VVV

14-15 January 2010 ADB Headquarters, Manila, Philippines
Report 5
Impact and Policy Responses
Bangladesh, Sri Lanka, Nepal,
Bhutan, Maldives
This paper was prepared by the Centennial Group as discussion materials
for the Regional Forum on the Impact of Global Economic and Financial
Crisis a regional technical assistance (RETA No. 6508), funded by the Asian
Development Bank (ADB).
The views expressed in this publication are those of the consultants and do
not necessarily reflect the views and policies of the Asian Development Bank
(ADB) or its Board of Governors or the governments they represent.
ADB does not guarantee the accuracy of the data included in this publication
and accepts no responsibility for any consequence of their use.
By making any designation of or reference to a particular territory or
geographic area, or by using the term country in this document, ADB
does not intend to make any judgments as to the legal or other status of
any territory or area.
Bangladesh, Sri Lanka, Nepal, Bhutan, Maldives
Prepared for ADB By
Manu Bhaskaran and Ritwick Ghosh
Centennial Asia Advisors
A member of
Centennial Group International
4 January 2010
CONTENTS
CHAPTER 1: BANGLADESH...........................................................
..................................... 3Introduction and Summary ................
................................................................................
. 3
1.1 Where does the economy stand? ..............................................
............................... 3
1.2 Prospects for the economy upside likely but some risks present .............
.............. 71.3 Implications for policy ....................................
......................................................... 11
CHAPTER 2: SRI LANKA ...........................................................
........................................ 13
Introduction and Summary .......................................................
........................................ 13
............................. 13
2.2 Prospects for the economy ..................................................
................................... 17
2.3 Implications for policy ....................................................
......................................... 21
CHAPTER 3: NEPAL ...............................................................
........................................... 23
........................................ 23
............................. 23
3.2 Prospects for 2010 .........................................................
........................................ 26
3.3 Developing Nepal s economic resilience .......................................
......................... 27
3.4 Implications for policy ....................................................
......................................... 28
CHAPTER 4: BHUTAN ..............................................................
......................................... 29
........................................ 29
............................. 29
................................... 31
4.3 Developing Bhutan s economic resilience ......................................
........................ 31
4.4 Policy suggestions .........................................................
........................................ 32
CHAPTER 5: MALDIVES ............................................................
........................................ 33
........................................ 33
............................. 33
................................... 35
5.3 Developing Maldives s economic resilience.....................................
....................... 36
5.4 Implications for policy.....................................................
........................................ 37
2
CHAPTER 1: BANGLADESH
Introduction and Summary
The Bangladesh economy has shown encouraging resilience in 2008/20091, with real
GDP
growing by 5.9%, only 0.3 percentage points below that of the previous year (Tab
le 1.1).
These figures suggest that Bangladesh has barely been impacted by the crisis but
deeper
analysis finds some areas where the economy did not perform as well. We summariz
e our
findings below:
The two areas of the economy remittance inflows and garment exports which helped
the economy weather the crisis with remarkable resilience are susceptible to the
vagaries of the global economy. In particular, remittances may not remain as res
ilient
when overseas Bangladeshi workers return home in 2010.
Inflation remains a worry. With reserve money growing rapidly as a result of uns
terilized
intervention in the currency markets, inflationary pressures could be easily tri
ggered by
an exogenous shock such as a spike in global food prices. Monetary policy should
be
tightened gradually but pro-actively.
In the longer term, Bangladesh s growth model might need some modification. As the
economy becomes larger and more globalized it needs to diversify its drivers of
growth
away from garment exports and remittance inflows.
1.1 Where does the economy stand?
In the absence of quarterly figures, Table 1.1 presents annual GDP growth data.
For the
year ending June 2009 which captures part of the global recession s impact, econom
ic
growth has been steady, driven by the same structural mix as in previous years.
Notably
growth in manufacturing has decelerated in the last four years with the lowest r
ate being in
2008/09.
Table 1.1: Bangladesh GDP
% y/y 2005/06 2006/07 2007/08 2008/09
Real GDP 6.3 6.4 6.2 5.9
Agriculture and Forestry 5.2 4.7 2.9 4.8
Mining and Quarrying 9.3 8.3 8.9 9.4
Manufacturing 10.8 9.7 7.2 5.9
Electricity, Gas and Water Supply 7.7 2.1 6.8 4.5
Construction 8.3 7.0 5.7 5.7
Wholesale and Retail Trade 6.8 8.0 6.8 6.4
Hotel and Restaurants 7.5 7.5 7.6 7.6
Transport, Storage & Communication 8.0 8.0 8.6 7.6
Financial Intermediations 8.5 9.2 8.9 8.0
Real Estate, Renting and Business 3.7 3.8 3.8 3.8
Activities
Other Services 6.2 6.5 5.8 6.2
Source: Collated by Centennial Group using CEIC Database.
Fiscal year in Bangladesh refers to July of the first year to June of the next.
