Pangs of Global Financial Crisis: South Asia and Beyond
GDP growth rate in Nepal in 2009 is projected to decline to 4.5 percent compared to the planned rate of 7.0 percent. Inflation is high at 14.4 percent and Nepali rupee has depreciated significantly ($1=Rs 83). In spite of increased revenue mobilisation, the development expenditure has been dismal. Indications of adverse impact on remittances of the slowing demand for Nepali workers in Malaysia, Korea or the Middle East appear in the horizon and could spell trouble sooner.
By Dr. Som P Pudasaini
The global financial crisis that started in the United States of America with a collapse of its sub-prime mortgage market in September 2008 spread quickly affecting nations across continents with varying degree of liquidity crunch, reduced demand and employment, and shrunk consumer and business confidence. At the heart of the global financial crisis lays a “fundamental breakdown of trust in global wholesale banking” and it is seen as the product of “four excesses - excess liquidity, excess credit, excess leverage and excess greed” (Sheng, 2009).
The output of advanced nations is likely to contract by 2 percent in 2009, the first global contraction after the World War II. The world trade is registering a largest decline in eight decades. Shrinking trade finance, declining net private capital flows, slowing foreign direct investment (FDI) and increased debt burden resulting from currency depreciation is likely to affect the construction and maintenance of public infrastructure vital for sustained and long term growth.
The average GDP growth of developing countries is expected to drop in 2009 to less than half the pre-crisis rate. South Asia, the home to almost a quarter of the global population, was initially believed to be relatively insulated from the crisis as they were not significantly exposed to the sub-prime mortgage crisis and toxic assets associated with it. The impact of the global crisis has varied from one South Asian country to another depending on their linkages with the global economies, export dependency, banking system, level of trade, macroeconomic stability, levels of foreign investment and external assistance.
South Asia confronted the crisis when it was just recovering from the brunt of the high global fuel and food prices. Pakistan, Sri Lanka and Maldives were more vulnerable. Bhutan, Bangladesh and Nepal were largely insulated from the first round effects of the financial crisis due to better macroeconomic management and underdeveloped financial markets less exposed to global shocks. Afghanistan is reeling more from internal security and socio-economic situation and the effects of the crisis are hard to untangle.
India, even though able to manage food and fuel crisis better, was hit relatively hard by the global financial crisis due to its greater connectivity to global financial institutions. In India the crisis has adversely affected traditional exports such as textiles, garments, carpets, gems and jewelry, and leather products. Employment in factories and loss of white colour jobs in information technology (IT), airlines and other sectors have been observed. Industrial production has fallen by 2 percent. Exports growth has declined and GDP growth has been revised downward to 5 percent in 2009 from 9 percent in 2007. Property transactions and prices have fallen and investment banking is down. Foreign capital flow is low and employment generation has dropped.
Pakistan’s exports have declined. Its foreign exchange reserve is strained. Inflation surged and growth slowed. The impact of global crisis is pronounced. With IMF support microeconomic imbalances are being corrected with some success. Nevertheless, the GDP growth is projected to decline to 3 percent in 2009 compared to 7.3 percent in 2007.
With effort made to contain monetary growth and fiscal deficit, Sri Lanka’s inflation has been brought down to 11 percent in January 2009 from a high of 28 percent in June 2008. Its foreign exchange reserve has fallen precariously low to be able to cover less than 2 months of imports. Growth rate is projected tumbled to 4 percent in 2009 from 7 percent in 2007.
Nepal’s economy is fragile largely due to unstable post-conflict transition. So far it has not been seriously affected by the global crisis. Remittances, which constitute 18 percent of its GDP, were growing until recently. Foreign aid has not been affected. The current foreign exchange reserve ($3.27 billion) is sufficient to finance merchandise import of 11.4 months and merchandise and service import of 9.1 months. However, tourist flow has slowed down. GDP growth rate in Nepal in 2009 is projected to decline to 4.5 percent compared to the planned rate of 7.0 percent. Inflation is high at 14.4 percent and Nepali rupee has depreciated significantly ($1=Rs 83). In spite of increased revenue mobilisation, the development expenditure has been dismal. Indications of adverse impact on remittances of the slowing demand for Nepali workers in Malaysia, Korea or the Middle East appear in the horizon and could spell trouble sooner.
In response to the crisis, all the developed nations, particularly US, Japan and EU, have introduced fiscal stimulus packages. So have China, India, South Korea and Malaysia. Only 25 percent of vulnerable developing countries are believed to be able to increase fiscal deficit to implement necessary countercyclical programmes. The global financial system, however, is said to not have adequate resources to meet the financial need and the poorest of the poor is feared to suffer the most.
Important economies are beginning to stress on protecting their own workers and industries. Rising protectionist slogans such as “Buy American First” have begun to trouble many. Pre-mature policy cracks are beginning to appear among the mighty global players. The American and the British are stressing on expanding “fiscal stimulus”. Important EU countries such as Germany and France are now stressing on the need to strengthen global financial regulations and on the implementation of the fiscal stimulus measures announced before committing on new counter cyclical measures.
China, a country with almost $ 2 trillion reserve, has expressed its willingness to contribute to the resolution of the crisis. But it has raised concern of the safety of its investment in the US and wants the special drawing rights (SDRs) managed by IMF as an alternative to the US dollar as a currency for global reserve, which has naturally raised eye brows among the bigwigs of mighty economies. Consequently, the important meeting of the G-20 leaders planned for April 2009 in UK is expected to end without significant agreement necessary to tackle the crisis.
Most South Asian nations are expected to confront a number of challenges as many other developing and emerging economies. First, growth, employment and balance of payments “stabilisation” is becoming a big challenge to be handled by undertaking countercyclical measures and adapting existing programs within the constraints imposed by resources and institutional and administrative capacity. Second, while responding to immediate fiscal pressure core development spending, including on infrastructure and human capital development, necessary for longer term growth and development must be protected to the maximum possible extent.
Thirdly, protecting the poor’ welfare in the crisis period is of utmost importance. Optimists believe that the US started the crisis and it will resolve it sooner. Others believe the crisis will show necessary sign of resolution only in 2010 or later. There is no clarity on the length or the depth of the crisis. A close monitoring and periodic adjustment of strategies to deal with the crisis is, thus, critical. Restoring trust and confidence in the global financial system and necessary reform in them is important. Renewed aggregate demand and growth in global trade with due consideration to the need and potential of the developing nations, particularly those of the poorest of the poor, should not be ignored.
(Dr. Pudasaini is editorial board member, South Asian Affairs, Visakhpatnam. Email: som.pudasaini@gmail.com)
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