South Asia Economic Focus Spring 2018 Growth? © 2018 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved 1 2 3 4 21 20 19 18 This work is a product of the staff of The World Bank with external contribu- tions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guar- antee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Nothing herein shall constitute or be considered to be a limitation upon or waiver of the privileges and immunities of The World Bank, all of which are specifically reserved. Rights and Permissions This work is available under the Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO) http://creativecommons.org/licenses/by/3.0/igo. Under the Creative Commons Attribution license, you are free to copy, distribute, trans- mit, and adapt this work, including for commercial purposes, under the follow- ing conditions: Attribution—Please cite the work as follows: World Bank. 2017. “Jobless Growth.” South Asia Economic Focus (April), Washington, DC: World Bank. Doi: 10.1596/978-1-4648-1284-2. License: Creative Commons Attribution CC BY 3.0 IGO Translations—If you create a translation of this work, please add the following disclaimer along with the attribution: This translation was not created by The World Bank and should not be considered an official World Bank translation. The World Bank shall not be liable for any content or error in this translation. Adaptations—If you create an adaptation of this work, please add the follow- ing disclaimer along with the attribution: This is an adaptation of an original work by The World Bank. Views and opinions expressed in the adaptation are the sole responsibility of the author or authors of the adaptation and are not endorsed by The World Bank. Third-party content—The World Bank does not necessarily own each compo- nent of the content contained within the work. The World Bank therefore does not warrant that the use of any third-party-owned individual component or part contained in the work will not infringe on the rights of those third parties. The risk of claims resulting from such infringement rests solely with you. If you wish to re-use a component of the work, it is your responsibility to determine whether permission is needed for that re-use and to obtain permission from the copyright owner. Examples of components can include, but are not limited to, tables, figures, or images. All queries on rights and licenses should be addressed to World Bank Publica- tions, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; e-mail: pubrights@worldbank.org. ISBN (electronic): 978-1-4648-1284-2 DOI: 10.1596/ 978-1-4648-1284-2 Cover photo: Sk Hasan Ali / Shutterstock.com Design: alejandro espinosa / sonideas.com PHOTO: Design Pics Inc / Alamy Photo PHOTO: World Bank T his report is a joint product of the Office of the Chief Economist for the South Asia Region (SARCE) and the Macroeconomics, Trade and Investment Global Practice (MTI). Its preparation was led by Robert Beyer (Economist, SARCE) under the oversight of Martin Rama (Chief Economist, SARCE) in close collaboration with Manuela Francisco (Practice Manager, MTI). Substantive contributions were made by Esha Chhabra, Milagros Chocce, Yan (Sarah) Xu, and Zetianyu Wang (all SARCE). The report greatly benefitted from inputs from Ekaterine T. Vashakmadze, Temel Taskin and other colleagues in the Development Economics Prospects Group (DECPG) under the supervision of Ayhan Kose (Director, DECPG). We are very grateful for comments and suggestions provided by Rinku Murgai, Urmila Chatterjee, Sutirtha Sinha Roy, Benu Bidani, Ghazala Mansuri, and David Newhouse (all Poverty Global Practice), as well as by Stefano Paternostro, David A. Robalino, Alvaro Gonzalez and Laurent Loic Yves Bossavie (all Social Protection Global Practice), as well as by Muhammad Waheed (MTI) and Dhushyanth Raju (SARCE). Colleagues providing information for country briefs include Saurabh Shome, Nandini Krishnan, Christina Wieser, Tobias Akhtar Haque and Tae Hyun Lee, Zahid Hussain, Yoichiro Ishihara, Smriti Seth, Florian Blum, Ralph Van Doorn, Sudyumna Dahal, Damir Cosic, Mona Prasad, Adnan Ashraf Ghumman and Kishan Abeygunawardana (all with MTI). Alejandro Espinosa at Sonideas signed responsible for the layout, design and typesetting. Alexander Ferguson, Senior Manager, South Asia External Communications (SAREC) coordinated the dissemination, together with Yann Doignon and Joe Qian (both with SAREC). Gonzalo Alberto Villamizar De La Rosa created accompanying videos, and Neelam Chowdhry provided valuable administrative support. South Asia as used in this report includes Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. The cutoff date for this report was April 9, 2018. South Asia Chief Economist Office Macroeconomics, Trade and Investment Global Practice Table of Contents Recent economic developments 8 Number one in growth again 10 Inflation is contained 13 Widening trade and current account deficits 17 The fiscal position is not improving 21 South Asia economic outlook 24 Jobless growth? 29 The job creation challenge 30 A foregone dividend 30 Generating comparable employment numbers 33 The structure of employment in South Asia 37 The short-term employment response to growth 39 The overall impact of growth on employment 40 The nature of the jobs created is not encouraging 42 Rapid growth alone is not enough 44 Data and economic policy agendas 44 South Asia country briefs 51 South Asia at a glance 74 PHOTO: World Bank Recent economic developments S outh Asia is again the fastest growing region in the world, albeit not by a wide margin. The rebound was led by India, whose growth rate picked up in the second half of 2017 after five consecutive quarters of deceleration. Inflation has increased in South Asia, in line with more vibrant economic activity and higher oil prices, but it is aligned with other regions. Besides, the inflation rates of most countries in the region remain near or below inflation targets. Despite an acceleration of economic growth in destination markets, export performance remains disappointing throughout the region, while imports are growing rapidly. The trade deficits of the three biggest countries in South Asia have widened. While remittances are recovering, current account deficits have continued to widen, but among larger countries the deficits are mostly within safe boundaries. The Indian and especially the Pakistani rupee depreciated recently, which may support an improved external balance. As usual, fiscal deficits in South Asia remain large by international standards, and government debt is high in many countries in the region. Recent economic de v e lopments FIGURE 1: Growth is picking up in advanced economies. Real GDP growth Percent, y-o-y 8 6 4 2 0 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q4 Developing countries Eurozone United States World Source: World Bank and staff calculations. Number one in growth again growth accelerated to 6.3 percent in the last quarter of last year, and further to 7.2 percent in the first quarter of 2018. Meanwhile, growth in East Asia and the Pacific – the other Global growth is gaining momentum. The world economy leading region – remained at 6.5 percent. Sub-Saharan Africa continued its recovery and global growth increased to 3.3 and Latin America and the Caribbean continued their recov- percent in the last two quarters of 2017. Growth in the United ery, with both regions growing by more than 2 percent in the States accelerated to 2.3 percent in the third quarter of last fourth quarter of last year. In the Middle East and North Africa, year and further to 2.6 percent in the fourth quarter. In the growth remains volatile and has on average moderated after Eurozone, growth accelerated to 2.7 percent and 2.8 percent some quarters of very high growth led by Iran. respectively. Developing countries grew slightly more slowly last year than in 2016, but their growth picked up to 6.6 Given its weight in the region, India’s growth performance percent in the last quarter of 2017. strongly influences South Asian trends. Around 80 percent of the region’s gross domestic product (GDP) is generated in Along with more vibrant economic activity, oil prices and India. A slow but steady fiscal consolidation, stable interest merchandise trade are on an upward trend. While much rates despite declining inflation, and growing stress in the below their peak, oil prices continued to slowly increase, financial sector may have contributed to India’s growth reaching around 65 USD per barrel recently. This uptick puts deceleration during most of 2016. Later that year, demone- pressure on the balance of payments of oil-importing coun- tization – the large withdrawal of currency from circulation tries, but the price level is still favorable compared to the earlier that took place in November 2016 – and the introduction of part of the decade. After decreasing through 2015 and 2016, the Goods and Services Tax (GST) added to the slowdown. global merchandise trade increased strongly again last year. While these policy measures are expected to increase the World trade increased by 10 percent in the first three quarters formalization of payments and the efficiency of transactions, of 2017. Higher growth in advanced economies offers export they both created short-term disruptions in economic activi- opportunities for many countries in the region, for which ty. As the inflation rate rebounded pushing real interest rates Europe and the US are the main destination markets. More down, a recapitalization plan for banks was announced, and restrictive trade policies in those countries could partly offset the effects of the two temporary shocks vanished, growth this improvement, but whether South Asian exports would bounced back to 7.3 percent. This is the same figure as in the be targeted is still unclear. third quarter of 2016, the last quarter before demonetization, but still considerably below the levels of late 2015 and early After a short interlude, South Asia claimed back the leading 2016. role in global growth. South Asia was the fastest-growing region throughout 2015, but its economic growth declined Growth elsewhere in the region is stable or slightly lower. for five consecutive quarters – from over 9 percent in the first In Nepal, growth is expected to slow down after a strong quarter of 2016 to below 5.5 percent in the second quarter re-bound in 2017. This is partly due to the heaviest flooding of last year – on the back of India’s deceleration. The region’s in decades, which adversely affected agriculture. In Bhutan, S OU TH A S I A E CO N OM I C F O C US | SP R I N G 2 0 1 8 10 FIGURE 2: Oil prices and merchandise trade reflect growing global demand. Crude oil prices: Brent - Europe World merchandise trade growth USD/Bbl Percent, y-o-y 140 15 120 10 5 100 0 80 -5 60 -10 40 -15 20 -20 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3 2014Q4 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 0 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Exports Imports Source: Federal Reserve Bank of St. Louis, Federal Reserve Economic Data; World Merchandise Trade. FIGURE 3: South Asia is again the fastest growing region in the world. Regional real GDP growth Percent, y-o-y 14 12 10 8 6 4 2 0 -2 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q4 East Asia & Pacific Europe & Central Asia Sub-Saharan Africa Latin America & Caribbean Middle East & North Africa South Asia Source: World Bank. FIGURE 4: South Asia’s rebound is led by India emerging from its slowdown. India real GDP growth Percent, y-o-y 10 8 6 4 2 0 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q4 Source: Government of India, Ministry of Statistics and Programme Implementation. J O B L E SS G ROW T H ? 11 Recent economic de v e lopments FIGURE 5: Despite favorable conditions, growth in the region has reached a plateau. Real GDP growth Percent 8 6 4 2 0 Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka (CY) (FY) (FY) (FY) (CY) (FY) (FY, at factor costs) (CY) 2016 2017 (est) 2018 (f) Source: World Bank. Note: Data for Afghanistan, Maldives, and Sri Lanka are in calendar year. Data for all other countries are in fiscal year. Fiscal year in India is named as the starting year of the fiscal cycle. For all other countries, fiscal year is named as the ending year of the cycle. For example, India 2017 runs from April 2017 – March 2018; Pakistan 2017 runs from July 2016 – June 2017. (est) = estimate, (f) = forecast. FIGURE 6: Industrial production is strong, but remains volatile. Industrial production growth Percent, q-o-q 8 4 0 -4 -8 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q4 South Asia Bangladesh India Pakistan Sri Lanka Source: World Bank. growth remains solid, on the back of on-going hydro-power for an entire year. In India, it has recently ticked upwards, projects and tourism, but its pace is slowing down. In Paki- after many quarters of very low growth. And in Sri Lanka, stan, preliminary estimates based on the first eight months industrial production growth fluctuates around zero since of fiscal year 2018 suggest that GDP growth increased by January 2016, but was positive in the last quarter of 2017. This 0.4 percentage points over the previous year, reaching 5.8 said, industrial production is a volatile indicator and changes percent. Growth is moderating in 2018 in Afghanistan, Ban- need to be interpreted with caution, particularly for individual gladesh, and the Maldives. In Sri Lanka, it is recovering from a countries. low base after a difficult year with inclement weather. Stock market prices in some of the countries in the region The manufacturing sector, an important contributor to have been strongly influenced by global trends. In India, overall growth and a key focus of many governments in the stock market has been climbing for a while, even causing the region, shows signs of strength. In the last quarter of some concern about a possible overvaluation. As part of a 2017, industrial production in South Asia grew by 4 percent, global correction of stock markets at the beginning of the up from 1 and 2 percent in the two previous quarters. In Ban- year, Indian stock prices declined somewhat as well. In Ban- gladesh industrial production growth has been substantial gladesh, stocks were more expensive than in 2016, but most S OU TH A S I A E CO N OM I C F O C US | SP R I N G 2 0 1 8 12 FIGURE 7: Stock markets follow global trends in Bangladesh and India, less so in Pakistan and Sri Lanka. Bangladesh: Dhaka Stock Exchange DSEX India: Bombay Stock Exchange SENSEX Index Index 6500 38000 6000 36000 5500 34000 32000 5000 30000 4500 28000 4000 26000 3500 24000 3000 22000 Jan-16 Jan-16 Feb-16 Mar-16 Apr-16 Apr-16 May-16 Jun-16 Jun-16 Jul-16 Aug-16 Sep-16 Sep-16 Oct-16 Nov-16 Dec-16 Dec-16 Jan-17 Feb-17 Mar-17 Mar-17 Apr-17 May-17 Jun-17 Jun-17 Jul-17 Aug-17 Aug-17 Sep-17 Oct-17 Nov-17 Nov-17 Dec-17 Jan-18 Feb-18 Feb-18 Mar-18 Jan-16 Jan-16 Feb-16 Mar-16 Mar-16 Apr-16 May-16 Jun-16 Jun-16 Jul-16 Aug-16 Sep-16 Sep-16 Oct-16 Nov-16 Dec-16 Dec-16 Jan-17 Feb-17 Mar-17 Mar-17 Apr-17 May-17 May-17 Jun-17 Jul-17 Aug-17 Aug-17 Sep-17 Oct-17 Nov-17 Nov-17 Dec-17 Jan-18 Feb-18 Feb-18 Mar-18 Pakistan: Karachi Stock Exchange 100 Sri Lanka: Colombo Stock Exchange ASPI Index Index 55000 7100 6900 50000 6700 45000 6500 6300 40000 6100 5900 35000 5700 30000 5500 Jan-16 Jan-16 Feb-16 Mar-16 Mar-16 Apr-16 May-16 May-16 Jun-16 Jul-16 Jul-16 Aug-16 Sep-16 Sep-16 Oct-16 Nov-16 Dec-16 Dec-16 Jan-17 Feb-17 Feb-17 Mar-17 Apr-17 Apr-17 May-17 Jun-17 Jun-17 Jul-17 Aug-17 Sep-17 Sep-17 Oct-17 Nov-17 Nov-17 Dec-17 Jan-18 Jan-18 Feb-18 Mar-18 Mar-18 Jan-16 Jan-16 Feb-16 Mar-16 Mar-16 Apr-16 Apr-16 May-16 Jun-16 Jun-16 Jul-16 Aug-16 Aug-16 Sep-16 Oct-16 Oct-16 Nov-16 Nov-16 Dec-16 Jan-17 Jan-17 Feb-17 Mar-17 Mar-17 Apr-17 May-17 May-17 Jun-17 Jul-17 Jul-17 Aug-17 Aug-17 Sep-17 Oct-17 Oct-17 Nov-17 Dec-17 Dec-17 Jan-18 Feb-18 Feb-18 Mar-18 Apr-18 Source: Haver Analytics. recently the Dhaka Stock Exchange Broad Index decreased Inflation is contained from roughly 6300 in January 2018 to around 5600 in March 2018. Since the beginning of 2016, the correlation between the S&P 500 and the BSE SENSEX in India has been above Inflation had been unusually subdued by South Asian stan- 0.95. The correlation is similarly high with the Dhaka Stock dards in recent years, but it is accelerating again. In January Exchange Broad Index in Bangladesh. Strong co-movements 2018, consumer prices in the region grew by 4.8 percent. This is with the US stock market suggests that trends are not heavily only 0.5 percentage points higher than the average since January influenced by domestic conditions. But strong co-movement 2016, but 1.2 percentage points higher than in July of last year. also increases contagion risk if global markets go down as Due to declining inflation in Sub-Saharan Africa and relatively monetary policies in advanced economies normalize. stable rates in other regions, South Asia has not only the highest GDP growth rate in the world, but also the highest inflation rate. The correlation between global trends and stock market However, its inflation rate is still close to that of other regions. In developments in Pakistan and Sri Lanka is weaker. The Sri January 2017 prices in Sub-Saharan Africa were growing by 4.1 Lanka Colombo Stock Exchange Index remained rather stable percent, in Latin America and the Caribbean by 3.7 percent, and and in Pakistan the Karachi Stock Exchange 100 Index (KSE in other developing regions at around 3 percent. By comparison, 100 Index) was on a downward trend until the devaluations earlier in the decade the inflation rate of South Asia was about of December 2017 and March 2018 pushed stock market pric- twice as high that of most other developing regions. es up again. This downward trend, had started around May 2017, after a period of exuberance that reflected an expected The regional pick-up in inflation is mainly driven by upgrade to the MSCI Emerging Market Index and greater con- monthly price increases steadily accelerating in India in fidence on macroeconomic stability. The declining trend was recent months. In line with rebounding growth, inflation in reverted after the Pakistan rupee depreciated by 5 percent in India increased from 1.5 percent in June 2017 to 3.6 percent December, which prompted the KSE 100 Index to jump by in October and to 5.1 percent in January 2018. In February in- around 5000 points. flation moderated slightly to 4.4 percent. In Pakistan, inflation J O B L E SS G ROW T H ? 13 Recent economic de v e lopments FIGURE 8: Inflation has accelerated but remains in line with other regions. Regional consumer price inflation Percent, y-o-y 8 6 4 2 0 16 M 6 6 M 6 6 16 Au 6 16 16 N 6 6 16 17 M 7 7 M 7 7 17 Au 7 17 17 N 7 7 17 18 18 1 -1 1 -1 l-1 -1 -1 1 -1 1 -1 l-1 -1 -1 n- b- r- n- g- p- c- n- b- r- n- g- p- c- n- b- ar ay ct ov ar ay ct ov Ju Ju Ap Ap De De Ja Ju Ja Ju Ja Fe Se Fe Se Fe O O South Asia East Asia and Pacific Europe and Central Asia Latin America and Caribbean Middle East and North Africa Sub-Saharan Africa Source: World Bank. FIGURE 9: The inflation rates of the larger countries fall within a narrow range. South Asia consumer price inflation Percent, y-o-y 16 12 8 4 0 -4 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka Source: World Bank, Trading Economics, and Sri Lanka Department of Census and Statistics. between May and December of last year was somewhat in the decade. Core inflation excludes price changes for below its average since 2016. It rose again in December, but food and energy. Due to the usually large swings in these the mild exchange rate depreciation in December has not led two components, core inflation tends to be less volatile to higher inflation so far. The smaller countries in the region, than overall consumer price inflation, and is therefore more on the other hand, mainly experienced a deceleration of price informative about deeper economic trends. In India, core increases. In Bhutan, inflation moderated from 7.0 percent at inflation increased much less than overall consumer price the end of 2016 to only 3.3 percent in December of last year. inflation from June 2017 to February 2018. In Pakistan, core In Afghanistan, it decreased from 7.5 percent in June of last inflation is very stable; in contrast to overall consumer price year (the highest level across South Asia) to 3.1 percent at the inflation, the core inflation rate did not dip in the second end of 2017. In Sri Lanka, inflation was high at 7.1 percent at half of 2017. On average, core inflation in 2017 was 0.7 the end of last year, but moderated to 4.5 percent in February. percentage points above core inflation in 2016. In Sri Lanka, core inflation dropped sharply in the second half of 2017, Trends in core inflation rates do not point to price reaching only 3.5 percent in February (compared to 4.5 increases returning to the high levels observed earlier percent overall consumer price inflation). S OU TH A S I A E CO N OM I C F O C US | SP R I N G 2 0 1 8 14 FIGURE 10: Core inflation rates have not accelerated. Core consumer price inflation Percent, y-o-y 8 6 4 2 0 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 India Pakistan Sri Lanka Source: Haver Analytics. FIGURE 11: In most countries inflation rates are near or below target. Inflation and distance to policy target Percent 8 4 0 -4 Bangladesh India Pakistan Sri Lanka China Japan Eurozone US Difference from inflation target Inflation (Feb 2018) Source: For India, Sri Lanka, Bangladesh, China, Pakistan, inflation target data is from Haver Analytics (National Authorities), and other data are from Trading Economics. US data is from FED. Euro data is from Eurostat. Distance to inflation is based on World Bank staff calculations. Note: The inflation target for Sri Lanka is not explicitly communicated by the central bank, but implicitly derived (Haver Analytics). FIGURE 12: Policy rates have remained unchanged, except in Pakistan and Sri Lanka. Official interest rate (policy instrument/base rate) Repo Rate (end of period, percent per annum) 8 7 6 5 4 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Bangladesh India Nepal Pakistan Sri Lanka Source: Haver Analytics. Note: Standing Liquidity Facility (SLF) rate is shown for Nepal. J O B L E SS G ROW T H ? 