The World Bank (WB) has downgraded the growth fore cast to 4.5 per cent in the fiscal year 2024-25, due to damage from floods and landslides, and to 5.2 per cent in the fiscal year 2025-26, as a result of persistent weakness in the financial system.
Amid increasing uncertainty in the global economy, South Asia’s growth prospects have weakened, with projections downgraded in most countries in the region, not only Nepal. Stepping up domestic revenue mobilization could help the region strengthen fragile fiscal positions and increase resilience against future shocks, says the World Bank in its twice-yearly regional outlook.
Likewise, Afghanistan economy is estimated to have grown by 2.5 per cent in the fiscal year 2024-25, slower than the pace of population growth and growth is forecast to increase only moderately to 2.2 per cent in 2025-26, whereas Bangladesh growth is expected to slow in the fiscal year 2024-25 to 3.3 per cent amid political uncertainty and persistent financial challenges, and the growth rebound in the fiscal year 2025-26 has been also downgraded to 4.9 per cent.
The World Bank has also downgraded the growth forecast of Bhutan to 6.6 per cent due to weak agriculture sector growth but upgraded in the next fiscal year to pick to 7.6 per cent due to expected strength in hydropower construction.
Indian growth story is also expected to slow from 6.5 per cent to 6.3 per cent as in the next fiscal year, as the benefits to private investment from monetary easing and regulatory streamlining are expected to be offset by global economic weakness and policy uncertainty, whereas the completion of a new airport terminal in Maldives will contribute to 5.7 per cent growth in 2025, although challenges in meeting external debt obligations continue to pose a downside risk, according to the World Bank.
In Pakistan, the economy continues to recover from a combination of natural disasters, external pressures, and inflation, and is expected grow by 2.7 per cent in the fiscal year 2024-25 and 3.1 per cent in the next fiscal year.
The Sri Lankan government has made further progress with debt restructuring, and a projected rebound in investment and external demand is expected to lift growth in 2025 to 3.5 per cent before it returns to 3.1 per cent in 2026.
Released today, the latest South Asia Development Update, Taxing Times, projects regional growth to slow to 5.8 per cent in 2025—0.4 percentage points below October projections—before ticking up to 6.1 per cent in 2026. This outlook is subject to heightened risks, including from a highly uncertain global landscape, combined with domestic vulnerabilities including constrained fiscal space.
“Multiple shocks over the past decade have left South Asian countries with limited buffers to withstand an increasingly challenging global environment,” said World Bank Vice President for South Asia Martin Raiser. “The region needs targeted reforms to address vulnerabilities such as fragile fiscal positions, backward agricultural sectors, and the impact of climate related shocks.”
Although tax rates in South Asia are often above the average in developing economies, most tax revenues are lower. On average during 2019–23, government revenues in South Asia totaled 18 percent of GDP—below the 24 percent of GDP average for other developing economies. Revenue shortfalls are particularly pronounced for consumption taxes but are also sizable for corporate and personal income taxes.
Tax revenues in South Asia are estimated to be 1 to 7 percentage points of GDP below their potential, based on existing tax rates, the report reads, adding that some of this shortfall is explained by the widespread informality and large agricultural sectors in the region. "However, even after taking this into account, sizable tax gaps remain, highlighting the need for improved tax policy and administration."
“Low revenues are at the root of South Asia’s fiscal fragility and could threaten macroeconomic stability, especially in times of elevated uncertainty,” said World Bank Chief Economist for South Asia Franziska Ohnsorge. “South Asian tax rates are relatively high, but collection is weak, leaving those who pay taxes with high burdens and governments with insufficient funds to improve basic services.”
The report recommends a range of policies to improve tax revenues by eliminating loopholes, streamlining tax codes, tightening enforcement, and facilitating tax compliance. This includes paring back tax exemptions; simplifying and unifying the tax regime to reduce incentives to operate in the informal sector; and using digital technology to identify taxpayers and facilitate collection. The report notes the potential of adopting pollution pricing, which could help address the high levels of air and water pollution while raising government revenues.
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