affected the outlook for the Caucasus and Central Asia. The subregional growth projection is raised because of unexpected knock-on effects from geopolitical tensions, such as large incoming money transfers from the sanctioned Russian Federation and robust hydrocarbon exports. With global commodity price hikes, inflation forecasts are raised, and larger current account surpluses are projected because of strong exports and inward transfers to some countries. However, the war’s future effects remain highly uncertain and the risks may prevail.

Despite a challenging external environment, the economy grew by a strong 11.0% in the first half of 2022, more than expected and well above 3.8% growth in the first half of 2021. Growth was underpinned by buoyant private consumption and soaring investment.

Average annual inflation jumped to 8.3% in January–July 2022 from 6.1% a year earlier, reflecting increases of 13.1% for food, 6.4% for other goods, and 3.9% for services. Buoyant domestic demand, rising global commodity prices, and the pass-through effect of higher electricity tariffs from February 2022 and natural gas price hikes from April 2022 all propelled the acceleration. Inflation was 9.3% year on year in July, well above the Central Bank of Armenia’s 2.5%–5.5% target range. To counter inflationary pressure, the central bank tightened monetary policy, raising the policy rate by 175 basis points in three steps to 9.5% in June 2022. With monetary tightening, an expected small moderation in aggregate demand, and strong appreciation of the Armenian dram against the US dollar and euro, ADO 2022 Update slightly reduces the inflation projections for 2022 and 2023.

Growth jumped to 6.2% during the first half of 2022 from 2.1% during the same period in 2021 as the economy aside from the large hydrocarbon industry expanded by 9.6%. Services grew by 9.6%, reflecting strong performance in transportation, a rebound in retail trade, and a doubling of value added in hospitality as pandemic travel bans were lifted. Manufacturing grew by 4.5% with strong gains in construction materials and metals, food processing, and textiles. Mining picked up by 2.5%, with expansion in both oil and gas production, while construction grew by 7.7%. Agriculture stalled during the period, with higher livestock production offsetting a 2.7% decline in crop output.

Inflation during January–June 2022 accelerated to 12.9% year on year from 4.3% in the same period of 2021. Prices rose by 18.4% for food, 6.7% for other goods, and 10.3% for services. High global food price inflation triggered the spike in food prices, while increased tariffs for fuel and other utilities in 2021 boosted inflation in services. A stable exchange rate kept inflation from rising even faster. The jump in inflation led the government to raise the monthly minimum wage by 20% to AZN300. In addition, the central bank raised its policy rate by 50 basis points in two steps to 7.75% in March, maintaining it through July as inflationary pressure moderated. With the jump in inflation during the first part of the year, ADO 2022 Update raises the projection for 2022 but maintains it for 2023 as administered utility prices are expected to remain unchanged.

Growth on the demand side came from strong private consumption, higher export and tourism revenue, and a large inflow of money transfers from Georgians working abroad and Russian citizens entering Georgia. With higher inflow of money transfers and encouraging growth figures, ADO 2022 Update raises growth projections for 2022 and 2023, despite heightened geopolitical risks from the ongoing Russian invasion of Ukraine.

Average annual inflation accelerated to 12.9% in the first 7 months of 2022 from 7.2% in the same period of 2021, led by food prices. Prices rose by 19.0% for food, 9.6% for other goods, and 7.1% for services, including increases of 19.3% for transport and 21.6% for utilities. The producer price index, which often presages increases in consumer prices, rose by 15.0% in the same period, while core inflation—excluding food, energy, and regulated tariffs, including some for transport—was 7.1%. With double-digit inflation in consumer prices, the National Bank of Georgia, the central bank, raised its policy rate by 50 basis points to 11.0% in March 2022 to help contain inflation and manage inflationary expectations. After some volatility following the Russian invasion of Ukraine, the currency appreciated significantly, helping to contain imported inflation. With higher-than-expected global commodity prices and strong domestic growth, ADO 2022 Update raises inflation forecasts for 2022 and 2023.

Investment will stagnate, reflecting a deteriorating global economic outlook under persistent inflation, rate hikes, and declining business confidence amid the Russian invasion of Ukraine. Moreover, the latest central bank enterprise survey reported weakening activity in all sectors except services. With declining confidence and weakening activity outside of services, ADO 2022 Update marginally reduces growth projections for both 2022 and 2023.

Inflation is accelerating, primarily from exogenous shocks. Supply chain disruption, rising energy prices, and currency depreciation have raised the cost of producing and transporting goods. Fiscal support measures help to cushion the negative effects but at the cost of adding to inflationary pressure. The central bank is expected to tighten monetary policy further by raising its key policy rate and absorbing excess liquidity, though inflation will likely remain well above the bank’s target range. With record inflation during the first 7 months of 2022, ADO 2022 Update raises inflation projections for both 2022 and 2023.

The Russian invasion of Ukraine and resulting sanctions on the Russian Federation constrain the outlook for growth because of the Kyrgyz Republic’s close economic ties through remittances, trade, investment, and tourism. The impact of the war is still evolving, and a major slowdown is expected in the second half of this year. Nevertheless, with sustained growth during the first 7 months of the year and a government anti-crisis plan estimated to equal 2.5% of GDP, ADO 2022 Update raises growth projections for 2022 and 2023.

During the first 7 months of 2022, average annual inflation reached 13.0%, mainly due to higher global prices for food and energy and currency depreciation against the US dollar in March and April (though later reversed). Prices rose by 12.6% for food, 5.6% for other goods, and 4.9% for services. To curb inflation and respond to depreciation, the National Bank of the Kyrgyz Republic, the central bank, raised the policy rate in March 2022 by 6.0 percentage points to 14.0%. In addition, the government cut the value-added tax on imports of key staple foods. With inflation expected to remain high in 2022 because of food and energy prices and then moderate slightly in 2023, ADO 2022 Update retains earlier inflation forecasts for 2022 and 2023.

With growth stronger than expected during the first half of 2022, ADO 2022 Update raises growth projections for 2022 and 2023. However, falling remittances, continuing trade disruption, and a slowdown in the Rogun hydropower project are forecast to constrain consumption and domestic business activity later this year.

Reported annual inflation averaged 8.3% in the first half of 2022, down from 9.0% in the same period of 2021. Prices rose by 9.6% for food, 6.6.% for other goods, and 8.4% for services, reflecting a surge in global commodity prices. To restrain inflation, the National Bank of Tajikistan, the central bank, raised its policy rate from 13.25% to 13.50% on 22 August and expanded sales of deposit certificates to absorb liquidity. In response to pressures on the exchange rate from ruble depreciation and the drop in remittances, and to eliminate a significant gap between official and market exchange rates, on 9 March the central bank devalued the Tajik somoni by 15% against the US dollar. The somoni subsequently appreciated by 21% to the end of June as the ruble strengthened against the US dollar. In addition, a hike in electricity tariffs was postponed until 2023. With these developments, this Update cuts inflation forecasts for 2022 and 2023.