3
First, while the trade channel did hurt the economy, its adverse impact was less
than
in other more export-dependent economies
Chart 1.1 shows the sharp fall in Bangladesh s exports as the global crisis unfold
ed. Export
growth in 2009 has been contracting throughout the year (except January 2009). E
xports
contracted 15.9% on a three month rolling average basis in June 2009. This cause
d
manufacturing to slow (Chart 1.2), but it is noteworthy that manufacturing produ
ction did not
contract as it did in many East and Southeast Asian economies. One reason could
be that
exports of readymade garments, which form the bulk of Bangladeshi exports, have
not
contracted at all (Chart 1.3). Instead, growth in apparel exports has expanded a
t an average
of 17% in the first 7 months of 2009. The pull back in export was driven by comm
odity
exports such as tea and fish products or lower value-added manufactured items su
ch as
leather.
-
-
Chart 1.1 Chart 1.2
Exports fell sharply, causing manufacturing to slow but not
fall
20.0
10.0
0.0
10.0
20.0
30.0
40.0
50.0
60.0
Jan-02
Oct-02
Jul-03
Apr-04
Jan-05
Oct-05
Jul-06
Apr-07
Jan-08
Oct-08
%y/y3MMA B angladesh: Trade
Exports
Imports
0.0
5.0
10.0
15.0
20.0
Jan-02
Sep-02
May-03
Jan-04
Sep-04
May-05
Jan-06
Sep-06
May-07
Jan-08
Sep-08
%y/y 3MMA Bangladesh: Manufacturing Index
While the impact of the external shock on manufacturing production was mitigated
, there is a
risk that there could be lagged adverse impacts on other parts of the economy. F
or example:
The construction industry is a major source of employment and a slowdown would c
ause
job losses. The sector breakdown of the GDP shows that the construction industry
has
remained stable in the last fiscal year. However indicators such as cement and i
ron
imports have contracted and foretell a slowing of the construction sector.
Similarly, capital machinery imports in the July 2008-March 2009 period showed a
15.4%
decline over the same period in the previous year.
4
-
-0
20
40
60
80
100 iChart 1.3 Chart 1.4
Textile/garment exports held up well as did remittances
20.0
10.0
0.0
10.0
20.0
30.0
40.0
50.0
60.0
Jan-02
Oct-02
Jul-03
Apr-04
Jan-05
Oct-05
Jul-06
Apr-07
Jan-08
Oct-08
%y/y3MMA B angladesh: Textile exports
-20
Jul-05
Nov-05
Mar-06
Jul-06
Nov-06
Mar-07
Jul-07
Nov-07
Mar-08
Jul-08
Nov-08
Mar-09
Jul-09
% y/y Bangladesh: Remttances
Second, remittances remained resilient as well, providing support to economic
activity
Remittance growth, when measured in US$ terms, has decelerated, but not as much
as
expected. Remittances grew 22.4% y/y in 2008/09 (Chart 1.4). But this resilience
may be
fragile forward looking indicators for remittances such as overseas deployment o
f
Bangladesh workers contracted by 33.7% y/y in 2009. The return of 12,000 Banglad
eshi
workers from Malaysia in 2008/09 will have an impact on the remittance flows. Th
ese
indicators raise the risk that there could be a lagged effect on remittance infl
ows of the global
crisis.
JulJulJul-2000
-1000
0
1000
2000
3000
Chart 1.5 Chart 1.6
Mild fall in the stock market mainly driven by foreign investors
1,400
1,700
2,000
2,300
2,600
2,900
3,200
3,500
Oct-06
Mar-07
-07
Nov-07
Mar-08
-08
Nov-08
Mar-09
-09
Dhaka Stock Exchange Oct-06
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
BDT Mn B angladesh: Portfolio Investments
Third, the transmission of financial shocks from the global environment to
Bangladesh was relatively muted
Financial markets remain consistent with rest of the region. The Dhaka Stock
Exchange has grown in prominence over the years, as domestic borrowers are going
beyond traditional sources of credit like bank loans. The stock market index ros
e to a
peak of 3,147 in May 2008 and then fell to a low of 2,433 before rebounding to 4
393 in
December 2009 (Chart 1.5).
5
Capital flows regain momentum but too small to make a difference. Foreign portfo
lio
investors recorded a deficit of US$159 million in 2008/2009 from a surplus of US
$47
million in 2007/2008. The main months of deficit were in Q1 2009 (Chart 1.6).
However, weakening loan disbursements suggest a lagged impact. Broad indicators
of loan disbursements showed sudden deceleration and even contraction in 2008 (C
hart
1.7). Other indicators such as term loans disbursements to industries showed a d
ecline
of 9.6% y/y in the July 2008-March 2009 period.