15 Recent economic de v e lopments FIGURE 13: Exports growth was disappointingly modest throughout the region. Exports merchandise growth Percent, y-o-y 15 10 5 0 -5 -10 -15 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q4 Bangladesh India Pakistan Sri Lanka Source: World Bank, International Monetary Fund International Financial Statistics (IFS) database and World Bank staff calculations. FIGURE 14: Imports are growing rapidly across South Asia. Imports merchandise growth Percent, y-o-y 40 30 20 10 0 -10 -20 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q4 Bangladesh India Pakistan Sri Lanka Source: World Bank, International Monetary Fund International Financial Statistics (IFS) database and World Bank staff calculations. Inflation rates are in line with the explicit or implicit Apart from Pakistan and Sri Lanka, countries in the region have inflation targets of the authorities in most South Asian left their policy rates unchanged for the last six months. Con- countries. The comparison of targets and actual rates reveals sistent with inflation close to target, interest rates have remained whether policy makers are confronting unexpected develop- mostly stable. Pakistan raised its interest rate slightly at the end of ments on the price front, and allows assessing how successful January to pre-empt an overheating of the economy and to react stabilization policies have been. In Bangladesh, India, and Sri to slowly but steadily increasing core inflation. Sri Lanka, on the Lanka, the difference between the inflation target and the other hand, lowered its rate in early April responding to a decline actual inflation rate is below one percentage point. While in inflation and to output growth below its perceived potential. inflation was above the target in Sri Lanka six months ago, it All other countries in the region left their monetary policy stance now is slightly below. In Pakistan, inflation is 2.2 percentage unchanged. However, Bangladesh Bank has lowered the Cash points below the target of 5 percent. Reserve Requirement from 6.5 percent to 5.5 percent recently. S OU TH A S I A E CO N OM I C F O C US | SP R I N G 2 0 1 8 16 FIGURE 15: The trade deficits of the three biggest countries are widening. Trade balance Percent of GDP 0 -2 -4 -6 -8 -10 -12 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q4 Bangladesh India Pakistan Sri Lanka Source: World Bank, International Monetary Fund International Financial Statistics (IFS) database and World Bank staff calculations. FIGURE 16: Remittances flows to Bangladesh are increasing again. Remittances growth Percent, y-o-y 25 20 15 10 5 0 -5 -10 -15 -20 -25 -30 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q4 Bangladesh India Pakistan Sri Lanka Source: Haver Analytics. Widening trade and the last quarter of last year. Only in Sri Lanka have exports grown stronger than imports recently. current account deficits With lackluster export performance and rapidly growing im- Despite the increasingly firm global recovery, exports ports, trade deficits are gradually widening. India’s monthly remain relatively flat throughout the region, while im- trade deficit increased by roughly one third in recent months, ports are growing rapidly. Exports have stabilized recently from USD 19 billion in September 2016 to USD 25 billion in in Bangladesh, after four quarters of decline. And export January 2018. In Pakistan, the monthly trade deficit reached growth has been positive for five consecutive quarters in USD 2.3 billion. In Bangladesh, it increased to the point of being India. It has also been positive in Sri Lanka since the second the largest ever recorded. Sri Lanka, the trade deficit in percent quarter of last year, and in Pakistan since the third quarter. of GDP narrowed somewhat during the last three quarters However, export growth in the region is generally lower compared to the three quarters before. It is important to note than overall economic growth, or at best similar. It is also that trade deficits are not necessarily a concern: as developing substantially lower than import growth. In both India and countries need to import capital goods and inputs in order to Pakistan, imports increased by more than 10 percent in grow. The key question is how these deficits are financed. J O B L E SS G ROW T H ? 17 Recent economic de v e lopments FIGURE 17: Foreign direct investment increased across South Asia. Foreign direct investment growth Percent, y-o-y 300 200 100 0 -100 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q4 Bangladesh India Pakistan Sri Lanka Source: Trading Economics. FIGURE 18: Among larger countries, current accounts are mostly within safe boundaries. Current account balance Percent of GDP 4 2 0 -2 -4 -6 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q4 Bangladesh India Nepal Pakistan Sri Lanka Source: Trading Economics, Haver Analytics, Nepal Central Bureau of Statistics, Central Bank of Sri Lanka, World Bank, and staff calculations. After being flat or declining for several quarters, remit- Foreign direct investment (FDI) has been volatile in the tances are showing some signs of dynamism again. Many short-term, but is on an upward trend across South Asia. South Asian countries have large migrant populations, and Throughout the last two years, FDI growth has been mostly remittances have been a key contributor to poverty reduction positive throughout the region. In Pakistan, it increased in the region. Remittances also help finance trade deficits. strongly at the beginning of 2016, stabilized for some time, But declining oil prices had affected the economies of Gulf and then increased again by more than 50 percent in the countries, where many of the region’s migrants work. After third quarter of 2017, before declining 17 percent in the last declining for several quarters, remittances increased by more quarter. Both India and Sri Lanka saw their FDI increasing very than 10 percent in India, and they rebounded by over 25 per- strongly in two of seven quarters. Compared to the beginning cent in the last quarter of 2017 in Bangladesh. In Pakistan they of 2016, FDI has increased by over a third in India and Pakistan, grew by 3.4 percent year-on-year from July to February. But and by 45 percent in Bangladesh. in Sri Lanka, remittances decreased throughout 2017 and are now USD 78 million lower than at the end of 2016. And across Current account deficits have widened, despite the recovery countries, levels are far from the heights reached in past years. in remittances, but they remain generally manageable. In Sri Lanka, the deficit bottomed out at the end of 2016 but the balance has remained negative since then. In Bangladesh, the S OU TH A S I A E CO N OM I C F O C US | SP R I N G 2 0 1 8 18 FIGURE 19: Current account deficits are narrowing slowly in Bhutan and Maldives. Current account balance Percent of GDP 10 0 -10 -20 -30 Afghanistan Bhutan Maldives 2016 2017 (est) 2018 (f) Source: World Bank. Note: (est) = estimate, (f) = forecast. FIGURE 20: The Indian and (especially) the Pakistani rupee depreciated recently. Real effective exchange rates Index (Jan 2016 = 100) 110 105 100 95 90 85 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 China Eurozone India Pakistan United States Source: Haver Analytics. FIGURE 21: International reserves are relatively low in Maldives and Pakistan. Foreign exchange reserves Months of imports 15 10 5 0 16 M 6 6 16 6 16 Au 6 16 16 N 6 6 16 17 M 7 7 17 7 17 Au 7 17 17 N 7 7 17 18 18 1 -1 -1 l-1 -1 -1 1 -1 -1 l-1 -1 -1 n- b- r- n- g- p- c- n- b- r- n- g- p- c- n- b- ar ay ct ov ar ay ct ov Ju Ju Ap Ap De De Ja Ju Ja Ju Ja Fe Se Fe Se Fe O O M M Bangladesh India Maldives Pakistan Sri Lanka Source: World Bank, Haver Analytics, Maldives Monetary Authority, and World Bank staff calculations. J O B L E SS G ROW T H ? 19 Recent economic de v e lopments FIGURE 22: South Asia’s fiscal deficit is the second highest in the world. Fiscal balance Percent of GDP 0 -5 -10 -15 -20 2016 (est) 2017 (est) East Asia and Pacific Europe and Central Asia Latin America and Caribbean Sub Saharan Africa South Asia Middle East and North Africa Source: International Monetary Fund World Economic Outlook Database and World Bank staff calculations. Note: (est) = estimate. FIGURE 23: Many countries in South Asia run a large fiscal deficit. Fiscal balance Percent of GDP 3 0 -3 -6 -9 -12 Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka 2016 2017 (est) 2018 (f) Source: World Bank. Note: (est) = estimate, (f) = forecast. current account was in surplus during most of 2016 but it de- traditionally large but are now declining. In Bhutan, clined from plus 2.7 percent of GDP in the first quarter of 2016 to sizeable imports related to the construction of hydropower minus 2.9 percent of GDP at the last quarter of 2017. Similarly, in projects kept the current account deficit high, reaching 21.7 India the current account was in surplus until the fourth quarter percent of GDP in 2017. But the deficit was almost entirely of last year, but then it turned into a deficit amounting now to financed by loans from India and hence did not affect inter- 2.0 percent of GDP. Pakistan experienced the sharpest deteriora- national reserves. In Maldives, the current account deficit in tion, with the current account balance decreasing steadily from 2016 was inflated by a one-off payment to settle a dispute; close to zero in the first quarter of 2016 to negative 5 percent it narrowed to 21.4 percent of GDP in 2017, still driven by of GDP in the last quarter of last year. It remains to be seen large investment-related imports. Only in Afghanistan does whether the modest exchange rate depreciations of December the current account balance remain positive, due to large 2017 and March 2018 will be sufficient to revert this trend. international aid flows. The current account deficits of the two smallest coun- Recent nominal exchange rate depreciations in India and tries in the region, Bhutan and Maldives, have been especially in Pakistan should improve competitiveness. In S OU TH A S I A E CO N OM I C F O C US | SP R I N G 2 0 1 8 20 FIGURE 24: Government revenues are growing more slowly than expenditures. Average government revenue and expenditure in South Asia Percent of GDP 27 24 21 18 15 12 9 2014 2015 2016 2017 (est) Revenue Expenditure Source: International Monetary Fund World Economic Outlook and World Bank Staff calculations. Note: (est) = estimate. FIGURE 25: Government debt remains high in many South Asian countries. Government debt Percent of GDP 120 80 40 0 Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka 2016 2017 (est) 2018 (f) Source: World Bank. Note: (est) = estimate, (f) = forecast. December 2017, the State Bank of Pakistan allowed the cur- exchange reserves only cover around three months of rency to depreciate against the USD. The Pakistani rupee fell imports or less. Pakistan’s reserves declined from 5 months from around 105 per USD to more than 110.5. A subsequent of import coverage in January 2016 despite the successful devaluation in March 2018 took the exchange rate to around issuance of USD 2.5 billion in international markets in 115.6 rupees per USD. In India, the real effective exchange November 2017. The decline was partly due to the larger rate declined by 5.2 percent since the beginning of 2018. import bill. In both cases, nominal depreciation should support export growth. The fiscal position is With few exceptions, countries in the region have a com- fortable level of foreign currency reserves. Both India and not improving Bangladesh have very sizeable international reserves, worth 10 months and 8 months import coverage respectively. Fiscal deficits in South Asia have been traditionally Coverage is much lower, but still at a prudent level, in Sri large, especially when taking into account the deficits of Lanka. On the other hand, in Maldives and Pakistan foreign sub-national levels of government. And the situation has J O B L E SS G ROW T H ? 21 Recent economic de v e lopments Box 1 Views from the South Asia Economic Policy Network The South Asia Economic Policy Network, launched by the office of the regional Chief Economist at the World Bank in 2017, represents an attempt to engage more strongly with thinkers and doers across South Asia. The objective is to be more pro- active in nurturing the exchange of ideas and to learn more systematically from colleagues and counterparts in the region. The Network currently focuses broadly on macroeconomics, and counts over 300 researchers and practitioners based in the region. The network has a wide regional coverage including researchers from seven countries, selected based on peer recog- nition and recent conference presentations. Many of them are academics at renowned universities; others are researchers in central banks and think tanks, and some are affiliated with policy-making units. FIGURE 26: We asked over 300 economists from seven countries about their views. Survey among South Asia Policy Network Number of experts 200 180 160 140 120 100 80 60 40 20 0 India Bangladesh Pakistan Nepal Sri Lanka Afghanistan Bhutan Undisclosed country Answered Invited Source: World Bank South Asia Economic Policy Network. A short opinion survey was conducted among the group for this edition of South Asia Economic Focus. The objective was to take the pulse of informed and influential experts about economic developments in their countries. By the same token, the survey allowed gathering their views on labor market data and the main obstacles to stronger employment generation. The response rate exceeded 24 percent, with 78 filled-in questionnaires from 7 countries. Nearly all respondents identified themselves as academics and as macroeconomists. Three quarters of the respondents are involved in policy advising and a not improved much in recent times. India, Pakistan and Sri deficit exceeds 5 percent of GDP excluding grants, but is very Lanka all run general fiscal deficits in excess of 5 percent of small if grants are included. GDP. In Pakistan, the fiscal position has deteriorated rapidly. The deficit reached 5.8 percent of GDP in 2017, which is 2 Larger fiscal deficits are mainly driven by larger public ex- percentage points higher than the initial target and more penditures, while government revenue remains relatively than 1 percentage point higher than in the previous year. stable. Low government revenue has been a distinctive fea- Sri Lanka achieved a primary surplus, but the overall deficit ture of most South Asian countries. Only Bhutan and Maldives slightly increased due to higher interest expenditure. In India, are substantially above what can be predicted given their the pace of consolidation has slowed down. The federal gov- development level. India is roughly in line with comparable ernment missed its fiscal target in 2017 and its deficit reached countries and can be expected to do better as the impacts 3.5 percent of GDP. The federal and state deficit combined of demonetization and GST on the formalization of payments amount to around 6 percent of GDP. In Afghanistan the fiscal materialize. All other countries are below international S OU TH A S I A E CO N OM I C F O C US | SP R I N G 2 0 1 8 22 quarter in policy making. Responses regarding the economic situation are summarized here; views on labor market data and the main obstacles to stronger employment generation are reported throughout the chapter on ‘Jobless Growth?’. The expectations of Network members regarding economic developments over the next six months are summarized in a single number, using so-called diffusion indices. For any indicator, a value above 50 indicates that an increase is expected, whereas a value below 50 corresponds to an expected decrease. The farther away the number is from 50, the greater the consensus among Network members that an important change is under way. Respondents anticipate an acceleration in GDP growth in the entire region. Network members also believe that inflation will pick-up across all countries. In Pakistan, both imports and exports are expected to increase, but the expectation is much stronger for exports. In India, on the other hand, only imports are expected to increase, while exports are seen as stable. In all countries network members foresee and increase in the fiscal deficit. Across South Asia, there are strong views that the exchange rate will depreciate and that financial sector stress will rise. FIGURE 27: Views on the outlook are generally optimistic. What do you expect to happen in your country within the next six months? Diffusion Index 100 Increase 80 60 40 Decrease 20 0 Real GDP Headline Interest Imports Exports Fiscal Exchange rate Financial growth inflation rates deficit sector stress Bangladesh India Pakistan Others Source: World Bank South Asia Economic Policy Network. Note: The index is calculated as follows: Index=(P1*100) + (P2*50) + (P3*0), where P1 is the proportion of responses that report that the variable is too large/overvalued/ too high, P2 is the proportion of responses that report that the variable is appropriate, and P3 is the proportion of responses that report that the variable is too low/ undervalued/too small. benchmarks, often by a vast margin. And for region as a Middle East and North Africa is the debt-to-GDP ratio higher, whole, government revenue has increased by a very modest mainly as a consequence of the unbalances created by the fall 0.8 percent of GDP over the last three years. Meanwhile, in oil prices. In South Asia as a whole, public debt has recently public expenditures grew by 2.6 percentage points, to reach surpassed 60 percent of GDP. However, there is considerable 25 percent of GDP last year. With revenues and expenditures variation within the region. Public debt is at around 100 increasingly drifting apart, fiscal deficits are worsening. percent of GDP in Bhutan, at around 80 percent in Sri Lanka, and over 60 percent in India, Maldives, and Pakistan. On the Despite financial repression allowing governments to other hand, it only reaches around 30 percent in Bangladesh place government bonds in favorable terms, public debt and Nepal, but it has strongly increased in both countries over in South Asia is high by international standards. Only in the the last year. J O B L E SS G ROW T H ? 23 South Asia economic outlook S outh Asia is expected to remain the fastest growing region in the world. Growth in South Asia is forecast to pick up to 6.9 percent in 2018, mainly reflecting India emerging from its slowdown. Growth should further strengthen to 7.1 percent on average in 2019- 20, reflecting an improvement across most of the region. Although risks to the forecast have become more balanced, with potential for further upside surprises to global growth, they are still tilted to the downside. Despite more favorable international conditions, domestic demand will remain the main driver of economic growth. PHOTO: Deshan Tennekoon/World Bank. South Asia economic outloo k FIGURE 28: South Asia is expected to remain the fastest growing region. Real GDP growth Percent Latin America and Caribbean Middle East and North Africa Sub Saharan Africa Europe and Central Asia East Asia and Pacific South Asia 0 2 4 6 8 2018 (f) 2019 (f) 2020 (f) Source: World Bank. Note: (f) = forecast. The international environment should remain favorable to be sustained in 2018, but energy prices – and to some in 2018. Global growth is projected to peak at 3.2 percent extent agricultural prices – should gradually firm up. this year, as the cyclical momentum continues. It should then moderate slightly to an average of 3 percent in 2019–20, South Asia is expected to remain the fastest growing reflecting a gradual slowdown in advanced economies. Other region in the world. Growth in South Asia is forecast to pick global trends will become less supportive over the forecast up to 6.9 percent in 2018, mainly reflecting India emerging period. Global trade, which accelerated sharply last year due from its slowdown. Growth should further strengthen to to a cyclical upturn in global manufacturing, is expected to 7.1 percent on average in 2019-20, reflecting a broad-based remain strong in 2018, but to moderate thereafter, as global improvement across most of the region. South Asia should investment growth eases. Protectionist pressures could result maintain its position as the fastest growing region and even in a less favorable environment as well. Global financing extend its lead over East Asia and the Pacific. conditions, which were benign throughout 2017, are likely to tighten this year, as monetary policy gradually normalizes in While this forecast is broadly unchanged from January major advanced economies. Capital inflows are still expected 2018, the expected growth rate is slightly lower, mainly FIGURE 29: Growth will continue to be driven by domestic demand. Contributions to growth in South Asia Percent 10 8 6 4 2 0 -2 2010-16 2017 (est) 2018 (f) 2019 (f) 2020 (f) Private consumption Government consumption Gross fixed investment Net exports GDP Source: World Bank. Note: (est) = estimate, (f) = forecast. S OU TH A S I A E CO N OM I C F O C US | SP R I N G 2 0 1 8 26 TABLE 1: Growth is expected to plateau in most countries. Real GDP growth in South Asia 2015 2016 2017 (est) 2018 (f) 2019 (f) 2020 (f) Afghanistan (CY) 1.3 2.4 2.6 2.2 2.5 3.3 Bangladesh (FY) 6.6 7.1 7.3 6.5 6.7 7.0 Bhutan (FY) 7.3 7.4 5.8 5.4 6.0 8.7 India (FY) 8.2 7.1 6.7 7.3 7.5 7.5 Maldives (CY) 2.2 6.2 6.2 5.5 4.5 4.9 Nepal (FY) 3.3 0.4 7.5 4.6 4.5 4.2 Pakistan (FY, factor costs) 4.1 4.6 5.4 5.8 5.0 5.4 Sri Lanka (CY) 5.0 4.5 3.1 4.8 4.5 4.5 Source: World Bank. Note: (est) = estimate, (f) = forecast. due to a downward revision for Pakistan in 2019. The rebound from the effects of the devastating earthquakes, baseline scenario assumes an ongoing, but gradually mod- Nepal’s GDP growth is forecast to moderate to 4.6 percent erating recovery in global economy and global trade, higher this year and to average 4.5 percent over the medium term. commodity prices, and gradual tightening of global financing In Pakistan, GDP growth is expected to moderate to 5.0 per- conditions. Although risks to the forecast have become more cent in 2019 reflecting tighter policies to unwind vulnerabil- balanced, with potential for further upside surprises to global ities accumulated over the past years. In the medium-term, growth, they are still tilted to the downside. growth in Pakistan is expected to rebound to 5.2 percent on average in 2019 and 2020, reflecting firming exports, Despite more favorable international conditions, do- and especially robust investment growth in connection mestic demand will remain the main driver of economic to the China-Pakistan Economic Corridor. This is, however, growth. Private consumption is expected to firm and lower than previously anticipated. In Bangladesh, growth is offset a moderation in public consumption as fiscal policy expected to recover from the effects of natural disasters and gradually tightens. Gross fixed capital formation should reach 6.7 percent in 2019, supported by improving exports remain above 7 percent over the forecast horizon. Private and remittances. In Afghanistan, growth will remain sub- investment is expected to accelerate and offset moderat- dued owing to weak confidence due to security challenges ing public investment. Import growth will peak in 2018, and political uncertainty. These outlooks assume continued and moderate to around 6 percent in 2020, helping reduce reforms leading to improved confidence, macro stability, the pressure on the current account. Export growth, which and increased export competitiveness. underperformed last year, is expected to strengthen to 6 percent in 2019, which is nevertheless lower than project- Risks to the regional forecast are more balanced than in ed in January. the January 2018 assessment, with potential for further upside surprises thanks to global growth. Downside Growth rates should remain relatively stable across coun- risks are mainly related to the possibility of domestic policy tries in South Asia. Growth in India is projected to accelerate slippages, such as a weakening of fiscal policies or setbacks to 7.3 percent this year, and to 7.5 percent in 2019 and 2020, in areas of reforms to improve the investment climate or to reflecting stronger private spending and export growth. Sri strengthen the banking sector. However, the region is also Lanka’s GDP growth may average around 4.5 percent over vulnerable to exogenous domestic events like increased the medium term, reflecting a recovery from the effects insecurity and natural disasters. Although South Asia is not on agriculture of last year’s adverse weather disruptions, a larger exporter of goods, it could also be adversely affected as well as robust consumption and investment growth. In by external shocks, such as escalating trade protectionism. Bhutan and Maldives, growth will continue to benefit from And financial markets in the largest countries in the region construction and services, and average 7.4 and 5 percent could be jittery in the event of an abrupt tightening of global respectively over the forecast horizon. After the strong 2017 financial conditions. J O B L E SS G ROW T H ? 