Growth at 6.0% for the first half of 2022, as reported by the government, was virtually unchanged from 6.1% reported for the same period in 2021. As reported, supply side growth came from all sectors, with the large hydrocarbon economy expanding mainly from higher production and exports of natural gas, and the nonhydrocarbon economy benefiting from partial relaxation of restrictions on external trade and travel. On the demand side, the government reported increased net exports and higher public investment in industrial and social infrastructure. However, notable inflation continued to limit real household incomes, as did constraints on employment from structural issues, suppressing private consumption. In view of these developments, ADO 2022 Update marginally reduces the growth projection for 2022 but maintains the projection for 2023.

The government has not reported data on inflation for the first half of 2022. However, observed prices for imported food and other products, medicines, and locally produced goods with imported components have continued to rise in line with earlier projections. Monetary policy remains focused on controlling inflation by keeping the official exchange rate unchanged, supplemented by price controls and the distribution of selected foodstuffs at subsidized prices.

Shocks from the Russian invasion of Ukraine on food and energy prices and sluggish future remittances will likely curb household income and consumption in the second half of 2022. With these uncertainties, ADO 2022 Update retains the growth projection for 2022 but raises it slightly for 2023.

Despite higher costs for imported food and capital goods, rising wages and pensions, and price deregulation for domestic wheat, inflation decelerated slightly to 10.6% in the first half of 2022 from 10.9% a year earlier. To stabilize food prices, the authorities exempted tax and customs duties on essential foodstuffs until the end of 2022, helping to slow food inflation to 14.2% from 15.5% a year earlier. Inflation for other goods accelerated from 8.6% to 9.0% but for services slowed from 8.4% to 6.6% as planned energy tariff increases were postponed. In response to external inflationary pressure and depreciation of the Uzbek sum against the US dollar, monetary authorities raised the policy rate from 14% to 17% in March 2022, subsequently lowering the rate to 16% in June and 15% in July to support growth as the exchange rate stabilized. With anticipated increases in energy tariffs in the second half of 2022 and continuing high prices for imported food, ADO 2022 Update raises earlier inflation projections for 2022 and 2023.

East Asia

Subregional GDP growth slowed in the first half of 2022, subdued in particular by COVID-19 lockdowns in the People’s Republic of China. The projection in this Update for aggregate GDP in the whole year is downgraded from ADO 2022, as is the forecast for 2023 but less so. Inflation has been rising, prompting projections for this year and next to be revised higher. ADO 2022 Update foresees narrowing subregional current account surpluses in 2022–2023 similar to those projected in April.

Lackluster performance in H1 and a darkening global environment significantly worsen the growth outlook for 2022. Domestic demand will be the main growth driver. Private spending is expected to recover slightly in the remainder of this year, aided by abating COVID-19 infections, gradually relaxed containment measures, and the new rounds of consumption vouchers and employment support. Fiscal policy will remain supportive this year and tighten thereafter.

Surveys indicate more businesses starting to expect the economic environment to improve. Nevertheless, growth will remain stifled for the rest of 2022 by slowdowns in the People's Republic (PRC) of China and the global economy and by prolonged supply chain disruption. In addition, with a currency peg forcing the Hong Kong Monetary Authority to mirror monetary tightening in the US, interest rates are set to remain higher for longer, thus denting domestic demand. Against this backdrop, including worse-than-expected performance in H1, ADO 2022 Update projects only minimal growth in 2022. It maintains the forecast for strong growth 2023 on an expected rebound in external demand and reflecting a base effect.

Headline consumer price inflation averaged 1.5% in H1 2022, slightly lower than 1.6% underlying inflation thanks to additional electricity charge subsidies provided by the government. External price pressures have intensified from elevated energy prices, rising food prices in the PRC, and continuing supply chain disruption. Nonetheless, headline inflation should remain moderate as domestic price pressures are low, reflecting subdued domestic demand and slowing growth. The inflation forecast is lowered for 2022 but maintained at that lower rate for 2023, when domestic demand is expected to be more robust.

Despite initial signs of recovery—recent reopening of trade portals with the People's Republic of China (PRC) and gradual improvement in exports—the economy’s near-term growth prospects remain uneven. Because of prolonged border restrictions compared to expectations in ADO 2022, sluggish growth and soaring inflation will persist this year, albeit with some improvement in 2023. The economy grew only slowly in H1, and recovery in industry and mining is likely to take time to materialize. However, agriculture and services will grow strongly. Contributions to growth from private investment and consumption will be moderated by higher borrowing costs and a likely decline in the availability of credit as banks lose their appetite for risk. This is in response to hikes in the central bank policy rate by 400 basis points in H1, which may continue, and to the phasing out of the regulatory forbearance regarding bank asset classification and provisioning, as well as banks’ heightened liquidity concerns. In 2023, GDP will climb slightly less than forecast in ADO 2022, though external risks are likely to be mitigated and border issues with the PRC resolved.

Annual inflation escalated to 15.7% in July 2022, remaining above the central bank target of 6% for the past 15 consecutive months. The surge in inflation will continue mainly on persistent supply disruption, rising transportation costs, and higher prices for food, fuel, and imported durables. Inflation forecasts for both years are therefore revised up from ADO 2022 projections. The current account deficit widened by 105.1% in H1 2022 and is forecast much larger in the whole of 2022 than in 2021 before narrowing somewhat in 2023. The deficit will exceed ADO 2022 forecasts in both years, mainly because of higher imports, lower growth expected in the PRC, and continued downward corrections to coal, copper, and iron ore prices.

Economic growth is expected to improve somewhat in H2 2022, recovering from weak H1 performance caused by COVID-19 lockdowns. At the same time, the government is unlikely to change course on its zero-COVID strategy. Merchandise exports, though moderating, are expected to support growth in industry in H2, while services should recover in line with improving household demand. Higher infrastructure investment and a pickup in fiscal outlays should support growth in H2 2022 as there is pressure on the government to address tepid household demand, support the ailing property sector, and address high youth unemployment. However, increased infrastructure spending can be only a temporary stopgap to boost growth. Government measures are needed to mitigate stress in the property market, which has linkages to many parts of the economy.

On balance, GDP is expected to grow by only 3.3% in 2022, 1.7 percentage points lower than forecast in ADO 2022, before expanding by 4.5% in 2023, or 0.3 points lower than forecast in April.

Consumer price inflation is forecast to average 2.3% in 2022, unchanged from the ADO 2022 projection, as inflation picks up in H2. Driven by rising pork prices, food inflation should remain elevated in H2 2022 after its strong rise in July 2022. Nonfood inflation is expected to stay moderate, though some producers may pass on increased input prices. With the outlook for global energy prices providing some relief—and given expected moderation in external demand—producer price inflation should not stage a strong comeback. Consumer inflation is now expected to rise to 2.5% on average in 2023, this forecast up from 2.0% in ADO 2022, given returning food price inflation.

Growth moderated to 2.9% in the first half of 2022, slowing from the first to the second quarter. Much of the impetus to growth came from exports, which rose by 6.0% in real terms, supported by robust exports of semiconductors and petroleum products. Government consumption spending rose by 5.4% as budget disbursements were stepped up and a substantial fiscal stimulus package was rolled out to temper the economic downturn. Private consumption rose by 4.2%, supported by a stronger labor market as the unemployment rate fell to 2.9% in June from 3.6% in January, but tempered by high household debt that weighed on consumer sentiment. Investment was hit by soaring costs for raw materials and energy and by generally weak business sentiment, which lowered construction and facility outlays in both quarters and softened investment in intellectual property products. On the supply side, manufacturing, supported by exports, maintained robust growth as the output of semiconductors, video and communication equipment, and machinery expanded. Service sector growth also continued.

