chapter
Chapter 1 | Opportunities amid lingering challenges
South Asia faces both opportunities and challenges. Lower global energy prices have eased domestic inflationary pressures, lowered import bills, and improved countries’ terms of trade. China’s economic reopening has reduced disruptions to global value chains and boosted tourism in the Maldives. These positive global developments have allowed some countries to phase out ad hoc measures such as energy subsidies, import restrictions, and loan moratorium programs. These policy changes have helped governments consolidate their finances, contained public debt, and reduced debt servicing costs. However, challenges remain, especially in the external and financial sectors. Tightening of monetary policy by developed countries has raised borrowing costs, leading to capital outflows and currency depreciation pressures in South Asian countries. Growing risks in the financial sector have manifested in the form of deteriorating asset quality in some countries and growing government-bank nexus in others. To address these challenges, countries face difficult policy choices. While foreign exchange market interventions and import restrictions can help contain short-term volatility, such policies could backfire and undermine long-term growth and competitiveness.
Spotlight | Informal foreign exchange markets and capital controls: A South Asian story
Faced with increasing balance of payments pressures, some countries have tightened exchange and capital controls, for example through restrictions on import volumes and lending. These controls may be circumvented by under-invoicing of imports and informal capital outflows, especially in countries with large informal exchange systems of hundi and hawala. This in turn leads to foreign exchange inflows into informal channels, leading to reduced official foreign exchange reserve inflows and dual exchange rates.
Chapter 2 | Navigating economic uncertainty
Amid uncertainty and an unfavorable macro-financial environment, growth in South Asia is expected to slow to 5.6 percent annualized in 2023. Weak consumption, ongoing fiscal consolidation, fragile economic conditions in Afghanistan and Sri Lanka, and an uncertain outlook for Pakistan all contribute to the slowdown. Countries in the region face uncertainty due to growth prospects in high-income countries, the path of monetary tightening in the United States, developments in global commodity prices, and deteriorating conditions in domestic financial sectors. Facing limited fiscal space and tightening global financial conditions, South Asian countries will require significant climate investments to address vulnerabilities to climate hazards and growing energy demand.
Chapter 3 | Expanding opportunity: Mapping equitable growth in South Asia
Among South Asians, support for redistribution, i.e., the claim that income should be made more equal, is the highest in the world and is growing. A possible explanation is that circumstances beyond an individual’s control, such as parental education, place of birth, caste, and gender, are major constraints to economic and social achievement in the lives of people in the region. Leveraging a large-scale data harmonization effort across nationally representative household surveys, this chapter assesses that circumstances account for 40-60 percent of consumption and education inequality. The trend has been that inequality in educational opportunities has decreased over the past three decades, but inequality in consumption opportunities has not. Although South Asia has made great progress towards achieving universal primary education, large disparities remain in education quality, tertiary enrollment, and labor market earnings. Low social mobility in the region is not only unfair but also inefficient. It impedes optimal allocation of human resources and reduces incentives for human capital accumulation, thus hindering long-term growth. Policies focusing on more inclusive growth are an important step in responding to calls for redistribution, especially given the public support needed to accompany the macroeconomic adjustments the region is undertaking.
