South Asia has defied a sluggish world economy and solidified its lead as the fastest growing region in the world in 2016, a new World Bank report said today. Led by solid performance in India, economic growth is expected to gradually accelerate from 7.1% in 2016 to 7.3% in 2017.
According to the twice-a-year, South Asia Economic Focus, the region remains a global growth hotspot and has proven resilient to external headwinds such as China’s slowdown, uncertainty around stimulus policy in advanced economies, and slowing remittances. The main challenges remain domestic, and include policy uncertainty as well as fiscal and financial vulnerabilities.
“A reality check reveals that private investment – a key future growth driver across South Asia – is yet to be ignited to sustain and further increase economic growth, said Annette Dixon, World Bank South Asia Region’s Vice President. “Countries will need to activate the full potential of private investment and exports to accelerate economic activity further, reduce poverty and boost prosperity.”
Given its weight in the region, India sets the pace for South Asia as a whole. Its economic activity is expected to accelerate to 7.7% in 2017, after maintaining a solid 7.6% in 2016. This performance is based on solid growth contributions from consumption – boosted by normal monsoon and civil service pay revisions. Over the medium term, accelerated infrastructure spending and a better investment climate may help increase private investment and exports.
A reality check on the state of private investment in South Asia shows that the region has fallen short of expectations. Mobilizing domestic savings remains key at the aggregate level. However, remittances and foreign direct investment prove very effective on a per-dollar basis, and the region should make the most of them. Ultimately, the investment climate sets the broader stage. Alas, most South Asian economies suffer from a challenging business environment and some are subject to broader uncertainty and insecurity, which is detrimental to investor confidence.
Many South Asian countries show potential for accelerated growth in the short to medium term. However, countries will need to sustain domestic demand as a pillar of growth while reactivating exports and the tapping the potential of private investment.
Growth in Bangladesh has remained robust despite internal and external headwinds. Growth will be sustained at 6.8% in 2017, coming slightly down from 7.1% in 2016 and with most economic indicators being stable. Delivering the necessary energy, infrastructural, and regulatory improvements remains critically important to ensure sustained and inclusive GDP growth with strong employment creation capacity.
Economic activity in Bhutan has remained strong and the economy is expected to grow at 7.1% in 2016 and 9.8% in 2017.
In Maldives, GDP growth is expected to remain modest at 3.9 % in 2017, up from 3.5 % in 2016.
Nepal has had a difficult year due to the earthquake, border disruptions with India, and reduced remittances. Its economic activity is recovering with growth expected to rebound to 5.0% in 2017, after a weak year 2016 at only 0.6% growth.
In Pakistan, economic activity is projected to gradually accelerate over the medium term reaching 5.0% in 2017 and 5.4% in 2018, building upon 4.7% GDP growth at factor cost in 2016 (5.7% at market prices).