Impact of Global Financial Crisis on South Asia

February 17, 2009 - The global financial crisis hit South Asia at a time when it had barely recovered from severe terms of trade shock resulting from the global food and fuel price crisis. The food and fuel price shocks had badly affected South Asia, with cumulative income loss ranging from 34 percent of 2002 GDP for Maldives to 8 percent for Bangladesh. Current account and fiscal balances worsened sharply and inflation surged to unprecedented levels. Pakistan, Sri Lanka, and Maldives were particularly vulnerable because difficult political and social environments prevented adequate policy measures to adjust to the terms of trade shock. Additionally, their reliance on foreign funding has been relatively large. The global financial crisis worsened their macroeconomic difficulties as sources of funding contracted. Although India was well advanced in responding to the food and fuel price crisis and has generally maintained prudent macroeconomic management, the magnitude of the financial crisis has hit India very hard because of the strong connectivity to global financial markets. Bangladesh, Nepal, and Bhutan have been mostly insulated from the first round effects of the financial crisis owing partly to sound macroeconomic management, but also because of the underdeveloped nature of the financial markets that are not well connected to international markets. They are however vulnerable to the second round effects of a global economic slowdown working through export earnings, tourism receipts, remittances and external financing for infrastructure. Issues in Afghanistan are much more complex and relate more to security and the political environment rather than the impact of global financial crisis.download