27 PHOTO: World Bank Jobless growth? T he demographic transition is swelling the ranks of the working-age population across most of South Asia. In this context, keeping employment rates constant would require massive job creation. But there is a widespread perception that increases in the working-age population have been offset by declining employment rates, and that women have accounted for most of the decline. To what extent this perception is correct is unclear, because employment data are not always comparable over time. For this report, crucial information about employment in South Asia is extracted in a transparent and replicable way from over 60 surveys and censuses covering the period from 2001 onwards. The analysis of this information reveals that employment does respond to economic growth in the short term, implying that growth is not jobless. It also appears that countries in South Asia have created large numbers of jobs over the years. However, the nature of the jobs created is not fully encouraging, and the analysis shows that rapid growth alone will not be sufficient to bring South Asian employment rates to the levels observed elsewhere in the developing world. In addition to high growth, more and better jobs need to be created for every percentage point of growth. The results in this chapter call for better employment data, and for a focus on the economic policies that can boost job creation. Jobless growth? The job creation challenge Indeed, the unemployment rate is not very informative about the labor market situation in countries where few people can afford to remain idle. Measurement is further complicated Job creation is one of the main concerns of politicians and by the fact that many occasional jobs fall in a gray area be- policymakers around the world. If anything, the concern is tween employment, unemployment and inactivity. With the more pronounced in South Asia, where very large numbers of noisy data available, crude statistical analyses suggest that young people are reaching working age every year. Between employment rates are less responsive to economic growth in 2005 and 2015, the number of South Asians aged 15 and developing countries than in advanced economies. above grew by 1.8 million per month, a trend that will only moderate gradually over time. Many of the entrants in this Evidence on the long-term relationship between economic group are staying in school longer than their predecessors, growth and employment rates is somewhat more conclu- and many may never seek a job. But still, preventing a sub- sive. When comparing employment rates across countries stantial decline of the employment rate – the share of the with different levels of income per capita, a U-shaped curve working-age population that is at work – is a major challenge. emerges. Many of the poorest countries in the world have very high employment rates. In these countries, people start Assessing what it would take to the keep the employment working young, and don’t have the means to be unemployed rate constant provides a useful benchmark for the job or retired. Not only adult men, but also women, the young and creation challenge. Between now and 2025, population will the elderly are part of the labor force. As countries become increase in all South Asian countries, although it will do so at richer, school enrollment increases, old-age pension programs different paces. The increase will range between 3 percent in are put in place, and not every adult in a household needs to Sri Lanka and 26 percent in Afghanistan. The growth of the be at work. But this downward trend reverses at higher levels working-age population will be faster, across all countries. of income per capita. In richer countries a growing number The number of people aged 15 and above will expand be- of youth reach tertiary education, and they are keen to work tween 8 and 41 percent by 2025, depending on the case. In in the field of their study. Higher wages, safer transportation Bangladesh, the working-age population will increase by 170 and workplaces, and more easily available childcare also bring thousand every month; the corresponding figures for Paki- large numbers of women back into the labor force. stan and India are 250 thousand and 1.3 million respectively. To keep employment rates constant, 1.1 million additional Several South Asian countries have employment rates jobs would be needed every year in Bangladesh, 1.4 million below those of other countries at a similar level of devel- in Pakistan, and more than 8 million in India. opment. Nepal is an exception, as its employment rate is higher than that of many other countries with a similar GDP A key question is whether rapid economic growth alone per capita. In Afghanistan and Bhutan, employment rates are can generate the massive numbers of additional jobs close to what can be expected given their income per capita. needed. Concerns that the answer could be negative lie In Bangladesh, India, Sri Lanka, and Pakistan, on the other behind discussions on “jobless growth”. But before reaching a hand, employment rates are much below what is predicted conclusion it is important to distinguish between short- and given their income per capita. The gap between the actual medium-term effects of economic growth. In the short term, employment rate and the estimated U-shaped curve varies growth can boost employment rates as greater labor demand between 7 percentage points in Sri Lanka and 13 percentage pulls people out of unemployment and inactivity. Growth can points in Pakistan. also lead to better jobs, for example when farm employment is replaced by work in factories and offices. In the long term, Low employment rates in South Asia are entirely due to on the other hand, growth could reduce employment rates. As women working less than in other regions. Employment countries become richer and living standards improve, families rates among men are above, or at most around, the estimated can afford to keep their children longer in school, the ill and the U-shaped curve. But employment rates among women are disabled can stay home, and women may withdraw from the consistently below, and the gap between the actual and labor force. In assessing whether growth is jobless or not, it is predicted employment rate is substantial in several countries. therefore important to distinguish between these two effects. In India and Pakistan, the gap is close to 30 percentage points. Estimating the short-term relationship between economic growth and employment rates has been the subject of a vast literature in advanced economies. There, the consensus A foregone dividend is that rapid economic growth does indeed reduce unemploy- ment rates in the short term, while slowdowns are associated South Asia’s rapid demographic transition results in with increases in unemployment. The literature is much declining dependency ratios, offering an opportunity for scanter in developing countries, partly due to data limitations. faster economic growth. The dependency ratio compares S OU TH A S I A E CO N OM I C F O C US | SP R I N G 2 0 1 8 30 TABLE 2: Keeping employment rates constant would require massive job creation. Monthly Monthly job creation needed increase in Annual job creation needed to Employment rate to keep employment rate population keep employment rate constant constant (15+) 2015-2025 2015-2025 2015 (or most recent) (in thousands) (in thousands) 2015-2025 (in thousands) World World World Survey Survey Survey Developent Developent Developent estimate estimate estimate Indicators Indicators Indicators Afghanistan 64 48 48 30.5 366.1 Bangladesh 170 53 60 89.6 101.1 1,075.0 1,213.4 Bhutan 1 60 65 0.50 0.54 6.0 6.4 India 1,319 50 52 662.4 684.6 7,948.3 8,214.6 Maldives 1 66 66 0.34 4.1 Nepal 35 68 81 23.9 28.2 286.9 338.3 Pakistan 245 48 51 117.2 124.3 1,407.0 1,492.0 Sri Lanka 10 51 49 5.2 5.0 62.8 60.4 Source: Bangladesh 2015/16 LFS; Bhutan 2012 LSS; India 2011/12 NSS-Thick; Pakistan 2015/16 HIICS; Nepal 2011 LSS; and Sri Lanka 2015 LFS. World Development Indicator data is based on modeled ILO estimates. FIGURE 30: Employment rates vary with economic growth: A U-shaped curve. Total employment rate Percent 90 Employment rate (percent of working age population) 80 70 NPL AFG BTN 60 BGD LKA IND 50 PAK 40 30 0 10000 20000 30000 40000 50000 60000 70000 80000 90000 100000 GDP per capita (constant USD, ppp adjusted) Source: World Development Indicators, Afghanistan 2013/14 ALCS; Bangladesh 2015/16 LFS; Bhutan 2012 LSS; India 2011/12 NSS-Thick; Nepal 2010/11 LSS; Pakistan 2015/16 HIICS; and Sri Lanka 2015 LFS and World Bank staff calculations. J O B L E SS G ROW T H ? 31 Jobless growth? FIGURE 31: Female employment is low in South Asia compared to other developing countries. Female employment rate Male employment rate Percent Percent 80 80 BGD N... IND LKA PAKBTN Employment rate (percent of Employment rate (percent of working age population) working age population) A... 60 NPL 60 AFG BTN 40 40 LKA BGD IND 20 PAK 20 0 0 0 20000 40000 60000 80000 100000 0 20000 40000 60000 80000 100000 GDP per capita (constant USD, ppp adjusted) GDP per capita (constant USD, ppp adjusted) Source: World Development Indicators, Afghanistan 2013/14 ALCS; Bangladesh 2015/16 LFS; Bhutan 2012 LSS; India 2011/12 NSS-Thick; Nepal 2010/11 LSS; Pakistan 2015/16 HIICS; and Sri Lanka 2015 LFS and World Bank staff calculations. the number of dependents, aged zero to 14 and over the age rate decreased on average more than 1.5 percent per year in of 64, to the working-age population, aged 15 to 64. In South Bhutan and India and by more than 0.5 percent per year in Asia the dependency ratio has decreased from 63 percent in Bangladesh. Since income per capita grew considerably in all 2005 to 55 percent in 2015, and it is expected to decrease these countries from 2005 to 2015, some decline in the em- further to 50 percent by 2025. Except for Sri Lanka, which ployment rates could be anticipated. However, the declines in is the only aging society in South Asia, the trend is present employment rates are much larger than can be explained by in all counties in the region. This change of the population’s increasing incomes per capita alone. age structure creates an opportunity for fast economic growth and rising living-standards. Potentially, there could be Rapidly declining female employment rates in some South more people earning an income for every child and elderly Asian countries are the main explanation for the difference person needing support. Even if the productivity of those at with East Asia. Between 2005 and 2015, male employment work were to remain unchanged, income per capita would rates decreased very little in India, but female employment increase, because there would be more working people per rates decreased by nearly 5 percent per year. In Bhutan, male capita. But to reap the benefits of this ‘demographic dividend’, employment rates were nearly stable, while female employ- sufficient new jobs need to be created. ment rates decreased by over 3 percent per year. But not all countries in the region display the same pattern. In Bangla- Not all countries have transformed their demographic desh, male employment declined by close to 1 percent per transition into a demographic dividend to the same extent, year, whereas female employment remained constant. And in however. The comparison between South Asia and East Asia Pakistan, female employment even increased – though from is revealing in this respect. In both cases, the U-shaped curve a very low level. suggests that employment rates were bound to decline with economic growth. But in East Asian countries employment In a context of rapid economic growth, the flip side of rates declined less than the U-shaped curve would have im- declining employment rates is higher average labor pro- plied, whereas in South Asian countries they declined more ductivity. To illustrate the point, if growth was truly jobless than could be anticipated. it would mean that more goods and services are being produced with the same amount of labor. But this is not Because of the decline in employment rates, the number necessarily an ideal outcome from an economic point of view. of people at work in South Asia has not increased in line Higher average labor productivity may originate in more with the working-age population. For example, between capital being used for production, but capital is expensive to 2005 and 2015, the share of the working-age group in the accumulate. Countries with limited financial resources and total population increased by over 1 percent per year in abundant labor may prefer a less capital-intensive develop- Bhutan, and by around 0.5 percent in Bangladesh, India, ment path. They can do so, for instance, by specializing their and Pakistan. At the same time, however, the employment production in more labor-intensive sectors of activity. S OU TH A S I A E CO N OM I C F O C US | SP R I N G 2 0 1 8 32 FIGURE 32: Increases in working age population have been offset by declining employment rates Working age rate, employment rate and predicted employment rate Annual change in percent, 2005-2015 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 India Bhutan Bangladesh Sri Lanka Pakistan China Philippines Vietnam Malaysia Indonesia Working age rate Employment rate Predicted on GDP per capita growth Source: The change of the employment rate for South Asian countries was calculated using the estimates from Bangladesh 2005/06 – 2015/16 LFS; Bhutan 2007-2012 LSS, India 2004/05 – 2011/12 NSS-Thick; Pakistan 2005/06 HIES – 2015/16 HIICS; and Sri Lanka 2006 – 2015 LFS. The change for the other countries is based on modeled ILO estimates. The change in working age rate is based on 2005-2015 UN population statistics. Note: The working age rate is the share of population above 15 in the total population. The employment rate is the share of employed among the working age population. FIGURE 33: Women account for most of the decline in employment rates. Employment rate by gender Annual change in percent, 2005-2015 2 0 -2 -4 -6 India Bhutan Sri Lanka Bangladesh Pakistan China Vietnam Philippines Indonesia Malaysia Male Female Source: The change of the employment rate for South Asian countries was calculated using the estimates from Bangladesh 2005/06 – 2015/16 LFS; Bhutan 2007-2012 LSS, India 2004/05 – 2011/12 NSS-Thick; Pakistan 2005/06 HIES – 2015/16 HIICS; and Sri Lanka 2006 – 2015 LFS. The change for the other countries is based on modeled ILO estimates. The change in working age rate is based on 2005-2015 UN population statistics. Note: The working age rate is the share of population above 15 in the total population. The employment rate is the share of employed among the working age population. Generating comparable ways. The implications of the gaps between definitions are amplified in economies where self-employment and casual employment numbers work are the norm. A nine-to-five job, with a written contract and benefits attached to it, is easy to recognize. But relatively Discussions on the relationship between economic growth few jobs match this description in South Asia. In many and job creation in South Asia have been muddled by data cases, it is hence difficult to tell whether people are working, gaps and inconsistencies. Employment figures are seldom unemployed, or out of the labor force, and the answers vary available with high frequency, and labor indicators differ in depending on the statistical instrument considered. The diffi- subtle but important ways across statistical instruments. Pop- culty to measure employment is exacerbated for women, as ulation censuses, economic censuses, household surveys, and they tend to engage even more than men in activities falling labor force surveys may all define employment in different in the gray area between work, unemployment and inactivity. J O B L E SS G ROW T H ? 33 Jobless growth? FIGURE 34: Economists are aware of the challenges posed by the available employment data. Do you agree with the following statements regarding the quality of labor market information in your country? Distribution of responses The coverage of the informal sector is satisfactory There are sufficiently frequent observations The most recent observation is generally timely The estimates are reliable The data are nationally representative 0 20 40 60 80 100 No Somewhat agree Fully agree Source: World Bank South Asia Economic Policy Network. Note: Results are from a survey conducted for this report and are based on 78 responses from 7 countries. Economists in South Asia agree that the quality of the information is gathered together with the household con- available employment data makes it difficult to credibly sumer expenditure module. The quinquennial surveys have assess the labor market situation in their countries. In large samples and are referred to as the ‘thick rounds’, where- a survey conducted for this report, views were sought on as the intervening surveys are known as the ‘thin rounds’ the challenges faced when measuring employment. Un- because of their relatively smaller sample size. Overall, data satisfactory coverage of the informal sector and infrequent is less frequent in India, and the most recent data point is the observations were named as the most important limitations `thick round’ NSS conducted in 2011-12. The annual Periodic of the available data. More than half of the respondents were Labor Force Survey (PLFS), which was started in 2017, aims also concerned about the timeliness of the data, and 40 to fill this gap by providing frequent and timely labor market percent about the reliability of estimates. On the other hand, data that is nationally and regionally representative. most respondents agreed that the key employment data was nationally representative. For this report, comparable employment information was constructed in a transparent and replicable way directly A rigorous assessment of the relationship between from primary data. The data sources used include population economic growth and job creation requires comparable censuses, as well as household surveys and labor force sur- employment figures across countries and over time. veys. The focus of the exercise were respondents aged 15 and These figures can be constructed out of primary data from above, but the results would have been similar if the narrower existing population censuses, economic censuses, household group aged 15 to 64 had been considered, given that the surveys and labor force surveys. Since 2001, close to 100 elderly are only a minor share of the population in South Asia. such censuses and surveys have been conducted in the Each respondent was classified as employed, unemployed or region. Sri Lanka and Pakistan have the most frequent and inactive based on standard definitions, matched as closely as easily accessible household surveys and labor force surveys. possible to the questionnaire of each census or survey. Sri Lanka conducts the Household Income and Expenditure Survey (HIES) every three years and has an annual Labor Force Employed individuals were further classified based on the Survey (LFS) which is nationally and quarterly representative. nature of their activity. Three breakdowns were considered: Similarly, Pakistan has been carrying out the Pakistan Social by type of job (regular, casual, self-employed and unpaid), by and Living Standards Measurement (PSLM) survey and the sector of activity (agriculture, manufacturing, construction Household Integrated Economic Survey on alternate years and services) and by institutional sector (private or public). since 2004-05. And with the exception of a few years, the LFS has been conducted on an annual basis during the time pe- The procedure used for the construction of this employ- riod considered for this report. In India, labor market informa- ment database allows to generate information with tion is collected by the National Sample Survey (NSS) using a relatively high frequency. In many of the surveys used for separate employment-unemployment module (Schedule 10) this report it is possible to attribute individual observations every five years. In the intervening years, basic employment to specific quarters. This is because the month when a S OU TH A S I A E CO N OM I C F O C US | SP R I N G 2 0 1 8 34 TABLE 3: Since 2001, there are close to one hundred surveys and censuses containing credible employment information. 