More challenges for Bangladesh, South Asia as global economic growth to fall in 2023: UN

The United Nations has said that global economic growth will fall significantly to 1.9% this year due to the food and energy crisis sparked by the war in Ukraine, Covid-19, high inflation and climate change.

Mentioning that Bangladesh, Pakistan and Sri Lanka sought financial assistance from the IMF in 2022, the UN said that the economic outlook has significantly deteriorated due to high food and energy prices, monetary tightening and fiscal vulnerabilities in South Asia.

Average GDP growth is projected to moderate from 5.6% in 2022 to 4.8% in 2023 for this region, the UN said in its report titled "World Economic Situation and Prospects 2023."

The report said this year's 1.9% economic growth forecast – down from an estimated 3% in 2022 – is one of the lowest growth rates in recent decades. But it projects a moderate pick-up to 2.7% in 2024 if inflation gradually abates and economic headwinds start to subside.

As per the report, seven nations – Angola, Bangladesh, Bhutan, Lao People's Democratic Republic, Nepal, São Tomé and Principe and Solomon Islands – are in the process of graduating from the group of least developed countries. 

For many, this reflects decades of development progress, driven primarily by sound domestic policies and favourable international support measures. Up to nine additional least-developed countries may seek graduation during the next triennial review of their status in 2024, provided they manage to sustain positive development trajectories. 

Meanwhile, fiscal deficits in Bhutan, Solomon Islands and, to a lesser extent, Lao People's Democratic Republic have widened since the pandemic, and fiscal balances in Bangladesh and Nepal have remained roughly unchanged. 

Also, low ratios of fiscal revenue to GDP, particularly in non-island graduating least developed countries, range from below 9% in Bangladesh to slightly above 26% in Bhutan, added the UN report.

Many countries have introduced extensions for filing taxes (e.g., Botswana, India and Nigeria) while others have temporarily suspended penalties and interest charges (e.g., Bangladesh and India) (Megersa, 2020) the UN reported adding that Bangladesh and Egypt introduced provisional tax changes, including reductions in tax rates, to manage the crisis. These temporary measures can be removed to create fiscal space. 

The UN urged the governments to carefully calibrate the process and remove tax cuts gradually, starting with sectors that have recovered faster before moving to those reviving at a slower pace.

The report stated that the central banks in South Asia have accelerated their interest rate hikes to stabilize exchange rates and tame inflationary pressures. 

The central banks of Pakistan and Sri Lanka started aggressive monetary tightening cycles in late 2021 amid rising inflation and widening current account deficits it said.

Whereas the Reserve Bank of India and the Central Bank of Bangladesh began tightening during the second quarter of 2022, later than most advanced economies, it added.

As the region's central banks prioritize bringing down inflation and keeping consumer inflation expectations anchored, further interest rate increases are expected in 2023, the UN urged caution.

Overall, the number of people in the South Asian region facing acute food insecurity rose in 2022, particularly in Afghanistan, Bangladesh, Pakistan and Sri Lanka (World Bank, 2022). 

The situation forced the Bangladesh government to reduce import tariffs on rice, increase fertilizer subsidies and boost budget allocations to the agricultural sector, the report added.

According to the report, slower growth, coupled with elevated inflation and mounting debt vulnerabilities, threatens to further set back hard-won achievements in sustainable development, deepening the already negative effects of the current crises.

Already in 2022, the number of people facing acute food insecurity had more than doubled compared to 2019, reaching almost 350 million.

A prolonged period of economic weakness and slow income growth would not only hamper poverty eradication but also constrain countries' ability to invest in the SDGs more broadly.

The UN Department of Economic and Social Affairs said that the current global economic slowdown "cuts across both developed and developing countries, with many facing risks of recession in 2023."

Shedding light on the 178-page report UN Secretary General Antonio Guterres said, "A broad-based and severe slowdown of the global economy looms large amid high inflation, aggressive monetary tightening, and heightened uncertainties." 

To put things into perspective, in Pakistan, the economy is expected to expand by only 2.5% in 2023, as devastating floods caused significant damages, particularly for agriculture, with spillover effects on related industrial and services sectors while Sri Lanka's economy contracted by an estimated 9% in 2022 and is likely to shrink by another 3.2% in 2023.

However, growth in India is expected to remain strong at 5.8%, albeit slightly lower than the estimated 6.4% in 2022, as higher interest rates and a global slowdown weigh on investment and export, it added.

Downside risks East and South Asia's near-term economic prospects face a deteriorating global environment. Weaker external demand will slow manufacturing activities and investment in export-dependent economies.

While the expected recovery of China's economy should support growth across the region, a surge in Covid-19 infections in China may temporarily impede such an outcome. Continued rate hikes in major developed countries could further tighten global liquidity, weaken domestic currencies, increase balance-of-payments vulnerabilities, and push up countries' debt servicing costs.

Existing high levels of sovereign debt and unsustainable debt-servicing burdens prompted several countries in South Asia to seek multilateral financial support. Climate risks are expected to continue affecting many countries in the region, exacerbating food insecurity and adding further pressure on inflation.

"The current crises are hitting the most vulnerable the hardest — often through no fault of their own. The global community needs to step up joint efforts to avert human suffering and support an inclusive and sustainable future for all," said Li Junhua, United Nations UnderSecretary-General for Economic and Social Affairs.