Beset with Sri Lanka's economic crisis, Pakistan's catastrophic floods, a global slowdown, and the impacts of the war in Ukraine, South Asia faces an unprecedented combination of shocks on top of the lingering scars of the Covid, the World Bank said in its twice-a-year update.
Released Thursday, the latest "South Asia Economic Focus, Coping with Shocks: Migration and the Road to Resilience," projects regional growth to average 5.8 percent this year – a downward revision of 1 percentage point from the forecast made in June. This follows the growth of 7.8 percent in 2021 when most countries were rebounding from the pandemic slump.
While economic distress is weighing down all South Asian countries, some are coping better than others.
Exports and the services sector in India, the region's largest economy, have recovered more strongly than the world average while its ample foreign reserves served as a buffer to external shocks.
The return of tourism is helping to drive growth in the Maldives, and to a lesser extent in Nepal – both of which have dynamic services sectors.
The combined effects of Covid and the record-high commodity prices due to the war in Ukraine took a heavier toll on Sri Lanka, exacerbating its debt woes and depleting foreign reserves. Plunged into its worst-ever economic crisis, Sri Lanka's real GDP is expected to fall by 9.2 percent this year and a further 4.2 percent in 2023.
High commodity prices also worsened Pakistan's external imbalances, bringing down its reserves. The country's outlook remains subject to significant uncertainty after devastating climate-change-fueled floods submerged one-third of the country this year.
"Pandemics, sudden swings in global liquidity and commodity prices, and extreme weather disasters were once tail-end risks. But all three have arrived in rapid succession over the past two years and are testing South Asia's economies," Martin Raiser, World Bank Vice-President for South Asia said.
"In the face of these shocks, countries need to build stronger fiscal and monetary buffers, and reorient scarce resources towards strengthening resilience to protect their people."
Inflation in South Asia, caused by elevated global food and energy prices and trade restrictions that worsened food insecurity in the region, is expected to rise to 9.2 percent this year before gradually subsiding. The resulting squeeze on real income is severe, particularly for the region's poor who spend a large share of their income on food.
South Asia's migrant workers, many of whom are employed in the informal sector, were disproportionately affected when restrictions on movement were imposed during Covid. However, the later phase of the pandemic has highlighted the crucial role migration can play in facilitating recovery.
Survey data from the report suggests that in late 2021 and early 2022, migration flows are associated with movement from areas hit hard by the pandemic to those that were not, thus helping equilibrate the demand and supply of labour in the aftermath of the Covid shock.
"Labour mobility across and within countries enables economic development by allowing people to move to locations where they are more productive. It also helps adjust to shocks such as climate events to which South Asia's rural poor are particularly vulnerable," Hans Timmer, World Bank chief economist for South Asia, said. "Removing restrictions to labour mobility is vital to the region's resilience and its long-term development."