Inflation quickened more rapidly than expected to average 5.0% in the first 8 months of the year and reach 6.3% year on year in July before falling to 5.7% in August, driven primarily by the higher prices for oil and food. Global supply chain disruptions contributed to higher prices, especially for durable goods. Prices for services, notably rent and dining out, also increased. Core inflation, which excludes energy and agricultural products, more than doubled in the first 8 months of the year to average 3.3%. These trends suggest an increased contribution from demand to current price pressures as the economy reopens following COVID-19 restrictions imposed earlier in the year. Rising inflation prompted the central bank to increase its policy interest rate in six steps from August 2021 and August 2022 to 2.50%. The won depreciated by 12.0% against the US dollar in the first 8 months of 2022. The government has since taken steps to support the won, including through an agreement with the US to provide foreign exchange liquidity facilities if needed.

Departure from the zero-COVID policy and lockdowns sets the stage for a rebound in private consumption. Investment will also help drive growth as company reshoring continues and investment expands in the semiconductor industry and green energy. However, growth in industrial production slowed to 0.7% in July, in line with the slowdown in export growth in Q1, and the July manufacturing purchasing managers’ index fell to a pessimistic 44.6. Export orders bounced back to double-digit growth in May and June, suggesting that exports could grow more strongly in H2 2022, albeit not as strongly as in previous years. On balance, given slowing export growth from weaker global demand, ADO 2022 Update revises down the forecast for 2022 growth but maintains the forecast for 2023 on the expectation that investment continues and consumption recovers.

Inflation averaged 3.1% in H1 2022, driven by higher global food and oil prices and poor weather affecting fruit and vegetable harvests. In response, the central bank raised its policy rates in March and June by a total of 37.5 basis points. The government also introduced various supply-side measures such as domestic oil price controls, electricity rate freezes, and lower customs duties. With these measures, and with oil prices expected to trend downward in the rest of the year, inflation is expected to slow in H2 2022. But with the higher-than-expected outturns in H1 2022, inflation is forecast to be higher than April projections in both 2022 and 2023.

South Asia

The subregional economy is forecast to grow more slowly in 2022 and 2023 than was forecast in ADO 2022. Higher inflation is expected and the current account deficit will be wider over the forecast horizon as domestic demand recovers. The outlooks for economies in the subregion remain largely similar to the earlier projections, but Sri Lanka is the outlier because of its deepening recession and galloping inflation.

Afghanistan continues to experience major turmoil, with the economic and political situation remaining highly uncertain. Humanitarian assistance from the international community in response to the ongoing socioeconomic crisis has had limited stabilizing effects on the economy in expanding the supply of basic household goods, increasing the supply of US dollars in the economy, helping stabilize the exchange rate, and facilitating transactions and payments. At the same time, the continued suspension of broader international development assistance poses serious challenges to normalizing economic activity in Afghanistan.

Continued political uncertainties and the limited international development assistance will further weaken domestic demand and economic activity in the second half of 2022. Weak domestic demand, limited access to international markets, and the disruption in the financial market will likely keep activity in services and industry subdued. An ongoing drought is expected to significantly reduce agricultural production and affect livestock health and the livelihoods of subsistence farmers. The drought reflects below average precipitation and snowfall from December 2021 to April 2022, which diminished the formation of snowpacks during the winter months and reduced the availability of water and irrigation during spring and summer. Unemployment has increased significantly. More than 900,000 people are estimated to have become unemployed since August 2021, reflecting jobs lost because of the economic crisis, the change in the political administration, and restrictions on employing women.

ADO 2022 Update revises down the forecast for GDP growth in FY2023 to 6.6% from the earlier 7.1% projection to reflect lower consumption expenditure on weaker export demand and income, an uncertain outlook, and domestic production constraints. Domestic power and energy shortages, together with rising input and transport costs, will weigh on industrial production. The economic fallout and uncertainty over the war in Ukraine will slow growth in key export destinations and substantially reduce export momentum and growth in the coming months. Public investment will slacken on government austerity measures prompted by slowing revenue growth and higher import costs. Lower private investment will also slow growth.

Inflation is projected to accelerate to 6.7% in the current fiscal year. Rising global commodity prices, increases in domestic-administered prices of all types of fuel, and an expected upward adjustment in domestic power tariffs are the main factors that will stoke inflation in the coming months. But increased food and agriculture subsidies, and a cut to 15.0% from 62.5% in customs duties on imported rice, should constrain food inflation.

ADO 2022 Update maintains the forecast for 2022 growth in ADO 2022 made in April, as supportive macroeconomic policies have been continued. Government investment will continue to be the key driver of growth as the government ramps up efforts to complete ongoing projects in the 12th Five-Year Plan, 2018–2023. Aggregate consumption expenditure is expected to ease since current government expenditure can be funded only through available tax revenue. Construction growth, forecast at 17.5%, will underpin moderate 6.3% industry growth because electricity output is expected to increase by only 1%–2% due to the temporary shutting down of the Tala plant, the country’s largest hydropower plant, for maintenance. Manufacturing output is forecast to double to 4.1%; mining and quarrying production will decline slightly. Services growth is expected to slip to 3.9% on slower consumption expenditure. Agriculture production is forecast at 2.3% due to better weather.

GDP growth in 2023 is revised down to 4.0%, well below ADO 2022’s 7.5% forecast, mainly due to delays in completing the 1,020 megawatt Punatsangchhu II hydropower plant and a slower-than-expected revival in tourism. Public investment is expected to decline due to the transition from the 12th to the 13th Five-Year Plan and private investment is expected to slacken in tandem with the decline in public investment.

Headline inflation in the first half of 2022 averaged 6%, mainly due to rising fuel prices. The increase in nonfood prices was relatively higher than food prices. Since fuel prices have eased since mid-July and the outlook for agriculture is positive, the forecast for inflation is revised down in 2022 from the earlier projection; the forecast for 2023 is retained.

Elevated oil and commodity prices and high inflation will likely require the continued tightening of monetary policy to ensure that inflation expectations do not get entrenched, which would likely hinder economic growth in the short run. Weaker than expected global demand over the next 2 years will also adversely affect exports and growth, despite the structural reforms being undertaken by the government. Nevertheless, the economy is expected to grow strongly over the forecast horizon, with investment playing a catalytic role. On the assumption that global demand will remain sluggish and oil prices elevated, ADO 2022 Update revises down the forecasts for growth to 7.0% for FY2022 from ADO 2022’s 7.5% projection and to 7.2% from 8.0% for FY2023.

Inflation will remain elevated in this and the next fiscal year. ADO 2022 Update forecasts the inflation rate averaging 6.7% in FY2022 before moderating to 5.8% in FY2023, just below the central bank target range of 2%–6%. Both forecasts are higher than ADO 2022’s projections. Even though supply pressures are expected to ease in FY2023, upward pressure on inflation could continue because of demand-side pressures caused by increasing economic activity.

