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South Asia

South Asia's economic prospects appear to be promising provided policies to promote macroeconomic stabilization are maintained and the pace of economic liberalization is accelerated. There is, however, considerable political uncertainty in several countries and the economic outlook will be influenced to a large extent by the manner in which the current conflicts are resolved. Furthermore, reducing poverty and improving income distribution remain long-term challenges in the subregion.

Economic prospects for Bangladesh in 1996 appear to be mixed, and the recent macroeconomic situation in the country shows a downward trend. Economic growth is expected to be about 3.6 percent in 1996, provided industrial output is not further held back. Economic growth should, especially, pick-up later in the year, provided private sector investment plays a more important role in the economy. Because of the lagged effect of expansionary monetary and fiscal policies, inflation is likely to remain high at 8.8 percent in 1996. The balance of payments is likely to remain strained, with a high anticipated growth in imports.

Economic growth in India is likely to accelerate to 6.5 percent in 1996, with the manufacturing sector leading the expansion. However, sustained economic growth will depend on continued economic liberalization and further fiscal consolidation. With the various policy changes that have been undertaken, it is expected that the fiscal deficit of the Central Government will be reduced to about 5 percent of GDP. However, to attain this goal, expenditure needs to be controlled more tightly and tax revenue needs to be augmented. Exports are expected to rise by 18 percent as a result of the depreciation of the rupee in the second half of 1995.

In Nepal, the rate of GDP growth is likely to more than double to 5.6 percent in 1996, largely because of strong expected recovery in agricultural output and better performance in the industry and services sectors. Reforms in the financial sector will stimulate both savings and investment. Macroeconomic stability will be enhanced by a further decline in the fiscal deficit. Inflation should moderate to 7 percent. Some further contraction in carpet and garment exports will expand the trade deficit, but with increased tourism receipts the current account deficit should contract to 7.8 percent of GDP.

In Pakistan, GDP growth is projected to pick-up to 5.5 percent in 1996. The agriculture sector will continue to play a major role in boosting economic-growth over the next two years. In a bid to lower inflation, which is a condition of the standby credit programme arranged with IMF, a tight monetary policy will be pursued. However, taking into account both the supply and demand side factors, the inflation rate is expected to remain in double digits, at around 13 percent. The trade deficit will deteriorate further and, combined with uncertain overseas workers' remittances, the current account deficit will be in the range of 4.5 percent-5 percent of GDP.

Economic growth in Sri Lanka is expected to be 5.2 percent. Under normal weather conditions, agricultural output could increase by 2 percent-3 percent primarily because of higher output of plantation and other high-value-added crops. The industry sector should grow by 7.9 percent. Investment should pick-up in 1997 as the momentum of industrial output accelerates. Given that the government will continue to administer the prices of key commodities over the short-term, the official inflation rate is expected to be maintained at the current levels of 9 percent-10 percent. Assuming a stable real effective exchange rate, total exports in dollar terms should increase by 11 percent in 1996, while imports should expand by 13 percent in the short-term as investments begin to recover and the need for capital goods increases. As a result, the trade deficit will widen to $1.2 billion in 1996 while the current account deficit should remain at 3 percent of GDP.