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South Asia Economic Focus, Spring 2013 : Regaining Momentum

Report by World Bank, 2013

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South Asia is regaining its economic momentum, but the recovery in the world’s region with the largest number of poor people could falter in the absence of a stronger investment climate. This report displays the region's recent economic developments and gives an outlook of South Asia's economic growth while presenting individual country briefs (Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka).

Regaining Momentum


South Asia Economic Focus Spring 2013




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S o u t h A S i A E c o n o m i c F o c u S 5




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This report is a product of the Office of the Chief Economist for the South Asia Region.
Its preparation was led by Markus Kitzmuller, with substantive contributions from David
Gould, under the oversight of Martin Rama (Chief Economist, South Asia Region). The
report benefitted from inputs by country teams in the Poverty Reduction and Economic
Management unit (SASEP) as well as Sanket Mohapatra and colleagues, with guidance
of Andrew Burns in the Development Economics Prospect Group (DECPG). Economists
providing information for country briefs include Deepak Bhattasali, Zahid Hussain, Au-
relien Kruse, Chandana Kularatne, Claudia Nassif, Denis Medvedev, Jose Lopez Calix,
Kirthisri Rajatha Wijeweera, Susan R. Razzaz, Saadia Refaqat, Thirumalai G. Srinivasan
and Salman Zaidi, under the guidance of Vinaya Swaroop (Sector Manager, Poverty
Reduction and Economic Management, South Asia Region) and Ernesto May (Sector
Director, Poverty Reduction and Economic management, South Asia Region). Valuable
research assistance was provided byBilgehan Gokcen , Ayesha Raheem and Amir Sadegh
Sadeghi. Gabriela Aguilar signed responsible for the layout, design and typesetting, and
Neelam Chowdhry provided administrative support.


South Asia as used in this report includes Afghanistan, Bangladesh, Bhutan, India, Mal-
dives, Nepal, Pakistan and Sri Lanka.




S o u t h A S i A E c o n o m i c F o c u S6


Table of Contents


I. Recent Economic Developments····························································································································································································9


a. Growth shows signs of stabilization significantly below pre-crisis levels ···························································································9
b. Core inflation has eased, but headline inflation remains high due to food prices ·································································11
c. The policy stance remains accommodative, but some countries recover fiscal space ·······················································12
d. Current account deficits have been widening, but remittance flows held up well ·······························································14
e. Capital inflows are increasingly dependent on volatile portfolio investments ··········································································17


II. Outlook and Policy ···············································································································································································································································21


a. The region remains vulnerable in light of continuing near-term uncertainty ············································································22
b. Uncertainty on policy orientations is bound to affect investment ········································································································23


III. Focus: The Investment Climate as the Key to Regain Momentum ············································27


a. Much of the economic slowdown can be traced back to slow investment ···················································································27
b. FDI has expanded in most countries, but goes mainly into the services sector ·······································································28
c. FDI inflows bear the potential to boost overall investment and growth ························································································30


IV. South Asia Country Briefs ···················································································································································································································35


Afghanistan ······················································································································································································································································································36
Recent Economic Developments ··································································································································································································36
Outlook and Policy ······································································································································································································································37


Bangladesh ························································································································································································································································································38
Recent Economic Developments ··································································································································································································38
Outlook and Policy ······································································································································································································································39




S p r i n g 2 0 1 3 7


Bhutan ·········································································································································································································································································································41
Recent Economic Developments ··································································································································································································41
Outlook and Policy ······································································································································································································································41


India ·················································································································································································································································································································42
Recent Economic Developments ··································································································································································································42
Outlook and Policy ······································································································································································································································43


Maldives ···································································································································································································································································································46
Recent Economic Developments ··································································································································································································46
Outlook and Policy ······································································································································································································································46


Nepal ··············································································································································································································································································································48
Recent Economic Developments ··································································································································································································48
Outlook and Policy ······································································································································································································································49


Pakistan ····································································································································································································································································································50
Recent Economic Developments ··································································································································································································50
Outlook and Policy ······································································································································································································································51


Sri Lanka ··································································································································································································································································································53
Recent Economic Developments ··································································································································································································53
Outlook and Policy ······································································································································································································································54


V. South Asia at a Glance ··································································································································································································································57


Notes: (Table South Asia at a glance) ····················································································································································································59






S o u t h A S i A E c o n o m i c F o c u S 9


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T
o regain the strong growth it had before
the global crisis, South Asia will have
to manage a combination of persistent
external economic headwinds and in-
creasing regional macroeconomic and


structural vulnerabilities. Macroeconomic policies
to tackle the adverse effects of the global downturn
have left the South Asian countries with weaker
fiscal and monetary options to stimulate growth
today. Against this background, countries will need
to confront the economic slowdown and a still-
tumultuous external environment with continuing
action to boost productivity and investment. The
options are well known to the region’s policy-makers
and progress has been made, but keeping ahead of
the global curve will require a deepening of commit-
ment to growth.


A. Growth shows signs of
stabilization significantly
below pre-crisis levels


South Asian economies managed the turbulence of
the financial and economic crisis reasonably well;
however, post-crisis real GDP growth rates have
moderated and remain well below pre-crisis rates.
Partly, this reflects a return to more sustainable levels
of growth, but current rates leave the region below its
potential. Overall, regional growth slowed from 7.2
percent in calendar year (CY) 2011 to 4.7 percent in
CY2012, mainly driven by India’s slowdown (Figure


1). Due to its size and regional importance, India’s
economy continues to significantly affect other
countries, particularly Nepal.1 India accounts for
about 80 percent of South Asia’s GDP; its real GDP
growth (at market prices) is projected at 4.7 percent
for FY2012/13, down from an actual 6.3 percent in
FY2011/12. Most recently, during Q3 of FY 2012/13
real GDP growth at factor cost slipped to a 15-quar-
ter low of 4.5 percent (year-over-year), compared
to 5.3 percent in the previous quarter. Pakistan, the
region’s second largest economy with about 8 percent
of regional GDP, faces a stagnant environment where
factor-cost GDP growth is estimated at 3.5 percent
in FY2012/13, with a negative outlook, down from
an actual 3.7 percent in FY2011/12.


With the exception of Afghanistan, economic
growth across other South Asian countries—
Bangladesh, Bhutan, Maldives, Nepal, and Sri
Lanka—has been moderating or stagnating. In
Bangladesh, with export and investment growth
slowing, GDP growth is likely to fall to around 6
percent in FY2013/14, down from 6.3 percent in
FY2012/13. Over the same period, Bhutan saw its
growth rate decline from almost 9 percent to 7.6
percent. For Nepal, public spending dropped sharply,


1 Growth spillover effects may occur through such direct linkages as trade and
financial flows as well as such indirect linkages as total factor productivity (TFP) or
business confidence. “India’s Growth Spillovers to SA,” a recent IMF WP (12/56) by Ding
and Masha, conducts panel regressions with country fixed effects and, controlling for
standard drivers of growth, estimates that real GDP growth in India is significantly
affecting SAR growth rates over the post-reform period of 1995-2007. A 1 percentage
point increase in India’s growth rate implies a 0.37-0.77 percentage point increase in
the regional growth rate.


Recent Economic Developments




S o u t h A S i A E c o n o m i c F o c u S10


agricultural performance was meager, and India’s
economy slowed significantly. As a result, growth of
a subdued 3 percent is expected in FY2012/13, down
from 4.6 percent in FY2011/12. The crisis depressed
Maldives’ tourism sector, contributing to a decline
in real GDP growth from 7 percent in 2011 to 3.4
percent in 2012. Sri Lanka, facing prudent macro-
economic policies and dampened demand in main
export markets, will see estimated growth of 6.4
percent in 2012, compared to 8.3 percent in 2011. In
Afghanistan, the regional outlier, real GDP growth
for 2012 is estimated at 11.8 percent, up from 7.3
percent in 2011.


A significant drop in the region’s exports and fixed
investment are primarily responsible for South
Asia’s growth moderation. Private consumption
remained stable, helped by resilient remittance flows,
and is expected to only pick up slowly due to effects
of persistent inflation, fiscal consolidation and slow
recovery in disposable income. Fiscal constraints have
led to decreasing public consumption and investment.
Export growth has plummeted from 16.5 percent in
2011 to 4.5 percent in 2012, and is forecast to stay
weak due to slow and uncertain recoveries in Europe
and the US. Fixed investment growth has dropped to
a low of 2.6 percent in 2012, less than half of its 2011
rate and down from 12.3 percent in 2010 (Figure 2).


Source: World Bank, IMF and National Authorities


0


5


10


15


SAR SAR minus INDIA


INDIA PAK


Afghanistan Bangladesh


Bhutan Maldives


Nepal Sri Lanka


2005 2006 2007 2008 2009 2010 2011 2013F
2005 2006 2007 2008 2009 2010 2011 2013f


-10.0


-5.0


0.0


5.0


10.0


15.0


20.0


Source: World Bank Sta Calculations


-10


-5


0


5


10


15


20


25


00-09 2010 2011 2012 2013f%


Private consumption Public consumption Fixed Investment


Exports, GNFS Imports, GNFS SAR CA as a % of GDP


Real GDP Growth


FIGURE 2: Declining trade and investment have caused South Asian growth to slow (GDP at market prices; annual
percentage change)


FIGURE 1: GDP growth across the region has slowed down but appears to stabilize (percent, constant 2005 USD)




S p r i n g 2 0 1 3 11


After recovering in CY2009-10, regional industrial
production has been trending downwards and re-
mains sluggish, particularly in India, Pakistan, and
Sri Lanka. The slowdown has been caused by a mix
of weak external demand and structural supply-side
constraints in domestic economies (Figure 3). Most
recently, India saw its mining sector activity slow
down and its IIP (Index of Industrial Production for
core sectors) registered a contraction of 2.5 percent
for February 2013, down from 3.1 percent in January,
with five of the eight sectors — coal, crude oil, natu-
ral gas, fertilizers and electricity seeing declines in
output and none of the sectors expanding faster than
a year ago. Overall IP expanded 0.6 percent y-o-y in
February, 2013, down from 2.4 percent in January.


B. Core inflation has eased,
but headline inflation remains
high due to food prices


Headline inflation has recently moderated across
SAR countries; however, it remains at relatively
high rates, with recent signs of an upswing mainly
due to food prices. Most recent data indicate a CPI
increase in India from 8.8 percent (year-over-year)
in February 2012 to 10.9 percent in February 2013
with a slight decline to 10.4 percent in March 2013,
however Wholesale Price Index (WPI) inflation
surprised positively in March 2013 with 5.95 per-
cent, down from February’s 6.8 percent. Sri Lanka’s


headline inflation (year-over-year) was 9.8 percent in
February 2013, and Nepal’s was 9.5 percent. Bhutan’s
inflation rose to 13.5 percent in the second quarter
of FY2012/13.


Core inflation fell across several countries, includ-
ing Bangladesh, India, and Pakistan, while food
and fuel price inflation continues as the main
impetus driving South Asian headline inflation
(Figure 4). Recently, lower food prices—mostly
due to favorable weather and international market
conditions—helped push down headline inflation
in Pakistan (though equally driven by core nonfood
prices), Maldives, and Afghanistan. In India, year-
over-year core inflation was 3.8 percent in February
2013, but prices increased 10.7 percent for food and
10.5 percent for fuel. In January 2013, Sri Lanka’s
year-over-year food inflation was 12.9 percent, well
above the nonfood inflation of 7.2 percent. Unfavor-
able harvests and balance of payments developments
in Bhutan pushed food-price inflation to 18.4 per-
cent for the second quarter of FY2012/13, compared
with nonfood inflation of 10.7 percent.


Notable exceptions to this regional trend are Ban-
gladesh and Nepal, where non-food prices have
recently driven headline inflation. In Bangladesh,
the rise in annual headline inflation from 8.8 percent
in FY2011/12 to 10.6 percent in FY2012/13 was ac-
tually driven by non-food price inflation, most likely
through upward adjustments of administered energy
prices as well as expansionary macroeconomic policy.
However, lower food price inflation during 2012


Source: IMF IFS, Central Bank of Sri Lanka


-20


-10


0


10


20


30


2006M12 2007M12 2008M12 2009M12 2010M12 2011M12 2012M12


India IndProduction Pakistan IndProduction Sri Lanka IndProduction


FIGURE 3: Industrial production across main South Asian economies remains sluggish (monthly; y-o-y; percent)




S o u t h A S i A E c o n o m i c F o c u S12


has helped reduce overall inflation to 8.2 percent in
February 2013. In Nepal, higher headline inflation—
from 4.2 percent in May 2012 to 11.8 percent in
December to 9.6 percent in February 2013—comes
from increasing commodity prices, the deprecia-
tion of the Nepali rupee, and structural supply-side
constraints.


C. The policy stance remains
accommodative, but some
countries recover fiscal space


With the exceptions of Sri Lanka and India, real
interest rates remain negative for major South
Asian economies, suggesting that monetary
policy’s overall stance has been broadly accom-
modative (Figure 5). Negative real interest rates
(RIR) signal an easy monetary policy stance for
many South Asian countries, suggesting the need


FIGURE 4: South Asian core inflation trended downwards with food prices keeping headline inflation high
(percentage change, y-o-y)


Source: CEIC and National Authorities


-5.00


0.00


5.0-


10.00


15.00


20.00
Fe


b-
11


M
ar


-1
1


Ap
r-1


1


M
ay


-1
1


Ju
n-


11


Au
g-


11


Se
p-


11


O
ct


-1
1


N
ov


-1
1


D
ec


-1
1


Ja
n-


12


Fe
b-


12


M
ar


-1
2


Ap
r-1


2


M
ay


-1
2


Ju
n-


12


Ju
l-1


2


Au
g-


12


Se
p-


12


O
ct


-1
2


N
ov


-1
2


D
ec


-1
2


Ja
n-


13


Fe
b-


13


Ju
l-1


1


SAR (Headline ination) SAR (Food ination)


BRICS Ination India (Core ination)
Afghanistan (Core ination) Sri Lanka (Core Ination)


FIGURE 5: South Asian real interest rates paint a mixed picture


Source: World Bank and CEIC


-12.000


-9.000


-6.000


-3.000


0.000


3.000


6.000


9.000


12.000


Bangladesh Nepal India Sri Lanka Pakistan


9/
20


10


10
/2


01
0


11
/2


01
0


12
/2


01
0


1/
20


11


2/
20


11


3/
20


11


4/
20


11


5/
20


11


6/
20


11


7/
20


11


8/
20


11


9/
20


11


10
/2


01
1


11
/2


01
1


12
/0


11


1/
20


12


2/
20


12


3/
20


12


4/
20


12


5/
20


12


6/
20


12


7/
20


12


8/
20


12


9/
20


12


10
/2


01
2


11
/2


01
2


12
/2


01
2


1/
20


13


2/
20


13




S p r i n g 2 0 1 3 13


for central banks to tighten policy to restore posi-
tive real interest rates return. India’s positive RIR
and softening core inflation have led the Reserve
Bank of India to recently ease monetary policy
slightly by reducing its repo rate by 25 basis points
in January and March 2013, down to 7.5 percent.
However, rates remain relatively high by historical
standards.


Today, most countries in South Asia are con-
strained in the fiscal policy space they have to
buffer potential external shocks, leaving them
much more vulnerable to adverse events. With
the exception of Bangladesh, space for fiscal and
monetary stimulus is more limited now than it was
in the aftermath of the global crisis (Figure 6). In
addition, those countries in difficult economic and
political situations face severe difficulties in starting
to rebuild their buffers. Fiscal deficit constitutes a
major concern in Pakistan, where revenue shortfalls
coupled with an electricity subsidy overrun have
lifted the projected consolidated FY2012/13 bud-
get deficit above 7 percent of GDP, well above the
targeted 4.7 percent (Figure 7). By contrast, India’s
situation has shown some improvement. Using the
World Bank definition, which discounts one-time
divestments from revenues, the FY2012/13 central
government deficit came in at 5.4 percent of GDP,
0.6 percent of GDP lower than the previous year and
significantly below the peak deficit of 6.8 percent in
FY2009/10. Maldives had the region’s largest deficit
in FY2011/12—and the largest projected deficit in
FY2012/13.


