Growth in South Asia, already uneven and fragile, will be slower than previously projected, due to the impacts of the war in Ukraine and persistent economic challenges, the World Bank said, in its twice-a-year regional update. It also said that this provides an opportunity to the region to move towards green energy sources, thereby reducing impact of the war.
Released on Sunday, the latest South Asia Economic Focus shows the region to grow by 6.6 percent in 2022 and by 6.3 percent in 2023. The 2022 forecast has been revised downward by 1.0 percentage point compared to the January projection.
Countries in South Asia are already grappling with rising commodity prices, supply bottlenecks, and vulnerabilities in financial sectors. The war in Ukraine will amplify these challenges, further contributing to inflation, increasing fiscal deficits, and deteriorating current account balances, the World Bank said in a statement.
“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. “Given these challenges, governments need to carefully plan monetary and fiscal policies to counter external shocks and protect the vulnerable, while laying the foundation for green, resilient and inclusive growth.”
Household consumption in India will be constrained
Though GDP growth continues to be solid during the recovery, all countries in the region will face challenges ahead. For India, the World Bank said, household consumption will be constrained by the incomplete recovery of the labor market and inflationary pressures.
Maldives faces vulnerabilities due to its large imports of fossil fuels as share of GDP and a reduction in tourists from Russia and Ukraine. In Sri Lanka, the economic outlook is highly uncertain due to fiscal and external imbalances. In Afghanistan, higher food prices will exacerbate food insecurity. One of Pakistan’s challenges in the current environment is its energy subsidies, which are the largest in the region. Bangladesh will face weaker demand from Europe for its exports. On a positive note, exports of services from the region are on the rise.
Impact on fuel prices
The war and its impact on fuel prices can provide the region with much-needed impetus to reduce reliance on fuel imports and transition to a green, resilient and inclusive growth trajectory. The report recommends that countries steer away from inefficient fuel subsidies that tend to benefit wealthier households and deplete public resources. South Asian countries should also move towards a greener economy by gradually introducing taxation that puts tariffs on products which cause environmental damage.
“The introduction of green taxation can have multiple quantifiable benefits for South Asia, including improved energy security, environmental gains and increased fiscal revenues,” said Hans Timmer, World Bank Chief Economist for the South Asia Region. “These revenues could be utilized for adaptation against climate-related disasters and to strengthen social safety net systems.”