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Afghanistan NRVA NRVA NRVA NRVA ALCS ALCS HIES HIES HIES Bangladesh Census Census LFS LFS LFS LFS LFS BLSS BLSS BLSS BLSS Bhutan Census Census LFS LFS LFS LFS LFS LFS LFS LFS LFS LFS LFS LFS LFS NSS (thick) NSS (thick) NSS (thick) NSS NSS NSS (thin) NSS (thin) NSS (thin) (thin) (thin) India NSS (thin) Census Census LBS LBS LBS LBS LBS NLSS NLSS Nepal Census Census LFS PSLM PSLM PSLM PSLM PSLM PSLM PIHS HIES HIES HIES HIES HIICS HIES  HIES Pakistan Census LFS LFS LFS LFS LFS LFS LFS LFS LFS LFS LFS HIES HIES HIES HIES HIES HIES Sri Lanka Census Census LFS LFS LFS LFS LFS LFS LFS LFS LFS LFS LFS LFS LFS LFS LFS LFS LFS Note: ALCS: Afghanistan Living Conditions Survey, LBS: Labor Bureau’s Employment Unemployment Survey, HIES: Household Income and Expenditure Survey, HIES (for Pakistan): Household Integrated Economic Survey, HIICS: Household Integrated Income and Consumption Survey, LFS: Labor Force Survey, NRVA: National Risk and Vulnerability Assessment, NSS: National Sample Survey, PIHS: Pakistan Integrated Household Survey, PSLM: Pakistan Social and Living Standards Measurement. The surveys in green have been used for analyses in this report. TABLE 4: Employment data is compiled from over 60 surveys. Employed Employment Public/ Total No. Unemployed Sector type Private survey week month year/usual Afghanistan 2 2 - 3 3 3 - 3 Bangladesh 8 - - 8 5 (3) 8 8 8 Bhutan 3 - 2 3 2 (1) 3 2 3 India 7 - 9 9 7 7 3 9 Nepal 3 - 2 3 1 (2) 3 1 3 Pakistan 10 12 10 19 17 (2) 19 10 19 Sri Lanka 14 - 4 17 12 (4) 17 16 17 Source: World Bank. x(y): Information for all categories from x surveys and for some categories from y surveys. -: No information J O B L E SS G ROW T H ? 35 Jobless growth? FIGURE 35: Employment information is extracted in a fully transparent and replicable way. Labor force status Inactive Employed Unemployed Job type Sector Employer Regular Agriculture Public Casual Manufacturing Private Self - employed Construction Unpaid Services FIGURE 36: How employment is measured matters. Employment rate in India by different sources Percent 60 55 50 45 40 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Modeled ILO estimate Thin rounds: weekly status Thin rounds: yearly status Thick rounds: weekly status Thick rounds: yearly status Census (year) Source: World Bank, NSS, and staff calculations. respondent was interviewed is recorded in most of the is made between ‘usual’ status and ‘principal’ status. Only the household and labor force surveys. Individual observations former is considered here. And in the Nepal Living Standards can thus be mapped to quarters, allowing to generate Survey (LSS) household activities such as fetching water and quarterly employment data, in addition to annual estimates. collecting firewood and dung, and making mats are counted However, this approach is only used in the case of surveys in as work. To ensure comparability with other data sources, which interviews were spread across space and over time in such ‘extended work’ was not considered employment for the a relatively even way. purpose of this report. A key difference in the definition of employment across Another key difference between statistical instruments is statistical instruments concerns the identification of the the recall period to which the questions refer. For example, main activity of the respondent. For example, in the Bangla- the Pakistan LFS uses a recall period of one week when asking desh HIES each respondent lists a number of activities he or respondents whether they are employed, but in the same she was involved in. Only the activity absorbing the most time country the HIES has a recall period of one month. In Sri is retained here to determine the person’s type of job, sector Lanka, some of the surveys do not specify a recall period at all of activity or institutional sector. In the India NSS, a distinction when inquiring about employment. The India NSS includes a S OU TH A S I A E CO N OM I C F O C US | SP R I N G 2 0 1 8 36 FIGURE 37: Whether extended economic The structure of employment activity is considered work affects employment rates. in South Asia Employment rate by source Percent The availability of comparable employment data across South Asia allows to construct meaningful job profiles by country. Starting with the sector of activity, it is clear 80 that agriculture still employs a majority of the working-age population across the region. Agriculture is the main stay for close to 40 percent of the working-age population in both 60 Nepal and Bhutan. In Afghanistan and India, it accounts for around half of all jobs and provides employment to almost a quarter of the working-age population. The second most important source of jobs is the services sector. Sri Lanka is the 40 only country in the region where the services sector employs more people than agriculture. In Bangladesh, 21 percent of those at work are employed in the services sector, making it 20 as important as agriculture. On the other hand, the share of the manufacturing sector is relatively low across all countries in the region ranging from 3 percent of employment in Bhu- tan to 9 percent in Sri Lanka. 0 LFS HIES LFS LSS Regular wage employment, regardless of whether it is for- Bangladesh Nepal mal or informal, is uncommon in South Asia. Regular wage Extended economic work employment does not necessarily mean a nine-to-five job, with a written contract and benefits attached. It simply means Source: Bangladesh 2015/16 LFS and 2016 HIES; Nepal 2008 LFS and 2011/12 LSS. Note: Shaded area represents individuals engaging in extended ecnonomic work, that there is a stable and predictable employment-employee including fetching water, collecting firewood and dung, making mats. relationship, and that the worker can expect to still have the job the following month. But even with this stripped-down weekly status, but it is constructed on the basis of questions definition, across South Asia only around one-tenth of the about time use successive over-half days. The yearly status, on working-age population has a regular wage job. The share is the other hand, is identified based on a specific question to higher in Bhutan, but it only reaches 16 percent. Even casual the respondent. wage work is relatively uncommon in the region. The corre- sponding share of the working-age population is highest in Because of these differences, comparing employment India and Sri Lanka, and lowest in Bhutan. As for other workers, figures across sources without ‘standardizing’ them first it is not always possible to distinguish the self-employed from can be misleading. For example, in India, data from the NSS unpaid family workers, but the combination of these two types `thin round’ survey of 2005-06 yields an employment rate of of jobs accounts for the majority of employment in the region, 55 percent using the year recall, but of only 49 percent when with the exception of Sri Lanka. Among the countries for using the week recall. Similarly, NSS data shows a decline in which a breakdown is possible, unpaid family workers account female labor force participation over time, while population for a quarter of the working-age population in Bhutan, a fifth censuses suggest that the female labor force participation in Afghanistan, and around one-tenth in India and Pakistan. rate is stable and instead the female unemployment rate has increased. In this context, relying on published data only is A significant share of regular wage employment is account- potentially confusing. ed for by the public sector. Because of data constraints, the public-versus-private breakdown cannot be computed for The large ‘gray’ area between work, unemployment and all countries. When the information is available, public sector inactivity accounts for much of the difference in employ- jobs represent less than one-tenth of total employment. The ment estimates across sources. For example, in Bangladesh exception is Sri Lanka where the share attains 15 percent; Ban- the employment rate for 2016 is 53 percent according to gladesh is at the other extreme, with only 3 percent. However the LFS, but only 44 percent based on the HIES. Removing more than half of the regular wage jobs in Sri Lanka are in ‘extended work’ brings the two rates closer together. In Nepal, the public sector. The share is also high in India and Pakistan, the employment rate for 2008 is 78 percent according to the where public sector jobs constitute around 35 percent of LFS, but 68 percent in the LSS in 2011-12. Part of the gap can regular wage jobs. Only Bangladesh has a relatively low share again be explained by ‘extended work’. of regular wage jobs in the public sector, at around 15 percent. J O B L E SS G ROW T H ? 37 Jobless growth? FIGURE 38: Agriculture and services employ the most people. Employment rate by sector Percent 80 60 40 20 0 Nepal Afghanistan Bhutan Bangladesh India Sri Lanka Pakistan Agriculture Manufacturing Service Construction Source: Afghanistan 2013/14 ALCS; Bangladesh 2015/16 LFS; Bhutan 2012 LSS; India 2011/12 NSS-Thick; Nepal 2011/12 LSS; Pakistan 2014/15 LFS; Sri Lanka 2015 LFS. FIGURE 39: Regular employment is the exception. Employment rate by type Percent 80 60 40 20 0 Nepal Afghanistan Bhutan Bangladesh India Sri Lanka Pakistan Regular employee Casual employee Self-employed worker Unpaid family worker Source: Afghanistan 2013/14 ALCS; Bangladesh 2015/16 LFS; Bhutan 2012 LSS; India 2011/12 NSS-Thick; Nepal 2011/12 LSS; Pakistan 2014/15 LFS; Sri Lanka 2015 LFS. Note: The survey design of Nepal 2011/12 LSS did not allow us to identify unpaid family workers. Therefore, this group of people are very likely to be mixed with self-employed workers. FIGURE 40: In Sri Lanka, public employment is relatively high. Employment in public sector Percent 60 40 20 0 Share of total employment Share of regular jobs Sri Lanka Pakistan India Bangladesh Source: Bangladesh 2015/16 LFS; India 2011/12 NSS-Thick; Pakistan 2014/15 LFS; Sri Lanka 2015 LFS. S OU TH A S I A E CO N OM I C F O C US | SP R I N G 2 0 1 8 38 Box 1 A simple analytical framework Macroeconomists and economists working on development look at the relationship between economic growth and employ- ment in very different ways. But their perspectives are complementary and can be easily integrated in a simple framework. By doing so it is possible to bring together the short- and long-term effects of economic growth on employment. For economists working on development, the relationship between employment rates and income per capita can be rep- resented in the form of a U-shaped curve. Countries in South Asia are all located on the left-hand side portion of that curve, where increases in income per capita are associated with declines in participation rates. Taking a linear approximation for tractability, the downward-sloping portion of the U-shaped curve can be represented as: where is the equilibrium employment rate, is total output, is population and parameter approximates the slope of the U-shaped curve around . Parameter can be expected to be negative for countries at South Asia’s development level. For macroeconomists, short-term accelerations in economic growth boost labor demand. In advanced economies the relationship is usually posited as involving the unemployment rate, but this is not a very informative indicator in developing countries, where many of the people at work are farmers or self-employed. However, for a stable labor force participation rate, the relationship considered by macroeconomist can be re-written as: where is the employment rate observed in the short-term, and parameter captures the responsiveness of employment to economic growth. Parameter can be expected to be positive. Combining the short- and long-term relationships into a single equation yields: The relative scarcity of comparable employment data in South Asia makes it difficult to estimate this equation directly. However, keeping the conceptual distinction between short- and long-term employment effects of growth, it is possible to combine different methodological approaches and estimate these effects separately. The short-term employment Pakistan do not. For the latter two countries, annual GDP can be interpolated with quarterly industrial production impos- response to growth ing the constraint that the interpolated series add up to the annual GDP totals (this is the so-called Denton method). The short-term response of employment to growth can be assessed based on quarterly employment and GDP data. Despite the fact that both the quarterly employment data Some statistical instruments, such as the Sri Lanka LFS, are and the quarterly GDP series are ‘noisy’, a positive correlation explicitly designed to generate quarterly data. For other sta- between them emerges. The strength of the correlation varies tistical instruments, the month of the interview can be relied depending on whether the GDP series are seasonally adjusted upon to disaggregate annual data by quarters. This approach or not, and also depending on the employment aggregate can be used for Bangladesh, India and Pakistan. Combining considered. The correlation coefficients are often statistically genuine quarterly employment data with constructed break- significant in the case of South Asia. They also have an intuitive downs by quarter, 123 observations on quarterly changes interpretation: depending on whether seasonally adjusted in employment can be generated from the over 60 surveys GDP series are considered or not, faster economic growth processed for this report. As for GDP data, both India and leads to either more jobs in the aggregate, or to a reallocation Sri Lanka publish quarterly series, whereas Bangladesh and of jobs away from self-employment. The significance of the J O B L E SS G ROW T H ? 39 Jobless growth? TABLE 5: Quarterly changes in employment rates are correlated with quarterly GDP growth. Between non-seasonally adjusted GDP and Between seasonally adjusted GDP and Quarterly Observations GDP total non-self self total non-self self employment employment employment employment employment employment Interpolated -0.03 0.24*** -0.30*** 0.16* 0.04 0.14 South Asia 123 and National 0.7206 0.0078 0.0006 0.0794 0.6353 0.1302 Accounts National -0.30 -0.26 -0.06 -0.11 0.04 -0.25 India 18 Accounts 0.2224 0.301 0.8191 0.6637 0.8726 0.326 -0.06 0.27** -0.37*** 0.15 -0.01 0.18 Pakistan 65 Interpolated 0.0305 0.0021 0.2299 0.9073 0.1451 0.6364 National 0.32* 0.33* -0.01 0.15 0.29 -0.2 Sri Lanka 30 Accounts 0.0821 0.0733 0.9597 0.4186 0.1176 0.3017 0.37 0.56* 0.07 0.37 0.56* 0.07 Bangladesh 10 Interpolated 0.2879 0.0946 0.851 0.287 0.0915 0.8573 Note: *** p<0.01, ** p<0.05, * p<0.10 coefficients also varies by countries, and is weakest in India’s population generated out of household surveys and labor force case. But significance levels are bound to be underestimated, surveys show more erratic movements by comparison. Third, given the significant measurement error in the series. annual changes in employment are computed for all pairs of employment points available for each country. And fourth all The conclusions are similar if a regression analysis is the annual changes in employment are divided by the annual conducted, instead of computing correlation coefficients. percentage change in GDP over the corresponding period. The key parameter in the regression analysis indicates by how much the employment rate changes for one percent- This four-step procedure is bound to lump together the age point of growth. For South Asia as a whole, the largest short- and the long-term impacts of growth on employ- coefficient is found when changes in total employment are ment. Given the many pairs of employment points, the regressed on seasonally-adjusted GDP growth rates. Then, procedure generates an array of estimates of the number for each percentage point in GDP growth, the employment of jobs created per percentage point of GDP growth, rather rate increases by a little more than 0.1 percentage points, a than a single number. Overall, 136 of these estimates can result that is statistically significant at the 10 percent level. be computed for South Asia as a whole, with the maximum This value is lower than the one usually found in advanced number of data points (70) being for Sri Lanka, and the lowest economies, but this could be expected for two reasons. First, (6) for Bangladesh. However, the dispersion of the estimates in developing countries downturns lead to more under-em- by countries is not too high, as can be seen by comparing ployment rather than to open unemployment. And second, the 25th and 75th percentiles in the distribution. For example, the data is ‘noisier’ in developing countries, which results in an it appears that Bangladesh has created between 90 and 120 attenuation of the key coefficient and a lower significance of thousand jobs per percentage point of GDP growth, and the regression compared to advanced economies. Pakistan between 310 and 410 thousand. However, from a longer-term perspective, the focus should be on the more distant pair of employment points available for each country. The overall impact of By this metric, Bangladesh generates 110 thousand jobs per percentage point of GDP growth, India 750 thousand, Paki- growth on employment stan 200 thousand, and Sri Lanka 9 thousand. More distant points in time need to be considered in order These multiple estimates can be summarized under the to assess how much employment is created overall per per- form of an ‘elasticity’, or percentage change in employ- centage point of growth. A four-step procedure is followed in ment per percentage point of GDP growth. Depending this respect. First, employment rates are computed from every on whether the mean of the median of the distribution of ‘standardized’ population census, household survey or labor estimates is considered, the elasticity of employment to GDP force survey. Second, the estimated employment rates are ap- varies between 0.2 and 0.3. Remarkably, this finding is very plied to consistent demographic estimates of the working-age much in line with the expectations of members of the South population. The advantage of using demographic series is that Asia Economic Policy Network. In the survey conducted for they are comparable over time. Estimates of the working-age this report, most respondents said that they expected one S OU TH A S I A E CO N OM I C F O C US | SP R I N G 2 0 1 8 40 Box 2 Okun’s Law in South Asia The short-term relationship between economic growth and jobs is often interpreted in connection with Okun’s Law, which posits that when growth accelerates above potential the unemployment rate falls below its ‘natural’ level. The intuition is straightforward: if growth accelerates, the demand for labor increases and, given that the labor force is stable in the short term, the unemployment rate must decline. This empirical regularity was first identified by Arthur Melvin Okun in the early 1960s for the US (Okun, 1962). Okun’s Law is central to modern macroeconomic analysis and is a key tool for policymaking (Ball et al. 2017). So far, most of the empirical research on this relationship has focused on advanced economies. Lee (2000), for example, evaluated the relationship based on postwar data for 16 advanced economies and found that while Okun’s law is statistically valid for most countries, the quantitative estimates are far from uniform. Harris and Silverstone (2001) found asymmetries in Okun’s Law for seven advanced economies and showed that the relationship between unemployment and output depends on the phase of the business cycle. Gordon (2012) showed that cyclical responses of aggregate hours and of productivity have changed sharply from those predicted by Okun’s Law. One of the few studies available for developing countries concluded that the relationship in these countries was half as strong as in advanced economies, and varied considerably across countries (Ball et al. 2016). The weakness of the rela- tionship in developing countries is not surprising: when people are too poor to afford being idle, unemployment is a poor indicator of the situation in the labor market. And the heterogeneity across countries could be anticipated, given the diverse ways in which employment (and hence unemployment) is measured. An estimation of Okun’s Law for South Asian countries, using readily available data from the International Labour Orga- nization (ILO), confirms the weakness of the relationship. The results are based on a specification in which deviations of growth from its potential are regressed on deviations of employment rates from their trend. The estimated relationship has the expected size and significance in the case of Pakistan and Sri Lanka, where one percentage point of economic growth increases the employment rate by roughly 0.16 percentage points. But the relationship is only half as strong as the one observed in Germany, and a third of that in the US. The relationship estimated for Sri Lanka and Pakistan is also weaker than in other developing countries like Russia, Brazil, or the Philippines. TABLE 6: Based on published employment data, Okun’s Law holds in Pakistan and Sri Lanka. South Asia Rest of the world Afghanistan 0.021 Germany 0.57*** Bangladesh 0.086 United States 0.72*** Bhutan 0.064 Brazil 0.14*** India -0.11 Malaysia 0.12 Maldives 0.011 Philippines 0.31*** Nepal 0.045 Russia 0.38*** Pakistan 0.16 *** Vietnam -0.089 Sri Lanka 0.17* China -0.035*** Note: The coefficients show the percentage point change in employment rates for one percentage point change in GDP growth. All regressions use annual data based on ILO estimates from 1991 to 2016 and are estimated as deviation from potential or trend (HP Filter). The coefficients in the right panel are from Ball et al. (2016). References: Ball, L., Furceri D., Leigh D. and Loungani, P. (2017), Okun’s Law: Fit at 50?, Journal of Money, Credit and Banking, 49(7):1413-1441. Ball, L., Furceri, D., Leigh, D. and Loungani, P. (2016), Does One Law Fit All? Cross-country Evidence on Okun’s Law, unpublished manuscript, International Monetary Fund, Washington DC Lee, J. (2000). The robustness of Okun’s law: Evidence from OECD countries. Journal of Macroeconomics, 22(2): 331-356. Harris, R. and Silverstone, B. (2001). Testing for asymmetry in Okun’s law: A cross-country comparison. Economics Bulletin, 5(2): 1-13. Gordon, R.J. (2010). Okun’s law and productivity innovations. American Economic Review, 100(2): 11-15. Okun, A. M. (1962). Potential GNP, its measurement and significance. Cowles Foundation, Yale University. J O B L E SS G ROW T H ? 