Some countries have executed prudent fiscal man-
agement to rebuild buffers. Bangladesh achieved
a budget deficit below the target of 5 percent of
GDP (excluding grants); to better its financing, the
country is using more concessional resources and
less domestic bank financing. The external position
is stable, and international reserves reached a record


0


1


2


3


4


5


6


7


8


9


10


20


30


40


50


60


70


80


2008 2010 2012


SAR Public External Debt (left axis)


SAR Public Domestic Debt (left axis)


SAR Fiscal Decit (right axis)


Source: World Bank Sta Calculations


-25


-20


-15


-10


-5


0


5 A
fg


ha
ni


st
an


Ba
ng


la
de


sh


Bh
ut


an


In
di


a


Sr
i L


an
ka


M
al


di
ve


s


N
ep


al


Pa
ki


st
an


2007 2008 2009 2010 2011 2012 2013 projection
Source: World Bank and IMF


FIGURE 7: Recent trends suggest many South Asian countries have started to rebuild buffers (fiscal deficit to GDP
(percent))


FIGURE 6: South Asia Region’s (SAR) fiscal space
remains limited (percent of GDP)




S o u t h A S i A E c o n o m i c F o c u S14


USD 13.6 billion in March 2013. Nepal’s fiscal posi-
tion remains comfortable. As tax collections remain
high, total revenues and grants are expected to exceed
expenditure by 3.6 percentage points of GDP, with
the Government a net lender.


Debt-to-GDP ratios have remained fairly stable
across the region (Figure 8). Slowing growth stalled
India’s debt ratio reductions, begun in FY2002/03.
In the current fiscal year, the country debt load is
projected at 67.9 percent, remaining close to the
FY2011/12 level of 67.6 percent. Standing at 58
percent of GDP at the end of December 2012, Paki-
stan’s debt ratio maintains an upward trajectory, and
it is projected to reach 64.5 percent for FY2012/13.
While both Bhutan and Maldives may have higher
debt levels, Bhutan is capable of managing its debt
and Maldives risks problems with debt sustainability
in the medium term. Bhutan’s high debt is tied to
commercially viable hydropower projects, and Indian
energy demand is set to remain high. Maldives exter-
nal debt obligations, including the public and private
sectors, probably reached 86 percent of GDP in
2012, and they are projected to rise to 115 percent by
2015, a difficult development in light of the country’s
increasing balance of payments pressures.


D. Current account deficits
have been widening, but
remittance flows held up well


South Asian countries’ current account deficits,
particularly the larger than expected increase in
India, imply the growing need for ongoing capital
inflows (Figure 9). India’s current account deficit has
widened to 6.7 percent of GDP for Q3/FY2012/13,
up from 4.4 percent for Q3/FY2011/12, signaling
weakening external demand as well as domestic
supply-side constraints. While India remains capable
of financing its current account deficit, Bangladesh,
Maldives, and Pakistan may find themselves in
more difficult situations, struggling to prevent their
economies from shrinking and managing a smooth
adjustment of their currencies.


South Asia’s trade balance remains negative,
with both export and import growth significantly
slowing across countries. Recovery is expected to
be slow due to continued demand weakness in the
Euro Area, the region’s most important export mar-
ket. India’s record current account deficit widening
was mainly fueled by its growing trade deficit,
with merchandise trade deficit increasing from 10
percent to 11 percent of GDP. During January and
February 2013, however, merchandise exports start-
ed to pick up, reducing the year-over-year export
decline from 7 percent in April through December
to 5 percent April through February. Meanwhile,


0


10


20


30


40


50


60


70


80


90


100


2007 2008 2009 2010 2011 2012


Afghanistan Bangladesh Bhutan India


Maldives Nepal Pakistan Sri Lanka


Source: CEIC, IMF WEO and World Bank sta calculations


FIGURE 8: Public debt to GDP (percent) shows little movement and broadly remains at manageable levels.




S p r i n g 2 0 1 3 15


growth in merchandise imports slowed to 1 per-
cent, down from 33 percent for the same period a
year earlier (Figure 10). Overall import growth re-
mains positive, but the boost received through gold
imports has weakened with gold imports growing
by 5.6 percent between April and December 2012,
down by 9 percent (in USD terms) when compared
to the same period last year. Pakistan saw its trade


deficit improve only marginally, driven by import
contraction due to overall slowdown in productive
activity. In Maldives, import growth drove most of
the current account deficit widening during 2012,
while import slowdowns helped improve the trade
balances in Sri Lanka and Bangladesh. Sri Lanka’s
share of exports to GDP continues to decline. Af-
ghanistan’s large trade deficit of 43 percent of GDP


-32.00


-27.00


-22.00


-17.00


-12.00


-7.00


-2.00


3.00
00-09 (avg) 2010 2011 2012 2013 2014


Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka


Source: World Bank (Bangladesh, India, Nepal, Pakistan, Sri Lanka); IMF WEO (Afghanistan, Bhutan, Maldives)


2009


2008 2009


-30


-20


-10


0


10


20


30


40


50


2008 2010 2011 2012


%


Afghanistan Bangladesh India Maldives


Sri Lanka Pakistan Nepal Bhutan


Sri Lanka Nepal Bhutan
-50


0


50


2010 2011 2012


%


Afghanistan Bangladesh India Maldives


Sources: World Bank Sta Calculations and IMF DOTS


FIGURE 10: Export growth (above) and Import Growth (below) dropped, though export slowing outpaced
declining import growth


FIGURE 9: Current account deficits (percent of GDP) will challenge some South Asian economies




S o u t h A S i A E c o n o m i c F o c u S16


remains a major issue as exports continue to decline
in spite of currency depreciation, suggesting major
capacity constraints. Nepal’s trade deficit continues
to grow by 1 percentage point per year, with con-
strained export performance and growing imports
six times the value of export earnings. Lastly, Bhu-
tan’s export performance remains volatile due to
weather induced weaker electricity exports in 2012.
Overall, while the eurozone may remain subject to
weak demand for time to come, the US recovery
may help boost South Asian exports in the middle
term.


The overall real effective exchange rate deprecia-
tion across South Asia reflects weak economic fun-
damentals. For Bangladesh and Sri Lanka, flexible
nominal exchange rates (depreciation/devaluation)
clearly have been helping offset relatively high infla-
tion rates vis-à-vis main trading partners, moderating
the negative impact on competitiveness (Figure 11).
In India, the real effective exchange rate remained
fairly constant, suggesting a fairly stable economy
that remained sufficiently capitalized. In Pakistan,
the central bank has kept nominal exchange rates
fairly stable despite the country’s weak fundamentals,


FIGURE 11: Depreciating real effective exchange rates reflect weak fundamentals, 3-month crawling average
(Index 2005=100)


Source: World Bank Sta Calculations


0


50


100


150


200


0


10


20


30


40


50


60


70


80


BDG IND NPL PAK LKA AFG (right axis) MDV (right axis)


Mar-11 May11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13


0


20


40


60


80


100


120


2005 2006 2007 2008 2009 2010 2011 2012e


Bangladesh India


Source: World Bank


-30.0


-20.0


-10.0


0


10.0


20.0


30.0


Remittances Trade Decit


Current Account Balance
Sources: World Bank, IMF WEO and CEIC


Bangladesh India Nepal


Nepal


Pakistan


Pakistan SAR


Sri Lanka


Sri Lanka


FIGURE 12: Resilient migrant remittance flows (USD billions) partly offset trade deficits to balance current
accounts.




S p r i n g 2 0 1 3 17


accepting the costs of diminished international re-
serves and decreasing competitiveness in exchange
for near term interest rate stability. Ultimately, the
Maldives’ announced depreciation of 2011 reflects
the catching up of nominal exchange rates with
fundamentals.


Remittances have proven fairly resilient, helping
to sustain consumption and mitigate trade balance
effects (Figure 12). For 2012, South Asia’s remit-
tances are estimated at USD 109 billion, up from
USD 97 billion in 2011. India experienced robust
inflows, increasing to 1.7 percent of GDP during
Q1-Q3 FY2012/13, up from 1.6 percent a year ago.
Pakistan benefitted from strong remittance growth
of 10.4 percent between July 2012 and January 2013,
helping the country avoid a complete balance of pay-
ments collapse—for now. In Nepal, estimated remit-
tances reached 23 percent of GDP for FY2011/12,
enough to cover the economy’s net deficit. However,
this may not be sustainable. Compared to the previ-
ous fiscal year, Bangladesh had a solid 17.3 percent
growth in remittance inflows during the first eight
months of FY2012/13. Sri Lanka relied on remit-
tances—up 16 percent to 10 percent of GDP—as a
cushion for its widening current account deficit.


E. Capital inflows are
increasingly dependent on
volatile portfolio investments


South Asia’s fixed investment declined in 2012,
while total private net inflows are estimated to
remain at 2011 levels, driven by more volatile net
portfolio flows. Overall, net FDI inflows totaled an
estimated USD 29.7 billion in CY2012, down from
USD 35.7 billion in 2011 and USD 50.8 billion in
2008 (Figure 13). The sharpest FDI decline was in
Pakistan, which fell to one-third its FY2010/11 level.
The decline reflected market concerns about security,
structural energy constraints, and weak growth pros-
pects and contributed to a significantly weakened
external position. In India, FDI has been bouncing
back after a slump of USD 9.4 billion in FY 2009/10
to a projected USD 20 billion for FY 2012/13, al-
though it declined 26 percent (year-over-year) dur-
ing Q1-Q3 of FY2012/13, a likely result of weaker
business sentiment and policy uncertainty. Regional
net portfolio investment inflows have proven volatile
in recent years, with a collapse of almost USD 5 bil-
lion in 2011 followed by some returning momentum
at USD 11.5 billion in 2012. With FDI dropping
and IMF debt repayments underway, subdued port-
folio investment in Pakistan could not help alleviate
the overall balance of payments stress. India, falling
in line with other emerging market economies, could
increase its net year-over-year portfolio investment
inflows from USD 0.8 billion to USD 5.6 billion in
the first half of FY2012/13.


-20


30


80


130


2008 2009 2010 2011 2012e 2013f


Net Portfolio Inows Net FDI Inows Net Equity Inows


Source: World Bank


FIGURE 13: South Asian capital flows (USD billion) become increasingly dependent on net portfolio flows




S o u t h A S i A E c o n o m i c F o c u S18


International gross reserves fell below levels of
two months of import coverage in Pakistan as well
as the Maldives, partly reflecting the two countries'
difficult external situations. During the first eight
months of FY2012/13, Pakistan’s net international
reserves fell to 1.8 months, down from 2.6 months
in the previous fiscal year (Figure 14). This reduction
was mainly driven by a sudden stop in FDI inflows.
Aggravated by high fiscal deficits and recent debt
settlements, also the Maldives saw their gross official
international reserves deteriorate below two months
of import coverage in February 2013, exacerbating
Maldives’ vulnerable situation in the face of weak
tourism and potential commodity price hikes.


0


2


4


6


8


10


12


14


2007 2008 2009 2010 2011 2012


Afghanistan Bangladesh Bhutan India Maldives! Nepal Sri Lanka Pakistan


Source: CEIC, IMF WEO, IMF Article IV Consultations and World Bank Sta Calculations


FIGURE 14: International reserves in months of import coverage








S o u t h A S i A E c o n o m i c F o c u S 21


II


S p r i n g 2 0 1 3
Ph


ot
o:


©
W


or
ld


B
an


k/
Si


m
on


e
D


. M
cC


ou
rt


ie


O
verall, South Asia is set to continue to
grow, although on a more modest pace
and with significant downside risk. Re-
gional GDP growth is expected to pick
up to 5.5 percent in 2013 and eventually


6.3percent in 2014. Ultimately, external and regional
factors will determine the region’s growth trajectory
and the extent the region takes full advantage of the
demographic dividend.2 On the one hand, prudent
near-term macroeconomic management will help
to reduce countries’ vulnerabilities in an uncertain


2 Demographic dividend broadly refers to favorable demographic developments
including high dependency ratios due to a relatively large young, working share of
the population, and related favorable savings and investment rates as well as scale
effects in educational attainment.


global environment. On the other hand, with a view
toward achieving increased and sustainable medium-
term growth rates, South Asian countries will have
to address structural and regulatory constraints that
stand as impediments to an efficient and attractive
investment and business climate. How countries cope
with these issues will be critical not only for manag-
ing near-term current account or fiscal deficits but
also for tackling the region’s long-term challenges of
infrastructure, energy pricing, poverty reduction, and
shared prosperity in South Asia and beyond.


Outlook and Policy


TABLE 1: Forecasts for South Asia show significant regional slowdown but suggest bottoming out (GDP at market
prices; annual percentage change)


2010 2011 2012 2013 2014 2015


GDP 10.0 7.2 4.7 5.5 6.3 6.6


Private Consumption 7.4 7.1 5.9 5.5 6.1 6.5


Government Consumption 9.9 7.6 6.5 5.6 5.9 6.1


Gross Fixed Investment 16.7 6.2 2.6 4.7 6.8 7.4


Exports, GNFS 14.0 16.7 4.5 5.9 7.3 8.1


Imports, GNFS 16.0 17.8 8.6 5.8 6.6 7.6


Statistical Discrepancy (% of GDP) -2.6 -0.6 0.3 0.5 0.5 0.5


Change in inventories 0.9 -0.5 0.3 0.2 0.0 0.0


     


Current account balance (% of GDP) -2.6 -3.1 -4.5 -3.7 -3.1 -2.7


Source: World Bank Staff Calculations; Note: Includes India, Pakistan Bangladesh, Sri Lanka and Nepal




S o u t h A S i A E c o n o m i c F o c u S22


A. The region remains
vulnerable in light of continuing
near-term uncertainty


With ongoing uncertainty prevailing in the Euro
Zone and the US economies, the probability of ex-
ternal shocks continues to be a risk at a time when
South Asian economies have gradually become
more exposed to the external environment. Despite
some improvements in the global economic outlook
in recent months, many countries’ current account
balances have deteriorated and put pressure on the
financing side of the balance of payments. Inflation
remains high in all SAR countries, posing a severe
monetary policy constraint. All countries in South
Asia remain dependent on imports and thus vulner-
able to international commodity price movements.
Some countries have decreased their reserves sig-
nificantly—in the case of Pakistan and Maldives, to


critical levels. While improving, fiscal deficits remain
a vulnerability in India, Pakistan, Sri Lanka, and
above all Maldives, and relatively high debt levels will
be costly to sustain for many countries, most notably
Bhutan, India, Maldives, and Sri Lanka (Table 2).


Inefficient revenue collection and expenditures on
(energy) subsidies need to be addressed because
they remain important driving forces of fiscal defi-
cits across countries. In Pakistan, only 38 percent of
budgeted revenue had been collected at the end of
the first half of FY2012/13, suggesting an imminent
shortfall. Meanwhile, power sector subsidies have
reached 80 percent of their budgeted cap, making it
almost certain they’ll exceed the budgeted 0.8 percent
of GDP. Sri Lanka’s fiscal system exhibits significant
structural weaknesses, with total revenues slipping
to 13.5 percent of GDP and tax revenue down to
11.5 percent of GDP—both the lowest levels ever
recorded. At the same time, expenditures rose by 10


 


EXTERNAL VULNERABILITY FISCAL VULNERABILITY
MONETARY AND ER


VULNERABILITY


EX
to


G
D


P


Co
m


m
od


it
y


IM
/


to
ta


l I
M


CA
B



to


G
D


P


Re
m


it
ta


nc
es



(s


ha
re


o
f G


D
P)


Re
se


rv
es



(m


on
th


s
of


IM
)


Pr
im


ar
y


Fi
sc


al


Ba
la


nc
e


D
eb


t


Fi
sc


al
D


efi
ci


t


to
G


D
P


M
an


da
to


ry


Ex
pe


nd
it


ur
e


as
a



pe


rc
en


t o
f T


ot
al



Ex


pe
nd


it
ur


e


In
fla


ti
on


Re
al


In
te


re
st



Ra


te


Ex
ch


an
ge


R
at


e
Fl


ex
ib


ili
ty


In
t.