-40
-20
0
20
40
60
80
100
-
-
-
Chart 1.7 Chart 1.8
Sharp fall in loan disbursements Current account in good shape
Sep-05
Jan-06
May-06
Sep-06
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Bangladesh: Loans
3.00
2.00
1.00
0.00
1.00
2.00
3.00
2000/01
2001/02
2002/03
2003/04
2004/05
2005/06
2006/07
2007/08
2008/09
% of GDP Bangladesh: Current Account
Fourth, as a result, the external accounts remained firm
Current account improving. The current account was healthy at 2.35% of GDP in
2008/09 increasing from 1.22% of GDP in 2007/08 (Chart 1.8). The stronger curren
t
account was driven by higher inflows of worker remittances despite ongoing defic
its in
the trade balance.
The exchange rate remained virtually tied to the US Dollar. Chart 1.9 shows how
the
Bangladeshi Taka has remained broadly stable against the US Dollar, even when th
e
US$ was weakening in 2007. This gave the real exchange rate a more competitive e
dge
and may partially explain the resilience of Bangladesh s garment exports.
Enough foreign exchange reserves being accumulated. Continuing the increasing
trend since 2001, international reserves reached a new high of US$7.5 billion in
2008/09
(Chart 1.10). A favourable balance of payments, caused by the flow of inward
remittances, has been an important component in Bangladesh economy s ability to wa
rd
off external threats.
6
455055606570752000/
2001/
2002/
2003/
2004/
2005/
2006/
2007/
2008/
lChart 1.9 Chart 1.10
Exchange rate remained stable vs US$ and reserves accumulated
Jul-00Feb-01Sep-01Apr-02Nov-02Jun-03Jan-04Aug-04Mar-05Oct-05May-06Dec-06Jul-07Fe
b-08Sep-08Apr-09BDT/USD
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
USD bn B angadesh: Forex reserves
1.2 Prospects for the economy upside likely but some risks present
First, the global environment looks mostly positive for Bangladesh but does cont
ain
some risks
Table 1.2 summarizes impact of the various transmission mechanisms on Bangladesh
.
Table 1.2: Transmission mechanisms
Scenario for 2009/10 Threats/Upsides
Trade Export growth should return to
positive territory by 4Q09.
Risks
In an unlikely but possible scenario,
the demand for readymade garments
could fall in case of a prolonged
suppression of consumer demand in
G-3.
This will have a cascading impact on
the entire economy.
Remittances The remittance outlook remains Risks
optimistic as the global economy
recovers but there could be some
lagged impacts from the crisis.
Lagged negative impacts due to the
problems in Dubai and other labourimporting
countries remain a risk.
Introduction of restrictions on foreign
labour by other countries is a worry.
Upside
Remittances remain unscathed from
the crisis which could lead to an
increase in worker demands in the
Middle East, on the back of
confirmed resilience in the region.
FDI Bangladesh will still remain a popular
destination for FDI. Attractive sectors
will be infrastructure and
manufacturing.
A more stable political leadership
7
following elections has bolstered
investor confidence.
The resilience shown by the
Bangladeshi economy will make it an
attractive location.
Commodity The increase in prices in 2009 had a
Prices mild effect so far but will translate into
higher inflation by end 2009. Still,
inflation will not return to 2008 highs.
Foreign Aid As expected overseas development
assistance (ODA) has slowed in
2008/09 and will slow as long as
economic growth in donor economies
does not stabilise.
Can economy continue to be resilient - strengths and weaknesses
The current crisis had muted effect on Bangladesh s economy which is not surprisin
g given
that the Bangladeshi economy is not very exposed to the global economy. Note, ho
wever,
that the Bangladeshi economy is primarily about low vulnerability rather than hi
gh resilience.
Only certain sections of the economy have been globalized and have external link
s.
Thus, the internal resilience framework of the Bangladesh economy was not really
tested
during the recent global crisis. However, as Bangladesh becomes more integrated
into
global trade, finance and investment flows, its resilience will probably be test
ed more in the
future. Resilience is all about the balance between shock absorbers and shock am
plifiers our
analysis in Table 1.3 suggests that there are some deficiencies in the economic
resilience structure of Bangladesh that need to be addressed.
Table 1.3: Analysing Bangladesh s Economic Resilience
2000 2008Component/Indicator Comments
Export Diversity
Average coefficient of 1.4 1.2 The more diversified your export base, the more
variation for top 10 exports resilient the economy is.
and destinations Lack of diversity in the export market allows no
room for manoeuvre.
Demand Diversity
C + I + G (% of GDP) 105.1 107.1 The greater the dependence on exports and less
exposure to domestic demand, the less resilient
the economy is likely to be.
Domestic demand of about 107% of the GDP is a
major shock absorber.
Automatic Stabilisers
10 year average of change 2.6 2.4 Tax revenues automatically adjust as economy
in tax revenue/change in accelerates or decelerates, providing a natural
GDP automatic stabiliser or shock absorber in the
economy.
Lack of automatic stabilizers to alleviate impact of
the crisis on households and poor sections of
society.
