India, the largest economy in South Asia, is expected to grow by 6.4 per cent in 2022, well below the 8.8 per cent growth in 2021, as higher inflationary pressures and uneven recovery of the labour market will curb private consumption and investment, according to the United Nations.
In its report titled ”World Economic Situation and Prospects as of mid-2022”, the world body said the economic outlook in South Asia has deteriorated in recent months, against the backdrop of the ongoing conflict in Ukraine, higher commodity prices and potential negative spillover effects from monetary tightening in the United States.
”The regional economic output is projected to expand by 5.5 per cent in 2022, which is 0.4 percentage points lower than our forecast released in January,” it added.
Higher prices and shortages of farming inputs including fertilizers are likely to persist in the region, negatively impacting the agricultural sector in Bangladesh, India, Pakistan, and Sri Lanka. This will probably result in weaker harvests and exert further upward pressures on food prices in the near term, the report said.
It observed that along with higher energy prices, elevated prices of food will likely increase food insecurity across the region. Consumer price inflation in the region is expected to accelerate to 9.5 per cent in 2022, from 8.9 per cent in 2021.
”Tighter external financial conditions will adversely affect regional growth prospects, especially for countries with high exposure to global capital markets facing debt distress or risks of debt default,” it added.
The report said the Covid-19 pandemic left many countries with large fiscal deficits and higher and unsustainable levels of public debt and noted that Sri Lanka is currently facing a debt crisis and discussing a new IMF-supported program to bring its economy out of the crisis.
Regarding the economic prospects of East Asia, the report said the region’s growth is projected to subside from 7 per cent in 2021 to 4.4 per cent in 2022 and 5 per cent in 2023, as a projected slowdown in China will weigh on the regional average. The Chinese economy is forecast to grow by 4.5 per cent in 2022, down from 8.1 per cent in 2021.
It said the Government of China has implemented stringent control measures, including the introduction of rolling lockdowns in major cities, to contain the Omicron wave of the pandemic during the first quarter of 2022.
The resulting slowdown in economic activities contributed to prolonging supply chain disruptions, negatively affecting other developing countries through trade channels.
In addition, soaring commodity prices have contributed to higher manufacturing costs across the region, adversely affecting exports. The expected rebound of the Chinese economy by the end of 2022, and steadily recovering international tourism should bolster growth in the region in 2023.
The report predicted that fiscal policies in East Asia are expected to remain expansionary in 2022. However, an increasing number of countries are expected to pursue fiscal consolidation in 2023 to contain rising government debt.
While China has been actively easing its monetary stance, Indonesia, Malaysia, Mongolia, and Singapore have already entered or are expected to enter a tightening phase in 2022. Other central banks remain hesitant to tighten policy, taking into account that higher interest rates will likely negatively impact growth and recovery. With the exception of Lao PDR, Mongolia, and Myanmar, inflation in the region is projected to remain below 5 per cent, it added.
Regarding the Russia-Ukraine conflict, the report noted that as of late April 2022, over 5.3 million people, predominantly women and children, have left Ukraine. Poland, which has an approximately 2-million strong Ukrainian diaspora, became the primary destination for the refugees, accepting almost 3 million of them.
While the authorities of these countries had anticipated such developments and had even made certain logistical preparations, the magnitude of the refugee flow turned out to be much larger than expected. The refugee crisis will impose a considerable financial burden on European countries at a time when they were planning to consolidate their finances after the large stimulus spending to fight the Covid-19 pandemic.
The Ukrainian economy is projected to contract by 30 to 50 per cent in 2022 given the massive destruction of physical infrastructure, suspension of production and trade activities, and displacement of the population. The post-conflict reconstruction would require immense financial resources, estimated in some cases at €200-500 billion, the report added.