ECONOMYNEXT – Sri Lanka’s economic growth will recover to 3.4 percent in 2021 and South Asia will grow 7.2 percent with Maldives to grow 17.1 percent from a contraction of 28 percent in 2020 due to a Coronavirus shock, the World Bank has said.
India is expected to grow 5.8 percent, Bangladesh 5.1 percent, and Pakistan which is under an International Monetary Fund program after its soft-pegged central bank got into trouble is to grow 2 percent.
“High-frequency data and non-traditional economic indicators show India, Sri Lanka, Nepal, and Maldives gaining growth momentum since end-2020, creating a fuller picture of the extent
and breadth of the recovery,” the World Bank said.
“Four countries in the region depend the most on tourism, as well as air travel for visitor arrivals: Bhutan, Sri Lanka, Maldives, and Nepal. Nepal and Sri Lanka’s visitor arrivals plummeted in
March-April 2020 and have not recovered.
“In Bhutan, borders have remained closed since March 2020. In contrast, Maldives’ “bubble tourism” strategy and new initiatives seem to be having some initial success.
Vaccination would bring strong economic gains across South Asia, the report said.
Mortality rates have been relatively low in South Asian nations except Pakistan and Afghanistan.
There were significant fiscal risks in South Asia from several years of pro-cyclical policy.
“The lack of fiscal space finds its origin in a history of procyclical fiscal policies in South Asia,” the report ssaid.
“Estimations suggest that the fiscal balance response to economic growth (time-average β coefficient, Appendix 2, equation 2) was slightly below zero, implying that growth accelerations led to a decrease in the fiscal balance.
“In other words, government expenditure increased proportionally more than economic
activity and total revenue.”
In the Maldives spending has been mostly financed by debt, including from China.
Some South Asian countries have also had a history of monetary instability followed by trade and exchange controls.
Except for Nepal and Bhutan, which have strong consistent pegs (anchored to the Reserve Bank of India which also has questionable policy) where the monetary authority does not print money, Maldives and Bangladesh where monetary restraint is seen, monetary stimulus have had devastating effects on several countries in the region, critic say.
In the wake of the Great Recession, policies advocated by Scottish economist John Law involving ‘monetary stimulus’ have seen new respectability, devastating countries with pegged exchange rates and condemning them to ‘Stop-Go’ cycles as the BOP gave way under liquidity injections.
Sri Lanka has also been hit by ‘revenue based fiscal consolidation’ where an IMF program attempted to boost revenues to an arbitrary revenue to GDP number, putting more of people’s money in the hands of politicians and bureaucrats downplaying the need to control spending by the ruling class in new a return to statist policy.
In Sri Lanka revenue to GDP rose from 11.6 percent in 2014 to 12.6 percent in 2019 as currency crises from monetary stimulus also hit the economy. Spending to GDP meanwhile rose from 17.4 percent to 19.4 percent by 2019 under ‘revenue based fiscal consolidation’.
In 2020 Sri Lanka’s deficit is expected to grow over 12 percent of GDP after taxes were suddenly cut in 2019 and more monetary stimulus was done. (Colombo/Apr02/2021)