8
Capacity for swift and effective policy response
Fiscal - Public Debt (% of 36.2 46.9 Higher public debt imposes a constraint on
use of
GDP) fiscal tools.
High public debt and high dependence on
overseas development aid encumbers the
capacity for the government to act through fiscal
means.
Monetary - G7-Country -3.9 -3.6 The greater the credibility the central bank has
Inflation over 8 yrs (%y/y) built up by controlling inflation not too different
from major countries inflation, the more latitude
central bank has to ease monetary conditions in a
slowdown.
Local inflation is consistently higher than that of
major trading partners, a source of vulnerability.
External Financial Vulnerability
Financially mobile capital 24.0 41.3 High financially mobile capital in relation
to FX
(as % of foreign exchange reserves and high current account deficit/GDP
reserves) signify reduced resilience.
Low financially mobile capital and a positive
current account deficit reduce the likelihood of a
balance of payments crisis.
Domestic Financial Vulnerability
NPL Ratio 34.9 10.8 A stronger banking sector with low non-performing
loans is less likely to amplify an external shock by
cutting lending drastically.
The weakness in the banking sector with high
NPL levels means that the financial system might
be a shock amplifier.
Vulnerability to oil prices
Avg. excess production of -1.4 -1.2 Country is more resilient if it is a net pro
ducer of
energy (% of GDP) energy.
Major petroleum reserve discoveries have
reduced the import dependence of the economy.
Political Stability
Index of Stability 4.4 4.2 Country with political stability is more resilient.
Periodic political instability and the lack of
institutional strength can lead to a quick loss of
confidence in the domestic economy.
Some specific problem areas emerge from this analysis:
First, the lack of export diversity may be a problem as competitors become stron
ger
The drivers behind economic growth in the last decade have not been diverse as i
s
desirable. A single export product (readymade garments) accounts for over 63% of
total
exports. Moreover, 70% of total exports are directed to the rich G7 economies. A
s the size of
the export oriented sector has grown over the years, it has gradually become a m
ore
important driver of the domestic economy. While earlier inputs were mostly impor
ted,
domestic players have also become a part of the supply chain. Thus, any impact o
n the
export industry will now have deeper ramifications for the entire economy.
9
Compared to our previous assessment of the Bangladesh economy in February 2009,
the
anticipated contraction in exports has materialized as expected but the surprise
has been
the robustness of garment exports, suggesting perhaps that the demand for Bangla
deshi
apparel exports to the G7 economies is relatively inelastic. However, even with
this
resilience, it is not healthy to depend so much on a single product. Many of its
competitors,
namely Cambodia, Nepal, Pakistan, Sri Lanka, Viet Nam and even the People's Repu
blic of
China (PRC), are working hard to improve their share of global apparel exports.
In fact,
many of Bangladesh s competitors have managed to diversity in the last sixteen yea
rs
(Table 1.4), with Cambodia, Nepal and Viet Nam in particular doing well in this
regard.
Table 1.4: Concentration of exported goods (share of top 10 exports)
1990 2000 2006
Bangladesh 65 66 72
Cambodia 87 69 70
Sri Lanka 49 42 44
Nepal 86 61 44
Pakistan 59 56 55
Viet Nam 73 57 48
Source: IMF Selected Issues Bangladesh, 2008.
Second, there is also a growing reliance on remittances to support domestic
consumption
A large part of the consumption is funded by remittances which overseas Banglade
shi
workers send back to their families. About a 42% of the remittance inflow is use
d by the
receiving households for consumption in various forms food, clothing, medicine,
education,
social ceremonies etc2 (Chart 1.11). If we remove the part of the remittance flo
w which is
invested in land, the ratio of consumption increases to almost 62% of the total
remittance
inflow.
Chart 1.11
A large part of remittance goes into consumption
% of total B angladesh: Utilization of remittance by households
0
5
10
15
20
25
30
35
Food and Medical and Social Other Investment Investment Investment
clothing education ceremonies consumption in land in migration in business
Source: ADB. 2004. Modified from paper by Efficiency of Migrant Workers Remittance
: The
Bangladesh Case , Tasneem Siddiqui.
2 ADB. 2004. Efficiency of Migrant Workers Remittance: The Bangladesh Case.
10
Further studies have shown the importance of remittances on per capita incomes.
It has
been calculated that the receipt of overseas remittances contributed to approxim
ately 18% of
the decline in poverty across households.
Overseas Bangladeshi workers are concentrated principally within a few countries
in the
Middle East, all of which are powered by oil prices: Saudi Arabia, UAE and Kuwai
t. Most
workers are employed in oil refineries and oil-related industries. As a result,
a large part of
domestic consumption in Bangladesh is indirectly linked to oil prices. Thus, a s
ustained fall
in oil prices could have a double blow to domestic consumption in Bangladesh.