Prospects are favorable for the peak tourist season in the fourth quarter. Maldives had 813,211 tourist arrivals in the first half of 2022; this exceeded the projection in ADO 2022 in April for arrivals in this period. Construction activity is expected to slow in the second half as the government reprioritizes spending and delays part of its public investment program to cover higher financing and interest costs and increased subsidies due to soaring global oil and food prices. At the end of June, subsidy spending was 191% higher than in the same period in 2021 and 21% above the approved allocation in the 2022 budget. Because of limited fiscal space and increased spending requirements, the government might surpass its earlier fiscal deficit projection for 2022 of 11.2% of GDP. Given all these developments and the base effect from the revised higher 2021 GDP growth rate, ADO 2022 Update revises down the forecast for growth for 2022 and 2023 from the earlier projections

The main downside risks to the outlook are the emergence of new viruses dampening the recovery in tourism and a sharp increase in global interest rates raising the cost of borrowing. Both would put pressure on debt sustainability in the face of the country’s very high public debt-to-GDP ratio and limited foreign exchange reserves. The government’s proposed increase in the goods and services tax and subsidy rationalization reforms, which are planned to take place next year, are corrective measures to tackle the fiscal imbalance and the high level of debt.

The government’s subsidies on food staples, fuel, and electricity largely kept inflation in check in the first half of 2022, at an average 1.8%, despite a big increase in energy prices and non-energy imports. However, inflationary pressure from high-priced imports appears to have intensified—June’s inflation rate was 5.2%—and inflation is now expected to be higher than ADO 2022’s projection. Inflation will ease in 2023 due to an expected moderation in global oil and food prices, but the level will remain elevated as the government increases the goods and services tax and streamlines subsidies. On balance, the inflation forecasts are revised up for 2022 and 2023.

The economy continued to recover in fiscal year 2022 (FY2022, ended 15 July 2022) after rebounding in FY2021 from a contraction in FY2020. ADO 2022 Update revises up the growth forecast for FY2022 from the projection made in ADO 2022 in April with official preliminary estimates showing GDP growth at 5.8%. The official preliminary estimates reflect the authorities’ expansionary fiscal and monetary policies in FY2022. Industry rebounded by 10.2%, up from 4.5% in FY2021, on increased electricity and manufacturing output and construction activity. Services grew by 5.9%, up from 4.2%, as tourism and related activities gathered pace on rising international tourist arrivals. Even so, arrivals and tourist revenue are still well below pre-pandemic 2019. Wholesale and retail trade, transport, and financial services picked up due to a significant containment of COVID-19 infections and the removal of mobility restrictions. Agriculture output slowed to 2.3% from 2.8% because of unexpected rains and floods in mid-October that damaged ready-to-harvest crops. On the demand side, strong 5.4% growth in private consumption expenditure helped underpin GDP growth. Fixed investment growth declined to 4.6% from 9.8% on a 6.0% slump in public investment because of budget implementation delays. Private investment, however, rose by 8.8%.

The forecast for growth in FY2023 is revised down from the earlier projection because of the effect of needed policy tightening to stem a rapid rise in imports, a marked decline in foreign exchange reserves, and the increasing inflationary pressure in FY2022. These developments if they had continued would have jeopardized macroeconomic stability. To tackle rising inflation and pressure on foreign exchange reserves, Nepal Rastra Bank, the central bank, announced an increase in its policy rate in July to 7.0% from 5.5%, which took effect in August. The fiscal policy for FY2023 is somewhat expansionary, focusing on strengthening agriculture, industry, infrastructure, and social protection. But some expenditure trimming may be needed to strengthen macroeconomic stability.

The inflation rate was at 8.1% at the end of FY2022. The elevated level mainly reflects higher global oil and commodity prices caused by Russia’s invasion of Ukraine. This somewhat dampened domestic agriculture production and the recovery in domestic demand. The marked rise in prices, however, occurred mostly in the final months of FY2022, as inflation was quite low early in the fiscal year. Annual inflation in FY2022 averaged 6.3%, a tad lower than ADO 2022’s projection. The inflation forecast for FY2023 is revised down as international crude oil prices have begun receding and on anticipation of a further rise in interest rates. The 22 July increase in Nepal Rastra Bank’s policy rate is expected to keep inflationary pressures in check.

ADO 2022 Update revises down the growth forecast for FY2023 to 3.5% from the 4.5% projection made in ADO 2022 in April, as economic activity will be curtailed by ongoing stabilization efforts to tackle sizable fiscal and external imbalances. Fiscal consolidation, apart from relief for flood damage, and monetary tightening are expected to suppress domestic demand. A contraction in demand, together with capacity and input constraints created by higher import prices from the rupee’s large depreciation, will reduce industry output. Agriculture growth is expected to moderate on high input costs, including electricity, fertilizers, and pesticides. Slower growth in agriculture and industry will in turn diminish services growth, particularly wholesale and retail trade.

Inflation is expected to accelerate in FY2023 as new tax measures announced in the budget, together with an increase in the wheat support price and planned upward adjustments to electricity tariffs, are expected to keep inflationary pressures high. The year-on-year consumer price index inflation rate was at 24.9% in July 2022. ADO 2022 Update substantially revises up the forecast for headline inflation for FY2023 to 18.0% from the earlier 8.5% projection due to a potentially strong second-round impact from the rupee’s depreciation and fuel and energy price adjustments.

Economic conditions deteriorated significantly since ADO 2022 in April on a deepening debt crisis, severe shortage of foreign exchange, and major supply shocks. These are the results of persistent and large fiscal deficits, the impact of the COVID-19 pandemic, an ill-timed move to switch from chemical to organic fertilizers, and Russia’s invasion of Ukraine. On 18 May, Sri Lanka defaulted on its external sovereign debt for the first time after suspending service payments on certain categories of its commercial and official bilateral debt. This resulted in its sovereign credit rating being downgraded to the restrictive/selective default category. Limited external financing avenues and dwindling foreign reserves have led to an acute energy crisis and shortages of essential goods and services that have threatened food security and hit consumer and business confidence.

GDP contracted by 1.6% year on year in the first quarter of 2022. Agriculture felt the impact of a temporary ban on chemical fertilizers, with output contracting by 6.8% in the quarter. The slight pick-up in overall services output was due to growth in information technology services and a brief revival in tourism in early 2022 as the pandemic subsided. Sri Lanka’s multifaceted crisis caused private consumption to fall in the first quarter, but government consumption rose. Gross capital formation declined on a sharp fall in inventories. But the deficit in net exports narrowed substantially because of the squeeze on imports and resilient export growth.

The severe macroeconomic challenges, including the impact of the ongoing crisis, which worsened in mid-2022 are likely to have resulted in sharp contractions in the second and third quarters. Contractionary monetary policy and tight fiscal policy will further weigh on growth. ADO 2022 Update revises down the growth forecasts for Sri Lanka for 2022 and 2023 from the projections made in ADO 2022. Contractions, not growth, are now projected for both years.

Inflation soared to 64.3% in August from 14.2% in January, averaging 37.1% in the first 8 months.This was largely driven by food inflation, at 93.7% in August. The core inflation rate also rose sharply, from 8.3% at the end of 2021 to 46.6% in August, signaling underlying inflationary pressures. Import restrictions, supply chain disruptions, poor agriculture output following the chemical fertilizer ban, rising global oil and commodity prices, energy price revisions, and exchange rate depreciation are stoking inflation. The inflation forecasts are therefore revised sharply up for both years, with inflationary pressures abating over time.