Re
se


rv
es


to


G
D


P




AFG                          


BGD                          


BTN                          


IND                          


MLD                          


NPL                          


PAK                          


LKA                          
Source: World Bank Staff Calculations
Threshold descriptions of vulnerability by indicator in sequence (green=low/yellow=intermediate/red=high). Exports to GDP (<25%/25-50%/50%>); Commodity imports/total imports
(<20%/20-30%/30%>); Current Account Balance to GDP (0</-3%-0/-3%>); Remittances as a share of GDP (<2%/2-8%/8 %<); Reserve Coverage in months of imports (>1y/6m-1y/6m>); Primary
Fiscal Balance (>1.5%/-1-1.5%/-1%>); Debt Burden (<25%/25-60%/60%<); Fiscal Deficit to GDP (<5%/5-12%/12%<); Mandatory Expenditure as a % of Total Expenditure (<50%/50-70%/70%<);
Inflation (<3.5%/3.5-7%/7%<); RIR (>1.5%/0-1.5%/0%>); ER Flexibility (float/managed float/peg); Int. reserves to GDP (>15%/10-15%/10%>).


TABLE 2: Most countries in South Asia are vulnerable to external shocks




S p r i n g 2 0 1 3 23


percent nominally and reached 20.3 percent of GDP,
mainly driven by debt service, subsidies, and transfer
payments. India faces lower than expected revenues
from corporate and excise taxes as well as customs du-
ties (down 0.2 percent of GDP) and non-tax revenue
(down 0.3 percent), leaving the overall shortfall at 0.5
percent of GDP. While expenditures remained below
target, fiscal consolidation continues to lag recom-
mendations by India’s Finance Commission. In Ban-
gladesh, tax revenues failed to meet the July 2012 to
January 2013 target, contributing to a shortfall in the
overall revenue target for FY2002/13, the first since
FY2008/09. Expenditures remain broadly on track,
and the Government’s moderate consolidation path
is within reach. Similarly, Maldives’ revenue collection
fell well below budget levels due to reduced customs
duties and shortfalls in nontax revenues, while expen-
ditures on subsidies and transfers to State Owned
Enterprises also boosted the overall fiscal deficit.
Also Afghanistan missed its 2012 revenue target by a
margin of 3.9%, mainly due lower customs revenues.


B. Uncertainty on policy
orientations is bound
to affect investment


To tackle the challenges of reestablishing resil-
ience against potential external shocks, sustaining
a stable macroeconomic environment and assuring


a stimulating investment climate will require
determined action by South Asia’s policy makers.
Investors, both domestic and foreign, as well as sav-
ers (depositors) will look towards ongoing improve-
ments regarding inflation, fiscal deficits and debt,
consumption, export growth, as well as underlying
policies pertaining to interest and tax rates, regula-
tion across real and financial sectors, and the broader
political economy with great and continued interest.


Current and upcoming political transitions will
pose challenges to reform momentum in several
South Asian countries. Afghanistan’s transition,
presidential elections in April 2014, and security
concerns caused by the departure of NATO troops
will create challenges for the Government. In par-
ticular, reduced international aid flows will increase
pressures to create a stable and vibrant domestic
business environment. Maldives has effectively
entered a state of political flux, with presidential
elections scheduled for September 2013 and Majlis
elections for the second quarter of 2014. Both elec-
tions are expected to be keenly contested. Pakistan
achieved a milestone in March 2013, when an elected
government completed its five-year term peacefully,
paving the way for democratic transition through a
caretaker government currently preparing for general
elections scheduled for May 11, 2013. However, se-
curity concerns have been mounting and remain a
concern. In Bangladesh, increasingly fragile political
conditions may affect the investment climate, while
Nepal shows signs of improvement.


3.00
3.50
4.00
4.50
5.00
5.50
6.00
6.50
7.00
7.50
8.00


Ja
n


09
, 2


01
2


Fe
b


13
, 2


01
2


M
ar


1
2,


2
01


2


Ap
r 1


0,
2


01
2


M
ay


1
4,


2
01


2


Ju
n


11
, 2


01
2


Ju
l 0


9,
2


01
2


Au
g


13
, 2


01
2


Se
p


10
, 2


01
2


O
ct


0
8,


2
01


2


N
ov


1
2,


2
01


2


D
ec


1
0,


2
01


2


Ja
n


14
, 2


01
3


Fe
b


11
, 2


01
3


M
ar


1
1,


2
01


3


Bangladesh - 01. GDP (% change) - 2013 - Consensus Forecast India - 01. GDP (% change) - 2013 - Consensus Forecast


Pakistan - 01. GDP (% change) - 2013 - Consensus Forecast Sri Lanka - 01. GDP (% change) - 2013 - Consensus Forecast


Source: Consensus Economics Inc.


FIGURE 15: A market perspective on key South Asian economies




S o u t h A S i A E c o n o m i c F o c u S24


Market sentiment reflects perceptions of con-
tinuing uncertainty and vulnerability. Consensus
forecasts show that market expectations were
deteriorating at the beginning of 2013, reflecting
new information regarding India’s economic per-
formance and a significantly more modest growth
outlook than at the end of CY2012 (Figure 15).
While these forecasts give insight into current
market sentiments and perceptions, they may
foreshadow future attractiveness for investment and
broader business activity.


Most of South Asia’s recent economic slowdown
has been associated with significant decline in
exports and a pronounced slowdown in the invest-
ment rate, while near term growth is expected to
be mainly investment driven. With trade and con-
sumption expected to remain modest growth drivers
in the short and middle run, investment activity will
be key in allowing the region to regain momentum.
Following India’s recent reforms and increasing
openness to international investment, the region
hopes to benefit from increasing fixed investment
growth in the middle to long run, while continued
fiscal consolidation and efforts to reduce subsidy
burdens will help countries including Bangladesh,
India and Sri Lanka to further rebuild fiscal buffers.
With a view to the longer term, the region will have
to continue its attempts to tackle structural supply
side challenges, most notably relating to energy and
infrastructure gaps.








S o u t h A S i A E c o n o m i c F o c u S 27


III


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A. Much of the economic
slowdown can be traced
back to slow investment


For South Asian countries, private investment
will increasingly become important for financing
current account deficits and fueling economic
growth. Over the next 20 years, more than 1 million
new workers will be entering the South Asian labor
market each month, offering an opportunity to reap
a substantial demographic dividend. To absorb these
workers into productive jobs and ultimately to reduce
poverty and boost shared prosperity, South Asia will
need to provide an investment climate conducive
to sustaining broad-based growth and job creation.
With fiscal deficit and debt levels constraining pub-
lic budgets in the medium term, countries will need
to stimulate and attract private investment to com-
pensate for weaknesses in public-sector investment.


Total regional fixed investment growth has
dropped to 2.6 percent in 2012, down from a high
of 16.7 percent in 2010 (Figure 16). Broadly, invest-
ment rates have stagnated, for example in Bangla-
desh at relatively low and in India at comparably
higher levels, or significantly dropped such as in the
case of Pakistan. In Pakistan, total investment during
FY 2011/12 reached a historic low of 12.5 percent of
GDP, y-o-y, mainly driven by a stark fall in FDI in-
flows, while India is projected to register investment
at 30.6 percent of GDP for FY 2012/13, only down
0.1 percent of GDP from its FY 2011/12 rate. Ban-
gladesh’s investment rate stagnated at 25.4 percent of


GDP in FY 2012/13 as compared to 25.2 percent in
the previous fiscal year, while Sri Lanka’s investment
rate slightly increased to an estimated 30.6 percent
of GDP in 2012, up from 29.9 percent in 2011.
To regain momentum, however, a sufficiently high
investment rate able to accelerate and sustain growth
will be important. Experience of successful develop-
ing countries in Asia in recent decades reveals that
the historically high economic growth recorded by


Focus: The Investment Climate as the
Key to Regain Momentum


FIGURE 16: SAR total fixed investment growth
slowed down, in line with lower net private inflows


Source: World Bank


0


10


20


30


40


50


60


70


80


90


100


0


2


4


6


8


10


12


14


16


18


2010 2011 2012e


Gross xed investment (annual percentage change)


Net Private Inows (US$ billion, right axis)


Net Portfolio Flows (US$ billion, right axis)


FDI Inows US$ billion, right axis)




S o u t h A S i A E c o n o m i c F o c u S28


these economies is essentially the result of increased
levels of investment in relation to GDP. Capital
deepening and related efficiency gains, including
labor productivity helps driving growth while lack
of improvement in macroeconomic, political and
governance indicators has contributed to stagnation
in private investment in relation to GDP.


Increasing domestic private sector investment is
important, but no country has moved into middle-
or upper-income status without the benefit of
substantial foreign-capital inflows (Frankel, 2010).
Foreign-capital inflows—both direct and portfolio
(i.e., equity and debt)—expand the potential sources
of capital, raising productivity and boosting growth.
However, studies find that foreign direct investment
(FDI) has a potentially larger role due to its greater
stability (Levchenko and Mauro, 2007) and its larger
impact on transfers of knowledge and technology.3
Domestic and foreign investors respond to the same
incentives and economic fundamentals that make an
attractive investment climate.


B. FDI has expanded in most
countries, but goes mainly
into the services sector


South Asia has experienced rising inflows of FDI
and portfolio investment, falling in line with the
global trend of increased shares of FDI flowing
into developing countries. While both FDI and
portfolio investment flows move with the global
business cycle, the relative stability of FDI becomes
particularly relevant during “sudden stops,” or inter-
ruptions in capital flows. Capital flows skewed toward
non-FDI types, such as bank lending and portfolio
investments, may lead to increased volatility and vul-
nerability to economic shocks. This pattern certainly


3 Empirical evidence points to FDI’s productivity-enhancing effects in advanced
economies—for the U.K., a 0.5 percent growth in productivity growth has been as-
sociated with a 10 percent FDI increase; for the United States, FDI has meant a 14
percent increase in productivity. Other research indicates similar outcomes in devel-
oping countries: the Czech Republic, , Indonesia (Blalock, Garrick, and Paul J Gertler.
“Learning from exporting revisited in a less developed setting.” Journal of Develop-
ment Economics (Elsevier) 75, no. 2 (December 2004): 397-416.), Lithuania (Javorcik,
Beata S. “Does Foreign Direct Investment Increase the Productivity of Domestic Firms?
In Search of Spillovers Through Backward Linkages.” American Economic Review
(American Economic Association) 94, no. 3 (June 2004): 605-627), among others.
Other references include Levchenko, Andrei, and Paolo Mauro. “Do Some Forms of
Financial Flows Protect from Sudden Stops?” The World Bank Economic Review 21, no.
3 (2007): 389-411; Frankel, Jeffrey A. The Natural Resource Curse: A Survey. working
papers 15836, Cambridge: National Bureau of Economic Research, Inc., 2010;


played out in South Asia during the global financial
crisis that began in 2008 (Figure 17).


India attracts 85 percent of total South Asian FDI
inflows; however, the relative economic importance
of FDI as a share of GDP and related pass through
effects stemming from the global crisis appear as
more evenly distributed across countries in the
region. In relative terms, the Maldives was the most
affected by the global crisis because it relies heavily on
tourist activity from the US and Europe. It saw a 64
percent drop in inward FDI as a share of GDP during
2008-11 (Figure 17). Looking at absolute levels, both
India and Pakistan had significant FDI declines after
the crisis. India experienced a 30 percent FDI slide
between 2008 and 2010. Annual FDI to the Pakistani
economy fell by 60 percent during the same period
and continued to fall in 2011. Foreign investors, par-
ticularly from Europe and the US, suffered losses at
home, leaving them less capital to invest abroad. The
fall was compounded by Pakistan’s weakening macro-
economic environment, security issues, and political
uncertainty. Unlike Pakistan, India’s absolute inward
FDI flows rebounded in 2011. The country’s FDI saw
additional but more modest growth in 2012.


Most recently, some countries including Bangla-
desh and Pakistan have experienced significant de-
cline in FDI performance. Bangladesh’s rate of FDI
inflows registers USD 995 million received during
FY 2012/13 down from USD 1.13 billion in 2011,
a rate perceived as particularly low when compared
to the regional USD 39 billion in FDI attracted in
2011. More strikingly, in Pakistan net FDI inflows
have fallen by over USD 1.1 billion, or 70 percent
below the fiscal 2011 level, mostly due to increasing
security concerns and Balance of Payment distress.


Experiencing annual average real GDP growth rates
of 6.7 percent for a decade has made South Asia the
world’s third largest region in terms of GDP, while
its FDI inflows as a share of GDP are the lowest of
all developing regions, averaging just 1.5 percent
between 2000 and 2011. Unlike other regions, South
Asian FDI inflows have never fully caught up with
GDP growth rates. Although the gap had been nar-
rowing, it regressed somewhat after the global crisis.


FDI flows into South Asia are heavily skewed toward
the services sector, with manufacturing and agricul-
ture FDI as a share of GDP lagging almost all other
regions (Figure 20). Led by India, South Asia is one




S p r i n g 2 0 1 3 29


-10


0


10


20


30


40


50
(USD, billions)


Source: UNCTAD statistics and World Bank Sta Calculations


FDI


Portfolio Investment


1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012


2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
-0.01


0


0.01


0.02


0.03


0.04


0.05


0.06


0.07


0.08


Afghanistan Bangladesh Bhutan India
Maldives Nepal Pakistan Sri Lanka


Source: Source: World Bank (2013)


2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
0


2


4


6


8


10


%


FDI Net Inows (% of GDP)


Real GDP Growth Rate


Source: WDI


-10


-5


0


5


10


%


ECA AFR MENA


LAC EAP SAR


Source: WDI and World Bank Sta Calcula3ons


FIGURE 19: When compared to other regions, South Asia’s growth significantly outpaces FDI inflows
(right: Growth-FDI gap)


FIGURE 18: The importance of FDI inflows (as percent of GDP) across South Asian countries varies


FIGURE 17: FDI and portfolio investment flows into South Asia have been increasing, particularly during the mid 2000




S o u t h A S i A E c o n o m i c F o c u S30


of the largest international hubs for the service indus-
try, particularly Business Process Outsourcing (BPO).
When it comes to FDI inflows, the services sector
accounted for around USD 10 trillion in 2009, or 72
percent of total inward FDI. At 1.77 percent of GDP,
however, overall inward FDI as a share of GDP remains
modest—the lowest among six regions and well below
the developing country average of more than 3 percent.


C. FDI inflows bear the
potential to boost overall
investment and growth


South Asia lags other developing regions when
it comes to the performance of its main drivers of
FDI growth. A recent World Bank study identifies
the key forces for attracting FDI to SAR countries:
investment policy openness, natural resource endow-
ments, trade liberalization growth, changes in control
of corruption, corporate tax changes, and the initial
inward FDI stock as a share of GDP. 4 While South


4 World Bank (2013) “Getting the most from FDI in South Asia” (Gould, Tan and Sadeghi):
The estimation results are based on a world panel (79 countries over the period 2000-
2010) as well as subsample estimations for 33 developing countries. The econometric
technique can be described as a reduced form cross section regression of growth of in-
ward FDI between 2000-10 on a comprehensive set of explanatory variables including
regional and oil fixed effects. Endogeneity is addressed implicitly by deriving explana-
tory variables over the first 5 years only (2000-05), thereby attempting to match the
model formulation with the actual process and time structure of investment decisions.


Asia’s initial stock of inward FDI as a hare of GDP
was lowest across all developing regions, it actually
helped inward FDI growth relatively more than for
the average developing country. With regard to all
other key driving forces for South Asian FDI, the
regional performance in terms of effects of policies
on FDI growth over the last decade lags the aver-
age developing country, more precisely South Asia
featured the lowest reduction in corporate tax rates
as a share of profits (and actual increases outside
India), and hence a net negative effect on its FDI
growth, as well as the largest decline in investment
policy openness, the lowest level of natural resources
per capita, and largest deterioration in political stabil-
ity (particularly for South Asia outside India), again
mostly with a negative impact on inward FDI growth
with the exception of a light positive effect from trade
liberalization (Figure 21).


