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The Financial Express

Focusing on orderly exit from stimulus


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In its recent Regional Economic Outlook (REO), the International Monetary Fund (IMF) notes that the pandemic has taken a turn for the worse in Asia since the spring, along with the region's growth outlook. The growth projection for the Asia and Pacific region is downgraded by more than 1.0 per cent to 6.5 per cent compared to the April 2021 forecasts--more than for any other region. The downgrade is mostly due to the fast spread of the delta variant amid initially low vaccination rates, which has tragically led to further devastating loss of lives, especially in the densely populated south and southeast Asia. Although demand for Asian manufacturing and exports from Europe and the US has supported recoveries, real Gross Domestic Product (GDP) outcomes in the first half of 2021 have disappointed. Manufacturing held up because of surging demand for pandemic-related supplies, but contact-intensive sectors such as services and retail sales are taking longer to recover. 

Despite the downward revision, Asia Pacific remains the fastest growing region in the world. But the divergence between Asian advanced economies and emerging and developing economies is deepening. High-tech (e.g., China, South Korea) or commodity exporters (e.g., Australia, New Zealand) can take full advantage of favourable external demand and accommodative financial conditions. By contrast, tourism-dependent economies such as the Pacific island countries and Thailand, as well as economies with limited room for fiscal stimulus (mostly low-income countries), have been lagging. 

As vaccination rates accelerate, the region is expected to grow by 4.9 per cent in 2022, 0.4 percentage point faster than projected in April. However, output levels in emerging and developing economies are expected to remain below pre-pandemic trends in the coming years.

Accelerating inflation remains a concern for the global economy, though price increases in Asia are more subdued than in other regions. Higher commodity prices, supply chain bottlenecks, and rising shipping costs have impacted exports more than domestic production. And thus, domestic consumer price increases have been contained.

As a result, monetary policies in the region have not tightened as much as in the rest of the world. While New Zealand was the advanced economy to taper asset purchases and Korea the first to raise policy interest rates (mainly due to financial stability considerations), emerging Asia has maintained an accommodative monetary policy to foster the recovery, unlike other emerging markets.

There are downside risks to the region's economic outlook. On the health front, the uncertain path of the pandemic and weakening vaccine efficacy against virus variants is a risk. On the economic side, global supply disruptions and potential financial spillovers from the Federal Reserve scaling back its support for the U.S. economy is a concern for the region. Higher financing costs can interact with domestic financial vulnerabilities (rising leverage in the corporate and housing sectors in some countries) and slow the recovery further. Natural disasters also pose a growing threat to low-income countries, especially the Pacific Island countries.

Given these challenges, our latest assessment calls for policymakers to carefully navigate the uncertainties and adjust their policy responses accordingly. Their first priority should be to address the health crisis. Swift and broad vaccinations and equitable sharing of vaccines globally are critical. In addition, macroeconomic policy support should remain in place where possible with improved targeting of support for the most vulnerable people and sectors, until the recovery is more firmly established, and the pandemic is under control. We also advise that fiscal policies should be undertaken within medium-term frameworks to maintain credibility and keep borrowing costs low, while central banks should be prepared to act quickly if the recovery strengthens faster than expected or where there is a tangible risk of rising inflation expectations.

Structural reforms and investments to develop new growth engines, including in the digital, education, and green sectors, would help raise productivity and ensure more equitable outcomes for students and workers dealt setbacks by the pandemic's upending of their learning and lives.

To explore the policies to foster a strong and durable recovery, this REO presents two studies. The first study provides new empirical evidence on the health and economic benefits of swift vaccinations. The analysis quantifies how these inoculations can spill over across borders, demonstrating that no single nation can fully recover until all countries enjoy broad access. The second study highlights how trade-a historically powerful driver of growth in Asia-has stalled, in part due to waning liberalisation amid still high trade restrictions. The analysis underscores how reducing non-tariff barriers-which are significantly higher in Asia than in other regions-can help to accelerate inclusive prosperity. This would also build on the past progress achieved through regional agreements, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and the Regional Comprehensive Economic Partnership.

In Bangladesh, multiple nation-wide lockdowns were imposed with the more recent ones formulated to keep - the RMG sector and the agriculture sector - open. Support packages close to Tk 1.0 trillion were announced during March to April 2020, which included wage support, working capital loans and social assistance. This was gradually scaled up to Tk. 1.8 trillion (around 6.0 per cent of GDP). The national Covid-19 vaccination strategy, kick started in January 2021, was supported by securing rapid access to vaccine financing. However, these efforts were dragged down by significant supply shortages. Although vaccination rates have improved since, Bangladesh continues to trail its South Asian peers.

Implementation of the stimulus package and the expansion of the fiscal deficit supported the recovery, although it was disrupted by the second and third wave of pandemic in last quarter of FY21 and the first quarter of FY22. The slowdown in vaccinations also added to this disruption. Supply side pressures kept food inflation elevated in early FY21, however, pressures eased later in the year and inflation declined. Exports and remittances surpassed expectations strengthening reserve buffers.

Bangladesh aims to reach upper middle-income status by 2031. Sustaining high pro-poor growth to reach middle income status requires (1) developing new growth engines and increasing productivity to create good paying jobs (2) bridging infrastructure gaps (3) investing in human capital and (4) addressing climate vulnerabilities.

Near-term policy priorities in Bangladesh should focus on providing additional stimulus as needed and ensuring a timely and an orderly exit from the stimulus. Over the longer term, mobilizing revenues by modernising tax administration, rationalising the VAT structure, and managing fiscal risks remain key fiscal priorities. For monetary and exchange rate policies, the focus should be on increasing exchange rate flexibility gradually and maintaining adequate FX reserves. Strengthening banking regulation and supervision, improving corporate governance, reforming legal systems, and reforming and reassessing the role of state-owned commercial banks are important financial sector reforms. In addition, lowering barriers for new businesses and rationalising the tariff structure would promote diversification. And finally, boosting female labour force participation and increasing financial inclusion would keep the growth inclusive.

Changyong Rhee, Director, Asia and Pacific Department, International Monetary Fund.

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