Precarious outlook

Chapter 2:

precArious outlook

Amid vaccine rollouts, the focus in South Asia is shifting to the still-incomplete recovery as major risks remain: a surge of COVID-19 cases as of end-March in India, Bangladesh, and Pakistan may require continued restrictions. We take a close look at the fiscal options of governments and how best the public sector can respond given very limited fiscal space. While public investment is crucial to reigniting long-term economic growth, tighter financial constraints force South Asia to deliver more with less. A critical challenge is how to support economic recovery while taking care of large COVID-related health expenditures by enhancing the efficiency of available resources. This is a tall order. Moreover, South Asia must contend with the long-term challenges of mitigating climate change and raising the level of human capital. The crisis does present an opportunity for countries to shift their policy priorities and make their institutions more resilient as they learn from the crisis.

This chapter presents the forecast and focuses on fiscal options given the difficult tradeoffs. Section 2.1 presents the forecasts for the region to 2023, the uncertainty around the baseline forecast, and the main risks to the outlook (including the risk of a sudden stop). Section 2.2 looks at how this crisis may differ from the previous global financial crisis in terms of aggregate variables. It also considers the different fiscal policy stances of the countries in 2021 and 2022 and what they imply for the sustainability of public debt. Section 2.3 estimates the fiscal multiplier for South Asia and how relevant this indicator is as the countries contend with this unique crisis. Section 2.4 considers two key long-term challenges that require making fiscal spending more effective: resilience to climate change and raising the level of education.