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    Inflation Will Be SouthAsia’s Sore Point in FY 2022, says World Bank Global Economic Prospects Report

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    Inflation Will Be SouthAsia’s Sore Point in FY 2022, says World Bank Global Economic Prospects Report

    In the face of global stagflation, growth in SouthAsia is forecast to slow down to 6.8 and 5.8 per cent in 2022 and 2023, respectively following a robust 7.6 per cent rebound in 2021, the World Bank’s latest Global Economic Prospects report released on Tuesday said.

    The World Bank’s Global Economic Prospects Report released Tuesday says that while the direct impacts from trade and financial exposure to the war in Ukraine are minimal in SouthAsia, the region faces the consequences of spillovers from rising commodity prices, higher borrowing costs, and weaker external demand are significant.

    Inflation is a particularly sore point, especially in India, according to the World Bank’s flagship report. “In India, the recovery is facing some headwinds from accelerating inflation. Rising inflationary pressures led to an unscheduled policy interest rate hike in May,” the report says.

    “In the rest of the region, activity has been mixed, with stronger-than-expected rebounds from the pandemic helping to boost growth through early 2022 in Bangladesh and Pakistan.”

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    Today, the Reserve Bank of India announced a decision to increase the policy repo rate under the liquidity adjustment facility (LAF) by 50 basis points to 4.90 per cent with immediate effect.

    As a result, the standing deposit facility (SDF) rate has been reduced to 4.65 per cent, while the marginal standing facility (MSF) rate and bank rate are reduced to 5.15 per cent.

    RBI Governor Shaktikanta Das said that the war in Europe is lingering, posing newer challenges daily, disrupting supply chains and leading to high inflation and demand-supply imbalances.

    He said that the steps were taken to decrease high inflation and minimize the impacts of geopolitical tensions.

    Optimism on Bangladesh

    Bangladesh’s GDP is estimated to grow at 6.4 per cent in the fiscal year 2022, according to the World Bank’s latest Global Economic Prospects report released on Tuesday.

    The growth rate will go up to 6.7 per cent for the Fiscal 2023, the report said. This growth will be boosted by an increase in investment and remittance income for the country.

    “In Bangladesh, growth is forecast to ease to 6.4 per cent in FY2021/22, as pent-up demand subsides, before picking up to 6.7 per cent in 2022/23 as investment recovers and remittance inflows accelerate,” the report says.

    Stronger than expected rebounds from the pandemic in Bangladesh have helped the country maintain a robust growth in the fiscal years 2021 and 2022. Till April, the export of goods from Bangladesh registered an impressive 25 per cent growth and the manufacturing production registered the fastest pace in at least four years.

    Grim for Lankans, Afghans

    It paints a particularly dire picture for Sri Lanka and Afghanistan.

    The report says that the outlook for Sri Lanka is highly uncertain and subject to significant downside risks.

    “The government of Sri Lanka announced a cessation of external debt repayments, and the country faces dual balance of payments and sovereign debt crises,” the report said. “With international reserves down to one-fourth of their pre-pandemic levels, the government abandoned its exchange rate peg in early March, leading to a rapid depreciation of the rupee.”

    According to the World Bank, Sri Lanka’s unsustainable external debt will require debt restructuring to start the process of fiscal rehabilitation.

    Likewise, the report said, “Despite increased international humanitarian support in Afghanistan, the economy has collapsed, and most households do not have sufficient incomes to meet basic needs.”

    In terms of regional projections, growth in SouthAsia is forecast to slow down to 6.8 and 5.8 per cent in 2022 and 2023, respectively following a robust 7.6 per cent rebound in 2021, the report said.

    The report points out that the level of per capita income in developing economies this year will be nearly 5 per cent below its pre-pandemic trend due to the impact of the Ukraine war and the COVID-19 pandemic.

    Among emerging market and developing economies too, growth is also projected to fall from 6.6 per cent in 2021 to 3.4 per cent in 2022—well below the annual average of 4.8 per cent over 2011-2019.

    The World Bank projects a slump in the global growth from 5.7 per cent in 2021 to 2.9 per cent in 2022, significantly lower than 4.1 per cent anticipated in January this year.

    Global Stagflation

    The report points out that the current juncture in the world economy resembles the stagflation of the 1970 in some aspects as persistent supply-side disturbances fuel inflation. The current phase was preceded by a long period of highly accommodative monetary policy in major advanced economies which is likely to be tightened to rein in inflation. This will cause weakening of growth prospects and vulnerabilities in the developing economies.

    Compounding the damage from the COVID-19 pandemic, the Russian invasion of Ukraine has magnified the slowdown in the global economy, which is entering what could become a protracted period of feeble growth and elevated inflation, the report says. “This raises the risk of stagflation, with potentially harmful consequences for middle- and low-income economies alike.”

    “Global growth is expected to slump from 5.7 per cent in 2021 to 2.9 per cent in 2022— significantly lower than 4.1 per cent that was anticipated in January,” according to the World Bank. “It is expected to hover around that pace over 2023-24, as the war in Ukraine disrupts activity, investment, and trade in the near term, pent-up demand fades, and fiscal and monetary policy accommodation is withdrawn.”

    “As a result of the damage from the pandemic and the war, the level of per capita income in developing economies this year will be nearly 5 per cent below its pre-pandemic trend.”

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