However, country performances vary substantial-
ly. India, which accounts for 85 percent of regional
FDI inflows, stands out with strong improvements
to investment policy and trade liberalization, which
have played a positive role in enhancing growth
in FDI as a share of GDP (FDI/GDP). In other
characteristics that influence FDI, such as control
of corruption and corporate tax changes, India is
quite similar to the rest of South Asia. For Pakistan,
reductions in corporate tax rates have been a large
positive in enhancing FDIGDP growth compared
to other developing countries and the rest of South
Asia, while control of corruption and improvements


Source: Source: World Bank (2013)


0


1


2


3


4


5


6


Other Services Manufacturing Agriculture and mining


0


10


20


30


40


50


60


70


80


90


100


East Asia
and Pacic


East Asia
and Pacic


Europe
and


Central
Asia


Europe
and


Central
Asia


Latin
America


And
Caribbean


Latin
America


And
Caribbean


Middle
East and


North
Africa


Middle
East and


North
Africa


South
Asia


South
Asia


Sub-Saharan
Africa


Sub-Saharan
Africa


FIGURE 20: South Asian FDI Inflows into manufacturing and agriculture lag levels in other regions, both as a
share of GDP (left) and as a share of total FDI (right)




S p r i n g 2 0 1 3 31


in investment policy growth have been relatively
large negatives. Overall levels of FDI/ GDP are rela-
tively small in Bhutan and Nepal, suggesting a large
potential for future FDI/GDP growth in countries
with high natural resource endowments due to
unexploited hydropower potential. Nonetheless,
the deterioration in investment policies has been
a relatively large deterrent to FDI/GDP growth
in Nepal. For Maldives, the current large stock of
FDI/GDP suggests that potential for future FDI/
GDP growth is modest. Control of corruption is a
significant hurdle to the in FDI/GDP growth for
most countries in the region, with the exception of
Bhutan, where improvements have been a positive
contributor to foreign investment. However, Bhu-
tan has implemented some temporary trade control
measures to manage the rupee shortage, somewhat
offsetting the positive impact of the gains through
controlling corruption. Overall, the results sug-
gest South Asia has the potential, through policy
changes, to take important steps toward becoming
a much greater FDI magnet.


Pakistan and Maldives stand out in terms of their
low savings rates, with Maldives actually dis-
saving in 2012, while India recently experienced
a decline in its savings rate vis-à-vis a high and
constant investment rate. India’s savings rate
came down to 29 percent of GDP for 2012 from
a 37 percent high in 2009, which implies greater
reliance on foreign investment inflows for sus-
taining the fairly stable domestic investment rate


of slightly above 30 percent (of which almost 24
percent are private). However, due to its favorable
demographic transition, India’s savings rate can be
expected to stay strong and hence be considered
as a strong investment driver in the middle term.
Pakistan, on the other hand, features a much lower
investment rate at around 13 percent of GDP for
2012, which can be explained by a mix of dropping
foreign investment (mainly FDI) due to secu-
rity and macroeconomic stability concerns and low
domestic savings. The latter is mainly due to low
rates of return on deposits as well as a strong bias
towards consumption.


South Asia does well in other dimensions relevant
for growth and FDI and may continue to build on
those. The region has been stronger than others in
human capital expansion; it has the largest reduc-
tion in energy losses (despite weak improvements
in India); financial sector development growth is
second only to the Europe and Central Asia regions;
and infrastructure growth has been second only to
Sub-Saharan Africa. For India, trade liberalization
(as measured by reduced effective rates of tariff pro-
tection) and investment policy openness have been
particularly strong between 2000-10, while the rest
of South Asia has shown only modest improvements
or deterioration. However, except for overall trade
liberalization and investment policy openness in
India, the analysis indicates these factors are not sig-
nificant determinants of FDI/GDP in South Asia,
but they may be important contributors to growth.


FIGURE 21: Factors significantly affecting FDI inflows to South Asia Region (SAR) show relative weakness vis-à-vis
the average of developing countries


Source: Source: World Bank (2013)


-0.02


-0.015


-0.01


-0.005


0


0.005


0.01 Changes in Investment Policy Openness


Natural Resources per capita


Trade Liberalization


Changes in Control of Corruption


Corporate Tax Reduction


Initial Inward FDI/GDP Stock


SAR


Developing Countries


Note: Numbers here refer to SAR specic total eects
on FDI growth over the estimated time span (i.e.
estimated coecients multiplied by the explanatory
variable’s value for South Asia)




S o u t h A S i A E c o n o m i c F o c u S32


This may partly explain the region’s relatively strong
GDP growth over the past decade, a period of rela-
tively weak growth in FDI inflows.


Significant scope exists for increasing South Asian
FDI flows and their positive economic effects by
addressing structural and policy constraints and
fostering regional integration and intra-regional
investment flows. Two factors are at work—high
overall regulatory restrictions on FDI and specific
restrictions placed on doing business with other coun-
tries in the region. Also limiting FDI flows are overall
trade restrictiveness and weak institutions to protect
foreign investors and facilitate investment. India


contributes 70 percent of intra-regional FDI; however,
total within-region FDI represents just 3.7 percent of
all South Asian inward FDI (Table 3). India is the
region’s largest market and a potential investment
magnet for the other South Asian countries; however,
bilateral restrictions remain despite considerable im-
provement in the country’s overall FDI policies.


While ongoing efforts are moving in the right di-
rection, a variety of policy challenges remain. Lib-
eralizing policy constraints in both trade and foreign
investment, keeping corporate tax rates competitive
and low, and improving governance and transparency
could help to substantially improve FDI flows




AFG BGD


BTN


IND


MDV


PAK


LKA


0
5


10


15


20


25


30


35


40


45


50


-10 -5 0 5 10 15 20 25 30


Total Investment
(% of GDP)


Total Savings
(% of GDP)Source: World Bank and IMF


 
 
 
 


Source Countries


EU US India China
East Asia
& Pacific


Middle
East &
North
Africa


South
Asia


Europe &
Central


Asia


Latin
America &
Caribbean


Sub-
Sahara
Africa


Other


Re
ci


pi
en


t C
ou


nt
rie


s


AFGH 2.35 1.57 2.72 71.58 0.00 16.07 0.97 4.73 0.00 0.00 0.00


BANGL 38.33 11.95 23.88 3.79 10.02 8.62 0.49 0.00 0.00 0.40 2.52


BHUT 0.00 16.91 48.75 0.00 24.67 0.00 0.00 0.00 0.00 0.00 9.67


IND 36.40 19.87 0.00 4.10 21.26 5.09 1.34 1.77 0.56 0.31 9.31


MAL 4.71 3.86 29.35 3.86 25.57 13.13 0.05 0.00 0.01 0.00 19.47


NEP 22.05 0.00 53.63 11.20 1.72 10.68 0.61 0.00 0.00 0.00 0.12


PAK 19.60 9.92 0.83 6.11 7.15 45.04 0.30 1.52 0.47 0.00 9.06


SL 18.09 2.95 37.41 9.19 8.10 2.71 0.22 0.00 0.15 8.36 12.82
Note East Asia& Pacific does not include China and South Asia does not include India as both are stated separately.
Source: World Bank Staff Calculations


TABLE 3: FDI inflows (percent of total FDI inflows over period 2003-11) into South Asian countries by source


FIGURE 22: Pakistan sticks out due to low investment and saving rates, while Maldives dis-saved in 2012








S o u t h A S i A E c o n o m i c F o c u S 35


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In alphabetical order:


Afghanistan


Bangladesh


Bhutan


India


Maldives


Nepal


Pakistan


Sri Lanka


South Asia Country Briefs




S o u t h A S i A E c o n o m i c F o c u S36


Afghanistan
While domestic developments helped to increase growth,
Afghanistan’s external position remains weak. Follow-
ing a strong performance in 2012, economic growth is
expected to slow down as a result of a weather induced
moderation in agricultural performance and uncertain-
ties stemming from transition which constitute a signifi-
cant downside risk.


Recent Economic Developments


One year into the transition process, Afghanistan’s
economy still gives an impression of strength.
The positive aspects include an exceptional wheat
harvest, favorable developments in the mining and
services sectors, and increased real GDP growth, to
11.8 percent from 7.3 percent. Inflation has halved,
and continuing high levels of aid have helped to
further bolster international reserves. However, the
transition is characterized by a loss of business con-
fidence, reflected in lower private sector investment
and a depreciating exchange rate. This compounds
the already sluggish recovery of the banking sector
from the Kabul Bank crisis which hit the country
in 2010. Trends in public finance deserve attention:
more on-budget aid will pose challenges to execution
through the relatively weak country systems. Growth
of domestic revenues is slowing due to worrisome
developments in customs revenue collection.


Exports, estimated at USD 2.6 billion, declined by
5 percent in 2012, in spite of a weakening currency.
In contrast, total imports increased by approximately
5 percent, to USD 11.2 billion in 2012, leading to
a higher nominal trade deficit, of USD 8.5 billion
in 2012.5 The Afghan export base has relatively few
tradable products and these are heavily concen-
trated in a few markets. Dry fruits, which account for
around one-third of official exports, declined by 21
percent. Carpet exports, another major export item,


5 These estimates include both official and unrecorded trade (smuggling), as well
transit exchanges, but exclude opium trade. Forty percent of trade is believed to
be unrecorded, mainly because of weaknesses in border security and customs. The
Central Statistics Organization shows official (recorded) exports declined by nearly 20
percent in 2012 (January through December), while imports increased by more than
30 percent. Official exports were recorded at USD 346 million, which are less than 2
percent of GDP. Official imports, on the other hand, reached USD 8.3 billion in 2012.


nearly halved to USD 23 million in 2012. The lack
of export response to the depreciation of the afghani
illustrates Afghanistan’s limited export capacity.


Afghanistan’s external position in 2012 remains
weak. The huge trade deficit of 43 percent of GDP
was offset by large transfers—mainly foreign aid
inflows—in the current account. Remittance inflows,
believed to be large, are mostly informal and not
captured by the balance of payments statistics. For-
eign direct investment remained stagnant at around
2 percent of GDP. As result, the overall balance of
payments in 2012 remained in surplus which con-
tributed to a further accumulation of international
reserves. Gross international reserves reached a re-
cord high of USD 7.1 billion in December 2012 but
had declined to USD 6.5 billion by March 2013.


Budget execution improved in real terms in 2012.
While the government executed only half of the
development budget in 2012, as in fiscal 2011, nomi-
nally it disbursed almost as much in the nine months
(USD 1 billion) as it did over the full 12 months of
the previous year (USD 1.1 billion).


Domestic revenues increased by 13.1 percent in
2012 but fell short of targets. Revenues reached
Afs 81.7 billion (equivalent to USD 1.6 billion),
or 8 percent of GDP, but missed the target agreed
with the IMF by 3.9 percent, mainly because of a


-50.0


0.0


50.0


-10.0


10.0


Real GDP and Agriculture Growth Rates


Real GDP growth (left axis)


Agriculture growth (right axis)


20
03


20
04


20
05


20
06


20
07


20
08


20
09


20
10


20
11


20
12


*




S p r i n g 2 0 1 3 37


lower revenue performance at customs. Customs
revenues account for approximately one-fourth of
total revenues and have been steadily increasing. But
last year these declined by 9.6 percent in spite of
higher import volumes—due in part to deteriorating
governance at customs.


The mining sector, meanwhile, showed dynamic
developments in 2012. Historically small, the share
of mining in aggregate output increased from 0.6
percent of GDP in 2010 to an estimated 1.8 percent
in 2012, due largely to the start of oil production at
the Amu Darya fields. The oil fields are currently
producing around 1,950 barrels per day and are
expected to reach more than 4,000 barrels per day
by end-2013.


Trends in microfinance remain a concern. The
sector has been going through a deep consolidation
phase since 2008, resulting in slower growth of the
loan portfolio, a decline in the number of active bor-
rowers, and the exit of several institutions from the
sector.


The afghani depreciated by nearly 9 percent
against the US dollar in 2012, falling to Afs 50.9/
USD 1.00 from an average Afs 46.9/USD 1.00 in
2011, probably due to increased uncertainty over
security and the business environment. This was
reflected in increased demand for foreign exchange


at the Central Bank auctions. However, the afghani
remained stable against the euro, at Afs 65.4 on
average in 2012 and appreciated by around 1 percent
against the Pakistani rupee.


Outlook and Policy


Economic Growth is expected to slow in 2013.
Political and security uncertainties are expected
to limit private-sector growth in the coming years.
Increased public spending, however, will continue to
fuel demand for services and construction through
2013. Mining should contribute more noticeably to
growth with the increasing oil production at Amu
Darya (the expected contribution to the government
budget through royalties and taxes is projected to
be around USD 250 million annually for the next
25 years). On the agricultural front, however, only
moderate rainfalls are forecast for this season, which
would reduce the year’s harvest to a more normal
output and slow GDP growth to 3.1 percent in 2013.


The transition process exposes Afghanistan to a
number of serious risks, such as rising financing
for public service provision. Security considerations
aside, promoting sources of inclusive economic
growth, especially agriculture, and strengthening
domestic revenue mobilization will be important to
mitigate some of these risks.


20
03


20
04


20
05


20
06


20
07


20
08


20
09


20
10


20
11


20
12


-100.0


0.0


100.0
Pe


rc
en


t o
f G


D
P


Current Account and Overall Balance


CAB (excl. foreign aid)


Overall balance


CAB (incl. foreign aid)




S o u t h A S i A E c o n o m i c F o c u S38


Bangladesh
Overall prudent macro management and a favorable
downward trend in inflation helped sustain growth.
While remittances are expected to remain strong and
together with a decline in imports will help maintain
Bangladesh’s positive external position, slow progress
on structural reforms and rising political fragility pose
threats to future investment.


Recent Economic Developments


GDP growth in fiscal 2013 is likely to fall to
around 6 percent, from 6.3 percent in fiscal 2012.
Weak exports and investments resulting from the
impact of the euro-area crisis, domestic supply
constraints, and intensified strikes and unrest were
principal reasons for the slowdown. However, strong
remittance and robust service sector performance are
expected to help keep growth in healthy territory. An
increasingly fragile political situation, however, does
not bode well for revival of the investment needed to
accelerate growth.


A broad-based declining inflation trend appears
to be gaining ground. Average (twelve-monthly-
moving) inflation has declined steadily over the
past ten months, from a peak of nearly 11 percent
in February 2012 to 8.2 percent in February 2013,
reflecting declines in both food and non-food infla-
tion. Favorable international commodity prices, a
stable exchange rate and monetary tightening helped
to lower inflation.


The overall external balance continued to remain
positive with a record increase in reserves to over
USD 13.8 billion (equivalent to 4.4 months of
imports) by end-February 2013. The rapid increase
in reserves reflects both the economy’s strengths in
attracting remittance and external assistance, and
weaknesses in the form of depressed domestic de-
mand growth leading to a decline in imports.


Financial development is riding a bumpy road.
Bangladesh slipped one notch in the Financial
Development Index, and is now ranked 57th out of
62 economies. Stability of the banking sector dete-
riorated as a result of corporate governance failures,


non-bank institutions are not doing any better, and
the confidence deficit in the capital market persists.


Prudent monetary and fiscal management con-
tributed to sustained growth and macroeconomic
stability. Monetary policy has gained credibility by
adhering to the monetary program target for the first
half of fiscal 2013, but the shift towards an expan-
sionary stance for the second half, albeit modest, may
be premature. Fiscal policy is on track to maintain
prudent levels of overall deficit and improve the
composition of deficit financing towards lower mon-
etization and domestic bank financing, with a rise in
the share of concessional external finance.


Progress on structural reforms has been slow. The
government has undertaken a reform program sup-
ported by the International Monetary Fund’s ECF.
Structural measures in the program aim to modern-
ize the tax regime, bolster fiscal controls, strengthen
financial sector oversight, and improve the trade and
investment climate. Policy undertakings have been
broadly in line with program commitments of the
ECF, but a number of structural benchmarks were
not met, because of either delays in completion or
the need for more time to make legislative changes
or reach internal policy consensus.