The downside risks to the outlook include global economic headwinds, geopolitical factors, spillovers from sovereign exposure to the financial sector, external financing constraints, delays in securing the IMF program, and political uncertainty.

Southeast Asia

Two factors—stronger domestic demand from the reopening of markets and borders, and reduced external demand from increased global risks—are shaping Southeast Asia’s growth. Because of stronger consumption, ADO 2022 Update revises slightly up the forecast for the subregion’s growth in 2022 from ADO 2022’s projection in April. The forecast for 2023 is lower, reflecting the cloudier global outlook. Continuing supply disruptions because of the war in Ukraine, higher commodity and food prices, and higher global interest rates will accelerate inflation. The current account surplus will likely narrow this year.

The economy contracted by 4.2% in the first quarter (Q1) of 2022, the sixth consecutive quarter of negative growth. The slowdown reflects a 9.0% decline in oil and gas output because of maintenance work. Economic activity normalized in other sectors in the absence of tight COVID-19 restrictions, despite a surge in cases earlier this year. As a result, sectors other than the oil and gas expanded by 1.0% in Q1, although the performance across sectors was mixed. Agriculture, forestry, and fisheries grew by 1.0%; services increased by just 0.4%. Services were marked by a rebound in transportation and accommodation, but finance, communication, and restaurants dragged sector growth. By expenditure, Q1 household consumption rose by 5.5% year on year and government consumption by 3.8%. Gross fixed capital formation declined by 4.2%. Net exports fell by 28% in real terms, consistent with the decline in oil and gas output.

Because of the unexpected contraction in Q1 growth, ADO 2022 Update revises down the forecast for 2022 growth in ADO 2022 made in April. The further easing of COVID-19 restrictions in June and the reopening of borders for nonessential travel in August will help economic activity this year. The forecast for 2023 is unchanged from the earlier projection on the assumption that crude oil prices will remain elevated in the medium term. Growth in 2023 will also be supported by the construction of the second phase of Hengyi Industries’ oil refinery and petrochemical project.

The global economic impact of Russia’s invasion of Ukraine and ongoing global supply chain disruptions pushed the headline inflation rate to 3.9% in April, its highest since 1995. In May, the rate eased to 3.8%. Price increases were especially pronounced for food, up by 6.0% year on year in May, clothing and footwear (2.6%), and transport (4.9%). Subsidies on electricity and petrol, and the exchange rate parity with the Singapore dollar, cushioned even higher prices. Although inflation should moderate in the second half of this year on normalizing food prices, average inflation in 2022 is forecast to be higher than the projection in April.

ADO 2022 Update maintains the growth forecast for 2022 made in ADO 2022 in April, but revises down the forecast for 2023. While Cambodia’s merchandise exports grew strongly in the first half of 2022, the economy faces challenges from weaker global growth.

Inflation accelerated faster than anticipated in the first half due to the strong pass-through effects of fuel price increases caused by Russia’s invasion of Ukraine. Because of this, the inflation forecast for 2022 is revised up from the earlier projection. The surge in fuel prices has moderated the projected narrowing of the current account deficit for this year and next.

ADO 2022 Update revises up the forecast for growth for 2022 to 5.4% from the 5.0% projection made in ADO 2022 in April and revises down the projection for 2023 to 5.0% from 5.2%. Domestic demand should remain strong through the rest of this year, despite higher inflation, and so should external demand. But financial market volatility is still present, a small wave of COVID-19 infections started in July, and global growth was worsening at the time of writing. Headwinds from these sources will continue through 2023, when macroeconomic policy will tighten.

The inflation rate will jump in September and remain high through December because of the increase in fuel prices. ADO 2022 Update revises up the inflation forecast for 2022 to 4.6% from 3.6% in the earlier projection. Because of the base-year effect of subdued inflation in the first half of 2022, inflation is forecast at 5.5%–6.0% through June 2023 and easing to 3.8% in December. Inflation is forecast averaging 5.1% in 2023, up from the earlier 3.0% projection.

ADO 2022 Update lowers the forecasts for GDP growth for 2022 to 2.5% from ADO 2022’s 3.4% projection and to 3.5% from 3.7% for 2023. The rising cost of living has decreased consumer purchasing power, and input supply constraints have reduced the growth prospects for agriculture and industry. These trends, coupled with the economic slowdown in the People’s Republic of China, delayed the Lao PDR’s recovery.

Next year will see a gradual recovery, supported by new investment and higher renewable energy and mining output. A consortium of lenders is preparing finance for the 600 megawatt Monsoon Wind project that, once completed, will export all the power it generates and be Southeast Asia’s biggest wind energy project.

The forecast for inflation is sharply revised up to 17.0% for 2022 on higher-than-expected oil prices and the weaker kip. Inflation next year is expected to moderate to 4.5% on lower global oil prices. Low interest loans for local food producers to buy agriculture inputs should help boost domestic food production and relieve pressure on food prices.

ADO 2022 Update maintains the forecast for GDP growth in 2022 at 6.0% made in ADO 2022 in April. The forecast for 2023 is revised down to 4.7% from 5.4% due to increasing global headwinds. Two factors are driving Malaysia’s near-term prospects: consumer demand is recovering strongly, supported by the reopening of markets and borders, and improving employment and income for households; and the continuance of a strong COVID-19 vaccination effort. As of 22 August, 84% of the population was fully vaccinated and almost 50% had received their first booster. All these factors are significantly lifting consumer confidence and retail trade, allowing for a solid recovery in consumer demand.

Although inflation accelerated to 2.8% in the second quarter from 2.2% in the first quarter as more expensive inputs were absorbed in production, inflation will remain stable in the near-term due to generous government subsidies and the tightening cycle of monetary policy. The headline inflation rate is forecast at 2.7% in 2022, down from the earlier 3.0% projection. The inflation forecast for 2023 is maintained at 2.5%.

Economic activity improved moderately since March 2022, despite domestic political turmoil continuing to impede investment and consumption, as well as the overall economy. But because of the pick-up in activity, growth is now expected in fiscal year 2022 (FY2022, ending 30 September 2022) after a contraction was forecast in ADO 2022 in April. The economy, however, remains vulnerable to macroeconomic instability from the political uncertainties.

In the first 6 months of FY2022, the year-on-year inflation rate climbed to 17.3% on sharp increases in food and nonfood prices, largely caused by domestic trade disruptions, a depreciating kyat, and soaring international commodity and oil prices. Inflationary pressures are expected to rise in the near term on higher international oil prices and the kyat’s continued depreciation. Despite measures by the Central Bank of Myanmar to limit the depreciation, the kyat fell by 27.2% against the US dollar in the first 10 months, and the gap between the reference rate and the parallel market rate rose by 45.9%. The average annual inflation rate is now expected to be double April’s forecast.

Growth this year should be higher than was projected in April, and higher inflation and a wider current account deficit are expected through 2023. ADO 2022 Update raises the forecast for growth for 2022 to 6.5% from the earlier 6.0% projection on the basis of the stronger-than-expected first half. Broad-based domestic demand will continue to underpin growth through 2023. The growth forecast for 2023 is maintained at 6.3%, as financial tightening and a broader pass-through of price pressures will likely weigh on consumption and investment.