41 Jobless growth? TABLE 7: South Asian countries have created large numbers of jobs. South Asia Bangladesh India Pakistan Sri Lanka Elasticity Jobs created by one percentage point of growth (in thousands) 25th percentile 0.10 90 400 310 5 Median 0.20 100 540 360 8 75th percentile 0.60 120 730 410 16 Mean 0.34 130 540 360 11 Long-run 0.19 110 750 200 9 Source: All comparable surveys highlighted in Table 2. FIGURE 41: Results are very much in line with expectations from regional economists. If GDP in your own country grows by 1 percent, by how much does employment grow? Percent 40 35 30 25 20 15 10 5 0 Employment Employment Employment Employment Employment decreases growth is grows but by less grows between 0.3 grows by more negligible than 0.3 percent and 1 percent than 1 percent. Source: World Bank South Asia Economic Policy Network. Note: Results are from a survey conducted for this report and are based on 78 responses from 7 countries. percentage point of growth to translate into less than 0.3 5 percentage points in both countries; but while manufactur- percent increase in employment. More than one third of ing employment increased in Bangladesh, it did not in India. the respondents actually expected negligible employment In Pakistan, structural changes in employment have been the growth, and only a quarter foresaw more than 0.3 percent most muted. Across countries, construction is the only sector growth in employment per percentage point of growth. that employed a bigger share of the working-age population in 2015 than in 2005. Employment growth in construction has been very large in some countries. The nature of the jobs Perhaps more disturbingly, the growth in regular wage created is not encouraging employment has been extremely modest across the region. Regular wage jobs are generally seen as better jobs, The ‘standardized’ employment data generated for this re- compared to farming, self-employment or casual work. But port allows analyzing how economic growth has modified the news on this front is not particularly encouraging. No the types of jobs available in South Asia. From a sectoral doubt, casual work and unpaid employment declined across point of view, it appears that structural transformation has the board, but regular wage employment did not increase been slow in many countries. As economies develop, it is in a commensurate way. The strongest expansion in regular expected that individuals will move out of agriculture into wage employment in the region was in Bangladesh, where more productive, non-agricultural employment. Such trans- the share of regular wage jobs in the working-age population formation effectively took place at a rapid pace in Bhutan, increased by 4.5 percentage points. Regular wage employ- where there was a clear shift in employment from agriculture ment also increased in Bhutan, by 2 percentage points. But to services. The transformation was slower in Bangladesh and in the other countries the share of regular wage employment India. The agricultural employment rate decreased by around increased very little. S OU TH A S I A E CO N OM I C F O C US | SP R I N G 2 0 1 8 42 FIGURE 42: Structural transformation of employment is slow in most countries Change in sectoral employment rates from 2005 to 2015 Percentage points 15 10 5 0 -5 -10 -15 -20 -25 Bangladesh Bhutan India Pakistan Sri Lanka Agriculture Manufacturing Construction Services Source: Bangladesh 2005-2015 LFS; Bhutan 2003-2012 LSS; India 2004/05-2011/12 NSS-Thick, Pakistan 2005/06-2014/15 LFS; and Sri Lanka 2006-2016 HIES. FIGURE 43: Only modest increases in regular employment. Change in employment type rates from 2005 to 2015 Percentage points 10 5 0 -5 -10 -15 -20 -25 -30 Bangladesh Bhutan India Pakistan Sri Lanka Regular Casual Self-employed Unpaid Source: Bangladesh 2005-2015 LFS; Bhutan 2003-2012 LSS; India 2004/05-2011/12 NSS-Thick, Pakistan 2005/06-2014/15 LFS; and Sri Lanka 2006-2015 LFS. Note: For Bhutan the comparison of unpaid family work between the two surveys is not comparable due to a reframing of the questionnaire. FIGURE 44: Public employment increased in India and Sri Lanka. Change in public employment rate from 2005 to 2015 Percentage points 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 Bangladesh Pakistan India Sri Lanka Source: Bangladesh 2005-2015 LFS; Bhutan 2003-2012 LSS; India 2004/05-2011/12 NSS-Thick, Pakistan 2005/06-2014/15 LFS; and Sri Lanka 2006-2016 HIES. J O B L E SS G ROW T H ? 43 Jobless growth? Employment growth is also supposed to be healthier when TABLE 8: The annual number of jobs needed it is driven by the private sector, but that is not always the depends on the target for employment rate. case in South Asia. The public sector can create only a limited amount number of jobs, especially in countries where govern- Annual jobs needed ment revenue is modest. In Bangladesh and Pakistan, the share (in thousands) of public sector employment in the working-age population Unambitious Constant Catch-up declined by around 0.5 percentage points between 2005 and 2015. In India and Sri Lanka, on the other hand, the share of Bangladesh 980 1,100 1,610 public sector employment increased during this period. And India 6,910 8,490 13,480 the increase was substantial in Sri Lanka’s case. Pakistan 1,220 1,310 2,140 Sri Lanka 40 65 130 Source: All information contained in Table 1 and Figure 1 plus the longest possible Rapid growth alone distance between comparable surveys highlighted in Table 2. is not enough If the employment rate is allowed to decrease further, Sri Having established that growth in South Asia is not job- Lanka would only need to grow by 4.6 percent per year, and less, the question is how fast does the region need to grow the other countries between 6 and 9 percent. These growth to address its job creation challenge. The answer depends rates are high, but they have precedents in South Asia’s recent on what the target for the employment rate is. One rather history. The growth rate needed to keep employment rates unambitious target would be to accept a gradual decline of constant would be higher. In Bangladesh, 1.1 million new the employment rate, as long as the decline is not faster than jobs would be required every year, in Pakistan 1.3 million, and the U-shaped curve between employment rates and living in India over 8 million. The growth rates needed to achieve standards would predict. In this case, the gap between em- such remarkable job creation would be between 6 and 11 ployment rates in South Asia and other countries at a similar percent. These growth rates are high and all above current level of development would remain constant. A slightly more performance. But conceivably they can be attained if there is ambitious target would be to keep employment rates con- a concerted effort to boost economic performance. stant at their current levels. An ambitious target could be to catch-up with the employment rates of other countries with However, growth alone will not be sufficient for employ- similar income levels over a certain period – say, over 20 years. ment rates to catch-up with those of comparable coun- tries. Even allowing for a 20-year transition period for the These three targets for the employment rate – unambi- catch-up, the number of new jobs needed every year would tious, status quo, and catch-up – result in three different be gigantic. Bangladesh would have to create over 1.6 million numbers of jobs ‘needed’ every year. Once a target em- jobs every year, Pakistan more than 2 million, and India close ployment rate is set, it can be multiplied by the forecast of to 13 million. Much smaller Sri Lanka would need to create the working-age population in the following year to obtain more than 120 thousand new jobs every year. Assuming the target level of employment. The difference between that the same job creation per percentage point of growth as target level and the current employment level is the net job before, growth rates in excess of 10 percent per year would creation ‘needed’. Setting the target for the employment be needed in all countries, and growth rates should reach rate is easy in the constant case, because it simply involves 15 percent per year in Bangladesh and 18 percent in India. maintaining the current employment rate unchanged. These rates are implausibly high, implying that rapid growth Calculations are slightly more demanding in the unambitious alone will not be enough. If South Asian countries are serious and the catch-up cases, as it becomes necessary to use an about increasing employment rates, more jobs will need to estimate of the U-shaped curve. For the unambitious target, be created for every percentage point of growth. the target employment rate is allowed to decline according to the slope of the U-shaped curve; for the catch-up case, the target employment rate is set higher to fill some of the gap with other countries. Proceeding this way, the net number of Data and economic jobs to be created in the unambitious and the constant case is policy agendas not too far off the recent experience of South Asian countries, but in the ambitious case the number is much higher than The results of the analyses above call first of all for a the region’s historic record. data development agenda. Despite substantial efforts to generate comparable employment numbers, the data used High but attainable growth rates would allow to address in this report remained ‘noisy’ and was not frequent enough. the jobs challenge in the unambitious and constant cases. Strengthening statistical systems is a priority in South Asia, S OU TH A S I A E CO N OM I C F O C US | SP R I N G 2 0 1 8 44 Box 3 How much growth is needed? Each of the three cases considered – unambitious, constant, and catch-up – involves a target employment rate for the next year. Demographic projections provide a credible estimate of the working-age population in the next year, . Multiplying the target employment rate by the predicted working-age population yields the net job creation needed to meet the target: Meanwhile, the analysis of all pairs of employment estimates available for each country had led to an assessment of the overall effect of growth on employment per country. This assessment can be summarized by the following relationship: In this expression is the growth rate of GDP and is the net number of jobs created in recent times for every percentage point of economic growth. Therefore, if the target employment rate is known, the two equations above allow comput- ing the growth rate needed to address the jobs challenge. Consider the constant case first. In this case the employment rate of next year is supposed to be the same as this year, namely : Therefore, the growth rate needed to address the jobs challenge satisfies: The unambitious and the catch-up cases are slightly more complicated to solve, as they both involve using the U-shaped curve that links employment rates with income per capita: where parameter approximates the slope of the U-shaped curve around the level of income per capita of the country, is output and is population. In the catch-up case the goal is to reduce the gap between the actual employment rate and the employment rate that the U-shaped curve would predict. Suppose that the intention is to reduce this gap over T years. The target employment rate is then: Combining this equation with the first two in the box implies: The most laborious calculation arises in the unambitious case. Here, the employment rate is allowed to decline at the speed predicted by the U-shaped curve, which implies: where is equivalent to . Again, combining the equation above with the first two equations in the box yields: J O B L E SS G ROW T H ? 45 Jobless growth? FIGURE 45: High growth alone, will not suffice to reach ambitious employment targets. Annual growth needed Percent 20 15 10 5 0 Bangladesh India Pakistan Sri Lanka Unambitious Constant Catch-up Source: All information contained in Table 1 and Figure 1 plus the longest possible distance between comparable surveys highlighted in Table 2. FIGURE 46: Informality and insufficient wage employment are the main concerns. Do you agree with the following statements regarding the labor market challenges in your country? Distribution of responses There is too much informality There is insufficient job creation There is insufficient female employment There is insufficient employment in manufacturing There is insufficient wage employment 0 20 40 60 80 100 Fully agree Somewhat agree No Source: World Bank South Asia Economic Policy Network. Note: Results are from a survey conducted for this report and are based on 78 responses from 7 countries. and some of the focus should be on labor market data. emphasized informality and insufficient job creation. In the Employment definitions and classifications that are better survey conducted for this report, multiple challenges were aligned with international practice would help. And, with the identified. But more than two thirds of the respondents exception of Pakistan and Sri Lanka, employment information fully agreed that informality and insufficient job creation should be generated more frequently. India’s recent initiative were serious challenges in their countries, with nearly all in this respect is highly welcome; it can only be hoped that other respondents agreeing somewhat with this proposition. the frequency of data points will increase in other South Asian Slightly less than two thirds of the respondents agreed that countries as well. insufficient female employment was a key challenge. About 64 percent thought that insufficient employment in manu- The results above also imply that the relationship between facturing was a key challenge and 58 percent saw insufficient growth and job creation needs to be strengthened, but wage employment as the main problem. what exactly should be done is less clear. Asked about the key employment challenges faced by their countries, Better infrastructure and greater integration with global the members of the South Asia Economic Policy Network markets are seen as the most promising strategies to S OU TH A S I A E CO N OM I C F O C US | SP R I N G 2 0 1 8 46 FIGURE 47: Infrastructure and trade are seen as most promising drivers of job creation. Would the employment response to GDP growth be stronger if: Percent 100 80 60 40 20 0 Labor Labor There was less There was There was There was more It was easier for regulations regulations competition greater better affordable workers to were made protected from imports integration with infrastructure housing in cities migrate more flexible workers more global markets internally A lot Somewhat No Source: World Bank South Asia Economic Policy Network. Note: Results are from a survey conducted for this report and are based on 78 responses from 7 countries. address these challenges. In the survey conducted for The views from the region resonate with the findings of re- this report, labor policy reform was not perceived as a cent analytical work emphasizing the need for more vibrant magic wand. Close to a third of the respondents viewed urban development and a greater export orientation. South more flexible labor markets as key to improve labor market Asia is a rapidly urbanizing region, and successful cities have a performance, but in parallel almost a quarter thought that very important role to play in economic development. Cities more protection for workers was needed. On the other hand, are the hubs connecting a country to the rest of the world, and there was general acceptance that more affordable housing they are also its engines of job creation. But urbanization in would support job creation, confirming the need for orderly South Asia has been messy. Cities are sprawling and congested, urbanization. And a stunning 70 percent of the respondents service delivery is uneven and trade logistics inefficient. South said that better infrastructure was key to strenghtening the Asian countries have also been reluctant globalizers. The region employment response to growth. This is more than twice is home to many success stories in terms of exports, but it has the number of respondents who agree with any of the other not tapped the abundance of its labor as a source of compet- options proposed, with the exception of a greater integration itiveness, in the way East Asia did. A policy focus on better with global markets, which received the second highest level cities and greater global integration could result in both faster of endorsement. economic growth and more bountiful job creation. J O B L E SS G ROW T H ? 47 Jobless growth? Box 4 Views from the region A one-day workshop on ‘Jobless Growth in South Asia?’ was jointly organized by the India Statistical Institute and the World Bank to discuss recent research on employment issues by economists from all of South Asia. The workshop took place in New Delhi on March 8, 2018. The call for papers went to the members of the South Asia Economic Policy Network, launched by the office of the Chief Economist for South Asia at the World Bank in 2017. This Network is a platform to engage more strongly with thinkers and doers across the region. Members of the network are academics at renowned universities, researchers in central banks and think tanks, and staff of policy-making units in government. Short opinion surveys have been conducted among the group for the last few editions of the South Asia Economic Focus report, to gather views on economic developments and challenges in the region. But this was the first time that a regional workshop became an integral part of the preparation of the report. A central theme of the presentations at the workshop was the pace of job creation and its long-term determinants. Some of the papers focused on structural transformation. Using data from 273 districts over a 25-year period, Subrata Kumar Ritadhi (Reserve Bank of India) and Madhur Gautam (World Bank) showed that agricultural productivity growth has had a positive and significant impact on the share of rural workers employed in the manufacturing sector; this is so for both male and female workers. Also building on a structural approach, Mohammad Akhtaruzzaman and Iftekhar Ahmed Robin (both with Bangladesh Bank) illustrated how sectoral growth patterns are likely to affect job creation and unemployment in Bangladesh toward 2021. The relationship between productivity growth and job creation was discussed as well. Relying on a growth decomposition for the period 1993-94 to 2011-12 Vinoj Abraham (Center for Development Studies, Trivandrum) conjectured that structural transformation could be a possible explanation for the perceived jobless growth in India. Structural transformation results indeed in higher productivity growth, reducing the labor requirement per unit of output. In a similar spirit, Dipti Ghosh (Jadavpur University) and Chandana Ghosh (India Statistical Institute Kolkata) used a small macro model to show how la- bor-saving technological progress and managerial changes can slow down employment growth. And Izza Aftab and Umair Mazher (both with Information Technology University, Lahore) showed that between 2010 and 2014, Pakistani districts characterized by higher assets-related income had lower employment levels. Other papers focused on short-term employment dynamics. Poongothai Venuganan and Chandranath Amarasekara (both with the Central Bank of Sri Lanka) assessed whether Okun’s Law holds in Sri Lanka. They found that the relationship be- tween growth and unemployment is weak overall, but has strengthened over time. Debjyoti Majumdar (Indian Institute of Management Indore) and Chetan Ghate (India Statistical Institute Delhi) discussed how macroeconomic policy can have adverse employment effects. Using a model with job search and matching, they showed that employment targeting by the authorities can result in higher unemployment and increase the size of the informal sector. The employment consequences of foreign trade featured prominently in the discussion. Christian Viegelahn (International Labour Organization) provided evidence that differences in the workforce size between trading and non-trading firms are larger in South Asia than elsewhere. In addition, South Asian trading firms tend to have a more educated workforce than their non-trading counterparts. Biswajit Nag and Saloni Khurana (both with India Institute of Foreign Trade, Delhi) found that between 2008-09 and 2013-14, employment growth in exporting industries was higher than in the manufacturing sector as a whole. And Soumyatanu Mukherjee (Indian Institute of Management Kozhikode) used a general equilibrium model allowing for different transmission channels to analyze the effect of trade liberalization on net job creation and wages. Last but not least, several of the papers focused on employment informality. P.P. Krishnapriya (India Statistical Institute Delhi) and Radhicka Kapoor (Indian Council for Research on International Economic Relations, Delhi) reported evidence of increasing employment informality among formal firms in India’s manufacturing sector. Using enterprise level data between 2000-01 and 2013-14, they found that the largest increases in employment informality were among large and capital-inten- sive firms. But they also found that the wage differential between regular and contract workers has narrowed over time. This informalization process was also highlighted in a study along similar lines by Rubina Verma (Georgetown University) and Rahul Giri (International Monetary Fund). S OU TH A S I A E CO N OM I C F O C US | SP R I N G 2 0 1 8 48 49 PHOTO: World Bank South Asia country briefs Afghanistan 52 Bangladesh 55 Bhutan 58 India 60 Maldives 62 Nepal 65 Pakistan 68 Sri Lanka 70 South Asia country briefs Afghanistan The political and security context continues to shape 2017 Afghanistan’s socio-economic outcomes. Forthcoming elections are expected to depress economic activity in the short term. Population, million 35.4 Deficient rainfall in the ongoing wet season along with GDP, current US$ billion 20.5 unprecedented levels of conflict-induced displacement will GDP per capita, current US$ 580 likely exacerbate the deterioration in welfare since the 2014 Source: World Bank WDI. Note: GDP (2017) is estimate. security transition. Business sentiment remains suppressed but recovered modestly in 2017. Stronger revenue performance and ongoing expenditure management reforms have improved the fiscal position over the past two years. Contributions to real GDP growth  Percent 15 10 5 0 -5 -10 -15 2015 2016 2017 (f) 2018 (f) 2019 (f) 2020 (f) Government consumption Private consumption Investment Net exports Statistical discrepancy Real GDP growth Source: Central Statistics Organization and World Bank staff estimates. Note: (f) = forecast. Recent economic developments security, fluid political situation, and a looming humanitarian crisis driven by internal displacement, refugee repatriation Afghanistan continues to face significant challenges to and food security concerns, feed into each other in a vicious its economic and social development. Civilian casualties cycle. The fragile security situation reduces the appropriability in the ongoing conflict reached the highest levels since of gains from economic activity, increases uncertainty and 2002. In 2017, internal displacement was at unprecedented elevates the cost of doing business. On the supply side, levels - more than 1.7 million Afghans or 5 percent of the agricultural output remained largely unchanged in 2017, total population is internally displaced due to conflict. The and economic growth was mostly driven by services. On the situation is further exacerbated by an influx of more than 2 demand side, a lack of economic opportunities has depressed million returning refugees since 2015 due to push factors incomes thereby reducing private consumption from close to from neighboring countries. 