Progress on the Millennium Development Goals
(MDGs) has been remarkably successful, with


0


5


10


FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12


Source : Bangladesh Bureau of Statistics


GDP and Sector Growth Rate (%)


Overall GDP Growth Agriculture


Industry




S p r i n g 2 0 1 3 39


Bangladesh managing to bend the arc of poverty re-
duction to a remarkable degree and share prosperity
during 2000-2010 far better than in the preceding
decade. Bangladesh has already achieved three of the
28 MDG targets, and is on track with another 11,
while needing to give attention to the remaining 14
(as of 2011). Poverty reduction during 2000-2010
was so dramatic that Bangladesh was listed among
the 18 “highlighted” countries of the South that made
greater gains than expected in the Human Develop-
ment Index between 1990 and 2012, based on their
previous performance. Human development also has
been more inclusive than before in Bangladesh.


The number of poor declined by 15 million in the
first decade of the new millennium, compared
with a decline of 2.3 million in the preceding
decade. There have been improvements too in sev-
eral dimensions of non-consumption-based welfare.
Inequality has stabilized and there has been some
regional convergence in consumption poverty levels
in the second half of the 2000-2010 decade. Growth
of labor income and declining dependency were the
main indicators of poverty reduction in this period.
Nevertheless, Bangladesh still has the highest rate of
poverty in South Asia, when measured by continuing
low real per-capita GDP.


There needs to be more depth and breadth in
development for Bangladesh to sustain its stellar


progress up the human development charts. Even
with its outstanding achievements in reducing poverty
and childhood under-nourishment at national level,
achieving all of the hunger MDGs remains a daunt-
ing challenge. The country faces a rough road in ad-
dressing certain pockets of poverty that lag far behind
the national averages (for example, in urban slums,
the hill tracts, coastal belts, and other ecologically
vulnerable areas). Enrollment in schools of the last 10
percent of hard-to-reach children, ensuring quality of
education, and promoting gender equity in tertiary
education are especially big challenges. The threat
of climate change could also diminish hard-earned
benefits from years of growth and development.


Outlook and Policy


The outlook depends largely on how successfully
Bangladesh seizes its opportunities and manages
the associated risks. Export product and market
diversification as well as diversification of the main
migrant labor destination countries would provide
the wherewithal for accelerating economic growth.
Experience from other countries suggests that export
diversification is associated with generally strong
economic performance. Current instability in the
Middle East and North Africa may have negative
consequences for Bangladeshis living and working in


0


5


10


15


20
Ju


l-0
9


O
ct


-0
9


Ja
n-


10


Ap
r-1


0


Ju
l-1


0


O
ct


-1
0


Ja
n-


11


Ap
r-1


1


Ju
l-1


1


O
ct


-1
1


Ja
n-


12


Ap
r-1


2


Ju
l-1


2


O
ct


-1
2


Ja
n-


13


Source : Bangladesh Bureau of Statistics


Ination (FY1996, y-o-y, %)


General Food Non-food


10


30


50


70


1992 1996 2000 2005 2010 2013p


Source: GoB, Household Income & Expend. Survey


National Headcount Poverty (%, fys)




S o u t h A S i A E c o n o m i c F o c u S40


those regions, and hamper their ability to earn and
remit money home.


Recovery in the euro area and the United States will
be especially important to Bangladesh’s economic
prospects. Global growth is projected to increase
during 2013, but the near-term outlook for the euro
area has been revised downward. Activity is now
expected to contract by 0.2 percent instead of expand
by that figure in 2013. Risks of prolonged stagnation
in the euro area as a whole will rise if the momentum
for reform is not maintained. Growth in the United
States is forecast to average 2 percent in 2013, rising
above trend in the second half of the year. The projec-
tions are predicated on the assumption that the fiscal
sequester from March 1 2013 will have a relatively
small adverse impact on GDP growth.


There is a downside balance of risks in the near
term. The readymade garments (RMG) industry is
suffering from a severe image crisis in the interna-
tional markets because of concerns about labor safety
arising from fire incidents in two garment factories.
These prompted the US and EU to rethink the Gen-
eralized System of Preference facilities provided to
Bangladesh. Sustainability of the recovery in remit-
tance growth is subject to downside risks because of
the uncertainties relating to manpower export pros-
pects. An immediate hindrance to the acceleration
of growth is the unprecedented political complexity
that Bangladesh appears to have entered.


Should these risks materialize, policy adjustments
will have to be primarily through exchange rate and
fiscal channels. At the same time, monetary policy


will have to remain sufficiently restrained to contain
inflation and maintain reserves. In the near term, a
further escalation of political tensions and deteriora-
tion in the financial condition of state-owned com-
mercial banks pose the largest risk that may affect
growth prospects and public finances.


In the longer term, the central question is, where
will Bangladesh’s good jobs come from? More than
half of the population depends on agriculture, but
that proportion will have to shrink if per-capita in-
comes in agriculture are to rise substantially. Industry
is creating jobs, but too many are low-productivity,
low-income, offering little protection, and no ben-
efits. Services jobs are relatively high productivity,
but employment growth in services has been slow
in recent years. Bangladesh’s challenge is to create
the conditions for faster growth of productive jobs
outside of agriculture, especially in organized manu-
facture and services, while at the same time improv-
ing agricultural productivity. The reward for meeting
that challenge is decades of strong, inclusive growth.


Domestic employment generation in the medium
term is likely at best to barely absorb new entrants to
the domestic labor market. At current employment
elasticity of growth (0.4) and under the baseline growth
scenario, Bangladesh can expect to generate about 1.3
to 1.6 million jobs per year. Its domestic labor force is
projected to grow by 1.3 million per year. This will hardly
make a dent in the stock of unemployed until growth
picks up to 6.5 percent-plus after fiscal 2014. Even that
will not be enough to bring the unemployment rate
down to single digits. Job creation on a significant scale
would require a lot more than business as usual.


TABLE 4: Bangladesh Labor Market Projections


Projections


2010 2011 2012 2013 2014 2015 2016 2017


Real GDP growth (%) 6.10 6.70 6.30 5.80 6.20 6.50 6.70 6.90


Labor force (in millions) 56.65 57.95 59.22 60.53 61.86 63.22 64.48 65.77


Percentage change in employment 2.44 2.68 2.52 2.32 2.48 2.60 2.68 2.76


Employment (in millions) 48.63 49.94 51.20 52.39 53.68 55.08 56.56 58.14


Change in employment (in millions) - 1.31 1.26 1.19 1.30 1.40 1.48 1.58


Unemployment (in millions) 8.03 8.01 8.02 8.14 8.17 8.14 7.93 7.63


Unemployment rate (%) 14.17 13.82 13.55 13.45 13.21 12.87 12.29 11.60


Note: Total unemployed persons by economic category are a combination of unemployed population aged 15 years and over, and unemployment equivalent of underemployed & unpaid family
workers working less than 15 hours/week. Source: Calculated from Labor Force Survey, Bangladesh Bureau of Statistics, IMF.




S p r i n g 2 0 1 3 41


Bhutan
Lingering effects of Bhutan’s overheated economy con-
tinue to challenge macroeconomic management. Poverty
reduction and governance show significant signs of im-
provement. The outlook on growth remains cautiously
optimistic, with large hydro power projects in the pipe-
line, but also conditional on a proactive solution of the
Rupee shortage and a stabilization of the financial sector.


Recent Economic Developments


The overheating of the Bhutanese economy has
ended with slowing private credit growth and
moderation of near-term growth, but its aftermath
continues to linger in the continued appetite for
rupee resources and vulnerabilities in the financial
sector. Though private-sector credit growth slowed
considerably during 2012, the use of short-term rupee
borrowings continued to climb, reaching Nu 17 bil-
lion by end-January 2013, an addition of Nu 6 billion
since June 2012. Inflation retreated but is still high, at
around 10 percent, as the wedge with India’s inflation
persists. Prices of non-traded services are rising.


The financial sector, though fundamentally sound
with capital adequacy ratios above the thresholds,
has become vulnerable with liquidity shortages
and deterioration in bank portfolio quality.


Export revenues from electricity sales (about one-
third of total merchandise exports) were again
lackluster through the peak July-October season.
Export revenues have fluctuated with a slight down-
ward drift reflecting the vagaries of hydrological
flows, as no new projects have come on line since
2006. Tourism has turned into an important source
of export revenue. The period January through No-
vember 2012 shows a surge of 17 percent in tourist
arrivals and 32 percent in revenue receipts, to USD
60 million.


Poverty reduction and governance are two beacons
of positive achievement for Bhutan. The Bhutan
Living Standards Survey 2012 shows the percent-
age of people living below the poverty line fell to 12
percent, from 23.3 percent in 2007, thus exceeding
the 10th Five-Year Plan target of 15 percent by 2013.


The pace of poverty reduction in Bhutan is one of
the highest in the world. Similarly, with its new
Anti-Corruption Law, Bhutan has emerged as South
Asia’s most powerful anti-corruption authority, serv-
ing as a model for the region and beyond.


Outlook and Policy


GDP growth is projected to moderate to 7.6 per-
cent in fiscal 2013 and remain subdued until new
hydro-power projects come on stream in fiscal
2018. Though the aim of adding 10,000 MW of
electricity generation potential by 2020 is feasible,
the growth path may be more gradual than earlier
envisaged, due in part to funding constraints and a
desire to avoid another bout of overheating.


Private Credit Growth vs. Short-Term Borrowing


The government has taken steps to avoid repeating
a rupee shortage—engaging in short-term bor-
rowing and imposing controls on lending for new
houses and the import of cars. New lines of credit
with the government of India for another Indian
Rs.3 billion and rupee-swap facility for USD 100
million are some of the new measures. While these
short-term measures may reassure the public, they
could become counter-productive unless the public
sector and households can be persuaded to raise sav-
ings levels.


0


50


0


10000


20000


RMA Rupee Liabilities in million Nu
(Left axis)


Private credit growth 3mMA, annual rate
(Right axis)


Private Credit Growth vs. Short-Term Borrowing


Dec-11 Feb-12 Abr-12 Jun-12 Aug-12 Oct-12 Dec-12




S o u t h A S i A E c o n o m i c F o c u S42


India
India’s continued slowdown is broad-based across sec-
tors. Vulnerabilities, mainly due to a wide current ac-
count deficit and high inflation reducing macro buffers
and increasing reliance on investment, persist. Slower
growth and tighter fiscal space may affect India’s progress
towards universal health coverage.


Recent Economic Developments


The slowdown in growth that began last year
continued in fiscal 2013. The growth of real GDP
at factor cost fell to 4.5 percent (y-o-y) during the
third quarter of fiscal 2013, the worst outturn in
16 quarters. For the entire fiscal year, the growth
rate of real GDP is expected to fall to 5.0 percent,
the slowest pace in a decade. The slowdown has
been broad-based, affecting all major sectors of
economic activity. The slump in the first half of the
fiscal year was particularly pronounced in private
consumption and especially investment, which
contracted by nearly 3 percent over the first two
quarters of fiscal 2013, however, growth in final
consumption expenditure and gross fixed capital
formation picked up in Q3 FY2013, suggesting
that the slowdown in demand may be bottoming
out. Although persistent weakness in the global en-
vironment contributed to the slowdown in growth,
the adverse contagion effects from the Eurozone
debt crisis explain only a small part of the overall
deceleration.


Continued weakness in the industrial sector
dragged down growth in services, the original
harbinger of India’s economic progress. Growth in
the industrial sector started weakening during fiscal
2012 as mining activity stalled and manufacturing
output decelerated. These weaknesses continued in
fiscal 2013, bringing down the average industrial
growth to 3.3 percent from an average of 9.2 percent
during the preceding two years. This slowdown in
services was most pronounced in the third quarter
of fiscal 2013 as the services sector was adversely af-
fected by the industrial slowdown through forward
and backward demand linkages, bringing down its
projected rate of growth an 11-year low of 6.6 per-
cent in fiscal 2013.


Macroeconomic vulnerabilities have increased.
A record current account deficit, stubbornly high
inflation, and a halt to the declining trend in the
debt-to-GDP ratio highlight the growing macro
vulnerabilities and limit the policy room available to
the authorities. The Reserve Bank of India (RBI) has
had to strike a difficult balance between monetary
stimulus and price restraint. Policy action to reduce
fuel subsidies and the recently presented fiscal 2014
Union Budget reaffirmed the authorities’ commit-
ment to fiscal consolidation.


The current account gap worsened due to a wid-
ening trade deficit. The current account deficit
increased to a record 5.4 percent of GDP in the
first half of fiscal 2013, compared to 4.1 percent in
the corresponding period last year. The merchandise
trade deficit widened to 11 percent of GDP, from
10 percent the previous year, the central cause of the
deterioration in the current account balance. The
worsening in the current account balance occurred
despite a robust inflow of remittance, which increased
to 1.7 percent of GDP during Q1-Q3 FY2013, from
1.6 percent last year.


The trade balance has showed signs recently of
improvement. Merchandise export growth (in US
dollars) turned positive during the first two months
of 2013, slowing the decline in exports from 7 per-
cent (y-o-y) to 5 percent (y-o-y) in April-December.


Broad-based slowdown aected all sectors
(Percent y-o-y growth)


Q
1


20
07


-0
8


Q
3


20
07


-0
8


Q
1


20
08


-0
9


Q
3


20
08


-0
9


Q
1


20
09


-1
0


Q
3


20
09


-1
0


Q
1


20
10


-1
1


Q
3


20
10


-1
1


Q
1


20
11


-1
2


Q
3


20
11


-1
2


Q
1


20
12


-1
3


Q
3


20
12


-1
3


Agriculture Industry Services


11


9


7


5


3


1


-1




S p r i n g 2 0 1 3 43


The decline in exports can be attributed primarily
to a fall in demand from Asian economies and for
goods such as engineering and petroleum products.
Growth in merchandise imports also slowed, to 1
percent (y-o-y) during April-February, from 33
percent last year. Import growth remains posi-
tive, however, even though gold imports declined
relative to last year, primarily because of inelastic
oil imports which grew at 13 percent y-o-y during
April-December 2012. As a result, the trade deficit,
which touched an all-time high of USD 22 billion
in October (44 percent y-o-y growth), fell to USD
15 billion by February (the same level as in February
2012).


With output growth slowing, headline infla-
tion fell to its lowest level in over three years. It
prompted the RBI to lower the policy repo rate by
25 bps twice (in January and March) to 7.50 percent,
after having held it constant for the previous seven
meetings. Wholesale headline inflation averaged
7.4 percent during April-February, down from 9.1
percent in the same period last year. However, after
December, headline retail inflation increased to more
than 10 percent (y-o-y). Food inflation remained
high, widening the wedge between wholesale and
retail inflation Food wholesale inflation averaged 9.3
percent y-o-y during April-February in fiscal 2013,
significantly above 7.2 percent y-o-y during the same
period last year, due to a surge in vegetable prices.
Some suppressed fuel inflation surfaced—rising to
10.5 percent (y-o-y) in February, from 7.1 percent
in the month before—after the government allowed
phased deregulation of diesel prices.


The Budget succeeded in containing the fiscal defi-
cit. The overall deficit for fiscal 2013 was limited to
5.2 percent of GDP (by the government’s definition),
0.1 percent above the goal set in last year’s budget
but below October’s revised target of 5.3 percent. By
the World Bank’s definition, which discounts once-
off divestment proceeds from revenues, the overall
deficit was unchanged from last year’s budget target
of 5.4 percent of GDP. This represents a 0.6 percent
of GDP improvement over the fiscal 2012 outcome
and a 1.4 percent of GDP reduction from the peak
deficit in of 6.8 percent in fiscal 2010. However, the
deficit remains well above the 3.7 percent of GDP
average recorded during fiscal 2005-2008, after the
Fiscal Responsibility law was enacted and before
the countercyclical stimulus applied to counter the
global crisis.


