Afghanistan, Sri Lanka, Pakistan, Maldives and Nepal.
The names come one after the other. Five of the eight economies in the South Asian Association for Regional Cooperation (Saarc) are now hard hit by inflationary shocks, leaving people struggling to meet basic daily needs for survival.
Global factors such as the pandemic and the supply chain disruptions caused by it were common to all. Then came the Russian-Ukrainian war, further affecting food and energy supplies, and sending price shocks everywhere.
But the economic impacts in South Asia have varied mainly due to internal factors – political developments in Pakistan and economic mismanagement in Sri Lanka.
Although inflation is high in all economies except the Maldives, the situation is worst in Sri Lanka, followed by Pakistan.
Bangladesh ranks third in the row, with higher inflation than India and three others.
Yet Bangladesh and India seemed to be the two countries in the bloc that have so far proven their economic resilience.
Once the most prosperous nation in the region, Sri Lanka is now mired in a crisis dubbed “twin deficits” whose roots lie in decades of mismanagement in the management of external funds.
High inflation, severe shortage of food and fuel oil, power outage for 13 hours a day led to violent protests demanding the ousting of the country’s president, who declared a state of emergency in Colombo.
Soldiers stood guard at gas pumps to discipline long lines of people with empty jars. School exams have been canceled for lack of stationery and desperate people are reportedly crossing the Indian border to find work. On Sunday, police fired tear gas at hundreds of student protesters who defied a curfew in central Sri Lanka.
Movements and gatherings in Pakistan’s capital, Islamabad, were also restricted on Sunday, sparking tensions over the planned no-confidence motion against Prime Minister Imran Khan. The motion was later defeated and the president ordered parliament dissolved. Soaring inflation there has given the political opposition a window to call for Imran’s resignation. The Pakistani rupee has lost half its value against the US dollar in three and a half years since Imran took office in 2018.
The case of Afghanistan is different. Its economy collapsed due to sharp cuts in external finance and the freezing of its $9 billion foreign exchange reserves by US and European banks soon after the Taliban takeover in August 2021 as part of the global fight against coronavirus.
Three relatively smaller economies in the region – Nepal, Bhutan and the Maldives – are also not doing well.
Bhutan, with an otherwise stable political and economic environment, has been faster and more effective in the fight against Covid-19 than its neighbors, but its strict containment measures have had significant economic costs. The landlocked Himalayan kingdom’s GDP slowed, unemployment rose and inflation soared.
Bhutan’s waning tourism industry saw the arrival of the first group of tourists on April 2 since the country closed its doors to foreign travelers in 2020. Tourism is one of the main earning sectors in the kingdom which has seen difficult times over the past two years.
Rising prices have already made life difficult in Nepal, with wholesale prices rising sharply in this heavily import-dependent country. The fuel shortage triggered panic buying, while the widening gap between wholesale and retail commodity prices led to lower demand due to weak consumer purchasing power.
The Maldives’ economy, which is largely dependent on tourism, declined sharply last year. Its low level of reserves and high indebtedness threaten macroeconomic stability. Although its tourism recorded some growth and its exports increased in February, its foreign exchange reserves declined and inflation falling to 0.34% indicates lackluster economic activity.
India, which just started its new fiscal year on April 1, is well placed to withstand economic shocks with its large foreign exchange reserves and ample leeway to weather any vulnerabilities.
Despite rising commodity prices and the increased burden of fuel and fertilizer subsidies, Bangladesh’s modest budget surplus due to weak performance of development projects and rising revenues has proven be a blessing in disguise, as economist Zahid Hussain has pointed out.
“Note that only 31.9% of operating expenses and 16.5% of development expenses budgeted for FY22 were spent in the first half of FY22,” he wrote in an article for The BusinessStandard.
The original fiscal deficit target for FY22 passes the macro-fiscal sustainability test and an increase in subsidies to maintain current energy price levels is unlikely to exceed the budgeted deficit for the current fiscal year , he pointed out, explaining Bangladesh’s leeway to redirect the deficit to alleviate some of the price pressures for consumers.
Strengths and concerns of Bangladesh
Bangladesh’s foreign exchange earnings have been positive as exports and remittances increased in January this year.
Also in February, export earnings grew 34.54% year-on-year, bringing the eight-month total to $34 billion, up $8 billion from the same period in February. last year. Remittances broke a downward streak in January, but fell to a 21-month low in February before posting positive growth in March.
But revenue in the nine months through March was significantly lower than the same period a year earlier, meaning remittance revenue is not stable enough to rely on.
Despite a strong rebound from pandemic shocks and positive export growth through February, a ripple effect is evident from the Russia-Ukraine crisis as the $665 million Russian market is now uncertain due to exclusion of Russia from the SWIFT system. Soaring inflation in the United States and Europe, Bangladesh’s main export markets, could also dampen future export demand, although orders are pouring in for the next season.
As the next fiscal year’s budget is being prepared, companies have launched a plethora of demands for duty and tax cuts to protect their industries. If necessary, this will put pressure on revenues.
Economists and business leaders have warned that rising inflation and prolonged supply chain shocks will make next year’s budget the toughest yet. In a pre-budget discussion on Saturday, they called for massive reforms on the revenue front.
Economist Ahsan H Mansur referred to the predicament of Sri Lanka due to the external debt burden and advised policy makers to learn a lesson from the situation when it comes to funding mega projects.