75 percent of GDP in 2015 to less than 74 percent in 2016. Growth is projected to have reached 2.6 percent in 2017, Meanwhile, the United Nations Office on Drugs and only slightly higher than 2.2 percent in 2016. Worsening Crime estimates that the poppy production almost S OU TH A S I A E CO N OM I C F O C US | SP R I N G 2 0 1 8 52 doubled to 9000 tons in 2017 and the area under poppy welfare and food security, compounded by widespread inse- cultivation increased to 328 thousand hectares – over curity, demographic pressures, a low human capital base, and 63 percent growth since last year and the highest ever the lack of productive employment. Industry and services are recorded. This increase was due to the absence of diseases expected to grow at 3.0 percent and 3.2 percent respectively, that impacted the 2016 crop, reduced government control driven by slightly improved investor confidence. Inflation is in some opium-growing areas, and increased uptake of fer- expected to remain close to the 2017 level, assuming a con- tilizers, and pesticides by opium farmers. Overall it reflects tinued current account surplus with stable donor aid flows weakening rule of law, lack of other economically viable and subdued domestic demand. agriculture or employment opportunities, and limited ac- cess to finance and markets. Population growth continues The current account surplus is projected to gradually nar- to outstrip economic growth, with adverse welfare and row from 4.1 percent of GDP in 2017 to around 1 percent poverty implications. GDP per capita has dropped from USD of GDP by 2020, driven by a gradual decline in foreign aid 691 in 2012 to USD 572 in 2016. inflows. Average inflation in 2017 reached 5 percent, slightly above Domestic revenue growth is expected to moderate in 4.4 percent in 2016, driven by higher food prices and de- 2018, as recent revenue reform efforts encounter dimin- preciation during the early period of the year. After peaking ishing returns. The fiscal account is expected to stay close at 7.5 percent in June, inflation slowed steadily to 3.1 percent to balance, on account of donor grants reaching budgeted in December as the exchange rate stabilized. levels and improved expenditure management. The 2018 budget was set based on actual expenditures in previous Official exports declined by 3 percent while official im- years to address the recent pattern of over-budgeting and ports increased by around 15 percent (y-o-y) in the first under-execution. half of 2017. The annual trade deficit is projected at around 33 percent of GDP, and has been largely financed by foreign aid inflows. Gross foreign exchange reserves remained at Risks and challenges comfortable levels – USD 7.7 billion as of August 2017, more than 7 percent higher than in end-2016, and equivalent to In the short-term, Afghanistan faces continued slow- more than 10 months of imports. down, likely to be exacerbated by low rainfall and the potential disruption from upcoming elections, with The fiscal position remains nearly balanced, with donor continuing negative impacts on poverty and welfare. grants being disbursed as planned and domestic revenues Declining per capita incomes, internal displacement, and surpassing targeted levels for the third consecutive year. the influx of refugee returnees is putting huge pressure on Domestic revenues (excluding one-off revenues) reached urban areas in particular. Lack of livelihood opportunities, Afs 166.7 billion in 2017 (18 percent increase y-o-y), equal to land, shelter, and access to basic services could exacerbate 11.4 percent of GDP, up from 10.5 percent of GDP in 2016. pre-existing risks of conflict. Expenditures moderated marginally in real terms, remaining close to previous year’s nominal level. Fiscal space is limited. An important short-term priority is to maximize the impact of public expenditure, including through: i) improving budget execution and the overall ef- Outlook ficiency of public expenditure; ii) reorienting expenditure towards sectors that directly stimulate domestic demand, Projected growth has been revised downwards to 2.2 including labor-intensive and community-based schemes; percent in 2018, reflecting expected contraction in agri- and iii) moving an increased share of aid on-budget, to cultural output. Precipitation in the wet season (October maximize alignment with government priorities and local to May) is expected to be around 25 percent lower than economic impacts. Boosting private sector confidence historical averages. This combined with higher average winter through continued implementation of planned reforms is temperatures will adversely impact snow accumulation – also vital. critical for water supply to agriculture. Expected contraction in agriculture will likely further weigh on the poverty situa- Over the longer-term, Afghanistan faces interlinked tion. Despite its declining GDP contribution in recent years, growth, fiscal, and poverty challenges. New sources of agriculture remains an important source of livelihoods for growth are needed to generate revenues, foreign exchange, the rural poor, while supplying low-cost basic food items and and jobs. Agriculture, extractive industries, and regional inputs to manufacturing. Slow agriculture growth threatens connectivity offer strong growth prospects but rely on tight J O B L E SS G ROW T H ? 53 South Asia country briefs 2015 2016 2017 (est) 2018 (f) 2019 (f) 2020 (f) Real GDP Growth, at Constant Market Prices 1.3 2.4 2.6 2.2 2.5 3.3 Private Consumption 6.8 -0.2 4.2 2.9 2.7 4.4 Government Consumption -0.5 0.3 1.5 1.9 10.2 -11.2 Gross Fixed Capital Investment 4.8 -6.0 6.3 -2.1 -4.7 9.2 Exports, Goods and Services 2.4 -0.3 7.0 8.0 8.0 8.0 Imports, Goods and Services 4.6 25.8 8.0 1.5 1.5 5.0 Real GDP Growth, at Constant Factor Prices 1.0 2.1 2.6 2.2 2.5 3.3 Agriculture -5.7 6.0 1.4 -3.6 2.5 2.5 Industry 4.2 -0.8 1.8 3.0 1.5 2.5 Services 1.9 2.2 3.4 3.8 3.0 3.9 Inflation (Consumer Price Index) -0.7 4.4 5.0 5.0 5.0 5.0 Current Account Balance (percent of GDP) 4.6 4.2 4.1 2.3 1.9 1.1 Financial and Capital Account (percent of GDP) 0.0 0.0 0.0 0.0 0.0 0.0 Net Foreign Direct Investment (percent of GDP) 0.8 0.3 0.2 0.1 0.1 0.1 Fiscal Balance (percent of GDP) -1.2 -0.2 -1.7 0.2 -1.3 0.0 Debt (percent of GDP) 9.1 6.5 5.7 5.8 6.6 5.4 Primary Balance (percent of GDP) -1.2 -0.1 -1.7 0.3 -1.3 0.0 Source: World Bank. Note: (est) = estimate, (f) = forecast. prioritization of available fiscal resources and sound public shortfalls in the disbursement of pledged aid would imme- investment management processes. Given Afghanistan’s diately strain the fiscal position, undermine mobilization continued aid dependence (domestic revenues covered only of new sources of growth, and forestall progress towards around 47 percent of total expenditures in 2017), delays or self-sufficiency, growth, and poverty-reduction. S OU TH A S I A E CO N OM I C F O C US | SP R I N G 2 0 1 8 54 Bangladesh Industrial and services growth remained resilient, but financial 2017 sector vulnerability increased. Notwithstanding a recovery in Population, million 164.9 exports and remittances, the external current account deficit GDP, current US$ billion 249.7 swelled in the first half of FY18, driven by a surge in imports. Fiscal outturns remained below budget targets and monetary GDP per capita, current US$ 1515 Source: World Bank WDI. policy has been accommodative. Growth is projected at 6.5 percent while macro stability may be challenged in FY19. Downside risks pertain to solvency of banks and the run up to elections elevating instability and policy uncertainty.  Contributions to real GDP growth Percent 10 8 6 4 2 0 -2 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 (f) Final consumption Gross fixed investment Net export Statistical discrepancy Real GDP growth Source: Bangladesh Bureau of Statistics (BBS) and World Bank staff estimates. Note: (f) = forecast. Recent economic developments half of FY18. Monetary growth has been restrained below nominal GDP growth, but supply shocks have accelerated Officially reported output growth rose to 7.3 percent in food inflation from 6 percent in FY17 to 7.1 percent in the FY17, up from 7.1 percent in the preceding fiscal year, driv- first half of FY18. A liquidity crunch in the banking system en by both services and manufacturing. On the demand has put upward pressure on deposit and lending rates. side, private consumption and investment contributed, while Non-performing loans remain a major concern for financial weak exports and strong imports dragged growth. Private stability. investment stagnated as a percentage of GDP. Official growth figures are almost exclusively based on production statistics, The sum of current and capital account turned into a which are often not very reliable. While incomes are certainly USD 422 million deficit in July-December 2017, com- increasing, they may not do so as rapidly as one would infer pared with over USD 2 billion surplus during the same from the official growth statistics. period in 2016. This was driven by an increase in the current account deficit from USD 1.5 billion in FY17 to USD With 5.4 percent, inflation in FY17 was at its lowest level 4.7 billion in the first half of FY18, primarily due to surge in five years, but it increased to 5.8 percent in the first in imports. Consequently, the nominal taka-US dollar rate J O B L E SS G ROW T H ? 55 South Asia country briefs has tended to depreciate. Bangladesh Bank’s intervention Risks and challenges to smoothen the exchange rate adjustment eroded foreign exchange reserves by more than USD 1.5 billion in the first The downside risks to the outlook include a revival of eight months of FY18. political unrest in the run-up to the elections, the recovery of exports and remittances running out of steam, and a Fiscal outturn in the first half of FY18 differed markedly failure to improve corporate governance in the banking from the original budget. A large underperformance in system. A surge in private credit growth could deepen the spending offset a revenue shortfall, thus containing the banking sector’s problems related to non-performing loans. deficit. Public debt increased modestly to 32.1 percent The quasi-fiscal deficit could rise should state owned enter- of GDP. However, excessive reliance on relatively more prises experience large losses. Export demand and remittanc- expensive nonbank sources of domestic financing has es could surprise on the upside due to stronger demand from continued. North America, Europe or the GCC economies. Outlook Sustaining the development progress requires not just high growth, but also that the growth delivers income gains for poor or near-poor households. Increasing job-oriented growth Growth is projected to remain resilient. Output growth in by accelerating the reform momentum, while avoiding reversal FY18 is expected to be around 6.5 percent, driven by indus- of reforms (for example, Banking Companies Act, VAT Law), is try and services. Exports will grow faster than last year, in a key near-term challenge. Taking advantage of the prevailing which exports grew 7.1 percent driven by garments, bene- but fading tailwinds (low international commodity prices, fitting from a recovery in global trade. Remittances grew by comfortable foreign exchange reserves) could help build greater 12.5 percent, driven by increases from the UK, US and GCC economic resilience. This means focusing policy on regulatory countries, in the first half of FY18 and the turnaround in reforms, better infrastructure management, and skill develop- remittances will continue as GCC economies benefit from ment to raise the economy’s jobs oriented growth potential. higher oil prices and incentives for remitting through infor- mal channels weaken. Investment will maintain a growth Exchange rate flexibility can mitigate external risks. The of 8 to 9 percent. Bangladesh economy will remain exposed to global uncer- tainties and external shocks and the Bangladesh Bank must Inflation is projected to increase as global commodity maintain sufficient foreign exchange reserves. Weaker than prices pick up. A possible overheating of the economy driven projected remittances growth and export demand, com- by an expansionary fiscal policy and election induced rise modity price spikes, and large lumpy imports could reduce in private expenditures, may add to inflationary pressures. coverage considerably. The Bangladesh Bank should allow Monetary accommodation will continue. Growing import the level of the nominal exchange rate to adjust as needed to payments are expected to keep the current account in deficit, preserve reserve buffers. which is manageable with a flexible exchange rate. A large shortfall in revenue due to the jettisoning of the implemen- Getting close to the overambitious FY18 revenue targets tation of the new VAT law and additional pressures on expen- will require harnessing efficiency gains from ensuring ditures due to food imports, expanded export subsidies, bank compliance improvements, streamlining tobacco taxes, recapitalization exceeding the budgetary provisions, or the and rationalizing tax incentives. Expenditure saving can Rohingya crisis could lead to overshooting the 5 percent of be harnessed by reducing low priority expenditures in the GDP deficit target. recurrent and capital budget. S OU TH A S I A E CO N OM I C F O C US | SP R I N G 2 0 1 8 56 2015 2016 2017 2018 (f) 2019 (f) 2020 (f) Real GDP Growth, at Constant Market Prices 6.6 7.1 7.3 6.5 6.7 7.0 Private Consumption 5.8 3.0 7.4 5.5 5.5 5.6 Government Consumption 8.8 8.4 7.8 8.0 8.4 8.8 Gross Fixed Capital Investment 7.1 8.9 10.1 11.9 10.5 10.2 Exports, Goods and Services -2.8 2.2 -2.3 7.5 7.2 7.2 Imports, Goods and Services 3.2 -7.1 2.9 14.0 10.5 9.0 Real GDP Growth, at Constant Factor Prices 6.5 7.2 7.2 6.5 6.7 7.0 Agriculture 3.3 2.8 3.0 3.3 3.1 3.1 Industry 9.7 11.1 10.2 9.4 9.5 9.6 Services 5.8 6.2 6.7 5.7 5.9 6.3 Inflation (Consumer Price Index) 6.4 5.9 5.4 5.9 6.2 6.2 Current Account Balance (percent of GDP) 1.5 1.9 -0.6 -2.8 -2.3 -0.9 Financial and Capital Account (percent of GDP) 1.2 0.7 1.8 2.8 1.6 1.1 Net Foreign Direct Investment (percent of GDP) 0.9 0.6 0.7 0.9 1.0 0.9 Fiscal Balance (percent of GDP) -3.9 -3.8 -5.0 -5.4 -5.1 -5.1 Debt (percent of GDP) 31.5 31.2 32.1 35.1 37.1 39.0 Primary Balance (percent of GDP) -2.1 -1.9 -3.2 -3.5 -2.9 -2.6 Source: World Bank. Note: (f) = forecast. J O B L E SS G ROW T H ? 57 South Asia country briefs Bhutan Bhutan maintained solid growth and macroeconomic stability 2017 during 2016/17. However, delays in hydropower construction are likely to lower growth prospects over the medium term. Population, million 0.8 The fiscal deficit is likely to reduce over the projected period GDP, current US$ billion 2.7 because of lower public capital expenditures during the initial GDP per capita, current US$ 3276 years of the 12th five-year plan (FYP) 2018-23. Source: World Bank WDI.  Contributions to real GDP growth Percent 8 6 4 2 0 2014 2015 2016 2017 2018 2019 Agriculture Industry Services Real GDP growth Source: National Statistics Bureau, Royal Monetary Authority, Ministry of Finance and World Bank forecasts. Recent economic developments deficit elevated at 23 percent of GDP in 2016/17. The deficit was almost fully financed by loans from India. As a result, GDP growth in 2016/17 is estimated at 7.4 percent, about as of November 2017, gross international reserves remained 1 percentage point higher than the last estimate. During comfortable at USD 1.2 billion, equivalent to 11 months of the year, growth was driven by the hydropower sector, a imports of goods and services. good agricultural harvest and the services sector (especially financial services, hotels and restaurants, and transportation). The ngultrum, pegged to the Indian rupee, appreciated On the demand side, gross fixed capital formation, primarily slightly in the second half of 2017. With stable non-food in hydropower and government financed infrastructure proj- prices and nominal effective exchange rate appreciation, the ects, supported output expansion. Consumer Price Index (CPI) decelerated from 5.8 percent in April 2017 to 3.3 percent in December. The introduction of To support the last year of the implementation of the the Goods and Services Tax (GST) in India in July 2017 did not 11th FYP, the government boosted spending, raising the have a significant impact on prices in the Bhutanese economy, fiscal deficit from 1.1 percent of GDP in 2015/16 to an although impact on growth and trade is yet unknown. The estimated 3.3 percent in 2016/17. As a result, public debt financial sector remained sound with the risk weighted capital exceeded 100 percent of GDP in 2016/17. High imports to adequacy ratio at 16.3 percent in September 2017, above the finance increased government spending as well as con- minimum requirement of 12.75 percent. The gross non-per- struction of hydropower projects, kept the current account forming loan ratio stood at 14.4 percent in September 2017. S OU TH A S I A E CO N OM I C F O C US | SP R I N G 2 0 1 8 58 Outlook Risks and challenges Economic growth is projected to average 6 percent a There are four key risks facing the Bhutanese economy:(a) year over the medium-term largely supported by the given the size of hydropower projects relative to the size of on-going hydropower projects and the services sector, the economy, any further delays in hydropower construction especially tourism. However, downside risks to growth will negatively affect the economy through lower exports remain, particularly from the delay in the completion of and revenues; (b) with sustained growth, donor financing two mega hydropower projects and the general elections in Bhutan is getting scarce while domestic debt markets are scheduled in the summer of 2018. In addition, lower capital not yet developed. Limited financing sources could constrain spending during the first few years of the new 12th FYP will government spending and negatively affect growth and also impact growth. It will however help reduce the fiscal development; (c) the upcoming 2018 general election could deficit to -0.9 percent by 2019/20. With the completion lead to policy uncertainty which could impact growth and of the Mangdechhu hydro project, exports are likely to investments; and (d) adverse weather events could negative- increase while imports will decline because of lower public ly impact the economy through lower electricity generation capital spending. This will help narrow the current account from existing hydropower plants and lesser tourist traffic. In deficit to 12 percent of GDP by 2019/20 and reduce external terms of longer-term challenges, the country needs a vibrant debt to 89 percent. job creating private sector. 2015 2016 2017 (est) 2018 (f) 2019 (f) 2020 (f) Real GDP Growth, at Constant Market Prices 7.3 7.4 5.8 5.4 6.0 8.7 Private Consumption 3.4 3.7 -2.0 0.8 7.0 9.6 Government Consumption 7.3 4.6 8.5 6.1 0.6 8.8 Gross Fixed Capital Investment 14.1 7.2 1.8 -0.6 3.5 3.5 Exports, Goods and Services -2.7 -2.0 -1.4 -2.0 6.3 4.4 Imports, Goods and Services 3.4 -2.4 -10.3 -11.5 1.7 0.4 Real GDP Growth, at Constant Factor Prices 7.8 7.5 5.9 5.4 6.0 8.7 Agriculture 4.3 3.9 4.5 3.7 2.8 2.8 Industry 7.5 5.7 5.4 5.0 4.8 12.1 Services 9.2 10.7 6.7 6.3 8.1 6.9 Inflation (Consumer Price Index) 3.3 4.3 5.0 5.0 5.0 5.0 Current Account Balance (percent of GDP) -29.3 -24.7 -21.7 -17.5 -11.7 -11.4 Financial and Capital Account (percent of GDP) 39.9 23.1 14.3 13.6 9.5 11.7 Net Foreign Direct Investment (percent of GDP) 0.4 -0.6 1.0 1.2 1.5 1.4 Fiscal Balance (percent of GDP) -4.6 -3.3 -2.4 -0.7 -0.9 -0.9 Debt (percent of GDP) 118.4 102.8 94.6 87.8 84.1 81.8 Primary Balance (percent of GDP) -3.1 -2.0 -1.3 1.1 0.8 0.9 Source: World Bank. Note: (est) = estimate, (f) = forecast. J O B L E SS G ROW T H ? 