Revenues underperformed as the pace of eco-
nomic activity slowed. Although gross tax revenue
improved to 10.4 percent of GDP from 9.9 percent
a year ago, the increase was 0.2 percent of GDP less
than the budgeted amount. Total revenue and grants
reached 8.7 percent of GDP, 0.3 percent of GDP
higher than last year but 0.5 percent of GDP below
the budgeted amount.


The pace of fiscal consolidation by the central
government continues to lag behind the targets
set by the 13th Finance Commission (FC). The
central government has pledged its commitment to
bringing down the deficit to 3.0 percent of GDP by
fiscal 2017, but at this deadline looks likely to slip.
The states, on the other hand, have largely achieved
the FCs’ targets, except for a brief deviation after the
global financial crisis, by acting on state-specific fis-
cal legislation passed in fiscal 2005. According to FC
targets, the states’ aggregate fiscal deficit-to-GDP
ratio should decline to 2.5 percent in this fiscal year.


The improvement in the central government’s
debt-to-GDP ratio over the last several years ap-
pears to have lost momentum. In fiscal 2012, the
central government’s internal liabilities rose for the
first time in seven years, reaching 48.1 percent of
GDP. It is expected to remain at about the same level
in the current fiscal year.


Outlook and Policy


Economic growth will likely slow further in 2013
but rebound somewhat through fiscal 2014 and
beyond, although downside risks remain high. The
slowing momentum of growth may have bottomed
out in the third quarter of fiscal 2013, but even a
substantial pickup in the last quarter is unlikely to
lift the rate of real GDP much beyond 5.0 percent.
However, a minor increase in the trend-cycle com-
ponent of GDP in the third quarter, an upturn in
industrial production in February, and some modest
improvements in investment and exports give rea-
son for optimism that economic activity may have
turned the corner. With these factors, and a gradual
improvement in the global environment, growth is
expected to climb to 6.1 percent in fiscal 2014.


Downside risks remain high, however. Macro buf-
fers are largely depleted and the authorities’ ability to




S o u t h A S i A E c o n o m i c F o c u S44


respond to negative external shocks is likely to be much
more limited than during the 2007-2009 global crisis.
The current account deficit is increasingly financed by
more volatile portfolio flows. While two main rating
agencies maintain a negative outlook on India’s sov-
ereign debt, with specific concerns on the slowdown
in economic growth, a third agency has recently
reaffirmed a stable outlook based on robust savings
and private sector dynamism. Continued progress on
the domestic reform agenda to encourage investment
and unlock supply constraints while adhering to fiscal
consolidation—especially important in the context of
upcoming state and general elections—is critical to
supporting growth and lowering macro vulnerabilities.


India’s growth drivers will increasingly have to
come from domestic sources. The authorities’ com-
mitment to fiscal discipline may give the Reserve
Bank of India more room for accommodative mon-
etary policy, while a series of investor-friendly mea-
sures announced in the fiscal 2014 budget will pro-
vide additional incentives for increased investment.


Inflationary pressures are expected to moder-
ate. Despite the surprise uptick in wholesale price
inflation in February and the pressure from food
prices keeping consumer inflation persistently high,
inflationary momentum is expected to wane over the
coming months. The RBI has remained staunch on
inflation and is unlikely to lower rates prematurely
or be very aggressive with rate cuts. The stabiliza-
tion of the rupee following a bout of depreciation in
the first half of calendar 2012 is also likely to limit
inflationary pressures. Good rainfall in the spring
and another solid wheat harvest should help alleviate
some push factors on food prices, although recent
steps to curtail fuel subsidies are likely to contribute
to higher impetus from fuel prices in the short term.


Fiscal deficits are likely to decline as the au-
thorities have renewed their commitment to fiscal
consolidation. Following notable fiscal slippages
in previous years, the authorities delivered on their
commitment to keep the fiscal 2013 central govern-
ment deficit within the revised target of 5.3 percent
of GDP. Even if divestment revenues in fiscal 2014
fall short of expectation, the authorities are likely to
be able to meet the deficit target of 4.8 percent of
GDP with expenditure compression and a recovery
in tax revenues as economic activity picks up. With
states’ fiscal performance roughly on target with
the adjustment path recommended by the FC, the


general government deficit is likely to remain below
8 percent of GDP in fiscal 2014 and fall to around
7.2 percent of GDP in fiscal 2015.


Debt ratios look likely to resume their decline but
at a slower rate than before. This year, the central
government’s debt-to-GDP is expected to remain
around 48 percent of GDP, just 0.1 percent of GDP
lower than last year, and decline gradually over
the next few years. Even if real interest rates rise, a
recovery in growth and continued commitment to
fiscal discipline are expected to offset any potential
adverse effects on debt sustainability and contribute
to a slowing decline in central government’s debt to
47 percent of GDP by fiscal 2015.


Slower growth and narrowing fiscal space could
affect India’s progress towards universal health
coverage. Based on recent trends in the roll-out of a
new wave of government-sponsored health insurance
schemes (GSHIS) launched since 2007, the share of
Indian population covered by some form of health
insurance could rise from 25 percent in 2010 to 50
percent by 2015. In particular, the coverage of GSHIS
could increase to more than 500 million persons by
2015. While the schemes are a crucial component of
building human capital and fill an important niche for
an otherwise under-served population, the additional
expenditures required to finance the initiatives could
amount to between 0.4 and 1.0 percent of GDP in
2015. The central government looks likely to be able
to finance its share of the incremental expenditure
towards broadening access to government-sponsored
health insurance. However, divergence in growth
performance at the state level and lower income flex-
ibilities of public health expenditure at the state level,
imply that a number of states may need to substan-
tially reallocate fiscal resources to finance the expan-
sion of government-sponsored health insurance.


In the global context, India’s growth could benefit
from economic recovery in the high-income coun-
tries, but this would not be sufficient to return it
to the record pace of the late-2000s. If high-income
economies were to recover strongly—with growth
of, say, 3 percent in 2014 and 2015—global import
demand could be expected to rise by about 5.5
percent, which would buoy India’s exports by 4.5
percent relative to the baseline for 2014 and 2015,
and real GDP growth by 0.4-0.5 percentage point
in 2013 and 2014, and 0.2 percentage point the fol-
lowing year. If such auspicious developments were to




S p r i n g 2 0 1 3 45


be joined by positive investor and consumer senti-
ment and an easing in financing constraints for firms
globally, India’s GDP could accelerate by another 0.1
percentage points relative to the baseline.6


Despite the current slowdown in economic growth,
India’s long-term prospects remain highly favour-
able. The country possesses the fundamentals to
grow at sustained high rates over the next several de-
cades on the strengths of its demographic transition,
high savings and investment rates, rising educational
attainments, and increasing agglomeration effects
(urbanization and growth of secondary cities). India
is entering demographic transition much later than
many other developing countries, and will still be a
relatively young nation 20 years from now, even as its
dependency ratio declines to 49 percent in 2030 from
its current 56 percent. Even as economic activity fell
to a decade-low pace this year, investment rates did
not decline much below 30 percent; combined with
the demographic dynamics and a rising age-savings
profile, India is likely to generate significant volumes
of savings and investment over the coming years. In
combination, these are the foundations for strong
growth for decades to come.


6 These calculations are based upon the World Bank’s global macro model, devel-
oped by the Development Prospects Group, which covers some 150 economies and
includes detailed trade linkages between each of these economies.


No contagion from income countries


Favorable global environment has limited positive
eects on Indias’s growth


History/baseline Lower oil prices


8


7


6


5


4
FY2011/12 FY2012/13 FY2013/14 FY2014/15 FY2015/16




S o u t h A S i A E c o n o m i c F o c u S46


Maldives
Political instability paired with a precarious external
situation constitutes the biggest threat to Maldives near
term economic future. The tourism sector and the fiscal
situation remain weak while debt sustainability may
become a major concern.


Recent Economic Developments


The economy remains hostage to politics in Mal-
dives, and the political situation is in flux with a
series of crucial elections ahead. The Presidential
elections are scheduled for early September 2013,
and the Majlis (parliamentary) elections for April
2014, with local government polls thereafter. The
first two elections, at least, look to be keenly con-
tested, and the Majlis poll could result in another
hung parliament.


Real GDP growth is reckoned to have reached
3.4 percent in 2012, on the back of sluggish tour-
ism performance. Inflation has remained subdued
on account of favorable global commodity prices,
especially food and fuel. However, recent increases
in global fuel prices are likely to stoke inflationary
pressures.


The fiscal position remains precarious, with the
government cash-flow position considerably
weakened. In response, the government has resorted
to imprudent means of managing the cash flow: (i)
ad-hoc borrowings from the banking and private
sectors, at high interest rates, (ii) monetizing, and
(iii) running huge payment arrears, amounting to
over 11 percent of GDP.


The precarious external situation presents a seri-
ous challenge to the country. The situation has been
aggravated by continued high fiscal deficits as well
as recent debt settlements. Current gross reserves
are below two month of imports and in the face of
increased monetization of the deficits, could deterio-
rate further.


In light of the precarious external situation, ex-
ternal debt sustainability has also become a major
concern. Under current trajectories, total external
debt obligations are projected to reach over 115
percent of GDP by 2015—a seriously vulnerable
situation, given the recent slowdown in tourism, and
the susceptibility of the economy to external shocks
(such as commodity price hikes).


Outlook and Policy


The political tensions are likely to prevail through
the lead-up to the elections—and beyond, if any of
the major polls turn out inconclusive. An incon-
clusive or disputed outcome would likely prolong
tensions and policy uncertainty.


Growth prospects for 2013 and beyond may remain
weak in the face of sluggish global prospects, with
the political crisis also a dampening factor. The
IMF predicts only slow growth over the medium
term—reaching 3.8 percent in 2013, and thereafter
around 4 percent growth in 2014 and 2015. This
is strongly commensurate with the expected low
growth in the tourism sector, mainly in view of the
falling average duration of stay.


The dire fiscal position and the government’s
recourse to highly imprudent financing of the
cash-flow shortfall could have far-reaching con-
sequences. The 2013 budget addressed the issue
by emphasizing consolidation of the fiscal situa-
tion—increasing taxes and cutting expenditures. But


Maldives GDP and Tourism Growth, %, Real


Sources: Maldives Monetary Authority and WB sta estimates


Real GDP Tourism Growth


50


40


30


20


10


0


-10


-20


-30


-40


2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012e




S p r i n g 2 0 1 3 47


these measures are unlikely to succeed—particularly
the expenditure cuts, which lack specific policies to
ensure compliance. The authorities need to take
more urgent action, such as (i) better targeting of the
main subsidy schemes—particularly electricity and
Aasandha health insurance, and (ii) freezing capital
expenditure for the foreseeable future. In the medium
term, the government should also seek to rein in the
biggest scourge of the public finance system: the size
of the public sector and associated high costs of pay
and allowances.


As long as the unsustainable fiscal deficits persist,
the rufiyaa will be under pressure. The prospects of
further money printing threaten the external stability
and risk a sharp adjustment in the exchange rate. The
biggest risk posed by a further exchange-rate adjust-
ment is the possible impact it could have on poverty;
the recent HIES shows that poverty rates remain
high despite years of fast per-capital income growths.
However, a move to a more flexible exchange rate
system—perhaps through the widening of the exist-
ing band of the managed float, or outright currency
flotation—would be futile in the face of persistently
high fiscal deficits. The monetary authorities need to
liaise closely with their fiscal counterparts to bring
about the necessary adjustments, even though such
adjustments are bound to be painful. A proper and
sufficient level of adjustment, on the other hand,
would likely see the resumption of the stalled IMF
program, and open the door for more donor support.


Monthly scal cost of subsidies in the Maldives
(2009-11), million ruf iyaa


M
ill


io
ns


. R
f


Jan 2010 Jan 2011 Jan 2012July 2010 July 2011


Usage subsidy Fuel surcharge Total


50


45


40


35


30


25


20


15


10


5


0


Source: World Bank sta estimates


Distribution of electricity subsidy benets in Male, 2012
(HIES estimates)


Pr
op


or
tio


n
of


to
ta


l s
ub


si
dy


b
en


e
ts


Poorest
quintile


Richest
quintile


2 3 4


Source: World Bank sta estimates


35%


30%


25%


20%


15%


10%


5%


0%


12%


19% 19%
21%


30%




S o u t h A S i A E c o n o m i c F o c u S48


Nepal
Nepal experienced a significant slowdown to the lowest
levels of growth in a decade. Persistent political instabil-
ity, a related shortfall in public spending, a weak invest-
ment climate and its dependence on India’s business cycle
continue to shape Nepal’s economic near term outlook.


Recent Economic Developments


Political instability has governed economic per-
formance in the current fiscal year, with growth
expected to be well below expectations with public
spending having slowed sharply. In the short to
medium term, however, there are reasons for cautious
optimism: not only has the (partial) resolution of the
political stalemate opened the possibility of a more
normal fiscal stance, but overall risks—linked mostly
to the financial sector—have also decreased, thanks
to the government’s active reforms in that area.


The growth rate for fiscal 2013 is projected to be
3.0-3.5 percent, the lowest in a decade. The initial
projection of 3.8 percent growth was downgraded
to account for (i) a significant shortfall in public
spending, particularly on infrastructure; (ii) low
levels of private investment due to structural weak-
nesses such as power outages, labor issues, and
policy inconsistencies, and political uncertainty;
(iii) strong linkages with India’s economy that is ex-
pected to slow significantly in fiscal 2013; and (iv) a
disappointing monsoon that depressed agricultural
production.


Despite low growth, inflation is expected to re-
main high and the current account to slip back into
deficit. Inflation, currently at 9.5 percent, is expected
to remain well above the policy target of 7.5 percent
because of large remittance inflows, accommodative
monetary policy, and supply-side rigidities. Both,
food and non-food prices rose in the first seven
months of the fiscal year (by 9.9 percent and 11.2
percent), well above the rates for the same period in
fiscal 2012.


The trade deficit rose to nearly one-quarter of
GDP in fiscal 2012 and remains on an upward
course. Both current and reserve accounts remain


positive but are dwindling as the deficit grows. It
has increased by one percentage point of GDP per
annum for the past five years (except in fiscal 2010,
when it shot up to 26.2 percent of GDP). Nepal has
a narrow range of export products, whose total value
amounted to barely 5 percent of GDP. By contrast,
consumption-fueled imports have been growing
steadily in share of GDP, and are now six times
higher in value than export earnings.


Remittance inflows are financing the trade deficit
but this may not be sustainable. Remittance inflows
are estimated at 23.1 percent of GDP, which is just
enough to cover the net deficit of goods and services,
amounting to 23 percent of GDP. The difference al-
lowed Nepal to maintain a positive current account
balance in fiscal 2012 and to accumulate reserves
equivalent to 10.3 months of imports of merchandise
and services, the highest yet seen.


Public expenditure dipped in the absence of a full
budget (which might emerge in April). The inabil-
ity of political parties to agree on either a consensus
government or budget through fiscal 2013 (to date)
prompted the President to limit spending to the same
actual nominal expenditure of the previous fiscal
year—while leaving tax rates unchanged and prohib-
iting domestic borrowing. Authorized expenditure
for fiscal 2013 amounts to 18.3 percent of GDP,
the lowest in the past five years. A mid-term budget
review estimates a 1.1 percent of GDP shortfall in
allocations for the year under the current budget ar-
rangement. A budget ceiling of 22.7 percent of GDP
is proposed for fiscal year 2014.


Budgetary issues aside, tax collection has improved
with the use of progressive instruments. Revenue
targets will be met, if not exceeded. In the first half
of fiscal 2013, income, trade and VAT tax collec-
tion rates exceeded the six-month targets. Revenue
collection in January was NRs.134.6 billion, 102
percent above the targeted NRs.131.9 billion.


Financial market liquidity stresses have eased from
last fiscal year, but not disappeared. The overall
credit-to-deposit ratio was 82.2 percent (mid-Jan)
compared to 78.4 percent the year before and 76.2
percent in 2011. Aggressive lending by banking and
financial institutions resulted in this mismatch with
deposits growing at a rate of 4.4 percent (NRs.38
billion) compared to credit growth of 12.3 percent
(NRs.76 billion).