ADO 2022 Update revises up the forecast for inflation for 2022 to 5.3% from the earlier 4.2% projection. Inflation is expected to remain elevated over the rest of the year due primarily to supply-side factors, including elevated global commodity prices. Bad weather has constrained the domestic supply of some agriculture commodities, and petitions for additional transport fare increases have been submitted by transport groups to the government. Inflation is forecast decelerating to 4.3% in 2023 as global oil and non-oil prices start to ease. The cumulative policy rate adjustment will also contribute to slowing inflation.

GDP grew by 4.1% year on year in the first half (H1) of 2022, buoyed by strong services and manufacturing output. Services rose by 4.8% on robust growth in information technology and real estate, and gains in tourism and domestic-oriented services in the second quarter as COVID-19 domestic and border restrictions eased from April. Tourist arrivals in H1, at 1.5 million, were almost five times higher than for the whole of 2021; first quarter tourism receipts totaled S$1.3 billion, up by 212.9% from the same quarter last year. Manufacturing grew by 5.6% year on year in H1, sustained by output growth in transport engineering and electronics. Construction rose by 2.8% on a pick-up in public and private sector construction. Domestic demand improved on higher private consumption and investment offsetting slower growth in government spending. Growth in exports slowed by 4.5% in real terms due to declining domestic oil exports, while imports expanded by 6.5% on higher oil imports.

The robust H1 growth is unlikely to continue in H2 due to the deteriorating external environment. Slower-than-expected growth in most major trading partners, continued inflationary pressures from global supply disruptions, and rising commodity prices due to the COVID-19 pandemic and Russia’s invasion of Ukraine still pose downside risks. Higher financing costs amid tightening financial conditions could depress investment. Private consumption will rise as pandemic-related restrictions are lifted, but elevated inflation will curb growth. On balance, the GDP growth forecasts for 2022 and 2023 are revised down. Growth will continue to be driven by robust information technology and financial services, sustained manufacturing growth, and the recovery in tourism and domestic-oriented services.

The inflation rate, as measured by changes in the consumer price index (CPI), rose to 7.0% year on year in July 2022 as all CPI components increased except for communication, which declined by 1.3% on competition lowering the cost of telecommunication services. Monetary Authority of Singapore (MAS) core inflation—which excludes private transport and accommodation—accelerated to 4.8% year on year in July from 4.4% in June on higher prices for food and electricity and gas. CPI inflation averaged 5.5% and MAS core inflation 3.3% in the first 7 months. Crude oil prices will remain elevated in the near term, and commodity prices are expected to stay high. MAS adjusted the rate of the Singapore dollar nominal effective exchange rate policy band in January, April, and July to ease inflationary pressures. In July, MAS revised up its 2022 forecast for CPI-All-Items average inflation to 5.0%–6.0% and average core inflation to 3.0%–4.0%. Based on these developments and trends, the inflation forecast for 2022 is revised up from ADO 2022’s projection, but the forecast for 2023 is unchanged—assuming global and domestic cost pressures easing next year.

Although the economy improved in the first half of 2022, this Update revises down the outlook for growth in 2022 to 2.9% from ADO 2022’s 3.0% projection and to 4.2% from 4.5% for 2023. The softer expected growth is largely due to higher global commodity prices following Russia’s invasion of Ukraine, weaker growth in the economies of Thailand’s trading partners, lower domestic investment, and higher inflation undermining consumer purchasing power.

Inflation will accelerate fast this year. The forecast for the inflation rate in 2022 is revised up to 6.3% from the earlier projection of 3.3% on a significant rise in global energy and commodity prices. Inflation will moderate in 2023, to a forecast 2.7% from the earlier 2.2% projection—a forecast that still reflects rising food and persistently high energy prices. Although the government has rolled out several measures to counter rising prices, including targeted subsidies on cooking gas and reducing social security contributions, the cost pass-through is expected to broaden into a wider range of products.

ADO 2022 Update revises down the growth forecasts for 2022 and 2023 made in April in ADO 2022, due to weaker private sector consumption and investment. The original government budget for 2022 set public expenditure at $1.9 billion and included funding for social protection schemes, such as the Cesta Básica basic food basket program. In April, the government approved fuel subsidies for public transport operators, and agricultural and fishing activities. In May, the government promulgated measures, increasing the total budget to $3.1 billion, the largest in the country’s history. However, the impact of the additional spending on growth is expected to be limited as 89% of the increase is for setting up a veterans’ fund. Moreover, the budget execution rate is low, at 24% in January–July compared to 32% in the same period last year. The increased annual withdrawal from the Petroleum Fund, the sovereign wealth fund, will affect its sustainability. The fund had a net decline of $910 million in the first quarter of 2022 due to falling investment income—the fund’s largest quarterly loss.

Timor-Leste has been exposed to rising global commodity prices, including surging food and energy costs, since Russia’s invasion of Ukraine. After a decade of steady prices, inflation accelerated to 3.8% in 2021 from 0.5% in 2020. The headline inflation rate rose to 8.0% year on year in June 2022. Food and nonalcoholic drinks, comprising 54% of the consumer price index (CPI) basket, is the main inflation driver. The rise in fuel prices is affecting road and ocean transport costs, which in turn are putting upward pressure on domestic commodity prices. The rising cost of construction material globally is already apparent in the CPI through the maintenance and repair of dwellings housing subcategory, up 8.1% year on year in June.

The economic rebound is expected to continue over the second half of 2022, supported by strong economic fundamentals, flexible monetary policy, and a faster-than-expected recovery in manufacturing, services, and domestic consumption from July to December. ADO 2022 Update maintains the growth forecasts made in ADO 2022: 6.5% for 2022 and 6.7% for 2023.

Viet Nam’s prudent monetary policy and effective price controls of gasoline, electricity, food, health care, and education should keep inflation in check at 3.8% in 2022 and 4.0% in 2023, the same as projected in ADO 2022. Increasing investment, controlled inflation, and accommodative monetary and fiscal conditions are expected to drive domestic consumption, boosting 2022’s ongoing economic recovery. Rising consumption over the rest of the second half and possible increases in some government-administered prices may increase inflationary pressure.

The Pacific

The subregional growth projection is increased on the strength of rapid recovery in tourism for Fiji and the Cook Islands, and in mineral exports for Papua New Guinea. However, community transmission of COVID-19 continues to pose a significant downside risk to the outlook for many of the smaller economies. Higher inflation is also now expected because the impact of the Russian invasion of Ukraine on global prices has been greater than expected. The projected current account surpluses have also been raised.

The rate of economic recovery projected for 2022 in ADO 2022 is upgraded. Stronger-than expected tourism recovery has been driven by visitor arrivals from traditional source markets in Australia, New Zealand, and North America and aided by streamlined entry requirements into Fiji. Visitor arrivals in July 2022 were almost 82% of those before the COVID-19 pandemic, with the number of tourists from Australia at 101% of the July 2019 count, Canada 76%, New Zealand 90%, and United States 94%. Arrivals in the first 7 months of the year were 56% of the comparable period in 2019.

