RAWALPINDI, Jan 22: The South Asia GDP growth is projected to step down to 5.4 per cent in 2009 from 6.3 per cent in 2008. Continued financial sector volatility and balance sheet weaknesses will translate into ongoing risk aversion.

This is expected to lead in further contraction in portfolio inflows and mute the prospect for FDI primarily affecting India, Pakistan, which receive the lion’s share of the regions inflows. In turn these factors are projected to lead a sharp fall-off in private investment growth, the World Bank says in a new report.

The economy of Pakistan deteriorated sharply over the course of 2008, as headline inflation surged, and the current account and fiscal deficits jumped on the back of rising oil and food prices, the report said.

The report: ‘Global Economic Prospects 2009’ says political turmoil and ongoing security concerns have also taken a toll on Pakistan’s economy, while the global financial crisis added substantial downward pressures on its financial markets.

The report says GDP growth in South Asia slowed markedly in 2008 to 6.3 per cent from 8.4 per cent in 2007. The onset of the financial crisis in the United States and Europe in mid-September 2008—which led to severe financial turmoil in emerging markets, including in many South Asian countries—ushered in a downshift in activity that started to take hold in late-2008.

The initial effects of the global financial crisis in South Asia were sharp corrections in regional equity markets. Bourses in India, Pakistan dropped 39 per cent over the year through mid-November. Notably in Pakistan, curbs on the sale of equities were imposed in August, effectively preventing the exit of existing investors and discouraging potential new investors, the report says.

The general deterioration in regional trade balances has been offset by large remittance inflows, which represent a sizable, and generally increasing share of GDP: during 2007, 14 per cent in Nepal, 8 per cent in Bangladesh and Sri Lanka, 4 per cent in Pakistan, and 3 per cent in India.

FDI inflows remained strong through the first half of 2008, helping to ease external financing requirements. In India, FDI surged to 3 per cent of GDP in 2008, up from 1.4 per cent in 2007.

FDI inflows to Pakistan remained relatively steady through the summer of 2008—on course to match the 3.7 per cent of GDP recorded in 2007—but the extreme financial and economic difficulties encountered during the second half of the year were likely to have changed that for the worse.

Fiscal policy across South Asia is broadly expansionary, with deficits generally exceeding 4.5 per cent of GDP—they are projected to reach 8.5 per cent in India, 7.5 per cent in Pakistan and Sri Lanka, and 4.7 per cent in Bangladesh in 2008.

In the medium-term, the report says the outlook for regional growth is highly uncertain, because of the sustained degree of volatility and synchronised nature of the slowdown across countries—and because the full extent of financial disruption on both the regional and global economies remains unclear.

Weakening foreign demand is expected to lead to a significant slowing in regional export growth, including services. In particular, the information technology and communications sector is considered vulnerable to shifts in financial sector activity, and clothing and tourism revenues are vulnerable to shifts in discretionary spending.

Given strong underlying growth dynamics in South Asia, the negative feedback effects of the global financial crisis are expected to be temporary. A relatively rapid rebound is expected in 2010, with a projected revival of GDP growth to 7.2 per cent.

Private consumption and investment growth are forecast to gain steam, supported by strengthening global demand and a rebound in consumer and business confidence. Commodity price decreases are projected, which will support a reduction of inflationary pressures within the South Asian economies. South Asia’s exports would also likely to contract instead of slow, and remittances could compress sharply, especially where destination countries were to send migrants home.