Full Report - Subregional Office for East and North-East Asia - escap

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ECONOMIC AND SOCIAL SURVEY OF ASIA AND THE PACIFIC 2013 account deficit is modest. However, inflation in Pakistan was brought down from 13.7% in 2011 to 11% in 2012. This was achieved despite increases in international oil prices, the effect of an upward adjustment in the administered prices of electricity and natural gas, supply disruptions due to heavy rains and flooding in the southern part of the country and heavy bank borrowings. Inflationary pressures in the Islamic Republic of Iran became stronger, driven by stringent economic sanctions and the removal of subsidies. With major weakening of the domestic currency, imported inflation rose. Overall inflation rose to 25.2% in 2012 and the rate is expected to remain equally strong in 2013. While economic sanctions are hurting the entire economy, people in the lower income groups are suffering the most due to high inflation and unemployment. In India, inflationary pressures continued to remain strong. Consumer price inflation rose to 10% for the first 10 months of fiscal year 2012 as compared with 8.4% in fiscal year 2011. Food inflation has been higher than overall consumer price inflation. Food inflation was driven by higher cereal prices, unlike in the previous year when the pressure came from higher protein food prices. The persistence of high inflation in the face of the significant growth slowdown points to serious supply bottlenecks and sticky inflationary expectations. Increases in the administered price of fuel (mid-September: diesel and LPG) as a part of a reduction of subsidies also contributed to the increase in inflation. Persistent non-food manufactured products inflation, despite the growth slowdown, has emerged as a major concern. Depreciation of the rupee raised the price of imported products. Wage pressures remain persistent. Therefore, improved supply responses and moderation of wage inflation is vital for bringing down inflation to a more “comfortable” level. In Bangladesh inflation also reached the double-digit level in 2012 when it rose to 10.6% in 2012 from 8.8% in 2011. Higher inflation in 2012 was due to multiple factors, including the lagged effect of high domestic credit growth in 2011, exchange rate depreciation and upward adjustments in energy and petroleum prices. A restrained monetary policy was used in 2012 to contain inflationary pressures and import growth. At the same time, well-targeted support programmes, such as selected rationing and fair price supply and open market sale of essentials for poor households struggling with high food prices, are being pursued by the Government. Removing critical supply bottlenecks through ongoing improvement in electricity, gas and transport infrastructure is also vital to mitigate cost-push inflation. In Sri Lanka, inflation which was only 2.7% in February 2012 compared with that in the same month in the previous year rose to 9.9% in July 2012. Inflation for the year as a whole averaged 7.6% as compared with 6.7% in 2011. The upward revision of administered energy prices, rise in food prices due to drought conditions, depreciation of the domestic currency as well as increase in import duties on several food items contributed to upward pressure on prices. Inflation in Maldives has been on the rise and reached double-digit levels in 2011 and 2012. Inflation in Nepal and Bhutan is closely linked to inflation in India because of the fixed exchange rates between the currencies of these countries as well as the close economic ties among them. About two thirds of the total trade of Nepal takes place with India only. Inflation in Nepal remained high but came down from 9.6% in 2011 to 8.3% in 2012. A weak supply of food items kept inflation high. At the same time, the cost of production of both agricultural and industrial products has been rising due to severe electricity shortages and rising labour wages due to increasing exports of labour. Inflation in Bhutan rose to 13.5% in 2012 from 8.3% in 2011, following high inflation in India, which supplies about three quarters of the country’s imports. In Turkey, inflationary pressures increased sharply towards the end of 2011 when monthly inflation exceeded 9%. The exchange rate came under severe pressure at that time, resulting in tightening of monetary policy. Inflationary pressure continued throughout 2012. During the second half of the 110
MACROECONOMIC PERFORMANCE AND POLICY CHALLENGES AT THE SUBREGIONAL LEVEL CHAPTER 2 year, the Government introduced sharp increases in indirect taxes and administered prices to shore up public finances. This raised consumer prices. Average inflation for 2012 is estimated to have been 8.9% as compared with 6.5% in 2011. Monetary policy needs to strike a balance between curbing inflationary expectations and reviving growth Countries in the subregion are facing serious challenges of slowing down of economic growth and at the same time to contain high inflationary pressures. Therefore, some countries have started to ease monetary policy to support private investment and growth. Pakistan lowered its policy rate by 150 basis points in October 2011 and again by the same magnitude in August 2012. With some slowing in inflation, the reduction in the policy rate continued in October and December 2012, when the policy rate was further lowered by 50 basis points each time to enhance the extension of credit to the private sector. In India, the cash reserve ratio of scheduled banks was lowered by 50 basis points in January 2012 and by 25 basis points each in September and October 2012 to add liquidity in the banking system and enhance the availability of credit to the private sector. Moreover, the policy rate was also cut by 50 basis points in April 2012, followed by another cut of 25 basis points in March 2013. On the other hand, Bangladesh continued tightening its monetary policy from 2011, and the policy rate was raised