59 South Asia country briefs India India’s economy has recovered from the impact of the twin 2017 policy events – demonetization and GST. Growth is likely to Population, million 1341.7 stabilize and reach 7.5 percent by FY 19/20. While the pace GDP, current US$ billion 2474.6 of consolidation moderated, public finances remain stable. GDP per capita, current US$ 1844 Source: World Bank WDI. Real GDP growth  Percent 10 8 6 7.4 4 2 0 2014Q1 2014Q2 2014Q3 2014Q4 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q4 2018Q1 2018Q2 2018Q3 GDP growth before GDP growth after Average GDP growth between Q3 2016-17 Q3 2016-17 Q1 2014 and Q3 2017 Sources: Indian Central Statistics Office. Recent economic developments averaging 3.4 percent between April 2017 and January 2018. While momentum has picked up since July 2017, following India’s economy has bottomed out from the deceleration rising global crude oil and domestic food prices, inflation is ex- caused by one-time policy events such as demonetization pected to remain within the target range in the medium-term. and GST introduction. Real GDP growth has accelerated The Reserve Bank of India maintained a neutral policy stance to 6.5 and 7.2 percent in Q2 and Q3 FY17/18, with private and held rates at 6 percent since Q2 FY17/18 after some easing consumption remaining its main driver. While investment in earlier quarters. Despite a decline in real lending rates, credit growth picked up and grew at 12 percent year-on-year in Q3 growth remains subdued and burdened by the prevalence of FY17/18, investment rates remain below levels experienced non-performing assets in the banking sector. before the financial crisis. Services accelerated further during The current account and merchandise trade deficit moved FY17/18, with sectoral value-added growing at 7.7 percent in tandem and widened due to strong import growth. in Q3 FY17/18. In contrast, agricultural growth decelerated Exports remain sluggish and, constrained by temporary to 2.7 percent growth during the summer, driven by uneven working capital constraints after GST implementation and rainfall and a high base effect. Growth in manufacturing and existing structural weakness in competitiveness, were out- construction, most affected by GST and demonetization, paced by imports. Capital inflows increased in early FY17/18 accelerated to 8.1 and 6.8 percent growth during Q3 FY17/18. due to strong portfolio inflows. FDI remained stable. Reserves reached an all-time high of USD 421 billion or 11 months Inflation remained within a 4 (+/-) 2 percent range since of imports in January 2018. The real effective exchange rate the adoption of inflation targeting by the central bank, appreciated by 6.9 percent during 2017. S OU TH A S I A E CO N OM I C F O C US | SP R I N G 2 0 1 8 60 Public finances remain stable, though the pace of consoli- bound in the medium term. The current account deficit dation has moderated. The federal government’s fiscal defi- is projected to widen moderately, with export and import cit reached 3.5 percent of GDP, missing its fiscal deficit target growth accelerating in line with increasing global trade in FY17/18 by 0.3 percentage points, due to compensation volumes. to the states for GST revenue shortfalls. Capital expenditures declined marginally in FY17/18. While GST collections have The fiscal outlook is sustainable. India’s general government yet to stabilize, tax collections and one-time disinvestment fiscal deficit is projected to decline in the medium term. The receipts increased in recent quarters, compensating for a de- implementation of GST may provide an additional impetus to cline in non-tax revenue. Subnational fiscal deficits have risen revenue collections in the medium-term. States’ fiscal deficits in recent years because of assumption of contingent liabilities. could rise in the near-term due to increasing pressures from General government debt has declined for nearly a decade to contingent liabilities, such as debt accumulated by the power 69.3 percent in FY16/17, and is considered sustainable. sector and measures to provide agricultural debt relief. Outlook Risks and challenges Growth has bottomed out and is expected to stabilize at Two crucial engines of growth have underperformed. 7.5 percent in the medium-term. GDP growth is projected First, private investment has been low compared to pre-crisis at 6.7 percent during FY17/18. A further acceleration to 7.5 levels, driven by factors that constrain credit supply and percent by FY19/20 is dependent on a sustained recovery in investment opportunities. Second, exports have slowed and private investments, which is expected to be supported by India’s share in world trade has stagnated. While external con- policy measures that improve the investment climate. Private ditions seem to be turning more supportive of growth, India’s consumption will remain the primary driver of growth, with ability to leverage these will depend on a sustained revival of the services sector and increasingly the industrial sector investments and exports. The fiscal outlook is sustainable, but leading production growth. state and central finances face risks emanating from salary revisions in the civil service, possible realization of contingent Inflation is projected to remain within the target range of liabilities from stressed bank balance sheets and extension of 4 (+/-) 2 percent, with oil prices projected to remain range further farm loan waivers. 2015 2016 2017 (est) 2018 (f) 2019 (f) 2020 (f) Real GDP growth, at Constant Market Prices 8.2 7.1 6.7 7.3 7.5 7.5 Private Consumption 7.4 7.3 6.8 7.9 7.6 7.6 Government Consumption 6.8 12.2 10.9 10.2 9.8 9.8 Gross Fixed Capital Investment 5.2 10.1 6.7 5.5 6.8 6.8 Exports, Goods and Services -5.6 5.0 4.0 5.7 6.8 7.0 Imports, Goods and Services -5.9 4.0 6.0 5.3 6.5 6.2 Real GDP Growth, at Constant Factor Prices 8.1 7.1 6.6 7.1 7.3 7.3 Agriculture 0.6 6.3 3.2 2.7 2.7 2.7 Industry 9.8 6.8 4.9 6.8 7.0 6.9 Services 9.6 7.5 8.5 8.5 8.6 8.7 Inflation (Consumer Price Index) 4.9 4.5 3.9 4.1 3.9 3.9 Current Account Balance (percent of GDP) -1.0 -0.7 -1.2 -1.6 -1.9 -2.0 Financial and Capital Account (percent of GDP) 1.5 0.1 0.7 1.2 1.5 1.7 Net Foreign Direct Investment (percent of GDP) 1.6 1.5 1.1 1.4 1.6 1.8 Fiscal Balance (percent of GDP) -7.3 -6.4 -5.8 -5.7 -5.6 -5.6 Debt (percent of GDP) 69.4 69.1 69.1 67.7 65.9 64.1 Primary Balance (percent of GDP) -2.6 -1.5 -0.9 -0.9 -1.0 -1.0 Source: World Bank. Note: (est) = estimate, (f) = forecast. Projections for 2017-18 are based on incomplete quarterly profile for the years FY15-16 to FY17-18, as released by Central Statistics Organization. A full and consistent quarterly profile is due to be released in end-May and data are expected to be revised thereafter. J O B L E SS G ROW T H ? 61 South Asia country briefs Maldives Growth and a pick-up in tourism are expected to continue to 2017 drive growth. The government has succeeded in containing Population, million 0.4 current fiscal expenditure to create space for capital GDP, current US$ billion 4.6 expenditure, but the level of public debt is projected to rise further and foreign exchange reserves recovered slightly but GDP per capita, current US$ 10468 are still low. A 45-day state of emergency from February 5 Source: World Bank WDI. to March 22 led to arrests, protests and widespread travel advisories. While the impact on tourism is not yet clear, it may have a negative impact on growth, fiscal revenue and the current account. Meanwhile, Presidential elections in September will add further uncertainty. Fiscal balance and debt level  Percent of GDP Percent of GDP 50 64 40 62 30 60 20 58 10 56 0 54 -10 52 -20 50 2011 2012 2013 2014 2015 2016 2017 Overall fiscal balance Total revenues Total expenditures Public debt (rhs) Source: Ministry of Finance and Treasury and World Bank estimates. Note: (rhs) = right hand side. Recent economic developments removal of food subsidies and the pass-through of ris- ing electricity prices. It is expected that fast price rises of Construction has been the main driver of growth, growing at food and beverages (5.6 percent in 2017) and of rents (4.6 an average of 19 percent in 2015-17. After peaking at 10.1 per- percent) has hit Maldivian households particularly hard. In- cent growth in 2013, the tourism sector slowed down between flation was higher in the atolls, with food prices rising even 2014 and 2016, due to a slowdown in tourist arrivals especially more significantly. This may have affected poor households from China and Russia. Tourism bed night growth started to even further, since the uptake of the cash transfer to com- recover in 2016 and reached 10.8 percent in 2017. Bank staff esti- pensate for the partial removal of the food subsidies was mates that real GDP growth in 2017 remained around 6.2 percent limited so far. as in 2016, below the government’s projection of 6.9 percent. The current account deficit widened sharply from 3.2 CPI inflation increased from below 0.5-1 percent in 2015 percent in 2014 to an estimated 21.4 percent of GDP in and 2016 to 2.8 percent in 2017, reflecting the partial 2017, driven by the large increase in investment-related S OU TH A S I A E CO N OM I C F O C US | SP R I N G 2 0 1 8 62 imports, with FDI inflows reflecting investment into open- sector. If a significant negative shock to tourism bed nights ing 13 resorts in 2017, and project loan disbursements into materializes, it may lead to a reduction in fiscal revenue, tour- large infrastructure projects. Thanks to a USD 250 million ism exports and activity in the tourism and ancillary sectors. sovereign bond issuance, gross official reserves recovered This may require a fiscal adjustment to rebalance the fiscal from USD 467 million at end-2016 to USD 586 million at end- accounts and the balance of payments. 2017, although usable reserves (after netting out short-term foreign currency liabilities to domestic banks) are only USD A reduction in tourism may also likely have a negative 206 million, equivalent to 1.1 months of goods imports. impact on employment, as Maldivians face strong com- petition from a relatively cheaper foreign workforce for The government has made progress in rebalancing fiscal low-skilled jobs and a relatively better educated foreign expenditure to accommodate increased capital expendi- workforce for high-skilled jobs. The Maldives face other risks ture. The fiscal balance shifted from a 10.6 percent of GDP that may impact macroeconomic stability. Other risks stem deficit in 2016 to a 2.5 percent of GDP deficit in 2017, driven from exogenous factors such as a downturn in global econ- mainly by a reduction in public investment from 10.9 percent omy, concerns about global terrorism, health pandemics, or of GDP in 2016 to 8.2 percent of GDP 2017, and a reduction in natural disasters that may also impact tourism. Another is a spending on food subsidies and on the Aasandha health care risk of increasing global commodity prices (for example, fuel system. Excluding the Public Sector Investment Program, the prices) that can impact the economy given its heavy reliance underlying current fiscal balance went from a deficit of 2.0 on imports. There is also a concern about fiscal slippages, es- percent of GDP in 2015 to an estimated surplus of 5.7 percent pecially due to delays in controlling current expenditure and of GDP in 2017, reflecting revenue increases and current the realization of contingent liabilities through guarantees. expenditure reforms. Public debt excluding guarantees is estimated to have Risks and challenges reached 61.9 percent of GDP, an increase from 59.7 per- cent of GDP in 2016, driven by external projected-related The immediate challenge is dealing with the macro-fiscal borrowing and the sovereign bond, while domestic T-bills impact of the state of emergency and travel advisories. were redeemed. Structural challenges include improving medium-term fiscal sustainability by addressing key expenditure drivers in the budget. These include increasing the efficiency of spending Outlook on Aasandha and replacing the electricity subsidies by a tar- geted cash transfer to help poor families pay electricity bills. In the baseline scenario, growth is expected to be driven It is also important to improve budget credibility by making by construction and by tourism arrivals, facilitated by the ministry and agency budget ceilings binding. opening of new resorts in 2017. The current account is projected to narrow gradually to 19.3 percent of GDP by 2020 The recent public-sector employment freeze was positive as new capital investment projects are gradually tapering off. from a fiscal perspective. However, it may put pressure on Reserve coverage is projected to remain weak. Despite the the absorption capacity of the Maldivian labor market, since one-off impact of promised civil service wage increases, the public sector employment is the main sector of employment fiscal deficit is projected to narrow gradually as public invest- of 25 to 64-year-old Maldivians, and the working age pop- ment projects are tapering off. Public debt is projected to rise ulation is increasing. It is critical to foster private sector job to 2020 and peak soon after. The recent World Bank-IMF Debt creation, since the main drivers of growth, construction and Sustainability Analysis assessed Maldives’ risk of external debt resort tourism, are highly reliant on foreign labor. distress as high, due a widening current account deficit, low international reserves, pipeline of guarantees, and rapid debt In this context, the consolidation of population from buildup. vulnerable islands and atolls to larger islands in Greater Malé, while also reducing pressure on Malé, is a country However, the immediate outlook is highly uncertain given priority. If successful, it may eventually allow for new forms the probable impact of the February-March state of emer- of economic activity in line with the aspirations of Maldivian gency on the tourism and non-tourism sector, which may youth and provide employment, improve the quality of public not be visible in the data immediately. Widespread travel services such as health and education, and make the country advisories may lead to cancellations affecting the tourism more resilient to climate change. J O B L E SS G ROW T H ? 63 South Asia country briefs 2015 2016 (est) 2017 (f) 2018 (f) 2019 (f) 2020 (f) Real GDP Growth, at Constant Market Prices 2.2 6.2 6.2 5.5 4.5 4.9 Real GDP Growth, at Constant Factor Prices 2.8 6.0 6.2 5.5 4.5 4.9 Agriculture -0.5 1.4 0.6 0.2 0.0 0.1 Industry 16.5 15.1 10.4 17.3 15.3 13.5 Services 1.4 5.2 5.9 4.1 3.0 3.6 Inflation (Consumer Price Index) 1.0 0.5 2.8 2.8 3.0 3.0 Current Account Balance (percent of GDP) -7.6 -24.4 -21.3 -19.8 -19.5 -19.3 Net Foreign Direct Investment (percent of GDP) 7.5 10.8 15.8 8.6 6.8 6.5 Fiscal Balance (percent of GDP) a -7.1 -10.6 -2.5 -5.2 -4.8 -4.0 Debt (percent of GDP)a 54.4 59.7 61.9 63.3 64.7 65.0 Primary Balance (percent of GDP) -4.9 -8.8 -0.8 -3.1 -2.7 -2.0 Source: World Bank. Note: (est) = estimate, (f) = forecast. (a) A large volume of expenditure was recorded in 2016, but the bills were settled with funds borrowed in 2017, which has led to a significant discrepancy been fiscal and debt numbers. It has been recorded as an additional positive financing item of 2.4 percent of GDP in 2016 (bills and arrears carried over) and a negative financing item of 3.1 percent of GDP in 2017 (bills and arrears clearance). S OU TH A S I A E CO N OM I C F O C US | SP R I N G 2 0 1 8 64 Nepal Despite subdued inflation, robust government spending, and 2017 the prospect of a stable government, economic growth is Population, million 29.2 expected to moderate in FY2018 as a result of the heaviest GDP, current US$ billion 24.5 flooding in decades, a modest recovery of exports, higher interest rates and a tightening of credit. As departures of GDP per capita, current US$ 839 Source: World Bank WDI. Nepali migrant workers going abroad continues to decline, the risk of a sharper slowdown in remittances and resulting adverse effects on the broader economy increase. Twin deficits increase  Percent 35 30 25 20 15 10 5 0 -5 -10 2012 2013 2014 2015 2016 2017 (est) 2018 (f) 2019 (f) 2020 (f) Government spending Remittances Fiscal balance Current account balance Source: Nepal Rastra Bank (NRB) and World Bank staff estimates and forecasts. Note: (est) = estimate, (f) = forecast. Recent economic developments have grown at one of the lowest rates in years. Government consumption is robust, especially as the transition to a new After a strong rebound in FY2017, economic activity, federal structure is necessitating an increase in spending at particularly agriculture, was adversely affected by floods sub-national levels. during the first half of FY2018. As a result of severe flooding in the southern plains, paddy production is estimated to have Inflation moderated in the first half of FY2018 because contracted by 1.5 percent from the record high output the of stable food prices and stood at 4.0 percent in January year before. The contribution of industry is expected to have 2018. Owing to a slow growth in remittances, growth of remained strong with the addition of hydropower capacity deposits in the banking sector has also slowed down. Credit and the post flood and earthquake reconstruction. Growth in growth, which peaked during first half of FY2017, moder- the services sector continues to be driven by trade and hotels. ated to 16 percent, but remained higher than the growth On the demand side, a pick-up in both private and public in- of deposits at 12 percent. Consequently, the availability vestment supported growth. Though still very low as a share of loanable funds at the banks has remained tight. Banks of GDP, FDI in the first half of FY2018 was at a record high can lend up to 80 percent of their local currency deposits of USD 140 million, an increase of 94 percent year-on-year. and core capital, and are running up against this limit. As Consumption, however, is expected to soften as remittances a result, banks have increased interest rates to attract new J O B L E SS G ROW T H ? 65 South Asia country briefs deposits, and with unchanged spreads, lending rates have continued slowdown in the growth of remittances will likely also reached a 5-year high. put pressure on Nepal’s foreign exchange reserves, which are currently adequate. Exports are showing signs of recovery, primarily driven by higher exports to India. However, imports have continued With increased government spending related to federal- to surge on the back of reconstruction with related capital ism implementation, earthquake recovery, flood response, and industrial goods, resulting in a higher trade deficit. With elections, and social assistance programs, the fiscal deficit slower growth in remittances, the current account deficit is expected to widen in FY2018 and during the forecast increased to 737 USD million during the first six months of period. Financing is not expected be a challenge, due to am- FY2018, up from 9 USD million during the same period in ple fiscal space and a low debt-to-GDP ratio of 27 percent in FY2017. FY2017, as well as large government deposits at hand. Debt is likely to grow relatively faster, but remain sustainable during With increased imports, tax collection was strong in the the forecast period. first half of FY2018, growing at 19.3 percent year-on-year. Public spending on capital goods has also increased. The first year of a budget system under a federal setup has resulted in Risks and challenges a sizable increase in the fiscal transfers to sub-national gov- ernments. However, given the unfinished fiscal architecture Nepal successfully conducted elections at all three tiers of in the federal set-up, execution of the transfers has been government (local, province and federal), which is no small low. Out of NPR 225 billion transferred to the sub-national feat for a country coming out of conflict. The new prime governments so far in FY2018, less than 40 percent has been minister has been sworn in and the coalition government has spent. a 2/3 majority in the parliament, improving the prospects for stable government over the next five years. However, the new government faces a challenging agenda with the transition Outlook to a federal state. Economic growth in FY2018 is projected at 4.6 percent The cost of establishing and running a federal system and is expected to average 4.3 percent during the forecast of government, the need for post-earthquake and flood period, as growth moderates in line with the potential. reconstruction, higher spending on social assistance pro- Construction is expected to remain strong, driven by recon- grams and larger outlays on much-needed infrastructure, struction efforts and construction of several big hotels. The could all lead to significant increases in spending. Addi- industrial sector may also remain robust with the commis- tionally, improving human resource capacity in the newly sioning of new hydropower projects and cement factories, created sub-national governments is a critical priority. and due to improvements in power supply to industries. The service sector, however, may be adversely affected by a The risks from the external environment are increasing as further slowdown in remittances. well. The decline in migrant workers’ outflow has continued. Remittances continue to slow down and a further decelera- Inflation is expected to be below the Central Bank’s target tion is likely, possibly resulting in a sharper deterioration in of 7.5 percent. Meanwhile, the current account deficit, which the balance of payments. Furthermore, this can adversely was marginal in FY2017, is expected to widen as the growth of affect growth of deposits in the financial sector, which could imports remains strong, while remittances ease and exports result in a persistent shortage of loanable funds and a sudden grow modestly. The persistence of a large trade deficit and a stop of new credit. S OU TH A S I A E CO N OM I C F O C US | SP R I N G 2 0 1 8 66 2015 2016 2017 (est) 2018 (f) 2019 (f) 2020 (f) Real GDP Growth, at Constant Market Prices 3.3 0.4 7.5 4.6 4.5 4.2 Private Consumption 2.9 -0.8 2.4 1.9 1.8 1.7 Government Consumption 7.4 -0.4 24.2 21.1 15.5 9.5 Gross Fixed Capital Investment 19.6 -12.3 34.3 15.0 9.7 7.1 Exports, Goods and Services 6.8 -13.7 16.9 8.0 8.8 9.8 Imports, Goods and Services 9.6 2.8 22.0 7.4 5.6 3.5 Real GDP Growth, at Constant Factor Prices 3.0 0.0 7.0 4.6 4.5 4.2 Agriculture 1.1 0.0 5.3 2.7 3.0 3.0 Industry 1.4 -6.3 10.9 5.5 3.7 3.5 Services 4.8 2.0 7.0 5.7 5.7 5.1 Inflation (Consumer Price Index) 7.2 9.9 4.5 4.5 5.0 5.0 Current Account Balance (percent of GDP) 5.1 6.2 -0.4 -4.5 -6.6 -7.6 Fiscal Balance (percent of GDP) -1.1 -0.4 -3.9 -5.9 -6.2 -6.2 Debt (percent of GDP) 25.5 27.9 27.0 30.7 34.3 37.6 Primary Balance (percent of GDP) -0.6 -0.1 -3.6 -5.3 -5.4 -5.3 Source: World Bank. Note: (est) = estimate, (f) = forecast. J O B L E SS G ROW T H ? 