South Asian countries: analogous indeed

The tale of Pakistans macroeconomic woes is a story oft-told. But if its any consolation, this story is shared by several of Pakistans regional South Asian partners. And the World Banks recent report titled Global Economic Prospects for 2011 reiterates this view.
Like Pakistan, India and Bangladesh are also on a spree of monetary tightening. India raised its lending rate for the sixth time in a year in November 2010 and Bangladesh also followed some monetary contraction, to control the inflationary pressures in the respective countries.
While Pakistan is battling with an inflation rate exceeding 15 percent, there are fears that Indias inflation may cross double-digit in 2011.
In fact, South Asia posted the highest median inflation rate amongst developing regions in the second half of 2010, according to the report. The pressure on domestic prices can be attributed mainly to rising international food and fuel prices as well as inflationary expectations.
This interest rate hike has rendered the region as one of the favourites for global investors as capital inflows into South Asia have strengthened, particularly on the back of India and Sri Lanka.
Despite that, the case of foreign direct inflows (FDI) in the region remains as dismal as that in Pakistan. The growth of FDI inflows in both India and Pakistan was in the negative in FY10.
Fiscal problems of the regional bloc are also relatively higher compared to other developing regions, with the regions fiscal deficit estimated at 8.2 percent of the GDP in 2010.
Like Pakistan, other countries in the region also experience tax revenue constraints, with the regions average at 14.3 percent of the GDP for 2009 according to the report. Its a pity that Pakistans tax collection was the lowest in the region at 10.4 percent of the GDP, with the exception of Afghanistan, where tax collection clocks in at 7.2 percent.
On the expenditure side, interest payments take up a significant share of the government expenses, with interest payments in Pakistan and Sri Lanka among the highest in the region.
Overall, GDP growth rate for the region is expected to descend in FY11, mainly because of monetary tightening and budget consolidation. Interestingly, the growth rate of remittance inflows into the region is expected to ebb in the coming few years, particular since the demand for migrant workers from the Gulf countries is expected to level off.
Risks for the future revolve around inflationary expectations, since high expectations of price increases are likely to keep the additional pressure on price levels. Further, rising commodity prices, particularly of oil, together with improvements in tax collection and overall fiscal discipline will be key challenges for the region.
Yet, despite the myriad economic quandaries common between South Asian countries, regional integration between the economies remains largely muted. A more concerted effort at improving trade ties within the region can go a along way in helping the countries move ahead, at least as far as the trade scenario is concerned.
Besides, once the countries are on a uniform platform, not just geographically, but economically as well, the strong domestic demand in the region can be tapped by the various regional partners. At an even higher level, perhaps the countries can even start brainstorming for the common problems they face. It may be an idealistic foresight, but then, for the grave economic issues the region has been battling with for quite some time, idealism may actually be a viable solution.

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                                            South Asian   Pakistan

                                              Region

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GDP growth FY10 (%)                             8.7            4.4

GDP forecast FY11 (%)                           7.7            2.6

Fiscal deficit (% of GDP)                       8.2            6.3

Tax revenues (% of GDP)*                       14.3           10.4

Interest payments (% of total expenditure)*    18.2           25.5

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* = Latest available data

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Source: World Bank Global Economic Outlook 2011.

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