All's not well in India's neighbourhood. Pakistan has recently got yet another prime minister. Sri Lanka is on the verge of defaulting on its foreign
All’s not well in India’s neighbourhood. Pakistan has recently got yet another prime minister. Sri Lanka is on the verge of defaulting on its foreign debt for the first time since its independence. Nepal has suspended its central bank chief as it stares at economic uncertainty. And in China, there are concerns that new Covid-19 restrictions could unsettle its economy that just about managed to survive the pandemic’s previous phases.
There is a crisis brewing in India’s neighbourhood and while the factors are many, the one strand common in all countries is the economy and the Covid-19 pandemic. Here’s a quick look at what’s going on in some of India’s neighbours as far as their economies are concerned.
PAKISTAN
Like Imran Khan, Pakistan’s new PM Shehbaz Sharif has promised to focus on economy and strengthen it.
Once again, a Pakistani prime minister crashed out of the office without completing the full term of five years. Imran Khan, who took over as the prime minister in 2018, came to power with a promise of creating a ‘naya’ (new) Pakistan. During his campaign, the swashbuckling former cricketer focussed on the anti-corruption plank and his campaign struck a chord with the masses. Imran Khan vowed to make Pakistan better with a ‘naya’ global image and a better economy.
Cut to March 2022. Pakistan is in the midst of neck-deep debt and high inflation with unemployment numbers hitting a record. In response, the Wazir-e-Azam said: I didn’t join politics to know the prices of tomatoes and potatoes.
Less than a month later, Imran Khan faced a no-confidence motion that he lost and Pakistan got yet another prime minister — Nawaz Sharif’s brother Shehbaz Sharif. Sharif too promised to tackle tackling the economic crisis on a war footing. “After the formation of the federal cabinet, the government would come up with plans to overcome inflation and revive the economy,” Sharif told the media soon after taking the oath.
But the job ahead is not that simple.
The State Bank of Pakistan (SBP) last week projected deterioration in the outlook for inflation, which has remained in double digits for some time. Pakistan’s central bank said the March inflation turnout was higher than expected. It said the average inflation forecast had been revised upwards to slightly above 11 per cent in FY22.
The SBP also pointed to pressure from a sharp drop in foreign currency reserves. Reserves held by the Pakistani central bank dropped by $728 million to $11.3 billion by April 1, compared to $16.2 billion on March 4. The bank said the decline was largely due to debt repayments and government payments pertaining to the settlement of an arbitration award related to a mining project.
Meanwhile, the Asian Development Bank has projected the country’s GDP growth rate to be 4 per cent this year.
SRI LANKA
In Sri Lanka, people are struggling to get essential things like food and medicines. Thousands of people have taken to the streets to denounce the government led by president Gotabaya Rajapaksa and his elder brother, prime minister Mahinda Rajapaksa.
Just like Pakistan, India’s neighbour down South is also in serious trouble. Sri Lankans are facing a shortage of basic items such as milk, rice, electricity and medicines. The crisis in the island nation has spiralled into protest and violence on the streets and mass resignations of ministers.
In late November 2019, after winning Sri Lanka’s presidential election and months ahead of a parliamentary ballot that would again test his popularity, Gotabaya Rajapaksa gathered his cabinet and made good on a campaign promise to slash taxes. The move, which included a near-halving of value-added tax, blindsided some top central bank executives.
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The economic argument in favour of the cuts was simple: it was needed to free up spending and boost Sri Lanka’s ailing finances. However, the case against it was that reducing potential revenues when obligations were high was risky and undermined a 2019 debt management plan that hinged on a narrowing fiscal deficit.
Not long after the move, the Covid-19 pandemic struck, crippling a Lankan economy that was heavily reliant on tourism. While the pandemic-induced hit to Sri Lanka’s coffers was all but inevitable, some analysts say policies before Covid-19 exacerbated the problems, leaving the country in a vulnerable financial position.
Sri Lanka is currently facing its worst economic crisis since independence in 1948 and is on the brink of its first debt default. The island-nation has been asking friendly nations including India and China for credit lines, food and energy, even as Sri Lanka’s central is has been left with dwindling foreign exchange reserves.
Sri Lanka’s foreign reserves were at $1.93 billion at the end of March. The island-nation’s reserves have slumped more than two-thirds in the past two years, as tax cuts and the Covid-19 pandemic badly hurt its tourism-dependent economy and exposed the government’s debt-fuelled spending.
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The country has foreign debt payments of around $4 billion due this year, including a $1 billion international sovereign bond maturing in July. However, Sri Lanka’s central bank stated it had become “challenging and impossible” to repay external debt.
Meanwhile, the Asian Development Bank has projected the GDP growth rate for the year 2022 to be 2.4 per cent.
NEPAL
The foreign exchange reserves of Nepal have been declining since July 2021 soon after a political crisis in the country led to the fall of the KP Sharma Oli government.
India’s neighbour in the East is also facing economic turmoil. Like Sri Lanka, Nepal’s foreign reserves have been hit by a slump in tourism in Asia during the pandemic.
“Nepal Rastra Bank (NRB, the central bank) feels the country’s foreign exchange reserves are under pressure and something must be done to restrict the import of non-essential goods, without affecting the supply of essential goods,” NRB deputy spokesperson Narayan Prasad Pokharel has told Reuters.
As a result, Nepal is tightening imports of cars, gold and cosmetics. The government has also suspended the central bank governor and named his deputy the interim chief.
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The Himalayan country is heavily dependent on tourism and the export of limited commodities for the foreign exchange reserves that the country needs to meet its import expenditure. The foreign exchange reserves have been declining since July 2021 soon after a political crisis in the country led to the fall of the KP Sharma Oli government. Imports have been surging ever since while the inflow of remittances and earnings from tourism and exports has declined.
Nepal’s forex reserves declined from $11.75 billion in mid-July 2021 to $9.75 billion in February this year. This is just enough to pay import bills for less than seven months — the threshold set as a benchmark by the country’s central bank.
The country’s import bill rose 38.6 per cent to $10.8 billion in the first eight months of the financial year that started in mid-July. This forced the government to dip into foreign currency reserves amid sluggish export earnings.
Soaring global prices of commodities such as crude and edible oil are adding to the pressure on the picturesque Himalayan country’s foreign currency reserves amid a decline in remittances and tourist earnings.
The reserves are sufficient to support imports for a little more than six months for the country.
CHINA
While China has still managed to keep a check on its economy during the pandemic, another Covid-19 outbreak is keeping the country on the edge. Currently, a total of 23 Chinese cities have implemented either full or partial lockdowns, which collectively are home to an estimated 193 million people and contribute to 22% of China’s GDP.
The European Union Chamber of Commerce in China has said that the current strategy is resulting in growing difficulties in transporting goods across provinces and through ports, harming factory output. This would likely impact China’s ability to export, which could eventually stoke inflation.
ALSO READ | People protest, scramble for food in locked-down Shanghai amid reports of suicides, killing of pets
WHAT ABOUT INDIA?
India, which reported a 17-month high inflation rate in March, has witnessed the steepest weekly fall ever in its forex reserves, according to Reserve Bank of India (RBI) data released on April 8. India’s forex reserves slid by $11.173 billion to $606.475 billion as the currency came under pressure due to geopolitical developments, according to RBI.
The previous worst weekly fall was of $9.6 billion for the week ended on March 11.
However, in a silver lining, RBI governor Shaktikanta Das has stated that the economic activity was barely above pre-pandemic levels but continues to steadily recover.
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