What has gone wrong with the Saarc economies?

Afghanistan, Sri Lanka, Pakistan, Maldives and Nepal.

Names are coming one after another. Five of the eight economies of the South Asian Association of Regional Cooperation (Saarc) are now hard hit by inflationary shocks, leaving people to struggle for daily essentials to survive.

Global factors like pandemic and supply chain disruptions caused by it were common for all. Then came the Russian-Ukraine war, further affecting supplies of food and energy, and sending price shocks all over.

But economic impacts in South Asia varied mainly due to internal factors-- political developments in Pakistan and economic mismanagement in Sri Lanka.

Though inflation is running high in all the economies except the Maldives, the situation is the worst in Sri Lanka, followed by Pakistan.

Bangladesh stands third in the row, with higher inflation than India and three others.

Yet, Bangladesh and India appeared to be the two countries in the bloc which have proved their economic resilience so far.

Once the most prosperous nation in the region, Sri Lanka has now plunged into a crisis labelled as "twin deficits" with roots lying in decades of wrong handling of external fund management.

High inflation, severe shortage of food and fuel oil, power outage for 13 hours a day led to violent protests demanding ouster of the country's president, who declared a state of emergency in Colombo.

Soldiers stood guard in fuel pumps to discipline long queues of people with empty jars. School exams were cancelled for want of writing paper and hard-pressed people are reportedly crossing the Indian border for jobs. On Sunday, police fired tear gas at hundreds of protesting students who defied curfew in central Sri Lanka.

Movements and gatherings in Pakistan's capital Islamabad were also restricted on Sunday centering tensions over the scheduled voting no-trust motion against Prime Minister Imran Khan. The motion was later dismissed and the president ordered dissolution of the parliament. Skyrocketing inflation there gave the political opposition a window to call for Imran's resignation. The Pakistani rupee has lost half of its value against the US dollar in three-and-half-years since Imran took office in 2018.

The case of Afghanistan is different. Its economy collapsed due to abrupt cuts in external finances and blocking of its $9b foreign currency reserves by US and European banks soon after August 2021 Taliban takeover amid worldwide fight against the coronavirus.

Three relatively smaller economies in the region-- Nepal, Bhutan and the Maldives-- are also not faring well.

Keep reading-

• Sri Lanka's excessive govt spending an eye-opener - Ahsan H Mansur
• Failure of macro management leads to this crisis - Professor Mustafizur Rahman
• Impacts on neighbouring economy affects integrated regions - Rizwan Rahman

Bhutan, with otherwise a stable political and economic environment, was faster and more successful in fighting Covid-19 than neighbours, but its stringent containment measures had deep economic costs. The landlocked Himalayan kingdom's GDP slowed, unemployment rose and inflation spiked.

Bhutan's shrinking tourism industry saw the arrival of the first batch of tourists on 2 April since the country shut its doors to foreign travellers in 2020. Tourism is one of the kingdom's key earning sectors which endured hard times for the last couple of years.

Rising prices have already made life hard in Nepal, with wholesale prices rising sharply in the heavily-import dependent country. Fuel shortage triggered panic buying while widening gap between wholesale and retail commodity prices led to subdued demand conditions because of consumers' low purchasing capacity.

The Maldives' economy, which is largely dependent on tourism, declined heavily last year. Its low level of reserves and high indebtedness pose threats to macroeconomic stability. Though its tourism has recorded some growth and exports increased in February, its foreign reserves declined and inflation dipping to as low as 0.34% indicates sluggish economic activities.

India, which just began its new fiscal year on 1 April, is well-poised to withstand the economic shocks with its large foreign exchange reserves and plenty of policy room to deal with any vulnerabilities.

Despite commodity price hikes and widening burden of fuel and fertiliser subsidies, Bangladesh's modest budget surplus because of low performance in development projects and rise in revenue earnings turned out to be a blessing in disguise, as pointed out by economist Zahid Hussain.

"Note that only 31.9% of the operating expenditure and 16.5% of development expenditure budgeted for FY22 were spent in the first half of FY22," he wrote in an article for The Business Standard.

The original FY22 budget deficit target passes the test of macro-fiscal sustainability and a rise in subsidies to keep current level of energy prices will most likely not breach the deficit budgeted for the current fiscal year, he pointed out, explaining Bangladesh's headroom to repurpose the deficit to take some of the price pressures away from consumers.

Strengths and concerns for Bangladesh

Bangladesh's foreign exchange earnings have been on a positive lane, with both exports and remittance inflows growing in January this year.

In February too, export earnings witnessed a 34.54% year-on-year growth, taking the eight months' total to $34 billion, up $8b from the previous year's same period. Remittance broke a declining streak in January, but fell to a 21-month low in February before posting a positive growth in March.

But the nine months' earnings to March were substantially lower compared to the same period of the last fiscal year, meaning that remittance incomes are not stable enough to bank on.

Despite a strong rebound from pandemic shocks and positive growth in exports till February, a knock-on effect is evident from the Russia-Ukraine crisis as the $665 million Russian market is now uncertain because of Russia's exclusion from the SWIFT system. Soaring inflation in US and Europe, Bangladesh's main export markets, might also dampen future export demand though orders are pouring in for the next season.

With the budget for the next fiscal year in the making, businesses have placed a plethora of demands for cuts in duties and taxes to protect their industries. If accommodated, it will put pressure on revenue earnings.

Economists and business leaders have warned that rising inflation and prolonged supply chain shocks will make the next year's budget the most challenging one so far. At a pre-budget discussion on Saturday, they called for massive reforms in the revenue front.

Economist Ahsan H Mansur referred to Sri Lanka's predicament due to external debt burden and advised the policymakers to take a lesson from the situation in financing mega projects.