S p r i n g 2 0 1 3 49


Nepal has met the MDG target of halving the
percentage of people living on less than USD 1.25
per day. The number of poor has declined dramati-
cally since the mid-1990s. In 1996, 68 percent of the
population lived under USD 1.25 per day; by 2011
this had fallen to 24.5 percent. The pace of poverty
reduction accelerated sharply in the last decade, from
1.5 percentage point per year during 1996-2004,
to 2.5 percentage points during 2004-2011—faster
even than that of Bangladesh.


Remittance—which accelerated in the post-
conflict period—also played a key role in poverty
reduction. Nepal is the world’s largest recipient of
foreign remittance in proportion to GDP (25 per-
cent) among countries with populations bigger than
10 million. The proportion of households receiving
remittance (internal or external) rose from 23 percent
in fiscal 1996 to 32 percent in 2004, then jumped to
56 percent in fiscal 2011.


Outlook and Policy


The economy could rebound if the trend towards
political stability firms. This, with the expected
recovery of India’s economy and pull from the
construction and services sectors could push Nepal’s
growth above 5 percent, especially if the country
takes full advantage of China’s granting of zero-tariff
status on most Nepali products. However, much
depends on the success of the upcoming elections
and whether the new government will fully utilize
its opportunities.


Stability is essential to hydro and construction sec-
tors which require significant upfront investments
and long-term engagement. Financial agreement
has been concluded to build a 750 MW medium-
size hydro scheme in 2014, while another 309 MW
medium-size hydro project is expected to begin
generating power in fiscal 2015.


Risks remain high, however, and the future rate
of remittance inflows will be critical. The current
slowdown in growth of remittance flows could put
pressure on domestic borrowing to fund larger public
expenditure outlays. The country remains at moder-
ate risk of debt distress, and further pressure from the
use of high interest-bearing channels could set the
government on the edge of a “fiscal cliff ”.


Can Nepal overcome its historic inertia to fully ex-
ploit its geographic advantage between two of the
world’s most populous and fast-growing econo-
mies in order to improve its investment climate,
fast-track completion of infrastructure projects,
and open its abundant resources to foreign invest-
ment? The establishment of the Investment Board
Nepal has begun to facilitate smoother processing
of large investment projects, but Nepal’s poor imple-
mentation record suggests more challenges lie ahead.


GDP


6


5


4


3


2


1


0
2001 2002-07 2008-12 2011-13


Conict Year Peace
negotiation


period


Constitution
writing
period


Three Year
Plan


Target


GDP


0.1


3.8


4.8


5.5




S o u t h A S i A E c o n o m i c F o c u S50


Pakistan
Pakistan has entered a new stage of external weakness.
The fiscal deficit is widening and stalled progress on
structural reforms, in particular tax and energy related,
pose major near term challenges.The completion of a full
term by the government marked a historic milestone in
the country’s democratic development.


Recent Economic Developments


Pakistan’s economy is slowing, moving from
borderline stagflation to deflation as real GDP
growth hovers around a mediocre 3.5 percent
with downward bias. Inflation has sunk into
single digits, although it appears likely to return to
double digits by mid-year. The agricultural sector,
contributing one-fifth of national GDP, is pro-
jected to grow at half of its targeted 4.2 percent.
In the industrial sector, large-scale manufactur-
ing—accounting for 52 percent of sectoral out-
put—showed mild signs of revival in the first half
of fiscal 2013, growing by less than 2 percent. The
services sector, which accounts for over 53 percent
of domestic output, is expected to grow at a rate
close to but lower than the targeted 4.6 percent.
Its growth will remain broad-based, benefitting
from growth in the wholesale and retail trade,
finance and insurance, and public administration
sub-sectors.


The external position deteriorated significantly
during the first eight months of fiscal 2013. Net
international reserves fell from about 2.6 months
of next year’s imports to 1.8 months. This is not
attributable to the current account; indeed, mild
export growth, declining imports associated to the
economic slowdown and strong inflows of workers’
remittance have resulted in a low current account
deficit projected to be around 0.8 percent of GDP.
The risk lies in the precipitous decline in financial
inflows—especially in FDI to about one-third of
its fiscal 2011 level—and scheduled external public
debt repayments that are draining reserves. Foreign
aid inflows remained weak during the first half of the
year and are not expected to be significant in financ-
ing the fiscal deficit.


Progress on critical structural reforms, especially
in tax administration and the energy sector, has ef-
fectively stalled. The government has not increased
power tariffs since May 2012 and unofficial estimates
of the circular inter-agency debt are approaching
Rs.600 billion. These constraints, together with dif-
ficulties encountered by the sector, such as reduced
allocations of the low-cost natural gas feedstock,
and delays in appointing professional boards (which
discourage private sector investment in electric-
ity generation, leading to high load-shedding levels
averaging 8 hours per day) continue to undermine
growth.


Power sector subsidies have continued to propel ex-
penditures. Confounding government’s expectations,
power sector subsidies increased and by the end of
the first half of the fiscal year, 80 percent (i.e., Rs.166
billion) of the total subsidy budget was already spent,
with power sector subsidies amounting to 0.7 percent
of GDP. With election politics likely to prohibit any
major adjustment in power tariffs, the electricity
subsidies are likely to continue or even be accelerated,
and by the close of the fiscal year will likely exceed the
target by around 0.8 percent of GDP.


On the positive side, provincial finances seem to
be doing much better than anticipated. Provincial
expenditure has risen much less than expected: only
9 percent. Hence, the provincial fiscal surplus was
0.6 percent in the first half of the fiscal year, which
implies that the provinces could generate a full-year
fiscal surplus of 0.8 percent of GDP.


The public debt-to-GDP ratio has maintained
an upward trajectory. At end-December 2012, the
public debt-to-GDP ratio stood at 58.0 percent
of the projected GDP, about 0.5 percentage point
higher than at end-December 2011. The rising
short-term financing pattern of the government,
has exposed scarce budgetary resources to enormous
interest outlays. Interest on floating debt alone was
20 percent of total revenues in the first half of fiscal
2013, about 62 percent more than that paid on the
same instruments in the corresponding period last
year. IMF repayments dominated the external debt.
The external debt of the country declined by USD
2.2 billion in the first half of fiscal 2013 mostly be-
cause of IMF repayments of about USD 1.2 billion.


The overall slowdown in economic activity is due
also in part to low credit to the private sector. The




S p r i n g 2 0 1 3 51


Rs.104.5 billion disbursement to the private sector
during the first half of fiscal 2013 appears much
lower than that of the same period in fiscal 2012
(Rs.194 billion). Credit to private sector businesses,
which truly captures private sector activities, in-
creased modestly by Rs.153.5 billion during the first
half of fiscal 2013 (Table 6), the biggest expansion
of the last three years. Most of this expansion came
from meeting working capital needs, which stood at
Rs.127.9 billion.


The balance of payments (BoP) situation
remains stressed: The reason for this is the
sudden halt in financial inflows, aggravated by
high scheduled debt repayments. The official
government inflows are barely sufficient to meet
the amortization of medium- and long-term
loans. Besides marginal improvement in the trade
deficit and robust growth in workers’ remittances,
the external current account deficit for fiscal
2013 is projected to remain at around 0.7 percent
of GDP.


The trade deficit of USD 8.8 billion from July-
January of fiscal 2013 is small. Although exports
grew by slightly less than 1 percent in this time, the
marginal improvement in the trade deficit was due to
a contraction of 2.2 percent in imports. The overall
slowdown in productive activity in the economy and
the reduction in the prices and volumes of imports
explain this result.


Inflationary pressures eased considerably over the
last eight months of fiscal 2013. But risks remain.
CPI inflation declined to 7.4 percent (y-o-y) in
February 2013, from 11.3 percent in June 2012.
Both food and non-food groups contributed to this
deceleration, but the share of the non-food group
was relatively higher than the food group. Food
inflation declined from 10.3 percent in June 2012
to 5.3 percent in November 2012 before increasing
to 7.4 percent in February 2013. The State Bank of
Pakistan (SBP) reduced the policy rate by 250 bps in
the first half of fiscal 2013. The Net Foreign Assets
(NFA) of the banking system contracted by Rs.80
billion (negative growth of 22.3 percent y-o-y) dur-
ing Jul 1-Feb 22, 2013.


Financial Sector developments: The banking
system maintained profitability during 2012 with
before-tax profit increasing 10 percent compared
to the previous calendar year. Both return on assets


(ROA) and return on equity (ROE) remained at
satisfactory levels of 2.1 percent and 22.9 percent
respectively, and the sector’s liquidity position
improved.


Credit quality remains a risk, but shows signs
of stabilizing. Non-performing loans (NPLs)
remain high, at 14.5 percent of loans in Decem-
ber 2012, and present a medium-term risk to the
sector, but have declined over the past year (15.7
percent in December 2011). The microfinance
sector is one of the most progressive and innova-
tive globally, but lags substantially in its overall
outreach to demand, particularly women. The
sector registered a 13.6 percent increase in active
borrowers, 32.6 percent growth in gross loan port-
folio, 19 percent increase in savers, and 61 percent
in value of savings between December 2011 and
December 2012.


Outlook and Policy


The major risk comes from the significant weaken-
ing of the external position. The main issues are
the sudden stoppage of financial inflows—especially
the fall in FDI to about one-third of its fiscal 2011
level—and scheduled external public debt repay-
ments that are draining reserves.


-4.0


-2.0


0.0


2.0


4.0


6.0


Ju
n-


10


Au
g-


10


O
ct


-1
0


D
ec


-1
0


Fe
b-


11


Ap
r-1


1


Ju
n-


11


Au
g-


11


O
ct


-1
1


D
ec


-1
1


Fe
b-


12


Ap
r-1


2


Ju
n-


12


Au
g-


12


O
ct


-1
2


D
ec


-1
2


Real WALR Real Policy Rate


Real Policy and Weighted Average Lending Rates


Source: State Bank of Pakistan Real rates calculated using y-o-y ination




S o u t h A S i A E c o n o m i c F o c u S52


The fiscal situation is worrisome. Pakistan is poised
yet again to miss all of its budget targets by large
margins. Expenditure overruns in an election year are
likely to remain substantial, as power sector subsidies
remain high. Revenue shortfalls are expected to be
large, due partly to the long-standing structural
problems with tax policy and tax administration but
also to an apparent slowdown in domestic economic
activity and reduced oil imports (a major source of
revenue). The budget deficit could balloon to 7 per-
cent of GDP by the end of the year—well above the
budget target of 4.7 percent.


Credit quality shows signs of stabilizing but is
still at risk. Non-performing loans (NPLs) remain


high, at 14.5 percent of loans in December 2012, and
present a medium-term risk to the sector, but have
declined over the past year (15.7 percent in Decem-
ber 2011). Vulnerability to default risk remains but
has been mitigated so far by adequate provisioning
requirements and strong earnings (Net NPLs to
loans are at 4.6 percent compared to 5.4 percent
in December 2011). Banks are moving aggressively
into new financing avenues, with some using mobile
phone technology to reach to the un-banked seg-
ment of the economy.


There is a growing national consensus that the
country needs to recover its external position.
Talks begun in February for another IMF-supported
stand-by arrangement (SBA) but stalled because of
the authorities’ failure during the election campaign
to agree on satisfactory revenue generation measures
and properly contain expenditure for fiscal consol-
idation—a situation aggravated by a questionable
tax amnesty scheme. How soon the SBA negotia-
tions resume will likely depend in the near term on
the caretaker or next government. Budget support
from the World Bank and other donors remains
dependent on not only establishing a satisfactory
framework for economic stabilization and recovery,
but on designing a comprehensive growth-oriented
set of structural reforms in areas such as power sector
reform, economic governance (business climate, and
state-owned enterprises), trade diversification, job
creation and the safety-net system. The approaching
two-to-three-months transition period of the care-
taker government could help to restore momentum
in the key reforms essential for not only recovering
solid macro fundamentals but fostering Pakistan’s
growth agenda in the medium term.


1.4%


0.5%


1.7%


0.2% 0.2%


2.5%


0.6%


2.9%


0.3% 0.3%


3.9%


1.1%


4.6%


0.5% 0.5%


0.0%


0.5%


1.0%


1.5%


2.0%


2.5%


3.0%


3.5%


4.0%


4.5%


5.0%


Direct
Taxes


Customs Sales Tax Federal
Excise


Petroleum
Levy


Pe
rc


en
t o


f G
D


P


Collection of Selected Tax Revenues
H1-FY2013


Remaining Collected
Budget


Source: Ministry of Finance




S p r i n g 2 0 1 3 53


Sri Lanka
Sri Lanka’s growth moderated, however, remains at
healthy levels. To sustain growth in the future, the coun-
try will face the challenges of strengthening the revenue
side of the fiscal balance as well as attracting greater
foreign investment flows.


RECENT ECONOMIC
DEVELOPMENTS


Economic growth moderated in 2012, signaling a
tempering of the post-conflict boom. Nevertheless,
GDP growth was still a healthy 6.4 percent in 2012,
far above regional peers, though significantly below
the 8.2 percent averaged through 2010 and 2011. The
slowdown was due largely to (i) conscious macroeco-
nomic policies aimed at managing credit growth in
the face of aggravating balance of payments (BoP)
issues, and (ii) dampened global economic condi-
tions that impacted particularly the country’s main
export markets.


On the production side, favorable weather condi-
tions supported good agricultural growth overall
in 2012, while the industrial and services sector
growth rate respectively stagnated and moderated.


While inflation has risen from 2011, it is still man-
ageable, in single digits. Moderating demand has
put downward pressure on inflation, counteracting
cost-push pressures that would have driven it higher.
Year-end inflation reached 9.2 percent (y-o-y) com-
pared to 4.9 percent in 2011, while the average for
the year was 7.5 percent compared to 6.7 percent
for 2011. The data for early 2013 indicate a further
rise, though not beyond single digits—February’s
headline inflation coming in at 9.8 percent (y-o-y).


Monetary policy has turned back towards accom-
modation, reversing a brief period of tightening.
This was likely due to falling growth rates and the
prevalence of low inflation. The central bank had
raised policy interest rates in February and again
in April, keeping them steady until making a small
downward adjustment in December.


The external balance improved because of a re-
duction in imports, while continued inflows to
services, income and financial accounts provided a
more comfortable cushion against external risks in
2012 compared to 2011. The import bill declined by
5.8 percent in 2012 to USD 19.1 billion, largely be-
cause of the policy measures introduced early in the
year, lower global commodity prices, and a weaker
rupee. The trade balance improved from a deficit of
16.4 percent of GDP to 15.8 percent, while the cur-
rent account deficit improved from nearly 8 percent
of GDP to 6.6 percent. With these developments,
the country’s basic balance improved in 2012 to a
deficit of 5.2 percent of GDP from a deficit of 5.7
percent of GDP the year before.


The Sri Lankan rupee depreciated rapidly with
relaxation of the forex market in early 2012 but
settled to around SLRs.127/USD 1 by year’s end.
By not intervening aggressively, the central bank
managed to build up its foreign exchange reserves
from a somewhat precarious three-and-a-half
months of imports at end-2011 to a relatively better
four-and-a-quarter months of imports by end-2012.


Sri Lanka Performance vs. Regional Peers


Sources: World Bank data, Global Economic Prospects 2012
and WB sta estimates, Economist Intelligence Unit


Lower middle income countries (average)


India


Sri Lanka Indonesia


Vietnam


Bangladesh


Malaysia


12


10


8


6


4


2


-


(2)


(4)


2007 2008 2009 2010 2011 2012f




54 S p r i n g 2 0 1 3S o u t h A S i A E c o n o m i c F o c u S


The weakening of the currency had little impact on
inflation, thanks to strong support from domestic
supply that helped contain price impacts, and the
moderation of aggregate demand. In step with the
sharp currency depreciation, the real exchange rate
also depreciated sharply post-February. However,
these trends reversed later in the year as positive
inflation differentials built up and inflow of foreign
exchange, largely through the financial accounts of
the BoP, maintained the strength of the currency.


