The World Bank on Wednesday said the South Asian region was now more vulnerable to risks from the volatile external environment due to the impacts of the Ukraine war and persistent economic challenges with slower growth.

In its twice-a-year regional update released on Wednesday, the World Bank said growth in South Asia, already uneven and fragile, would be slower than previously projected. While some countries experienced a solid rebound in GDP growth, it said Afghanistan faced a humanitarian crisis, Pakistan a political crisis and Sri Lanka a balance of payments crisis.

The latest ‘South Asia Economic Focus Reshaping Norms: A New Way Forward’ projected the region to grow by 6.6 per cent in 2022 and by 6.3pc in 2023. The 2022 forecast was revised downward by one percentage point compared to the January projection.

The report said countries in South Asia were already grappling with rising commodity prices, supply bottlenecks, and vulnerabilities in financial sectors. The war in Ukraine would amplify these challenges, further contributing to inflation, increasing fiscal deficits, and deteriorating current account balances.

“South Asia has faced multiple shocks in the past two years, including the scarring effects of the Covid-19 pandemic. High oil and food prices caused by the war in Ukraine will have a strong negative impact on peoples’ real incomes,” said Hartwig Schafer, World Bank Vice President for South Asia.

Observations on energy

The report said energy subsidies as a per cent of GDP were the highest in Pakistan and also the largest in the region, which meant that price increases in international markets potentially posed a tough fiscal challenge.

The war and its impact on fuel prices could provide the region with the much-needed impetus to reduce reliance on fuel imports and transition to a green, resilient and inclusive growth trajectory. The report recommended that countries steer away from inefficient fuel subsidies that tend to benefit wealthier households and deplete public resources.

It said South Asian countries should also move towards a greener economy by gradually introducing taxation that puts tariffs on products that cause environmental damage.

Additional challenges

It added that South Asian economies were emerging from the deep Covid-19 recession, burdened by high inflation, rising current account deficits and deteriorated fiscal balances, which were exacerbated by the impact of the war in Ukraine.

Financial sectors in South Asia, already in relatively weakened positions before Covid-19, were effectively supported during the pandemic but were facing renewed challenges.

It noted that rising interest rates in advanced economies could lead to capital outflows, putting pressure on the currencies in countries grappling with high external indebtedness. This is of particular concern in countries with high levels of foreign currency-denominated debt, such as Sri Lanka, Pakistan and the Maldives.

Indicators of ability to pay, such as the ratio of public external debt service to exports and remittances, were the highest in Pakistan and Sri Lanka.

Another challenge the region faced was the disproportionate economic impact the pandemic had on women. The report included an in-depth analysis of gender disparities in the region and their link with deeply rooted social norms and recommended policies that would support women’s access to economic opportunities, tackle discriminatory norms and improve gender outcomes for inclusive growth.