RAWALPINDI, Dec 12: GDP growth in South Asia which slowed markedly in 2008 to 6.3 per cent from 8.4 per cent in 2007, is expected to slip to 5.4 per cent in 2009, says a latest World Bank report.

High food and fuel prices, tighter credit conditions, and weaker foreign demand have led to worsening external accounts and slower investment growth. The downturn is most apparent in India and Pakistan, where industrial production fell sharply, says the World Bank report, ‘Global Economic Prospects 2009’.

Moreover, the onset of the financial crisis in the US and Europe in mid-September 2008 — which led to severe financial turmoil in emerging markets, including in many South Asian countries — ushered in a downshift in activity that started to take hold in late-2008.

The slowdown in growth during 2008 reflected increasing weakness in the region’s two largest economies, India and Pakistan.

In Pakistan, the economy deteriorated sharply over the course of 2008, as headline inflation surged, and the current account and fiscal deficits jumped on the back of rising oil and food prices.

Political turmoil and security concerns have also taken a toll on Pakistan’s economy, while the global financial crisis added substantial downward pressures on its financial markets.

Prior to reaching an agreement with the IMF for standby credit in mid-November, Pakistan came close to a full-blown balance of payments crisis.

Growth had already begun to wane in the region prior to the onset of the global crisis, as rising inflationary pressures and tight credit conditions had started to take a toll on domestic activity, while already slowing external demand and high international commodity prices led to a deterioration in external positions.

The initial effects of the global financial crisis in South Asia were sharp corrections in regional equity markets. Bourses in India, Pakistan, and Sri Lanka dropped 57 per cent, 39 per cent, and 35 per cent, respectively, over the year through mid-November.

Notably in Pakistan, curbs on the sale of equities were imposed in August, effectively preventing the exit of existing investors and discouraging potential new investors, according to the report.

Equity sell-offs and ‘flight-to-quality’ contributed to significant currency depreciation in some countries, with local currencies in India, Pakistan, and Nepal falling by 21 per cent, 30 per cent, and 21 per cent, respectively, against the US dollar, over the year through mid-November.

Despite the current financial turmoil and sharp slowdown in growth anticipated in 2009, longer-term prospects for developing countries have changed only modestly compared with last year’s forecast.

In part prospects are little changed because a slowdown had already been anticipated, albeit to a much lesser degree, according to the report.

The primary reason, however, lies in the long-term supply potential of developing countries, which should allow output to recoup the lost production induced by the coming growth recession during the first five years of the next decade.

The World Bank report says per capita GDP in developing countries over the period 2010–15 is expected to expand at a relatively rapid annual pace of 4.6 per cent, much faster than the 2.1 per cent pace of the 1990s and the 0.6 per cent average of the 1980s, replicating the average performance of this decade.

Improvements in macroeconomic policies have combined with structural reforms to reduce uncertainty and generally improve incentives for investment. The initial effects of the global financial crisis in South Asia were sharp corrections in regional equity markets.