South Asia in the Developing Asia perspective: Need to balance external borrowings and growth impulses

The situation however has been somewhat different in certain countries of South Asia which have raised resources through external borrowings despite having current account deficits - Afghanistan, Maldives, Bhutan, Nepal Pakistan, and Sri Lanka.  Caution needs to be exercised by them in resorting to such borrowings.

Partha Pratim Mitra Nov 01, 2022
South Asia in the Developing Asia perspective (Photo: Twitter)

Developing Asia, which consists of  46 member countries eligible for Asian Development Bank (ADB) assistance, including the eight counties of South Asia, faces mounting challenges for economic recovery both internally and externally in the global context of the Russian invasion of Ukraine creating major uncertainties in the energy and food markets. With inflation showing its ugly head across the globe, restrictive monetary policies have been witnessed by central banks led by the US Federal Reserve. 

The inflation forecast for Developing Asia has been raised by the ADB  to 4.5 per cent from 3.7 per cent for 2022 and to 4.0% from 3.1% for 2023.   The strengthening US Dollar amidst global uncertainties has impacted global demand and made financial markets turbulent impacting the developed and the developing world.

Against this backdrop the ADB has in September 2022, projected Developing Asia to grow more slowly, at 4.3 per cent in 2022 and 4.9 per cent in 2023, revising downwards its earlier projection made in April 2022 of 5.2 per cent for2022 and 5.3 per cent  for 2023. East Asia and South Asia account for most of the downgrade in Developing Asia. East Asia’s growth has been revised down to 3.2 per cent from 4.7 per cent for 2022, as growth in China will be much weaker than expected earlier. 

Growth in South Asia in 2022 has been revised down to 6.5 per cent from 7.0 per cent  and to 6.5 per cent from 7.4 per cent for 2023 made in the earlier projection primarily due to monetary tightening and external debt repayment problems experienced in the region. Growth forecasts have either been raised or kept unchanged for the other regions of Developing Asia. 

Domestic demand driving recovery

While they have been raised for the Caucasus and Central Asia and the Pacific, for  South East Asia it remains largely unchanged. Many countries of the Developing Asia region have benefited from exports of crude oil and natural gas— Azerbaijan, Brunei Darussalam, Indonesia, Kazakhstan, Malaysia, Papua New Guinea, and Turkmenistan. Domestic demand leads the recovery even as inflation rises in Developing Asia.   The contribution of domestic consumption to overall growth rose in the economies of South East Asia as they reopened, marking an important shift from the more export-driven growth in earlier phases of the recovery.  

We would attempt to examine the structure of domestic demand that drives the growth process in Developing Asia a little more closely. The structure of domestic demand has five components for any country and consists of the following:(1)Household final consumption expenditure(2)Government final consumption expenditure  (3) Gross capital formation (4) Exports of goods &services (5)imports of goods& services. In the South Asian region between the period 2000  and 2021, except for the Maldives all the other seven countries –Afghanistan, Bangladesh, Bhutan, India, Nepal, Pakistan and Sri Lanka - had the first component as the predominant source (estimated to be of a numerical value which is more than 50% of GDP at current prices) of demand in the economy. 

The trends show that most economies of South Asia were less dependent on demand impulses from the external world. The major source of demand for the economies of the region mainly came from domestic sources such as consumption of households and government and investment in the domestic economy as witnessed by the trends in gross capital formation.

Resources to generate growth
Turning to the rest of Developing Asia, the trends witnessed in South Asia are somewhat different with the smaller as well as the large economies of South East Asia relying both on domestic sources as well as external sources for demand- Malaysia, Thailand, Philippines, Vietnam, Trends witnessed in South East Asia were also witnessed in East Asia – Hongkong, Mongolia, Republic of Korea, Chinese Taipei. The exception in the region has been the People’s Republic of China where the share of external sources of demand gradually declined over the years and the focus has been on an investment in the domestic economy to generate demand along with government consumption. The Caucasus and the Central Asian region –Tajikstan, Uzbekistan, Kazakstan and the Pacific region -Fiji, Tonga- Largely consist of smaller nations had relied upon both domestic and external sources for demand generation.

We now turn to the resources that are needed to generate incomes that trigger the growth process through demand. The resources for the generation of income that creates demand come from national savings invested in gross capital formation, government revenue from tax and non-tax sources that triggers government consumption demand, borrowings from internal and external sources that trigger investment and create incomes and foreign exchange earnings through exports, remittances by citizens from overseas and foreign capital that generates investment and incomes which create demand in the domestic economy. In the South Asian region data available for seven countries(except Maldives) show that between 2000 and 2021, national savings have not been able to fully finance the gross capital formation in most countries except Nepal and Pakistan.  