67 South Asia country briefs Pakistan Pakistan’s growth continues to accelerate but macroeconomic 2017 imbalances are widening. Macroeconomic stability is a major Population, million 196.6 concern for the near-term economic outlook. Several short- GDP, current US$ billion 304.3 term measures are required to correct external and domestic imbalances, which must be complemented with implementation GDP per capita, current US$ 1548 Source: World Bank WDI. of medium term reforms. Annual GDP growth (at factor cost) and twin deficits  Percent 6 3 0 -3 -6 -9 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 GDP growth (at factor cost) Fiscal balance (% of GDP) Current account balance (% of GDP) Source: Ministry of Finance and State Bank of Pakistan. Recent economic developments higher trade deficit. Government imposed regulatory duties on some imports to slowdown import growth. In addition, the Pakistan’s GDP growth increased by 0.8 percentage points exchange rate depreciated in December 2017 (by 5 percent) and over the previous year to reach 5.4 percent in FY17. Major in March 2018 (4 percent), and the policy interest rate was raised impetus came from improved performance of services and by 25 bps in January 2018 to ease demand pressures. Despite this, the agricultural sector. The industrial sector also saw some official international reserves have declined to USD 12.2 billion by recovery. The low interest rate environment contributed to end-February 2018 (2.3 months of imports), compared to USD the growth in private sector credit, which supported busi- 16.1 billion at end-June 2017. To support declining reserves, nesses. On the demand side, consumption made up almost government issued international bonds of USD 2.5 billion in 92 percent of GDP, and contributed nearly eight percentage November 2017. points towards GDP growth at market prices. Average head- line inflation for Jul-Mar FY18 was 3.8 percent, compared to The fiscal deficit deteriorated rapidly to 5.8 percent of GDP 4.0 percent in Jul-Mar FY17, well below the target of 6 percent in FY17, 2.0 percentage points higher than the target set for FY18. at the start of the year and 1.2 percentage points higher than that of the previous year. The fiscal deficit has been The balance of payments is under stress due to relatively high somewhat lower in the first half of FY18 at 2.2 percent of GDP current account deficit (CAD) at 4.1 percent of GDP (US$12.4 compared to 2.5 percent in the first half of FY17. Tax revenues billion) in FY17. This trend continued in Jul-Feb FY18, and CAD of Federal Board of Revenue (FBR) during Jul-Jan FY18 stood reached US$10.8 billion (3.4 percent of GDP). Exports, after con- at PKR1,992 billion compared to PKR1,696 billion in the same tracting for three consecutive fiscal years, have started to recover period last year – 17.5 percent year-on-year growth. The in FY18, but relatively stronger import growth has resulted in a public debt to GDP ratio deteriorated to 65.7 percent of GDP S OU TH A S I A E CO N OM I C F O C US | SP R I N G 2 0 1 8 68 by end of the first half of FY18 compared to 64.5 percent of bilateral, and private debt-creating flows are expected to be GDP at end of the first half of FY17. the main financing sources in the medium-term. To meet external financing needs, the Government will continue to access international markets. Outlook Fiscal deficits are projected to narrow in FY19 as authorities Supported by infrastructure projects of the China Pakistan adjust macroeconomic policies. The adjustment will come Economic Corridor (CPEC), improved energy supply, and initially on the back of scaling down in investment spending persistent private consumption growth, GDP growth is both at the federal and provincial level. However, bolstering projected to reach 5.8 percent in FY18. This growth estimate of revenues as a result of expanding the tax base and other is based on actual data from the first eight months of this administrative measures will support fiscal consolidation. fiscal year. After the election, expected policy adjustments to correct for macroeconomic imbalances are projected to lead Inflation is expected to rise in FY19 and remain high in to a slowdown in growth in FY19, driven by a contraction in FY20. The increase in prices will be driven by exchange rate domestic consumption and investment. However, growth is passthrough to domestic prices and a moderate increase in expected to recover in FY20 and reach 5.4 percent. This recov- international oil prices. ery is contingent upon restoring and preserving macroeco- nomic stability, as well as steady progress in implementing reforms which tackle key growth constraints. The outlook Risks and challenges assumes that oil prices will increase moderately but remain low, and that political and security risks will be managed. Macroeconomic and political risks have increased in FY18. The balance of payments position is particularly vulnerable at The pressure on the current account is expected to persist the current level of reserves. Upcoming elections may delay as the trade deficit is projected to remain at an elevated decisive policy adjustment, such as increased exchange rate level during FY19. Increased exchange rate flexibility should flexibility and fiscal consolidation, until after the elections. In support exports and imports are expected to slow down in the medium-term, the government needs to put considerable FY19. Remittances will continue to partly finance the current effort in reforming its tax system and tackle competitiveness account deficit; nonetheless, slower growth in GCC countries challenges. A strategy based on lowering the cost of doing will affect migrants’ employment options and growth in business and improving productivity would be critical for remittances. Foreign Direct Investment (FDI), multilateral, higher and sustainable export growth. 2015 2016 2017 2018 (f) 2019 (f) 2020 (f) Real GDP Growth, at Constant Market Prices 4.7 5.5 5.7 5.4 5.0 5.4 Private Consumption 2.9 7.6 8.7 6.3 3.3 3.5 Government Consumption 8.1 8.2 5.3 14.2 2.0 3.5 Gross Fixed Capital Investment 15.8 7.5 10.0 5.7 7.0 7.0 Exports, Goods and Services -6.3 -1.6 -0.8 9.9 12.0 14.0 Imports, Goods and Services -1.6 16.0 21.0 17.5 0.2 1.1 Real GDP Growth, at Constant Factor Prices 4.1 4.6 5.4 5.8 5.0 5.4 Agriculture 2.1 0.2 2.1 3.8 3.3 3.4 Industry 5.2 5.7 5.4 5.8 7.0 7.3 Services 4.4 5.7 6.5 4.8 4.8 5.3 Inflation (Consumer Price Index) 4.5 2.9 4.2 5.0 8.0 7.5 Current Account Balance (percent of GDP) -1.0 -1.7 -4.1 -5.1 -4.4 -3.1 Financial and Capital Account (percent of GDP) 2.0 2.5 3.4 3.7 4.3 3.5 Net Foreign Direct Investment (percent of GDP) 0.3 0.8 0.9 1.0 1.2 1.4 Fiscal Balance (percent of GDP) -5.2 -4.5 -5.7 -5.4 -5.0 -4.7 Debt (percent of GDP) 64.3 68.6 68.1 68.7 68.1 66.2 Primary Balance (percent of GDP) -0.5 -0.2 -1.4 -1.0 -0.9 -1.2 Source: World Bank. Note: (f) = forecast. J O B L E SS G ROW T H ? 69 South Asia country briefs Sri Lanka In 2017, Sri Lanka’s improvement in its macroeconomic 2017 performance was masked by inclement weather. Fiscal Population, million 20.9 and monetary policy measures contributed to stabilization; GDP, current US$ billion 87.8 however, a prolonged drought took a toll on growth and the external sector while contributing to raising inflation. GDP per capita, current US$ 4207 Expediting reforms to promote competitiveness, governance Source: World Bank WDI. and continued fiscal consolidation are critical for sustained growth and development. Nevertheless, the challenging political environment has already slowed the pace of the reform agenda and remains the key risk to a favorable medium-term outlook.  Contributions to real GDP growth Percent 10 8 6 4 2 0 -2 2011 2012 2013 2014 2015 2016 2017 Agriculture Industry Service Net taxes Real GDP growth Source: Department of Census and Statistics, Sri Lanka and World Bank staff estimates. Recent economic developments Growth decelerated to a 16-year low of 3.1 percent in 2017 due to adverse weather conditions, with floods in May in In 2017, Sri Lanka’s improvement in its macroeconomic the South and West, and prolonged drought across the performance was masked by inclement weather. Fiscal country. Agriculture contributed negatively to growth for the and monetary policy measures contributed to stabilization; second consecutive year, while slower growth was recorded however, a prolonged drought took a toll on growth and the in the previously buoyant construction sector. The tight mon- external sector while contributing to raising inflation. Ex- etary policy maintained in 2016 and 2017 dampened high pediting reforms to promote competitiveness, governance monetary growth; however, disruptions in food supplies, the and continued fiscal consolidation are critical for sustained impact of VAT reforms and rising global oil prices contributed growth and development. Nevertheless, the challenging to relatively high inflation. political environment has already slowed the pace of the reform agenda and remains the key risk to a favorable medi- On the external front, gradually rising oil prices and um-term outlook. increased imports of food and petroleum due to the S OU TH A S I A E CO N OM I C F O C US | SP R I N G 2 0 1 8 70 drought offset the growth in exports, led by a recovery maintaining a more market-determined exchange rate, and of the tea industry. Tourism grew, albeit at a slower rate increased FDI. The overall fiscal deficit is projected to fall in the than in 2016, while remittances shrank because of adverse medium term, supported by the ongoing implementation of economic conditions in the Middle East. Nevertheless, pro- revenue measures. Growth should continue to translate into ceeds of sovereign bonds and syndicated loans, increased poverty reduction and improvement in living standards. FDI mainly thanks to long-leasing of a port asset and a large land reclamation project, and forex purchases by the monetary authority lifted the reserve cover of imports to 3.8 Risks and challenges months of imports. The currency depreciated by 2 percent against the US Dollar. A further slowdown in reform implementation, in a challenging political environment, remains the key risk to A primary surplus recorded for the first time in decades, the baseline. The impending election cycle elevates this risk. albeit small, and passing of the new Inland Revenue Act External risks include disappointing growth in key countries helped with the successful completion of the third review that generate foreign exchange inflows to Sri Lanka: exports, of the IMF program. However, a sharp increase in interest ex- tourism, remittances, FDI, and other financing flows. Steeper penditure forced the overall deficit to slightly increase, while than expected global financial conditions would increase the public debt to GDP ratio marginally decreased thanks to the cost of debt and make rolling over the maturing Eurobonds primary surplus and relatively low currency depreciation. from 2019 more difficult; however, the enactment of the Liability Management Act will help mitigate this refinancing Political uncertainties slowed the implementation of risk. Faster than expected rises in commodity prices would reforms. The uneasy relationship of the ruling coalition increase pressure on the balance of payments and make surfaced after the victory of the party backed by the former domestic fuel and electricity price reforms more difficult. President, at the local government elections. Recent commu- On the fiscal and debt management front, risks include the nal tensions that led to violence in some parts of the country delay in implementing revenue measures, and slower than also added to the challenging political environment. expected improvement in tax administration. The increasing occurrence and impact of natural disasters could have an adverse impact on growth, the fiscal budget, the external Outlook sector and poverty reduction. The outlook remains favorable, provided the government Sri Lanka faces several challenges that increasingly put is committed to the reform agenda of improving compet- its future economic growth and stability at risk, which itiveness, governance and public financial management. must be addressed through macro and structural reforms: Together with the IMF program, these reforms will add to (1) stay on the fiscal consolidation path by broadening confidence and support fiscal consolidation efforts. and simplifying the tax base and aligning spending with priorities. This is important given high public debt, SOE debt Growth is projected to rebound in 2018 from a low base and guarantees and large gross financing requirements; and continue to be around 4.5 percent in the medium (2) shift towards a private investment-tradable sector-led term, driven by private consumption and investment. In- growth model by improving trade, investment, innovation flation will stabilize at the mid-single digit level as the impact and the business environment; (3) improve governance and of natural disasters wears off, although the upward trend accountability by implementing the Right to Information Act in oil prices may exert some upward pressure. The external for citizens engagement and improve SOE performance and sector will continue to benefit from the GSP+ preferential service delivery; and (4) reduce vulnerability and risks in the access to the European Union and tourism receipts, despite economy by enhancing disaster preparedness and mitigat- the deceleration of remittances. External buffers are expected ing the impact of reforms on the poor and vulnerable with to improve, with emphasis on purchasing foreign exchange, well-targeted spending. J O B L E SS G ROW T H ? 71 South Asia country briefs 2015 2016 2017 (est) 2018 (f) 2019 (f) 2020 (f) Real GDP Growth, at Constant Market Prices 5.0 4.5 3.1 4.8 4.5 4.5 Private Consumption 8.6 0.7 3.1 4.8 4.5 4.6 Government Consumption 10.2 2.3 1.4 1.7 1.5 2.8 Gross Fixed Capital Investment 5.4 8.3 5.1 5.8 6.1 5.6 Exports, Goods and Services 4.7 -0.7 4.8 5.0 4.0 3.9 Imports, Goods and Services 10.6 7.9 3.4 3.4 3.4 3.5 Real GDP Growth, at Constant Factor Prices 5.0 4.5 3.1 4.8 4.5 4.5 Agriculture 4.7 -3.8 -0.8 4.0 3.0 3.0 Industry 2.2 5.8 3.9 4.3 4.8 4.8 Services 6.0 4.7 3.2 4.6 4.6 4.6 Inflation (Consumer Price Index) 0.9 4.0 6.6 5.0 5.0 5.0 Current Account Balance (percent of GDP) -2.3 -2.4 -2.8 -2.5 -2.7 -2.7 Financial and Capital Account (percent of GDP) 2.9 2.4 2.8 2.5 2.7 2.7 Net Foreign Direct Investment (percent of GDP) 0.6 0.7 1.4 1.7 1.0 0.8 Fiscal Balance (percent of GDP) -7.6 -5.4 -5.5 -4.9 -4.1 -3.6 Debt (percent of GDP) 77.6 79.3 78.1 78.2 76.6 74.7 Primary Balance (percent of GDP) -2.8 -0.2 0.0 0.8 1.5 1.8 Source: World Bank. Note: (est) = estimate, (f) = forecast. S OU TH A S I A E CO N OM I C F O C US | SP R I N G 2 0 1 8 72 PHOTO: World Bank South Asia at a g lance South Asia at a glance Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka South Asia 2015 1.3 6.6 7.3 8.2 2.2 3.3 4.1 5.0 7.1 2016 2.4 7.1 7.4 7.1 6.2 0.4 4.6 4.5 7.5 2017 (est) 2.6 7.3 5.8 6.7 6.2 7.5 5.4 3.1 6.6 Real GDP 2018 (f) 2.2 6.5 5.4 7.3 5.5 4.6 5.8 4.8 6.9 Growth 2017 Q3 .. .. .. 6.5 .. .. .. 2.9 .. (CY) 2017 Q4 .. .. .. 7.2 .. .. .. 3.2 .. (CY) 2015 -0.7 6.4 3.3 4.9 1.0 7.2 4.5 0.9 4.5 2016 4.4 5.9 4.3 4.5 0.5 9.9 2.9 4.0 4.4 2017 5.0 5.4 5.0 3.9 2.8 4.5 4.2 6.6 3.8 Inflation (Consumer 2018 (f) 5.0 5.9 5.0 4.1 2.8 4.5 5.0 5.0 3.1 Price Index) 2018 3.6 5.7 4.0 4.4 2.1 .. 3.8 4.5 4.4 February 2018 .. 5.7 .. 4.3 .. .. 3.2 4.2 4.5 March 2015 .. .. .. 103.7 .. .. 110.3 .. 104.3 2016 .. .. .. 105.0 .. .. 109.6 .. 105.5 2017 .. .. .. 109.8 .. .. 106.4 .. 109.4 BALANCE of PAYMENTS REER 2018 (f) .. .. .. 105.9 .. .. 99.9 .. 105.3 (CY) 2018 .. .. .. 104.3 .. .. 110.7 .. 103.9 March 2018 .. .. .. 104.0 .. .. 109.5 .. 103.6 April 2015 4.6 1.5 -29.3 -1.0 -7.5 5.1 -1.0 -2.3 -3.7 Current Account 2016 4.2 1.9 -24.7 -0.7 -24.4 6.2 -1.7 -2.4 -5.2 Balance 2017 (est) 4.1 -0.6 -21.7 -1.2 -21.4 -0.4 -4.1 -2.8 -6.0 (% of GDP) 2018 (f) 2.3 -2.8 -17.5 -1.6 -20.2 -4.5 -5.1 -2.5 -6.5 2015 -41.8 -7.4 -28.5 -2.3 9.2 -29.9 -6.4 -7.5 -3.7 Trade Balance 2016 -42.1 -4.7 -23.4 -1.5 4.0 -29.9 -6.9 -7.6 -2.8 (% of GDP) 2017 (est) .. .. .. .. .. .. .. .. .. 2015 4.6 3.2 3.4 -5.9 .. 9.6 -1.6 10.6 -3.8 2016 25.8 -7.1 -2.4 4.0 .. 2.8 11.7 7.9 0.3 2017 (est) 8.0 2.9 -10.3 6.0 .. 22 24.0 3.4 6.2 Import Growth 2018 (f) 1.5 14.0 -11.5 5.3 .. 7.4 14.0 3.4 7.5 (%, y-o-y) 2018 .. .. .. 20.2 .. .. 14.0 .. .. January 2018 .. .. .. 5.5 .. .. 5.8 .. .. February 2015 2.4 -2.8 -2.7 -5.6 .. 6.8 -6.3 4.7 -5.0 Export Growth 2016 -0.3 2.2 -2.0 5.0 .. -13.7 -1.6 -0.7 0.9 (%, y-o-y) 2017 (est) 7.0 -2.3 -1.4 4.0 .. 16.9 -0.2 4.8 4.5 2018 (f) 8.0 7.5 -2.0 5.7 .. 8.0 7.0 5.0 5.7 S OU TH A S I A E CO N OM I C F O C US | SP R I N G 2 0 1 8 74 Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka South Asia 2018 .. .. .. -0.4 .. .. 6.0 .. .. Export Growth January (%, y-o-y) 2018 .. .. .. -4.6 .. .. 12.4 .. .. February 2015 .. 7.6 .. 10.7 4.1 .. 4.6 4.5 9.8 2016 .. 8.7 .. 12.1 3.4 .. 5.4 3.8 11.0 BALANCE of PAYMENTS Foreign Reserves, 2017 .. 8.3 .. 10.4 2.8 .. 4.0 3.8 9.5 Months of Goods Import 2018 .. 7.1 .. 10.0 .. .. 3.0 4.0 9.0 Cover (CY) January 2018 .. .. .. 10.4 .. .. 3.1 .. 9.4 February 2015 301 15,296 20 68,910 4 6,730 19,306 7,000 117,565 Personal 2016 431 13,529 34 62,744 4 6,612 19,761 7,257 110,373 Remittances, 2017 .. 13,535 .. 37,998 .. .. 19,591 6,884 .. Received (USD Million, CY) 2017 Q3 .. 3,391 .. 10,022 .. .. 4,790 1,635 .. 2017 Q4 .. 3,541 .. 10,541 .. .. 4,955 1,767 .. 2015 -1.2 -3.9 -4.6 -7.3 -7.1 -1.1 -5.2 -7.6 .. GOVERNMENT FINANCES Fiscal Balance 2016 -0.2 -3.8 -3.3 -6.4 -10.6 -0.4 -4.5 -5.4 .. (% of GDP) 2017 (est) -1.7 -5.0 -2.4 -5.8 -2.5 -3.9 -5.7 -5.5 .. 2018 (f) 0.2 -5.4 -0.7 -5.7 -5.3 -5.9 -5.4 -4.9 .. 2015 9.1 31.5 118.4 69.4 54.4 25.5 64.3 77.6 .. Public Debt 2016 6.5 31.2 102.8 69.1 59.7 27.9 68.6 79.3 .. (% of GDP) 2017 (est) 5.7 32.1 94.6 69.1 62.4 27.0 68.1 78.1 .. 2018 (f) 5.8 35.1 87.8 67.7 64.2 30.7 68.7 78.2 .. 2015 6.8 5.8 3.4 7.4 .. 2.9 2.9 8.6 5.5 Private Consumption 2016 -0.2 3.0 3.7 7.3 .. -0.8 6.9 0.7 8.4 Growth 2017 (est) 4.2 7.4 -2.0 8.0 .. 2.4 8.6 3.1 7.6 (%, y-o-y) 2018 (f) 2.9 5.5 0.8 7.9 .. 1.9 7.3 4.8 6.6 CONSUMPTION and INVESTMENT 2015 4.8 7.1 14.1 5.2 .. 19.6 15.8 5.4 5.5 Gross Fixed Capital 2016 -6.0 8.9 7.2 10.1 .. -12.3 6.7 8.3 4.7 Investment Growth 2017 (est) 6.3 10.1 1.8 4.0 .. 34.3 8.3 5.1 10.3 (%, y-o-y) 2018 (f) -2.1 11.9 -0.6 5.5 .. 15.0 7.0 5.8 7.6 2015 0.8 0.9 0.4 1.6 7.7 0.2 0.3 0.8 1.9 Net Foreign Direct 2016 0.3 0.6 -0.6 1.5 10.6 0.5 0.8 0.8 1.7 Investment 2017 (est) 0.2 0.7 1.0 1.1 .. .. 0.9 1.6 .. (% of GDP) 2018 (f) 0.1 0.9 1.2 1.4 .. .. 1.0 1.8 .. 2015 -85 203 .. 9,487 -123 .. -916 -686 .. Net Foreign Portfolio 2016 -105 101 .. -4,725 5 .. -154 -993 .. Investment (USD million, 2017 .. -363 .. 30,645 .. .. 458 .. .. CY) 2017 Q4 .. 138 .. 5,314 .. .. 2,338 .. .. J O B L E SS G ROW T H ? 75 South Asia at a g lance Notes (est) Estimate (f) Forecast CY Series for Calendar Year FY Series for Fiscal Year Afghanistan’s fiscal year is the calendar year. Bangladesh’s fiscal year runs from July 1st to June 30th. Bhutan’s fiscal year runs from July 1st to June 30th. India’s fiscal year runs from April 1st to March 31st. Maldives’s fiscal year is the calendar year. Nepal’s fiscal year runs from July 16th to July 15th. Pakistan’s fiscal year runs from July 1st to June 30th. Sri Lanka’s fiscal year is the calendar year. Real GDP Growth Note: Real GDP growth rates (percent change, y-o-y) at Market Prices; Pakistan is in Factor Costs. Source: World Bank. Government of India, Ministry of Statistics and Programme Implementation. Inflation (Consumer Price Index) Note: Period average percent change in CPI inflation. Source: World Bank MTI, DEC GEM, and Trading Economics. REER (CY) Note: Real effective exchange rate is the nominal effective exchange rate (a measure of the value of a currency against a weighted average of several foreign currencies) divided by a price deflator or index of costs. An increase in REER implies that exports become more expensive and imports become cheaper. Source: World Bank DEC GEM. Current Account Balance (% of GDP) Note: Does not include grants unless otherwise stated. Source: World Bank MTI and staff calculations. Trade Balance (% of GDP) Note: Trade balance in goods and services is derived by offsetting imports of goods and services against exports of goods and services as ratio to GDP. Source: World Bank WDI and staff calculations. Import Growth (%, y-o-y) Note: Annual trade change is in (respective) fiscal year and covers goods and non-factor services (GNFS) imports. Monthly trade change is in calender year and covers only merchandise. Source: World Bank MTI, DEC GEP, and staff calculations. Export Growth (%, y-o-y) Note: Annual trade change is in (respective) fiscal year and covers goods and non-factor services (GNFS) exports. Monthly trade change is in calender year and covers only merchandise. Source: World Bank MTI, DEC GEP, and staff calculations. Foreign Reserves, months of import cover (CY) Source: World Bank DEC GEM. Remittances (US$ million) (CY) Note: Personal remittances including personal transfers and compensation of employees in Current US$. Source: World Bank WDI, Haver Analytics, and World Bank staff calculations. Fiscal Balance (% of GDP) Note: Does not include grants unless otherwise stated. Source: World Bank MTI. Public Debt (% of GDP) Note: Gross public debt stock including domestic and foreign liabilities, End of Period. Source: World Bank MTI. Private Consumption Growth (%, y-o-y) Note: Annual (respective) fiscal year percent change in gross consumption expenditure. Source: World Bank MTI. Gross Fixed Capital Investment Growth (%, y-o-y) Note: Annual (respective) fiscal year percent change in gross fixed capital expenditure. Source: World Bank MTI. Net Foreign Direct Investment (% of GDP) Note: Net balance of Foreign Direct Investment assets and liabilities as ratio to GDP. Source: World Bank MTI and WDI. Portfolio Investment (US$ million) Note: Net balance of Foreign Portfolio Investment assets and liabilities in Current US$. Source: World Bank WDI, Haver Analytics, and World Bank staff calculations. S OU TH A S I A E CO N OM I C F O C US | SP R I N G 2 0 1 8 76 77