Third, the banking sector is a source of vulnerability in a shock - high NPLs ar
e
eroding capital
The financial sector in Bangladesh has grown in recent years and internal soundn
ess has
also improved. However, even after this recent progress, we believe that the fin
ancial sector
is still a potential shock amplifier in the event a global shock hits Bangladesh
.
The main area of concern is the high level on non-performing loans or NPLs (Tabl
e 1.5). The
NPL ratio of 13.2% is high even if that is a huge improvement from the 41.1% rat
io in 1999.
NPLs are more concentrated in state-owned commercial banks (SCBs) than in privat
e banks
which constitute only 25% of total assets. The gross NPL ratio in SCBs was a ver
y elevated
28.6%.
Table 1.5: Banking Sector Financial Soundness Indicators
% 2004 2005 2006 2007
Risk weighted capital asset ratio 6.9 7.3 5.3 7.4
Gross NPL ratio 17.6 13.5 13.1 13.2
State owned Commercial 42.9 34.9 33.7 28.6
Banks
Provisions as proportion of NPLS 19.1 24.3 26.3 42.9
Return on assets 0.7 0.6 0.8 0.9
Source: IMF Article IV - Bangladesh, Oct 2008; Bangladesh Bank Quarterly Report.
1.3 Implications for policy
First, monetary policy should be tightened pro-actively but gradually
The Bangladesh Bank projects inflation in 2010 to be averaging 6.5% in 2009/10.
We
believe that the risks to inflation are on the upside. Inflation declined rapidl
y when global
food and oil prices declined after the onset of the crisis (Chart 1.12). Banglad
esh is a net
importer of major food items and domestic prices reflect some of the movement in
the
international market. But the rapid bounce back in inflation from 2.2% in June 2
009 to 4.7%
in August 2009 is a warning. While rising commodity and food prices can explain
this surge,
the rapidity with which inflation rebounded suggests that monetary conditions ar
e probably
too easy. This is also supported by the sharp rise in asset prices - stock price
s have surged
since end-March 2009, and there is anecdotal evidence that property prices are b
eginning to
rise. Private sector credit has also been growing, rising 15.4% in October 2009
from 13.7%
in September 2009.
While we do not anticipate a spike in inflation, Bangladesh is highly vulnerable
to exogenous
shocks which can intensify inflationary pressures. A sudden rise in global food
prices or a
natural disaster which affects food crops are possible. Policy needs to be pro-a
ctive to such
risks.
11
JulFood
Chart 1.12
Inflation has fallen but could rise again
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
Jan-05
Jun-05
Nov-05
Apr-06
Sep-06
Feb-07
-07
Dec-07
May-08
Oct-08
Mar-09
% y/y Bangladesh: CPI Inflation
All items
Non Food
Second, on the related issue of the appropriate exchange rate framework, we beli
eve
it is premature to move to a more flexible exchange rate regime though that is a
worthwhile long term goal
Given the turbulence and uncertainty that we expect to prevail in the global env
ironment in
the immediate post-crisis period, Bangladesh needs some kind of monetary anchor
and
under current circumstances, a stable exchange rate versus the US Dollar may be
the best
among available options.
Third, it is vital to create fiscal space to allow the government to step up cri
tical
development expenditure
Bangladesh will not be able to compete in the much more competitive global econo
my we
described in Report 2 if it does not address failings in areas where the state i
s the key
provider: acute infrastructure constraints in power, inland transportation and p
ort capacity.
To be able to do so, the state has to spend a lot more. It, therefore, has to in
crease the tax
share of GDP. Expeditious implementation of a value added tax as planned would b
e vital.
Fourth, improve economic resilience by enhancing economic diversity
With subdued external demand likely in coming years from US and Europe, Banglade
sh
needs to diversify its export base in terms of product types as well as export d
estinations.
Target intermediate good exports. Instead of solely targeting finished product e
xports,
Bangladeshi export houses should consider intermediate products, linking it to t
he
changing Asia wide supply chain. This will also improve the countries linkage wi
th the
rest of the Asian region instead of depending solely on advanced economies.
Develop a more trade friendly foreign policy. Foreign policy should also be alig
ned for
this purpose: targeting suitable trade agreements with Asian economies.
12
CHAPTER 2: SRI LANKA
The Sri Lankan economy has undergone a tough 2008 and 2009. Economic woes were
accompanied by a civil war disrupting the normal way of life. However in the las
t few months
optimism has gradually set into the economy as the crisis seems less threatening
and the
internal conflict reaches a conclusion.
The country s GDP recovered in 2Q09 and would probably improve further in the rest
of
2009 (Table 2.1). Twin factors of the IMF loan and the end of the civil war help
ed Sri Lanka
narrowly avoid a Balance of Payments crisis. Both foreign reserves and the equit
ies market
are back to stable positions upheld by rebounding investor sentiments.
Table 2.1 shows the recent trajectory of the economy. While GDP growth slowed
significantly between June 2008 and March 2009, output did not contract and the
downturn
was a shallow one, with GDP growth re-accelerating in 2Q09. A number of characte
ristics of
the economy stand out.