The picture is more uniform in the areas of government finances and balance of payments (Current account). All countries run a deficit in government budgetary finances as government revenues have not been able to fully finance government expenditures, and export earnings as well as inward remittances and other financial flows have not been able to fully bridge the balance of payments( current account) gap. However inward remittances and capital flow from abroad have in some countries – India, Bangladesh, Nepal - made the overall balance of payments position better. To generate resources for investment all countries in the region have had to resort to external borrowings which in recent years had become increasingly short-term in nature resulting in increased outflow for debt servicing out of their export earnings. 

Countries witnessing such increase in recent years were  Afghanistan, Pakistan, Bangladesh, Nepal and Sri Lanka. There are some countries that have witnessed sharp increases in total external debt-Maldives, Bhutan, Nepal, Sri Lanka and Pakistan. Such increases only point towards their growing dependency on the external world to mobilise resources for domestic growth.

Developing Asia situation
Looking at the situation in the rest of Developing Asia we find that in South East Asia out of the ten countries considered in our analysis, data available on savings and investment for nine countries (except Laos) shows that for six countries –Brunei, Malaysia, Philippines, Singapore, Thailand and Timor Leste - gross national savings exceeded gross capital formation while for the remaining three countries-Cambodia, Indonesia Vietnam- it was not so. In East Asia of the five countries considered in this analysis, four of them - Hongkong, the People’s Republic of China, the Republic of Korea, and Taiwan - gross national savings exceeded gross capital formation with Mongolia being the sole exception. In the Caucasus and Central Asian region of the three countries considered, two of them –Tajikistan and Kazakstan – had gross national savings that exceeded Gross Capital formation – while the third country –Uzbekistan did not.

For the Pacific region of the three countries considered,  data available for two of them (except  Papua New Guinea) - Fiji, and Tonga - showed a mixed picture with gross National Savings exceeding Gross Capital Formation for Fiji while it was not so for Tonga. The picture is more uniform for government finances in South East Asia with all ten countries of the region running budgetary deficits in recent years. The picture is also similar in East Asia while in the Caucasus and Central Asia –Tajikistan- ran budget deficits over a longer period while Uzbekistan and Kazakstan ran deficits only recently. In the Pacific region, Fiji and Papua NewGuinea ran budgetary deficits over a longer period while for Tonga there was no such deficit.

While there is an imperative to generate internal resources to meet budgetary deficits for Developing Asia, the balance of payments situation for most of the countries remains in the surplus for South East Asia except for a few countries which had deficits in the current account-Cambodia, Indonesia, Lao (Deficits on both current and overall) Malaysia (marginal overall deficit) the Philippines, Thailand(deficit on both current and overall only recently)Timor-Leste (deficit on both current and overall)In the countries of East Asia most countries had no balance of payments deficits except Mongolia and Hongkong which in 2021had a marginal overall deficit. 

Among the Caucasus and Central Asian countries, Uzbekistan had a current and overall deficit until recently while Kazakstan had a current account deficit with no overall deficit. while Tajikstan had surpluses on both current and overall. Among the Pacific countries, except for Fiji which had deficits both on current and overall, Papua New Guinea and Tonga had surpluses on the two accounts in 2021.

External borrowings' dilemma

Within Developing Asia, a look at the external debt profile of some countries in South East Asia shows that they have resorted to external borrowings including short-term borrowings-Cambodia, Indonesia, Lao, and Malaysia (Data available up to 2016) Philippines, and Thailand. For certain countries -Thailand, Philippines, Malaysia, Indonesia, Cambodia - the proportion of external debt to Gross National Income has been growing over the years, In East Asia, the appetite for external borrowings has also been growing with Hongkong and Mongolia at the top. 

In the Caucasus and Central Asia, a similar situation exists with all three countries resorting to external borrowings. In the Pacific region, Papua New Guinea has resorted to heavy borrowings among the three countries. followed by the other two countries which have been relatively more conservative in their approach toward external borrowings. Fiji and Papua New Guinea also face steep debt servicing burdens.

Relative stability on the balance of payments front gives many countries the confidence to borrow in external markets for raising resources for internal growth. The situation however has been somewhat different in certain countries of South Asia which have raised resources through external borrowings despite having current account deficits - Afghanistan, Maldives, Bhutan, Nepal Pakistan, and Sri Lanka.  Caution needs to be exercised by them in resorting to such borrowings.

(The writer is a retired Indian Economic Service officer. Views are personal, He can be reached at 

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