The impact of the Russian invasion of Ukraine on commodity prices has been more intense than expected in ADO 2022. Inflation averaged 4.0% in the first half of 2022 with fuel-dependent sectors posting the most significant price jumps. Compared to the same period in 2021, transport prices soared by 13.2%, while prices for food commodities and utilities each increased by 5.0%. This Update therefore increases inflation forecasts for 2022 and 2023 to take into account second-round effects of the commodity shock, including higher wages, bus fares, and taxi fares.

The forecast for growth in 2022 is revised up. This mostly reflects base effects stemming from a downward revision to 2021 GDP and recovery in mining and in petroleum and gas production. Production at the Ok Tedi gold and copper mine and the Lihir gold mine is expected to normalize after disruptions from two COVID-19 waves last year. A higher-than-expected uptick in liquefied natural gas production in the first half of 2022 also contributed to growth.

The forecast for inflation in 2022 is revised up as the national election fueled domestic spending and inflationary pressures from global supply chain disruption persisted. In the first quarter of 2022, inflation reached 6.9%, up from 4.6% a year earlier. Prices for alcoholic beverages, tobacco, and betelnut increased by 13.2%; transportation 11.7%; household equipment 9.9%; food and nonalcoholic beverages 6.2%; and housing 2.9%. Inflation is still projected to moderate in 2023 with easing price pressure on crude oil and less supply chain disruption.

ADO 2022 Update projects worsening GDP contraction in 2022, deeper than forecast in ADO 2022, but no change to the forecast for positive growth in 2023. Economic fallout from measures to contain COVID-19 community transmission in the first quarter has been severe, consistent with earlier expectations. However, as production continued to suffer through the second quarter, recovery is now possible only in the second half of the year, buoyed by the lifting of restrictions.

The forecast for inflation in 2022 is revised down due to lower-than-projected first quarter inflation and the weaker economy. Muted inflation at 0.6% in the first quarter of 2022 accelerated to 3.8% in the second quarter, driven mainly by imported items, prices for which rose by 10.6%. Higher inflation in the second quarter was severe for transport, food, and household utilities including water, electricity, and gas. The index for alcoholic beverages and tobacco fell over the same period mainly because of a lower price for betel nut.

Inflation is expected to accelerate in the rest of the year, with diesel prices up by more than 75% in August from a year earlier, petroleum by 50%, and liquefied petroleum gas by 15%. The price of rice rose by more than 15% over the same period. Despite higher inflation, the Central Bank of Solomon Islands maintained its expansionary monetary policy.

The forecast for growth in 2022 is revised up from ADO 2022. International borders reopened on 1 July, paving the way for recovery in tourism and related enterprises. Demand is expected to be further boosted by remittances from Ni-Vanuatu hired as seasonal workers in Australia and New Zealand. Stronger-than-expected revenue from honorary citizenship programs in the first half of this year and higher grants from development partners allowed the government to increase planned spending for COVID-19 response and economic stimulus.

Inflation forecasts are retained, with aggregate price increases in the first quarter of 2022 at 2.8%, in line with estimates in ADO 2022. Price rises for food at 4.4%, alcoholic drinks and tobacco at 3.9%, and education at 2.5% drove the inflation, while indexes for household supplies, health care, communication, and recreation fell from a year earlier. Inflation is expected to accelerate in the rest of the year, with fuel prices reported to have doubled in August 2022 from a year earlier.

Inflation in 2022 is expected to be above the 1%–4% target of the Reserve Bank of Vanuatu, the central bank, which nevertheless has kept its key policy rate at 2.25% since March 2020. Broad money supply rose by 9.6% in the year to June 2022. Private sector credit grew by only 1.6% in the same period but is expected to accelerate in the second half of this year as economic recovery gains momentum. Inflation is still expected to ease to 3.2% in 2023, in line with global commodity prices.

Growth forecasts are mixed. For Kiribati, they remain unchanged from ADO 2022, with economic activity seen picking up with support from border reopening in mid-2022. In Nauru, higher government spending is expected to mitigate a forecast growth slowdown in 2022, but with lower growth in 2023 and a slightly higher inflation. Growth forecasts for Tuvalu are downgraded for both years as higher inflation in 2022 threatens growth. Forecasts for other economic indicators are retained, except that Tuvalu is now expected to have a higher current account deficit in 2022.


Forecasts are unchanged for steadily accelerating growth in 2022 and 2023. Economic activity will pick up with the incremental implementation of high-value infrastructure projects, as Kiribati reopened its borders in mid-2022. With support from development partners, the government managed to control COVID-19 transmission. Since the number of new cases peaked at 222 in February 2022, there has been a downward trend in new cases, with 82 active cases as of 22 July 2022. A high vaccination rate, with about 90% of the eligible population having had two vaccine doses, has helped to control transmission. However, any future outbreak of COVID-19 could become unmanageable, and another natural emergency such as the drought declared on 11 June 2022 could arise. Either risk could divert government attention and resources and delay the rollout of projects, thus posing risks to forecasts. Relief support provided by development partners is expected to moderate the impact of the drought on the economy.

Forecasts for inflation and current account balances in 2022 and 2023 remain unchanged. While the Russian invasion of Ukraine has resulted in soaring fuel prices in many economies in the Pacific, inflation in Kiribati is mitigated by the government’s policy to subsidize fuel, which is implemented by the state-owned Kiribati Oil Company. Other subsidies provided by the government to other state-owned enterprises, including the Public Utilities Board, moderate the costs to households of their energy consumption.


Economic growth in fiscal year 2022 (FY2022, ended 30 June 2022) is estimated to have exceeded the forecast in ADO 2022, the anticipated slowdown from FY2021 turning out less than initially projected. The passage of supplementary budgets—partly funded by additional revenue from the Regional Processing Centre (RPC)—pushed government expenditure higher than expected, providing economic stimulus. Recipients of additional allocations were notably health care and the COVID-19 taskforce, Nauru Community Housing, RPC operations, public administration and infrastructure, and subsidies to state-owned enterprises. With expenditure rising by 11.6% and revenue by only 1.2%, the estimated fiscal surplus declined to the equivalent of 29.4% of GDP in FY2022 from 43.8% in FY2021.

The projection for inflation in FY2022 is unchanged, but it is raised for FY2023. While Nauru relies on fuel imports, government measures are expected to cushion the impact of imported inflation on households and businesses. The government reduced import duties on diesel and gasoline in June 2022, and the FY2023 budget maintained subsidies to the state-owned electricity utility to prevent consumer prices from rising too much. Subsidies to the state-owned airline and shipping company were also maintained to contain import costs. In June, the price control act was revised to raise the maximum retail price of petrol by 2% above the October 2021 price, diesel by 12%, and jet fuel by 26%.


Growth forecasts for Tuvalu in 2022 and 2023 are somewhat downgraded from ADO 2022. While the number of COVID-19 cases in the country has remained manageable, higher-than-expected import prices brought about by the Russian invasion of Ukraine are likely to create additional spending pressures and delay expenditure on lesser priorities in 2022. Growth is expected to accelerate slightly in 2023, but lower planned expenditure is likely to keep it below the ADO 2022 forecast.

