The COVID-19 pandemic and the on-going Russia-Ukraine conflict have caused an economic crisis worldwide. The slow economic growth, high inflation, fragile supply chains, war-related sanctions, counter-sanctions, and the division of the world into economic and geopolitical blocks are becoming increasingly alarming. The disruptions in the major economic powers, including the United States, China, and major European economies, are causing concerns for people across the globe.
The possibility of a severe global recession is looming, and the people living below the poverty line are severely impacted by the rising prices. The world is struggling to manage its economic conditions up to par, so thus the countries of the South Asian region. In this article, we will get to know how these south Asian countries have managed to keep battling with the economic war worldwide.
HOW HAS BANGLADESH SUFFERED IN THIS CRISIS MOMENT?
Bangladesh is one such country that has been forced to suffer the consequences of global events like the COVID-19 pandemic and the Russian-Ukrainian war, despite not being responsible for their spread or outbreak. While the country has been impacted by the global crisis like many other countries, it has also faced challenges like a fall in GDP growth and exports, trade balance deficit, and energy shortages, which have adversely affected its ready-made garment (RMG) industry. The government has taken measures to address these challenges, including taking a bridging loan of $4.7 billion from the IMF subject to certain conditions, such as financial sector management reforms, reducing non-performing loans, updating revenue administration, reducing interest rates on savings certificates, and reducing corruption and bureaucracy, etc. Moreover, the country is facing rising inflation, which has been primarily caused by higher prices for imported goods. The supply-chain disruptions due to the Ukraine-Russia war and the lag effect of the pandemic are contributing to higher fuel, fertiliser, and food prices. Moreover, the tightening of the monetary policy of the Federal Reserve is leading to speedy gains in the yields of US long and medium-term bonds, which is strengthening the exchange rate of the US dollar against major currencies. As a result, Bangladesh’s inflation has been hovering around 8.4%, and the central bank is finding it difficult to raise its repo rate. The rate of growth of deposits has been running much lower than that of private credit growth, which may lead to a liquidity crunch in some banks.
HOW HAS BANGLADESH MANAGED TO RECOVER ITS ECONOMY FROM THIS GLOBAL CRISIS?
To address this situation, the central bank of Bangladesh has been taking several macro-prudential measures to suppress the import of luxury and non-essential items, including raising margins and strengthening stronger monitoring of letters of credit above three million USD. The government has also introduced austerity measures, raised tariff barriers for undesired imports, and slowed down the pace of implementation of those projects that may not yield immediate investment and employment. It has also readjusted subsidies given to imported items like fuel to keep the budget deficit within the targeted level, despite some risk of a rise in inflation. However, a substantial devaluation of the Taka to make imports more costly may also be necessary.
The inflationary situation in developing countries, including Bangladesh, has been exacerbated by a deteriorating exchange rate of their currencies against the USD. Most central banks in the world, including the European Central Bank, the Bank of England, and the Reserve Bank of India, have started raising their primary rates to address the inflationary challenges. Nonetheless, Bangladesh Bank is finding it difficult to raise its repo rate, given the general cap on the rate of interest. Deposit rates are substantially below the inflation rate, making depositors jittery, and the rate of growth of deposits has been running much lower than that of private credit growth.
In terms of the domestic response, the focus has been on promoting sustainable agriculture to avoid a potential food crisis. The country aims to raise its current food stock of two million metric tons to three million metric tons through both domestic and external procurement processes. Bangladesh’s thriving agriculture has been a boon for the country, providing necessary employment to the rural population, raw materials, and sources of demand for industrial products.
Thanks to robust financial inclusion, the rural economy of Bangladesh has been transformed into a vibrant landscape of smaller entrepreneurs, providing strength to macroeconomic stability. Sustainable agriculture has been synonymous with import-substituting industrialisation in Bangladesh, helping the country avoid billions of dollars in food imports.