Overall fiscal policy remained stimulatory while
the overall deficit narrowed only marginally to 6.4
percent of GDP in 2012, from 6.8 percent in 2011.
Several structural weaknesses in the fiscal structure
came into sharp focus in 2012—notably weak rev-
enues, which reached their lowest levels in history.


Outlook and Policy


The country will need decisive policies to meet its
medium-term challenges. Fiscal policy, in particular,
will need to place emphasis on reforming the state-
owned enterprise sector, and require a combination
of hard budget constraints and broad-based reforms
to stop the current hemorrhaging. The government
needs also to adopt policies that attract greater
foreign investment in order to buoy the country’s
growth potential. The long-term decline in exports
gives cause for concern; the authorities need to focus
beyond traditional export markets, into more of the
emerging markets.


Structural limitations threaten Sri Lanka’s abil-
ity to sustain the high level of economic growth of
recent years. Firstly, the country’s current investment
levels are well below the rates required to spur the
8 percent-plus growth envisaged by the government.
Investment rates in Sri Lanka rose to 30.6 percent
of GDP in 2012, from 30 percent in 2011. To sustain
8 percent-plus growth Sri Lanka will require invest-
ment rates of 35-40 percent of GDP. This will require
increased domestic investment but also foreign invest-
ment—in particular foreign direct investment (FDI).
FDI is particularly important in the Sri Lankan con-
text because it facilitates technology transfers which
support productivity and innovation. However, Sri
Lanka has not shown a striking ability to attract suf-
ficient FDI in the recent past. Sustaining economic
growth will be subject to fiscal constraints and the


increasing challenge of maintaining government ex-
penditure on public investments at 6.0-6.5 percent of
GDP. The problem is aggravated by a lack of effective
reform in the SOE sector, with several SOEs being
a considerable drain on fiscal resources. Sri Lanka’s
long-term decline in exports gives reason for concern,
highlighting a need to reverse the country’s increased
reliance on domestic sources for growth.


The government’s medium-term revenue growth
target appears ambitious, particularly in light of
the poor revenue fundamentals in the country.
Contemporary analysis shows that Sri Lanka has
one of the highest gaps between actual and potential
revenue in South Asia, with these gaps likely to
worsen. Furthermore, Sri Lanka also records one
of the lowest revenue buoyancies in South Asia—a
ratio close to 0.61, substantially below unity. Sri
Lanka’s low buoyancy seems to come from poor
performance of all tax instruments. No individual
tax category has buoyancy above 1.0, and buoyancy
is particularly low for VAT, the single largest source
of tax revenue. Against this backdrop it is important
that the government gives due cognizance to the rec-
ommendations of the Presidential Tax Commission
(PTC) that delivered its findings to the government
in September 2010. While the 2011 budget did take
cognizance of some of these recommendations, a
lot more needs to be done to revamp the revenue
machinery.


Sri Lanka Real Eective Exchange Rate, 2005=100


Source: IMF


20
06


M
1


20
06


M
5


20
06


M
9


20
07


M
1


20
07


M
5


20
07


M
9


20
08


M
1


20
08


M
5


20
08


M
9


20
09


M
1


20
09


M
5


20
09


M
9


20
10


M
1


20
10


M
5


20
10


M
9


20
11


M
1


20
11


M
5


20
11


M
9


20
12


M
1


20
12


M
5


20
12


M
9


20
12


M
13


135


130


125


120


115


110


105


100


+ indicates appreciation








S o u t h A S i A E c o n o m i c F o c u S 57


V


S p r i n g 2 0 1 3
Ph


ot
o:


©
W


or
ld


B
an


k/
So


fie
T


es
so


n


  AFG (1) BGD (6) BTN (12) IND (16) MDV (24) NPL (29) PAK (34) LKA (44) SAR (50)


O
U


TP
U


T
an


d
PR


IC
ES


Real GDP
Growth


2010 8.4 6.1 10 10.5 7.1 3.9 3 (35) 8 10


2011 7.3 6.7(p) 9 6.3 7.0 4.6 3.7 8.3 7.2


2012 11.8 (e) 6.3(p) 7.6 (p) 4.7 (p) 3.4 (e) 3.0 (p) 3.5 (e) 6.4 (e) 4.7


2013 3.1 (e) 5.8 (p) 14 (p) 6.1 (p) 4.3 (p) 3.9 3 (e) 7 (e) 5.5 (f )


Inflation
(y-o-y)


2010 1.1 7.3 6.3 9.6 (17) 6.1 (e) 9.6 13.7 5.9 9.2


2011 12.8 8.8 5.7 8.9 13 (e) 8.3 11 4.9 (Year end) 9.6


2012 6.3 10.6 8.9 7.3 (p) 12.3 (e) 8 11.01 (e) 6.7 (average) 8.6


2013 7 (e) 7 (e) 9.1 6.9 (p) 5.8 (p) 8.03 (e) 10.4 (e) 7.5 (average) 8.4 (Feb 2013)


Core Inflation


2010 9.8 (2) 4.8 .. 5.0 .. 5.8 9.3 7 ..


2011 15.9 6.8 .. 7.3 .. 6.4 9.9 6.9 ..


2012 7.6 11.5 .. 5.4 .. 10.7 10.6 5.8 ..


2013 .. 7.5 (7) .. 3.9 (18) .. 9.9 (30) 9.8 (36) 7.4 (45) ..


Food Inflation


2010 -1.4 10.1 10(Q4) 14.2 12.4 13.5 .. 6.9 11.4


2011 12.1 12.8 9 (Q4) 7.9 12 13 11 9 11.4


2012 4.6 7.5 12(Q4) 8.1 -8 8 9 5 4.9


2013 .. 7.8 .. 10.4 -2 10 8 12 7.5 (Feb 2013)


BA
LA


N
CE


o
f P


AY
M


EN
TS


Current
Account
(% of GDP)


2010 2.8 1.8 (8) -1.39 (13) -2.7 -7.3 (e) -0.9 -0.7(37) -2.0 -2.6


2011 2.2 0.2 -19.11 -4.2 -1.3 (e) 4.7 -1 -7.8 -3.1


2012 3.9 (e)(3) 0.8 (e) -25.5 -5.1 (p) -4.2 (e) 0.6 (p) -0.8(p) -6.6 (e) -4.5


2013 1 (e) 0.8(f ) -20.77 -4.5 (p) -9.3 (p) -0.3 (p) -1(f ) -4.7 (e) -3.7 (f )


Trade Balance
(% of GDP)


2010 -45.9 -10.7 -7.92 -7.5 15.1 (e)(25) -26.2 -0.5 -9.7 -5


2011 -43.6 -11.3 -31 -8.8 3 (e) -25.8 -8 -16.4 -6


2012 -43.1 (e) -10 -32.32 -10.9 -3.1 (e) -25.2 -7.4 (p) -15.8 ..


2013 .. .. -28.25 .. -6 (p) .. .. .. ..


Import
Growth


2010 5.1 5.5 36.9 (e) 28.8 14.2 (e) 10.2 14.9 31.8 16.0


2011 6.7 41.8 39.4 (e) 24.2 33.8 (e) 3.4 12.8 50.7 17.8


2012 5.0 (e) 5.3 -3.3 (e) 11.9 1.5 (e) .. -2.2 -5.8 (e) 8.6


2013 0.6 (e) 2.1 (p) 2.4 (p) 18.6 (p) 5.1 (p) .. 6 (e) 11 (e) 5.8 (f )


Export
Growth


2010 4.8 4.1 7.1 (e) 37.5 25 (e) 13.2 28.9 21.0 14.0


2011 4.2 41.5 21.8 (e) 17.9 15.9 (e) 5 -2.6 22.4 16.7


2012 -5.0 (e) 5.9 -1.6 (e) 13.5 (p) -4.2 (e) 6.9 (p) 1 -7.4 4.5


2013 -2 (e) 7.2 (p) 4.2 (p) 24 (p) 2 (p) 8.1 (p) 7 (e) 7 (e) 5.9 (f )


Remittances


2010 .. 10.9 (9) .. 54 (19) -0.19 3.5 (31) 9.7 (38) 4.2 (46) 82 (51)


2011 .. 12.1 .. 63 -0.22 4.2 12.3 5.2 97


2012 .. 13.7 (e) .. 69.8 (e) .. 5.1 (e) 13.9 6.3 (e) 109 (e)


South Asia at a Glance




S o u t h A S i A E c o n o m i c F o c u S58


  AFG (1) BGD (6) BTN (12) IND (16) MDV (24) NPL (29) PAK (34) LKA (44) SAR (50)


G
O


VE
RN


M
EN


T
FI


N
AN


CE
S


an
d


M
AC


RO
P


O
LI


CI
ES


Fiscal Deficit
(% of GDP)


2010 0.9 (4) 3.7 -2.1 -6.8 (central govt) -7.3 (e)(26) -0.8 -6.4 -8 -8.7


2011 -0.9 4.1 -0.7 -6 -1.3 (e) -0.9 -8.5 -6.8 -7.6


2012 1.6 (e) 4.5 -1.6 (p) -5.2 -4.2 (e) -0.6 -7 (p) -6.4 -9 (e)


2013 1 (e) 4.5 -1.4 (e) -5.4 -9.3 (p) 3.6 -7 (e) -5.8 (e) -8.3 (f )


Debt to GDP
Ratio (%)


2010 13.8 .. 54 (e) 47.4 62 (e) 33.3 62 (e) 81.9 ..


2011 13.2 .. 72 (e) 48.1 71 (e) 33.3 57.5 (Dec 2011) 78.5 ..


2012 11 (e) .. 76 48.2 (f ) 86 31.3 58 (Dec 2012) 82 (end of 2012) ..


2013 .. .. 86 (e) 47 (f ) 105 (e) 30.7 63 (e) .. ..


Reserves
in Months
of Import


2010 6.7 5.1 13.9 7.1 (20) 4 (end of 2010) 5.4 (32) 3.9 (39) 6.4 ..


2011 7 3.9 11.2 5.0 3 (end of 2011) 10.3 2.6 3.5 ..


2012 7.7 (e) 3.3 9.5 4.4 (p) 2 (end of 2012) 6.2 (p) 2.6 (June 2012) 4.3 ..


2013 .. 3.5 9.6 4 (p) .. .. 1.8 (Feb 2013) .. ..


REER


2010 163.05 (5) 62.01 (10) 97.4 (e)(14) 54.42 (21) 124.53 (27) 54.08 (33) 71.86 (40) 81.97 (47) ..


2011 163.99 62.2 98.6 (p) 60.16 134.97 45.95 66.84 57.34 ..


2012 105.77 57.27 .. 60.88 120.31 40.31 52.85 47.8 ..


2013 127.32 (Q1) 48.11 (Q1)   51.08 (Q1) 95.73 (Q1) 47.11 (Q1) 42.33 (Q1) 40.83 (Q1)  


CO
N


SU
M


PT
IO


N
a


nd
IN


VE
ST


M
EN


T


Consumption
(% of GDP)


2010 120 82 66.3 (e) 72.5 .. 88 90 66 ..


2011 120 84 64.1 (e) 72.8 .. 91 92 70 ..


2012 .. .. 63.2 (e) 77 (p) .. 80 .. 69 (e) ..


2013 .. .. 60.7 (p) 75.5 (p) .. 88 (C) .. .. ..


Investment
(% of GDP)


2010 27 24.4 51.6 (e) 31.7 .. 32.5 16 28 28


2011 25 25.2 59.4 (e) 30.6 .. 32.8 12.5 29.9 27


2012 .. 25.4 61.8 (e) 30.5 (p) .. .. 11 30.6 (e) ..


2013 .. .. 65 (p) 31.3 (p) .. .. .. .. ..


FDI


2010 .. 0.9 0.019 (e) (15) 37.6 (22) 0.22 (e)(28) 0.1 1.6 (41) 0.4 (48) 30.4 (52)


2011 .. 0.8 0.016 (e) 38.6 0. 28 (e) 0.1 0.9 0.9 35.7


2012 .. 1.0 0.011 (e) 35 (p) 0.16 (e) .. 1.3 .. 29.7 (e)


2013 .. .. 0.011 (p) 44.5 (p) 0.22 (p) .. .. .. 36.9 (e)


Portfolio
Investment


2010 .. -0.07 (11) .. 28.2 (23) .. .. 0.3 (42) .. 29.9 (53)


2011 .. 0.01 .. 16.6 .. .. -0.1 -0.2 (49) -4.8


2012 .. 0.06 .. 15 (p) .. .. 0.8 (43) 0.3 11.5 (e)


2013 .. .. .. 18 (p) .. .. .. .. 16.4 (f )




S p r i n g 2 0 1 3 59


Notes: (Table South Asia at a glance)


e Estimate
f Forecast
p Projections

Afghanistan
1 These numbers are for fiscal year unless otherwise mentioned. For example; for 2010 numbers, 2010-2011 values


are used.
2 Core inflation (exc. Fuel and cereal, %)
3 Including grants
4 Overall Core Balance incl. grants
5 WB Staff Calculations


Bangladesh
6 These numbers are for fiscal year unless otherwise mentioned. For example; for 2010 numbers, 2010-2011 values


are used.
7 (Avg of Jan-Feb)
8 Current Account bal/GDP (%) is for calendar year
9 Remittances numbers are taken from GEP 2013 Jan report and they are calendar year numbers (USD billions)
10 WB Staff Calculations
11 Portfolio Investment Liabilities, US $ billions


Bhutan
12 These numbers are for calendar year unless otherwise mentioned.
13 Current Account surplus or deficit (% of GDP)
14 WB Staff Calculations
15 Net private foreign direct investment (USD billion)


India
16 These numbers are for fiscal year unless otherwise mentioned. For example; for 2010 numbers, 2010-2011 values


are used.
17 Wholesale Price Index
18 (Avg of Jan-Feb)
19 Remittances numbers are taken from GEP 2013 Jan report and they are calendar year numbers (USD billions)
20 Foreign Exchange Reserves (in months of next year’s goods and services imports)
21 WB Staff Calculations
22 Foreign Investment (US billion)
23 Portfolio Investment, net (US billion)


Maldives
24 These numbers are for calendar year unless otherwise mentioned.
25 WB Staff Calculations
26 WB Staff Calculations
27 WB Staff Calculations
28 Net private Foreign direct investment (USD billions)




60 S p r i n g 2 0 1 3S o u t h A S i A E c o n o m i c F o c u S


Nepal
29 These numbers are for fiscal year unless otherwise mentioned. For example; for 2010 numbers, 2010-2011 values


are used.
30 (Avg of Jan-Feb)
31 Remittances numbers are taken from GEP 2013 Jan report and they are calendar year numbers (USD billions)
32 Gross official reserves in months of GNFS (goods and nonfactor services) imports
33 WB Staff Calculations


34 Pakistan
34 These numbers are for fiscal year unless otherwise mentioned. For example; for 2010 numbers, 2010-2011 values


are used.
35 Real GDP Growth ( at factor cost)
36 (Avg of Jan-Feb)
37 Current Account Bal/GDP (%) is for calendar year
38 Remittances numbers are taken from GEP 2013 Jan report and they are calendar year numbers (USD billions)
39 SBP Gross Reserves exclude Cash Reserve Requirement, gold and foreign currency deposits of commercial banks


held with SBP & In months of next year`s imports of goods and services.
40 WB Staff Calculations
41 & 42 USD billions
43 Portfolio Investment Liabilities


Sri Lanka
44 These numbers are for calendar year unless otherwise mentioned.
45 (Avg of Jan-Feb)
46 Remittances numbers are taken from GEP 2013 Jan report and they are calendar year values which is same as the


fiscal year (USD billions)
47 WB Staff Calculations
48 & 49 USD billions
SAR
50 These numbers are for calendar year unless otherwise mentioned.
51 Remittances numbers are taken from GEP 2013 Jan report and they are calendar year numbers (USD billions)
52 & 53 USD billions


Sources: World Bank, IMF, CEIC, National Authorities






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