The inflation projection for 2022 is significantly upgraded from ADO 2022, reflecting surges in meat and petroleum prices in the first half of the year. Meat prices have soared by 27% since the beginning of the year because of supply constraints and high import prices. Fuel and electricity prices have increased by at least 8% in the same period because of market disruption since the Russian invasion of Ukraine. The projection for inflation in 2023 is maintained as supplies normalize.

The Federated States of Micronesia (FSM) reopened its borders in August 2022, and the Marshall Islands in September 2022, but the near-term outlook for these economies is skewed toward the downside by concerns about high international commodity prices and the ongoing COVID-19 pandemic. The growth outlook for Palau is similarly muted as high fuel prices and concerns about COVID-19 variants dampen prospects for tourism. Higher inflation and lower current account.

Federated States of Micronesia

ADO 2022 Update retains the GDP growth forecast for the FSM in fiscal year 2022 (FY2022, ends 30 September 2022, as in the Marshall Islands and Palau) as economic activity picks up following the gradual unwinding of mobility restrictions. This trend is expected to sustain recovery in hotels and restaurants, transport, and construction despite rising prices for key international commodities. Government support and price stabilization measures are expected to delay any second-round effects of higher inflation to FY2023. Consequently, economic growth in FY2023 is now projected marginally lower than forecast in ADO 2022 because of slower growth in import-dependent and labor-intensive construction.

The impact of the Russian invasion of Ukraine on prices both globally and in the FSM has been greater than expected earlier this year. Inflation forecasts are therefore revised up for both FY2022 and FY2023. Preliminary estimates indicate that inflation has accelerated in FY2022 and it is expected to remain elevated in FY2023 given the country’s dependence on imports of food and fuel. This is partly mitigated, however, by a pricing policy framework that stabilizes domestic retail prices in the short term. Retail fuel prices in the FSM have steadily increased since March but at a lesser pace than in other Pacific developing member countries. Uncertainty about the outlook is considerable, however, as international commodity prices remain volatile due to low global inventories.

Marshall Islands

ADO 2022 Update anticipates continued economic contraction in FY2022, not a return to growth as projected in ADO 2022. Quarantine restrictions have persisted, keeping economic activity subdued, and on 8 August the government announced the first locally transmitted cases of COVID-19 in Majuro, the capital. Travel to neighboring islands was suspended but no other mobility restrictions have been imposed. As of 1 September, 15,042 cases had been reported, 28 of them in the previous 24 hours, as well as 17 deaths.

Inflation forecasts are revised up. The impact of the Russian invasion of Ukraine on commodity prices has been larger than initially expected. Prices are seen to remain high in FY2023, tracking price trends in the United States.


With full-year tourism arrivals expected to reach about 12,000 at most, the GDP growth forecast for FY2022 is revised down. With lingering uncertainty regarding the strength and sustainability of recovery in international tourism amid concerns about COVID-19 variants and high fuel prices, the GDP growth forecast for FY2023 is likewise cut.

Rising international commodity prices following the Russian invasion of Ukraine have further fueled inflation, which reached double digit rates year on year in the second and third quarters of FY2022. With average inflation over the first 3 quarters of the fiscal year at 10.2%—led by 20.0% inflation for transportation and 13.8% for food and nonalcoholic beverages—the FY2022 inflation forecast is revised significantly upward. The FY2023 inflation forecast is likewise raised in line with expectations of a potentially prolonged period of elevated international crude oil prices.

In line with ADO 2022 estimates, the reopening of the Cook Islands to tourism in January 2022 supported a significant rebound in fiscal year 2022 (FY2022, ended 30 June 2022 for all South Pacific economies). Conversely, delayed reopening in Niue, Tonga, and especially Samoa degraded their results. The economic impact of a volcanic eruption in Tonga has been even more severe than initially expected, but significant capital commitments are now expected to support more rapid recovery in FY2023 than previously forecast. Notwithstanding strong recovery in tourism in the Cook Islands, all South Pacific economies face continued risks to their fiscal positions, current account balances, and, because of elevated inflation, household purchasing power.

Cook Islands

Growth in FY2022 was higher than projected in ADO 2022. This was driven by quicker-than-expected recovery in tourism, with tourist arrivals exceeding the government’s projection by 37.5%. Arrivals in June 2022 were 13,939, or 87.5% of the pre-pandemic level for that month. Spurring recovery is an effective vaccination program supported by development partners that has administered two doses of COVID-19 vaccine to 99% of the population aged 12 years and above and a booster shot to 76% of the population aged 16 years and above. Other measures implemented by the Cook Islands Tourism Corporation have helped to restore tourists’ confidence. The growth forecast for FY2023 is unchanged, assuming smooth recovery in tourist arrivals.

In its FY2023 budget document, the government estimated inflation at the end of FY2022 at 4.3%, consistent with ADO 2022. With supply disruption in New Zealand, the main trade partner of the Cook Islands, and effects on commodity markets from the Russian invasion of Ukraine, costs have risen for transportation, dairy products, and other imported food items. The forecast for FY2023 is unchanged, with inflation easing slightly.


The government posted a fiscal deficit in FY2022 equal to 13.3% of FY2019 GDP, higher than 10.0% as forecast in ADO 2022 as recurrent expenditure outweighed moderate growth in recurrent revenue. Official grants declined by 19%. In FY2023, the recent border reopening will boost government revenue, but the government still forecasts a larger fiscal deficit, equal to 21.4% of GDP, due to much larger increases in both capital and recurrent spending.

Imports increased by 8.4% to NZ$19.6 million, overshadowing a notable increase in exports to NZ$1.6 million. Imports were mainly food and petroleum products and machinery. The Russian invasion of Ukraine is likely to cause the trade balance to deteriorate further and accelerate inflation.


Revised GDP data released since ADO 2022 deepened the contraction in FY2020 to 3.1% but reduced the contraction in FY2021 to 7.1%. Border reopening delayed until August 2022 meant a second full fiscal year without tourism. GDP data for the second and third quarters of FY2022 show much deeper impact on the Samoan economy than previously suspected. The GDP growth estimate for FY2022 is thus revised down from weak recovery forecast in ADO 2022 to significant contraction despite countercyclical government programs.

Actual inflation in FY2022 was close to the ADO 2022projection. It featured significant increases in food and transportation prices, which stemmed from high global oil prices and imported food costs, partly related to the ongoing Russian invasion of Ukraine. As in ADO 2022, inflation is expected to moderate in FY2023 as these effects dissipate but still remain somewhat elevated.


The Hunga Tonga–Hunga Ha’apai volcanic eruption and subsequent tsunami in January 2022 affected agricultural production and exports more than initially anticipated. A consequence is that GDP decline in FY2022 was greater than predicted in ADO 2022. The eruption and tsunami caused damage estimated to equal 18.5% of GDP. The delayed reopening of borders, competition for returning tourists, and losses from repeated disasters are likely to hobble the long-term recovery of tourism. However, with border reopening in August 2022 now allowing Tongans to visit relatives at home, and increased capital spending supporting reconstruction, stronger GDP recovery is projected for FY2023.

Inflation outpaced the ADO 2022 forecast due to higher-than-expected import prices and domestic food prices, with food contributing 3.5 percentage points to annual inflation, transportation 2.7 points, and housing and utilities 2.1 points. The forecast for FY2023 is retained, with domestic price pressures becoming more important and imported inflation less so.