TENSIONS CAUSED INFLATION TO SKYROCKET IN INDIA
The announcement of military operations in Ukraine by Russia had a significant impact on domestic equity markets in India. The BSE benchmark Sensex plummeted by 2,700 points, and the NSE Nifty50 dropped by 815 points. This fall, which happened on February 24, 2022, was the worst since the COVID pandemic broke out in March 2020, and it was the fourth-worst fall ever recorded in the index’s history. Although the Sensex and Nifty recovered in the following months, they witnessed their worst fall in June, due to rising concerns over the war’s impact on inflation and the economy.
On June 16, 2022, the Sensex hit a low of 51,360.42, while the Nifty fell to 15,293.50. However, the markets rebounded and hit new peaks later in the year. On November 30, 2022, the Sensex crossed the 63,000 mark and the Nifty breached 18,758 points for the first time ever. In recent times, there has been a significant sell-off in the domestic markets due to the Hindenburg report on the Adani group, and also because of Putin’s threat to resume nuclear tests. On February 22, 2023, the Sensex plummeted over 900 points and the Nifty50 fell by 272 points, following Russia’s announcement of new strategic systems on combat duty.
In February of last year, the Reserve Bank of India had projected an average inflation rate of 4.5% for FY23, but the macroeconomic conditions of the country were upended by geopolitical tensions, causing the prices of commodities like crude oil, metals, and food to skyrocket. In India, inflation peaked at 7.8% in April 2022, with an average of 6.8% from May to November of that year. To curb inflation, the RBI has raised the repo rate by 250 basis points since May 2022, with the current lending rate standing at 6.50.
STEPS TAKEN BY INDIA TO BOUNCE BACK
Following the Russian military operations in Ukraine, several Western nations imposed sanctions on Moscow, leading to restrictions on purchases from Russia. The West also imposed a price cap of $60 per barrel on crude products in December 2022 to limit Russia’s revenues from oil exports. Russia has responded by selling crude oil at a discounted price to Asian countries, including India. Indian refiners, who previously avoided Russian oil due to high logistics costs, have now been buying discounted crude from Moscow. According to data released by the Petroleum Planning & Analysis Cell (PPAC), India’s reliance on crude oil imports increased by 87% between April-December 2022. Although Iraq remained India’s top supplier of crude oil during this period, Russia replaced Saudi Arabia as the second-largest supplier.
Despite these external factors, the Indian economy showed remarkable resilience and grew by 13.5% in the first quarter of the financial year 2022–23 (April-June 2022). In the following quarter (July-September 2022), GDP growth was 6.3%. As a result, India is in a better position compared to other global economies. Both the World Bank and the International Monetary Fund (IMF) have recognised India as a relatively “bright spot” due to its digitisation efforts, prudent fiscal policy, and investments in capital announced in the latest budget. The IMF predicts that India will grow by 6.8% in FY23, making it the fastest-growing major economy.
The IMF managing director, Kristalina Georgieva, recently stated that India alone will contribute 15% of the global growth in 2023. Georgieva cited several reasons for India being a “bright spot,” including the country’s successful use of digitalisation to drive growth and create job opportunities, its responsive fiscal policy, and its implementation of strong policies to overcome the pandemic’s impact.
PAKISTAN ADOPTS COST-CUTTING MEASURES TO TACKLE ECONOMIC CRISIS
Pakistan is currently facing a severe economic crisis with the devaluation of its currency, rising fuel prices, and increasing taxes on luxury goods. To alleviate this crisis, China has agreed to lend Pakistan $700 billion, and Pakistan is also working towards unlocking a $6.5 billion loan facility from the International Monetary Fund (IMF). However, the IMF has laid down certain conditions that Pakistan must fulfill, including raising taxes on luxury goods and services and increasing petrol prices.
