In Nepal, domestic demand was subdued on investor concerns over bankingsystem fragilities and a decline in remittances from the Middle East, according to a report by the International Monetary Fund (IMF).
The report 'World Economic and Financial Surveys regional economic outlook for Asia and Pacific titled 'Navigating an Uncertain Global Environment, While Building Inclusive Growth," in South Asia, private consumption remained robust in India on account of rising disposableincome, but investment was subdued partly on concerns over governance and the global outlook.
Similarly, in Bangladesh, buoyant credit growth amid a still-accommodative monetary stance continued to fuel domestic demand, while in Sri Lanka activity benefited from greater political stability. Wage pressures in Nepal, Mongolia, Timor-Leste, and Vietnam have been rising in recent months, it said, adding that a few factors suggest inflationary pressure may continue in the near future in Asian Low Income Countries (LICs).
Asian LICs’ core (or nonfood) inflation has been lower for the most part in the current episode, even though it is increasing in some countries. Core rates have also risen more slowly than in emerging Asia suggesting that inflation may not yet have run its course in Asian LICs, the report added.
Similarly, headline inflation for Asian LICs reached a three-year high in 2011. Generally, food inflation has been the main driver of inflation, it said, adding that in some cases, however, the procyclicality of macroeconomic policies, along with second-order effects of higher food prices, contributed to raise core inflation rates. "As of September 2011, futures prices for rice and wheat imply price increases for these major staples of about 10 per cent through end-2012. Higher food and commodity prices carry with them a risk of more generalised inflation, if they destabilise inflation expectations."
The report also suggested Asian policy makers to balance growth considerations against inflation and balance sheet risks from prolonged easy financial conditions. "In economies where inflation pressures are still elevated and monetary conditions accommodative, the return to more neutral monetary stances should continue," it said, adding, "However, for economies where expected inflation is within central banks’ target ranges and the exposure to severe external shocks is greater, a pause in monetary tightening may be warranted.
Meanwhile, fiscal policy consolidation is rightly continuing in many economies as structural fiscal deficits are still above pre-crisis levels.
Asian countries have taken comprehensive reforms over the past decade to strengthen their financial, corporate and public sector balance sheets that are now providing strong buffers for the renewed global uncertainties.
Thus, if the downside risks to the global outlook were to materialise, the IMF said that Asian economies have the scope to reverse course and use a range of measures to cushion the impact on economic activity, as many did in response to the global crisis in 2008.
Fears about the spillovers from global growth amid still high inflation pressures in much of the region mean that policymakers in Asia face a delicate balancing act, according to the IMF.
Tighten loop holes
KATHMANDU: In low-income economies, including Cambodia and Nepal, as well as emerging economies like the Philippines, significant revenue enhancement can be achieved by efforts to strengthen tax administration, the IMF report said, adding that revenue measures can also play a role in creating fiscal space. In Japan, comprehensive tax reform with a gradual increase in the consumption tax and a reduction of the corporate tax rate — with revenue losses offset by reforms of personal income tax that reduce allowances and base exemptions — will help ensure fiscal sustainability in the face of reconstruction costs and the need to promote private investment.