by 100 basis points in fiscal year 2012 to restrain inflationary pressures. Consumer credit was tightened through administrative measures. Similarly, policy rates were raised in Sri Lanka in February and April 2012 to curtail trade-related credit to reduce trade and current account deficits as well as to contain inflationary pressures. However, the policy rate was lowered by 25 basis points in December 2012 as GDP growth was decelerating sharply. Budget deficits continue to remain high Budget deficits generally remained higher in these countries compared with other subregions. The main reason for this is low tax-to-GDP ratios: for example, the ratio maintained by the central Government of India has been less than 11% in recent years (India, Ministry of Finance, 2012), and in the case of Pakistan it has been about 10% (Pakistan, State Bank of Pakistan, 2013). On the other hand, Turkey enjoys a tax-to-GDP ratio of more than 20%. At the same time, the subregion’s economies must face increased demand for fiscal expenditure for expanded social services and protection that a wealthier and more developed population will demand. In this context, given their low tax-to-GDP ratios, countries have a great potential to increase tax revenues. Furthermore, a considerable proportion of government expenditure in South and South-West Asia is absorbed by subsidies and interest payments (SRO-SSWA, 2012). The hangover from food, energy and other subsidies that impose large fiscal expenditure loads on Governments of countries in the subregion is likely to endure, as only a phased approach to their elimination is appropriate. There is also considerable potential to reengineer the existing public expenditure profile across countries to provide for a greater proportion of social expenditure. Reining in fiscal deficits during a slowdown and a period of increased volatility is particularly challenging as such actions can precipitate further slowdowns; instead such action should be pursued over the medium term. India, for example, recently announced a five-year time frame for fiscal consolidation. The subregion’s economies must face increased demand for fiscal expenditure for expanded social services and protection The Government of Pakistan finds it difficult to contain the budget deficit, estimated at 8.5% of GDP in 2012 against 6.6% of GDP in 2011 7 (see figure 2.12). To contain budget deficit, Government continued its efforts to broaden the tax base and simplifying the tax structure. Efforts are underway to move towards two main taxes, i.e. income tax and sales tax. On the expenditure side, austerity measures were adopted. However, policy of not passing the entire burden of oil price increases 111
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UNDER EMBARGO UNTIL 03.30 GMT, THUR
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ECONOMIC AND SOCIAL SURVEY OF ASIA
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PREFACE The Economic and Social Sur
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EXECUTIVE SUMMARY FORWARD-LOOKING M
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on education and health. Indebted c
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ACKNOWLEDGEMENTS This report was pr
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CONTENTS Page Foreword ............
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CONTENTS (continued) Page Australia
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BOXES Page A. Forward-looking macro
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FIGURES (continued) Page 1.20. Ineq
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TABLES Page 1.1. Main destination e
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References to dollars ($) are to Un
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ABBREVIATIONS ADB AEC APEC ASEAN AS
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SOURCES OF QUOTATIONS (a) Page 1: a
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WHY FORWARD-LOOKING MACROECONOMIC P
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▲ WHY FORWARD-LOOKING MACROECONOM
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THE STATE OF INCLUSIVE AND SUSTAINA
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DEVELOPMENTAL MACROECONOMICS: THE C
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INVESTING IN INCLUSIVE AND SUSTAINA
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Percentage of GDP INVESTING IN INCL
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❚ ❚ ✕❚ INVESTING IN INCLUSI
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207 REFERENCES
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REFERENCES REFERENCES Abdyrasulova
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REFERENCES (2012a). The debate on e
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REFERENCES (2012). World Energy Out
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REFERENCES Ma, K-H (2008). Assessme
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REFERENCES (2011b). Child Poverty i
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REFERENCES United Nations, Economic
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STATISTICAL ANNEX STATISTICAL ANNEX
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STATISTICAL ANNEX Table 2. Poverty
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STATISTICAL ANNEX Table 4. Resource
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STATISTICAL ANNEX Technical notes T
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STATISTICAL ANNEX Source: Barro, Ro
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STATISTICAL ANNEX estimates based o
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This publication may be obtained fr
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READERSHIP SURVEY The Macroeconomic
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Half a decade since the onset of th
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