To deal with the financial crisis, Pakistan has also adopted a cost-cutting formula. Prime Minister Shehbaz Sharif has directed all federal ministers and government offices to reduce their expenditures by 15%, and he has also asked his ministers and advisers to forgo their salaries, allowances, luxury cars, foreign trips, and business class travel. The armed forces have also responded positively by cutting non-combat expenditures. Additionally, there is a complete ban on the purchase of luxury items or vehicles for all government-run entities, and no new administrative units will be created for the next two years.
These measures are expected to save the government around 200 billion rupees annually, and they demonstrate Pakistan’s commitment to overcoming its economic crisis by making difficult but necessary decisions.
The Pakistani government has recently passed the Finance (Supplementary) Bill 2023, also known as the ‘mini-budget’, to seek a $6.5 billion tranche of the IMF loan. This bill includes an increase in taxes on luxury imports and services, with sales tax rising from 17% to 25% on items such as cars, household appliances, chocolates, cosmetics, and mobile phones. Business-class air travel, wedding halls, and sunglasses will also be subject to higher taxes. Furthermore, the general sales tax has been raised from 17% to 18%.
In addition to these measures, the Pakistani government has also increased the excise duty on business class tickets to various destinations, including South America, Africa, the Middle East, Europe, Australia, New Zealand, and other countries. The bill was passed with some amendments, and Finance Minister Ishaq Dar informed the parliament about the changes.
FOREIGN RELATIONS ARE ALSO COMING TO PAKISTAN’S AID
Furthermore, China has agreed to lend Pakistan a new $700 million loan through the state-owned China Development Bank to help boost its foreign exchange reserves. This loan is expected to increase Pakistan’s reserves by about 20%, as the country is currently seeking to unlock funds from a $6.5 billion bailout. China is already Pakistan’s largest creditor, holding around 30% of its external debt.
According to Iranian Consul General Hasan Noorain, Iran has established six border markets to promote trade with Pakistan, which may help the crisis-hit country. The volume of bilateral trade between the two countries has reached $2 billion in the last 10 months, and the target has been set at $5 billion. However, Noorain mentioned that trading is facing difficulties due to the absence of a banking channel.
To facilitate trade, Noorain said that progress is being made in barter trade with Pakistan, and the visa policy has been relaxed. Despite friendly relations between the two countries, trade between Pakistan and Iran has not developed as it should have so far. These efforts by Iran to promote trade with Pakistan may help to strengthen economic ties between the two countries and provide relief to Pakistan’s economic crisis.
AFGHANISTAN’S POLITICAL CRISIS LEAVES THE PRIVATE SECTOR STRUGGLING
In August 2021, Afghanistan was hit by a political crisis that compounded the challenges faced by the private sector, including an unfavourable investment climate, political instability, endemic corruption, low business confidence, and underdeveloped market infrastructure. This crisis came at a time when businesses were still struggling to recover from the impacts of the COVID-19 pandemic, which had led to lockdowns and trade disruptions. The sudden collapse of the government disrupted the functioning of institutions, caused a financial sector crisis, and largely cut off the flow of foreign aid, further compromising the private sector’s ability to create jobs for the large number of people entering the labour market each year.
While the uncertainty about the future of businesses has subsided, the lack of consumer demand remains a challenge. Consumer demand appears to have stabilised for some firms in recent months, although it remains a problem for many. Private sector jobs are beginning to return slightly, although they remain at half of pre-August 2021 levels, on average. Some firms have maintained employment by cutting pay. These challenges interrupted the delivery of basic services and further compromised the private sector’s ability to create jobs for the 600,000 people who enter the labour market each year. Moreover, firms continue to face a tough environment, with depressed demand for their goods and difficulties accessing banking services, particularly cross-border payments. Restrictions on the banking sector have forced businesses to use cash for domestic transactions and rely increasingly on traditional Hawala networks for international transactions. Women-owned companies remain vulnerable given the security situation and the restrictions imposed on their social and economic activities.
