South Asia suffers from fallout of Russia’s actions

Harvesting the wheat crop on the occasion of Baisakhi at a village on the outskirts of Gurugram, India. Photo by Vipin Kumar/Hindustan Times via Getty Images.
Harvesting the wheat crop on the occasion of Baisakhi at a village on the outskirts of Gurugram, India. Photo by Vipin Kumar/Hindustan Times via Getty Images.

Despite South Asia being one of the least connected regions in the world, its economies do share numerous similarities – and the fact that Sri Lanka, Pakistan, and Nepal are each currently facing a mixture of economic and political crises reflects replication rather than contagion.

Russia’s invasion of Ukraine, coming as it does two years into a global pandemic, has led to soaring prices of fuel and wheat – the latter to a level last seen in 2008 which was a factor in triggering the Arab Spring.

This time it is South Asia’s turn to be the first region to undergo political and economic turmoil because of rising commodity prices, on top of a combination of economic mismanagement and the impact of the pandemic.

Economically, the region is facing reduced foreign earnings primarily due to the pandemic and increased foreign outgoings, particularly since the commodity price shock caused by the Ukraine invasion. With limited foreign exchange reserves, this is unsustainable.

Reduced income due to remittances and tourism

Overseas workers’ remittances are economically important across the region. When countries in South Asia have faced previous economic crises, an outflow of workers to regions such as the Gulf served to counter domestic woes.

But the pandemic harmed remittance inflows and overseas opportunities remain limited, while earnings from tourism – vital to Bhutan, the Maldives, Nepal, and Sri Lanka – declined dramatically.

With fuel and food, South Asian countries are generally net importers with only Pakistan and India self-sufficient in rice production. Pakistan’s staple is wheat but it needs imports to top up domestic production, and Sri Lanka’s ban on fertilizer imports harmed its food production. The current spike in commodity prices has come at a bad time.

As well as needing foreign exchange to pay for vital imports, the region needs to meet its external debt obligations. Sri Lanka defaulted on this in April and has the highest external debt to GDP ratio, followed by the Maldives and Pakistan.

India and Bangladesh have healthy foreign exchange reserves, but elsewhere a prolonged period of high fuel prices coupled with lower foreign exchange receipts will quickly run down any reserves.

Economic woes inevitably impact the politics of the region. Although Sri Lanka remains governed by the Rajapaksa family, Pakistan and Nepal have recently replaced their own ‘populist’ leaders following some economically illiterate decisions.

When facing rising fuel prices, Pakistan prime minister Imran Khan announced a $1.5 billion subsidy package which was widely seen as essentially a trap for his successors in case he is ousted – because removing the subsidy seems likely to be part of the cost of an IMF bailout.

In a similar vein, following his 2019 election in Sri Lanka, Rajapaksa halved VAT and abolished several taxes, which led to a credit rating downgrade the following year.

Former Nepalese prime minister Sharma Oli seemed more focused on centralizing power than on economics, despite the country still recovering from – and dealing with the costs of – the 2015 Kathmandu earthquake. A pandemic-related collapse of tourism, which employs around 12 per cent of Nepalese workers, means its economic situation is highly precarious.

At least Nepal’s new prime minister Sher Bahadur Deuba has announced the country will only accept grants from China, not loans – unlike Sri Lanka and Pakistan which have been significant recipients of Chinese loans.

Borrowing is not a problem in itself, but borrowing to construct economically-unviable infrastructure certainly is – as Sri Lanka has already found out while, for Pakistan, time will tell with regards to the China-Pakistan Economic Corridor (CPEC).

Food and fuel price rises affects everyone

Elsewhere in the region, the tourist-reliant Maldives is at risk of similar pressures to Sri Lanka, whereas India and Bangladesh are better placed, having significantly higher foreign exchange reserves, more diverse sources of foreign exchange, and lower external debt.

But the inflation of food and fuel prices will be problematic throughout the region. India is seeking to attract foreign investment but faces ongoing problems of unemployment and debt – state government debts particularly have grown, fuelled by promises of free electricity and cash handouts in election campaigns.

Sri Lanka, Pakistan, and probably Nepal face prolonged belt-tightening economically, but their political pathways are less obvious. Each had a turn of populism but this has now been rejected as – at least in part – having contributed to the mess they are in.

But whether this leads to a return to more ‘technocratic’ governments or whether economic crises aggravate societal cleavages on ethnic or religious lines seems far from certain.

Dr Gareth Price, Senior Research Fellow, Asia-Pacific Programme.

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