Table 2.1: Sri Lanka GDP Breakdown
% y/y Jun 08 Sep 08 Dec 08 Jun 09Mar 09
Gross Domestic Product 7.0 6.3 4.3 1.6 2.1
Agriculture, Forestry & Fishing 7.4 12.4 4.0 3.0 4.4
Mining & Quarrying 19.6 15.6 5.7 -4.3 11.1
Manufacturing 4.9 5.0 5.3 2.8 1.1
Electricity, Gas & Water 6.2 -0.6 2.4 -2.5 4.3
Construction 9.7 6.9 6.2 3.0 5.4
Wholesale & Retail Services 5.9 4.9 2.0 -2.5 -5.3
Hotels & Restaurants 0.4 -6.8 -9.3 -16.7 -0.4
Transport & Communication 9.8 7.0 6.5 3.9 6.3
Banking, Insurance & Real
Estate etc 7.8 6.8 5.9 3.8 5.4
First, the most important development was a domestic one, the end of decades of
civil
war
On 18 May 2009, government forces achieved a complete victory over Tamil separat
ist
rebels, bringing an end to a 25-year long conflict which had drained the nation s
resources
and sapped its economic vigour. The intensification of the conflict, in the peri
od between
December 2008 when the government began its final offensive, and May 2009 when i
t
achieved victory, hurt the economy, but the end of long years of conflict is now
producing
major benefits and transformed prospects for the country s future.
The return of peace yielded immediate dividends in the form of a boom in tourism
, which has
been a significant source of growth for Sri Lanka in recent years (Chart 2.1). T
he
rejuvenation of tourism is linked to increased inflows of European and American
tourists
(Chart 2.2). However, the tourism industry will take some time to recover from t
he war - hotel
13
occupancy rates have remained low even with the recovery in tourist arrivals, an
d is still at
its lowest since June 2002 at 35.5 % (3-month average).
US
-50
-30
-10
10
30
50
70
i iils
-50
-30
-10
10
30
50
70
90
ils
US
Chart 2.1 Chart 2.2
A boom in tourism following end of civil
war
Increased inflows of tourists from Europe,
-70
Jan-06
May-06
Sep-06
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
May-09
% y/y SrLanka: Tourst arrva-70
Jan-06
May-06
Sep-06
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
May-09
% y/y Sri Lanka: Tourist arrvaEurope
-20
-10
0
10
20
30
40
50 i
020406080i
Chart 2.3 Chart 2.4
Exports contracted sharply with crisis onset with major exports hit hard
-30
Jan-05
Jun-05
Nov-05
Apr-06
Sep-06
Feb-07
Jul-07
Dec-07
May-08
Oct-08
Mar-09
%y/y SrLanka: Exports
-60-40-20Jan-05May-05Sep-05Jan-06May-06Sep-06Jan-07May-07Sep-07Jan-08May-08Sep-0
8Jan-09May-09SrLanka: Exports by category
TextilesTea
Second, the global crisis did hurt the economy, principally through the trade ch
annel
as exports fell sharply
Exports are more vulnerable that other South Asian peers to a slowdown in the US
and
Europe because of the poorly diversified base. Sri Lankan exports appear to be
concentrated in a few main products like textiles and tea, and only a few econom
ies
dominate the list of exports making it highly dependent on the demand cycles in
those
economies. Overall exports contracted in 2009 (Chart 2.3). The contraction was l
ed by
declines in textiles and tea (Chart 2.4). As a result, export-oriented manufactu
ring production
such as tea and textiles contracted in 1H09 (Chart 2.5).
14
-
i iil
-10000
0
5000
10000
15000
i iial
Chart 2.5 Chart 2.6
Industrial production dragged down by
exports
Capital outflows but not substantial
-15.0
10.0
-5.0
0.0
5.0
10.0
15.0
Jan-06
May-06
Sep-06
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
May-09
%y/y 3MMA SrLanka: Industral Producton
TotaTextiles
-5000
Mar-06
Jun-06
Sep-06
Dec-06
Mar-07
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
LKR Mn SrLanka: FnancAccount
The fall in industrial production hurt the household sector through job losses.
The quarterly
labour force survey shows that Sri Lanka lost 155,000 industrial jobs in Q2 2009
offsetting
the agricultural sector s 118,000 additional jobs. The unemployment rate has conti
nued to
rise, and now stands at 6.3% in Q2 2009 from 5.5% in Q2 20083.
