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Economic Crises Everywhere: What’s Happening in India’s Neighborhood

All is not well in India’s neighborhood. Pakistan recently has another prime minister. Sri Lanka is on the verge of defaulting on its foreign debt for the first time since independence. Nepal has suspended the head of its central bank amid economic uncertainty. And in China, there is concern that the new Covid-19 restrictions could destabilize its economy that almost managed to survive the previous phases of the pandemic.

A crisis is brewing in the neighborhood of India and while the factors are many, the one common thread across all countries is the economy and the Covid-19 pandemic. Here’s a quick look at what’s going on in some of India’s neighbors when it comes to their economies.

PAKISTAN

Like Imran Khan, Pakistan’s new Prime Minister Shehbaz Sharif has promised to focus on and strengthen the economy.

Once again, a Pakistani prime minister left office without completing the full five-year term. Imran Khan, who took over as prime minister in 2018, came to power promising to create a ‘naya’ (new) Pakistan. During his campaign, the swashbuckling former cricketer focused on the anti-corruption chart and his campaign struck a chord with the masses. Imran Khan promised to improve Pakistan with a ‘naya’ global image and a better economy.

Cut to March 2022. Pakistan is in the midst of neck-deep debt and high inflation with unemployment figures reaching a record high. In response, the Wazir-e-Azam said: I did not go into politics to know the prices of tomatoes and potatoes.

Less than a month later, Imran Khan faced a vote of no confidence which he lost and Pakistan got another prime minister: Nawaz Sharif’s brother, Shehbaz Sharif. Sharif also promised to tackle the economic crisis on a war footing. “After the formation of the federal cabinet, the government would present plans to overcome inflation and revive the economy,” Sharif told the media shortly after being sworn in.

But the work ahead is not so simple.

The State Bank of Pakistan (SBP) last week projected a deteriorating outlook for inflation, which has remained in double digits for some time. Pakistan’s central bank said March inflation was higher than expected. He said the average inflation forecast had been revised up to just over 11 percent in FY22.

The SBP also pointed to the pressure of a sharp drop in foreign exchange reserves. Reserves held by Pakistan’s central bank fell by $728 million to $11.3 billion on April 1, compared with $16.2 billion on March 4. a mining project.

Meanwhile, the Asian Development Bank has projected the country’s GDP growth rate at 4 percent this year.

SRI LANKA

In Sri Lanka, people struggle to obtain essential things like food and medicine. Thousands of people have taken to the streets to denounce the government headed by President Gotabaya Rajapaksa and his older brother, Prime Minister Mahinda Rajapaksa.

Like Pakistan, India’s southern neighbor is also in deep trouble. Sri Lankans face a shortage of basic items such as milk, rice, electricity and medicine. The crisis in the island nation has turned into protests and violence in the streets and mass resignations of ministers.

In late November 2019, after winning Sri Lanka’s presidential election and months before a parliamentary vote that would once again test his popularity, Gotabaya Rajapaksa assembled his cabinet and made good on his campaign promise to cut taxes. The move, which included nearly halving the value-added tax, surprised some top central bank executives.

READ ALSO | How Sri Lanka’s economic crisis unfolded

The economic case for the cuts was simple: it was necessary to free up spending and boost Sri Lanka’s ailing finances. The counterargument, however, was that cutting potential income when obligations were high was risky and undermined a 2019 debt management plan that depended on a reduced fiscal deficit.

Not long after the move, the Covid-19 pandemic hit, crippling Lanka’s economy that relied heavily on tourism. While the pandemic-induced hit to Sri Lanka’s coffers was all but inevitable, some analysts say pre-Covid-19 policies exacerbated the problems, leaving the country in a vulnerable financial position.

Sri Lanka is currently facing its worst economic crisis since independence in 1948 and is on the verge of its first default. The island nation has been asking friendly nations including India and China for lines of credit, food and energy, even as central Sri Lanka has been left with dwindling foreign exchange reserves.

Sri Lanka’s foreign exchange reserves stood at $1.93 billion at the end of March. The island nation’s reserves have plunged by more than two-thirds in the past two years as tax cuts and the Covid-19 pandemic severely damaged its tourism-dependent economy and exposed debt-fueled government spending.

READ ALSO | Sri Lanka crisis highlights culture of debt and giveaways in India

The country has foreign debt payments of about $4 billion due this year, including a $1 billion international sovereign bond due in July. However, Sri Lanka’s central bank stated that it had become “difficult and impossible” to pay off the external debt.

Meanwhile, the Asian Development Bank has projected the GDP growth rate for the year 2022 to be 2.4 percent.

NEPAL

Nepal’s foreign exchange reserves have been declining since July 2021, shortly after a political crisis in the country led to the fall of the KP Sharma Oli government.

India’s neighbor to the east is also facing an economic crisis. Like Sri Lanka, Nepal’s foreign exchange reserves have been hit by a drop in tourism in Asia during the pandemic.

“Nepal Rastra Bank (NRB, the central bank) feels that the country’s foreign exchange reserves are under pressure and something must be done to restrict the import of non-essential goods, without affecting the supply of essential goods,” said the deputy spokesman for NRB, Narayan Prasad Pokharel. he has told Reuters.

As a result, Nepal is restricting imports of cars, gold, and cosmetics. The government also suspended the central bank governor and appointed his deputy acting chief.

READ ALSO | A History of India’s Neighbors: Is Nepal Going South, Sri Lankan Style?

The Himalayan country relies heavily on tourism and the export of limited commodities for the foreign exchange reserves the country needs to cover its import bills. Foreign exchange reserves have been declining since July 2021 shortly after a political crisis in the country led to the fall of the KP Sharma Oli government. Imports have been increasing ever since, while remittance inflows and tourism receipts and exports have declined.

Nepal’s foreign exchange reserves decreased from $11.75 billion in mid-July 2021 to $9.75 billion in February this year. This is enough to pay import bills for less than seven months, the threshold set as a benchmark by the country’s central bank.

The country’s import bill rose 38.6 percent to $10.8 billion in the first eight months of the fiscal year that began in mid-July. This forced the government to dip into foreign currency reserves amid sluggish export earnings.

Rising global prices for commodities such as crude oil and edible oil are putting pressure on the picturesque Himalayan country’s foreign exchange reserves amid declining remittances and tourism earnings.

The reserves are enough to sustain imports for just over six months for the country.

CHINA

While China has still managed to get its economy under control during the pandemic, another outbreak of Covid-19 is keeping the country on edge. Currently, a total of 23 Chinese cities have implemented full or partial lockdowns, collectively housing approximately 193 million people and contributing 22% of China’s GDP.

The European Union Chamber of Commerce in China has said the current strategy is leading to increasing difficulties in transporting goods between provinces and ports, hurting factory output. This would likely affect China’s export capacity, which could eventually fuel inflation.

READ ALSO | People protest and fight for food in Shanghai lockdown amid reports of suicides and killing of pets

WHAT ABOUT INDIA?

India, which reported a 17-month high rate of inflation in March, has seen the steepest weekly drop in its foreign exchange reserves, according to data from the Reserve Bank of India (RBI) released on April 8. billion as the currency came under pressure due to geopolitical developments, according to RBI.

The worst previous weekly drop was $9.6 billion for the week ending March 11.

However, on a silver lining, RBI Governor Shaktikanta Das has stated that economic activity was barely above pre-pandemic levels but continues to recover steadily.

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