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

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
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