0
500
1000
1500
2000
2500
3000
3500 l() i
Chart 2.7 Chart 2.8
Sri Lankan equities fell with global equities ...but the resulting fall in reser
ves was
drastic
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Coumbo Stock Exchange CSE2.00
2.50
3.00
3.50
4.00
4.50
5.00
5.50
Jan-02
Aug-02
Mar-03
Oct-03
May-04
Dec-04
Jul-05
Feb-06
Sep-06
Apr-07
Nov-07
Jun-08
Jan-09
USD bn SrLanka: USD Reserves
Third, the financial outflows from Sri Lanka were relatively small but the resul
ting fall
in foreign exchange reserves nearly precipitated a crisis
As the global crisis deepened, foreign investors hastily withdrew funds parked i
n treasury
bills and treasury bonds in Sri Lanka in 2008/09. Portfolio investment on the fi
nancial
account weakened from an inflow high of LKR9.8 billion in 3Q08 to an outflow LKR
2.4 billion
in 2Q09 (Chart 2.6). The stock market fell sharply in line with global equities
as well (Chart
2.7). While the outflow of capital was not particularly sharp in relation to pre
vious history, the
precipitous fall in foreign exchange reserves (Chart 2.8) caused alarm, almost s
parking an
external crisis as US Dollar reserves bottomed in 1Q09 at US$2.65 billion from a
high of
US$5.0 billion in July 2008.
Derived from http://www.lankabusinessonline.com/fullstory.php?nid=1927376562 job
losses.
15
The Sri Lankan government secured a US$2.6 billion IMF aid package in 2Q09, whic
h was a
primary factor in preventing a full-blown crisis. The first tranche of US$322.2
million was
transferred in July 2009, helping directly boost the balance of payments as well
as instilling
investor confidence. Foreign reserves rebounded to US$3.8 billion by July 2009 a
s the loan
transfer of the IMF s first tranche flowed in and foreign investors began returnin
g to purchase
Sri Lankan securities in large numbers. The Central Bank of Sri Lanka reported t
hat a US
asset manager bought more than US$875 million in treasury bonds in August 20094.
The weakness in the financial dimension of the economy was also highlighted by i
ssues that
arose in the banking sector. The rise in non-performing loans was reported to ha
ve almost
forced Seylan Bank to collapse when its affiliate credit card company Golden Key
defaulted
on its debt5. After some complex negotiations and transfers, the state owned Ban
k of Ceylon
rescued Seylan Bank.
Fourth, remittances provided important support to the economy
Remittance inflows posted an averaged growth of 18% y/y until September 2009 (Ch
art 2.9).
Given the high remittance to GDP ratio of 7.8%, this was a material positive for
the economy
in terms of GDP growth. In addition, the incoming remittances helped to support
the balance
of payments at a crucial time by raising current transfers (Chart 2.10).
-
i iiil
Chart 2.9 Chart 2.10
Remittances held up fairly well .. supporting the balance of payments
20.0
0.0
20.0
40.0
60.0
80.0
100.0
120.0
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
% y/y 3MMA SrLanka: Remttance nflows
45.0
50.0
55.0
60.0
65.0
70.0
75.0
80.0
Mar-06
Jul-06
Nov-06
Mar-07
Jul-07
Nov-07
Mar-08
Jul-08
Nov-08
Mar-09
LKR Bn SrLanka: Private Current Transfers
Fifth, inflation fell sharply as food and oil prices fell and previous policy me
asures
kicked in
Chart 2.11 shows the sharp fall in inflationary pressures throughout 2009. With
GDP growth
lagging behind Sri Lanka s potential growth rate in recent quarters, and with labo
ur market
conditions weak, there is likely to be sufficient slack in the economy to keep i
nflation in
check. The stability of the exchange rate (Chart 2.12) has helped as well. Credi
t growth has
been weak (Chart 2.13). Monetary growth has recovered sharply but has yet to ret
urn to precrisis
rates.
4 Reuters. 2009. Big foreign bond buy swells Sri Lanka's reserves.
Daily News. 2008. CB bails out Seylan.
16
05101520253080859095100105110115120125130JulChart 2.11 Chart 2.12
Inflation fell sharply And the Rupee was basically stable
Jan-04May-04Sep-04Jan-05May-05Sep-05Jan-06May-06Sep-06Jan-07May-07Sep-07Jan-08Ma
y-08Sep-08Jan-09May-09Sep-09CPI Inflation %
Jan-03Jun-03Nov-03Apr-04Sep-04Feb-05-05Dec-05May-06Oct-06Mar-07Aug-07Jan-08Jun-0
8Nov-08Apr-09Sep-09Sri Lankan Rupee Effective Exchange Rate
0%
5%
10%
15%
20%
25%
30%
35%
10%
12%
14%
16%
18%
20%
22%
24%
Credit growth is weak but monetary growth has recovered
Jan-05May-05Sep-05Jan-06May-06Sep-06Jan-07May-07Sep-07Jan-08May-08Sep-08Jan-09Ma
y-09Sep-09Credit Growth
Jan-04Jun-04Nov-04Apr-05Sep-05Feb-06Jul-06Dec-06May-07Oct-07Mar-08Aug-08Jan-09Ju
n-09Broad Money M2 Growth %
Thus the recent indicators suggest that the economy has narrowing avoided a very
dangerous outcome with the help of some favourable policies and an IMF loan.
