FDI in South Asia rises to $8.4b in ’05

ISLAMABAD — Foreign direct investment (FDI) in South Asia rose to $8.4 billion in 2005, an increase of $1.2 billion from in 2004.

By From A Correspondent

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Published: Sat 3 Jun 2006, 9:55 AM

Last updated: Sat 4 Apr 2015, 3:21 PM

According to a latest World Bank report, in India, investment rose in industries such as cement, sugar, plastics and rubber, and hotels. While in Pakistan, privatisation and resource-related investment led to a doubling of foreign direct investment from $1.1 billion in 2004 to $2.2 billion in 2005. Growth in the rest of the region was mixed.

The report said that regional GDP growth for 2005 accelerated to 7.7 per cent, driven by very strong growth in Afghanistan at 13.8 per cent, Bhutan 8 per cent, India 8.0 per cent,

and Pakistan 7.8 per cent.

It also said that tighter monetary policy in Pakistan and Sri Lanka was expected to stem increases in the inflation rate.

The Bank termed the increase in the inflation as a serious challenge for the South Asian region.

It said that while large swings in food prices have contributed to the upswing in regional inflation, rapid increases in domestic demand (notably consumption) and low interest rates likely played a role. However, the Bank believed that in the current context, and especially with significant portions of high oil prices yet to be passed on to consumer prices, a tightening of monetary and fiscal policy of the government of Pakistan is needed, if overheating and a hard landing are to be avoided.

Much of the increase in inflation stems from changes in food prices, with good harvests in Afghanistan, India, and Pakistan leading to some easing or containment of pressures, while poor harvests in Bangladesh and Nepal created the opposite effect.

Although several countries have taken steps to pass on higher oil prices, explicit and implicit subsidies (through state oil companies) are imposing a heavy burden on the government purses. They have increased government deficits by as much as 0.5 per cent of GDP in Pakistan and 0.7 per cent of GDP in India between 2002 and 2005, the report said.

In India, subsidies appear to have crowded out other development spending on health and education .

In India and Pakistan, the two largest economies in the region, growth was consumption-led, reflecting higher farm incomes and a relaxation of fiscal policy in Pakistan, plus an already lax fiscal and monetary policy stance in India.

The boost to private consumption represented almost three quarters of the increase in Indian GDP . In India, investment and exports continued to grow rapidly, but in Pakistan investment grew 1.5 per cent while exports were up 7.8 per cent.

The acceleration of domestic demand in Pakistan was not met by domestic production and, as a result, imports rose by much more than exports.

Even in India, industrial production growth slowed from 8.5 per cent in 2004 to 7.8 per cent in 2005 and import growth outstripped exports by a significant margin suggesting that supply was unable to keep up with demand.

Notwithstanding double-digit growth in export volumes in 2005, the combination of higher oil prices and very strong consumption demand generated deterioration in the regional current account balance equal to 2.0 per cent of GDP.

"The deterioration would have been worse, but the region has benefited from the removal of textile and clothing quotas, gaining market share", the report said.

While the clothing and textile exports of Bangladesh, India, Pakistan, and Sri Lanka picked up, producers in Nepal and the Maldives lost market share.

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