SOME PRAISEWORTHY STEPS TAKEN BY TALIBAN SO FAR
Despite the worsening economic and humanitarian conditions in Afghanistan, the Taliban have taken steps towards financial stability by publishing a fiscally responsible three-month budget and increasing domestic revenue through customs duties. The Taliban have been cracking down on corruption, leading to a rise in customs duties. Furthermore, the Taliban held an economic meeting with the U.N. and other countries, indicating their attention to government finances and economic governance.
According to the World Bank and other sources, the Afghan government collected $400 million in total revenue from September 21-December 21, 2021, in addition to the revenues the Taliban collected through informal and traditional levies on agriculture, transport, mining, etc. While less than half the revenue collected in previous years, this is still a solid achievement considering the economic disruptions caused by the regime change. Customs receipts held up better than expected, indicating substantial improvements at the borders and a reduction in corruption.
Looking ahead, the Afghan government can expect to mobilise at least $1.2-1.5 billion per year in total revenue, compared to $2 billion-plus annually in previous years. The Taliban’s new three-month budget is nearly balanced and projects no aid flows directly into the budget. Although the revenue projections may be somewhat optimistic, the budget appears relatively prudent and compares well against past Afghan budgets. This demonstrates the Afghan government’s commitment to fiscal responsibility and its ability to govern to the outside world.
SRI LANKA: PRIVATISATION AND RESTRUCTURING OF STATE-OWNED ENTERPRISES TO TACKLE CRISIS
Sri Lanka has been grappling with an economic crisis caused by a debt crisis and dwindling foreign exchange reserves. The on-going conflict in Ukraine has only made matters worse, with the fallout being acutely felt in Sri Lanka’s tourism industry, trade, and energy sectors. Russia and Ukraine are significant trade partners for Sri Lanka, accounting for 2% and 2.2% of its imports and exports in 2020, respectively. Additionally, both nations are vital import sources of wheat, semi-finished iron, asbestos, and food items such as sunflower oil and soybeans, while also being export destinations for Sri Lanka’s black tea.
As Sri Lanka heavily relies on external energy sources, high oil prices and limited supply will worsen its current economic crisis. The prolongation of the conflict will retard its overall economic growth, and this will threaten many sectors, including trade, investment, industry, tourism, and employment. As prices of essential commodities reach new heights, Sri Lankans’ purchasing power will contract further, adversely affecting the country’s food security and welfare system. These social issues are not limited to Ukraine and will eventually have ramifications that will unfold upon other countries, making it crucial to prevent future conflicts.
After facing widespread protests, President Gotabaya Rajapaksa resigned in June 2022, and Prime Minister Ranil Wickremesinghe took over as acting president and declared a nationwide state of emergency. While the protests have now subsided, the new administration is grappling with a severe financial crisis as Sri Lanka owes around $7bn to China and $1bn to India. Recently, both countries agreed to restructure their loans, giving Sri Lanka more time to repay them. This restructuring paved the way for the International Monetary Fund (IMF) to agree to lend Sri Lanka $3bn, in addition to a $600m loan from the World Bank in the previous year.
To pay off its debts, the Sri Lankan government has announced plans to restructure state-owned enterprises and privatise the national airline. In early 2023, the government introduced income taxes for higher earners, ranging from 12.5% to over 36%, and raised other taxes to fund critical purchases like fuel and food.
In conclusion, the south Asian countries have suffered various economic challenges due to global events like the COVID-19 pandemic and the Russian-Ukrainian war. Countries Like Afghanistan, Sri Lanka and Pakistan’s political crisis has further compounded the challenges, including an unfavourable investment climate, political instability, endemic corruption, low business confidence, and underdeveloped market infrastructure. The lack of consumer demand remains a challenge, and private sector jobs are beginning to return slightly. But all the countries, despite having several challenges, are trying hard to get back to their good days; some are becoming able, and some are still in the backyard, keeping their struggle go on. It’s now everyone’s hope to see a better financial future of all these countries.