2.2 Prospects for the economy
Sri Lanka is set to see continued economic recovery.
First, the scenarios for the channels through which global variables affect the
economy seem positive for the key drivers of the economy
Table 2.2 presents the prospects for the various transmission mechanisms and pos
sible
risks to the outlook.
17
Capital
flows
Euphoria surrounding post-war policies
will continue to support capital flows.
Upsides
Liberalisation of limits on foreign
investments could lead to a surge in
investment.
The next tranche of the IMF loan would
further boost confidence.
Trade Recovery in textiles will be moderate Risks
and will flatten in 2010 in line with Protracted consumer demand shortage
sluggish demand prospects in the US. in the US and Europe are the main
concern. Tea and garments form 65%
of total exports.
Remittances As in the case of Bangladesh, the
remittance outlook remains optimistic
as the global economy recovers but
there could be some lagged impacts
from the crisis.
Risks
Lagged negative impacts due to the
problems in Dubai and other labourimporting
countries remain a risk.
Introduction of restrictions on foreign
labour by other countries is a worry.
Upside
Remittances remain unscathed from
the crisis which could lead to an
increase in worker demands in the
Middle East, on the back of confirmed
resilience in the region.
Tourism Tourism will be the main bright spot for
the economy in 2H09.
Upside
As countries start removing warnings
and restrictions to travel to Sri Lanka,
we should expect increased traffic into
the country.
FDI A healthy return in FDI is likely with
some big projects being launched such
as the US$75 million beach resort in
Kalpitiya.
Interested firms from India will also be
interested to carve out a market
position in neighbouring Sri Lanka.
Commodity
Prices
The two main commodities of
importance are tea and rubber. Rainfall
shortages have lead to production
shortages during this monsoon.
We expect prices to increase but
production volume to fall in 2H09.
Second, Sri Lanka s resilience was in terms of economic growth but the financial
dimension of the economy remains vulnerable
Table 2.3 tabulates our analysis of Sri Lanka s resilience.
18
Table 2.3: Comparing Sri Lanka s strengths and weaknesses
Export Diversity
Average coefficient of 1.8 1.4 The more diversified your export base, the
variation for top 10 exports more resilient the economy is.
and destinations Exports are concentrated in certain sectors
and industries exposing the economy to
demand shocks in these areas.
Demand Diversity
C + I + G (% of GDP) 110.6 108.3 The greater the dependence on exports
and less exposure to domestic demand,
the less resilient the economy is likely to
be.
Domestic demand of about 110.6% of the
GDP is an important shock absorber.
Automatic Stabilisers
10 year average of change 2.3 2.8 Tax revenues automatically adjust as
in tax revenue/change in economy accelerates or decelerates,
GDP providing a natural automatic stabiliser or
shock absorber in the economy.
Tax revenues have seen strong sustained
growth.
Capacity for swift and effective policy response
Fiscal - Public Debt (% of 103.2 85.0 Higher public debt imposes a constraint on
GDP) use of fiscal tools.
Though public debt/GDP is at a moderate
level, the fiscal deficit is still quite high.
Monetary - G7-Country -7.6 -9.8 The greater the credibility the central bank
Inflation over 8 yrs (%y/y) has built up by controlling inflation not too
different from major countries inflation, the
more latitude central bank has to ease
monetary conditions in a slowdown.
Inflation has been high relative to
developed economies.
External Financial Vulnerability
Financially mobile capital (as 58.9 58.7 High financially mobile capital in rela
tion to
% of foreign exchange FX reserves and high current account
reserves) deficit/GDP signify reduced resilience.
Sri Lanka has an enormous current
account deficit, which together with the
moderate level of financially mobile capital
is a risk.
Domestic Financial Vulnerability
NPL Ratio 13.6 6.5 A stronger banking sector with low nonperforming
loans is less likely to amplify an
external shock by cutting lending
drastically.
NPLs remain a major issue with funding
schemes.
19
Vulnerability to oil prices
Average excess production -4.1 -2.6 Country is more resilient if it is a net
of energy (% of GDP) producer of energy.
High energy import bill, but real GDP
growth has been higher than growth in
energy consumption.
Political Stability
Index of Stability 5.3 5.1 Country with political stability is more
resilient.
The end of the civil war should result in a
substantial improvement over time.
There are a number of areas of weakness in economic resilience:
First, the fiscal position needs to be improved further
According to the IMF conditions, the government needs to cut its budget deficit
to 7% of
GDP by end-2009 and further to 6% in 2010 and 5% by 2011. The budget deficit has
been
over 7% since 2002 (Chart 2.15). However, there has been a substantial improveme
nt in the
ratio of public debt to GDP which has come down to 38.1% in 2008 compared to 103
.2% in
2000.
---
---
--
-
2002 2003 2004 2005 2006 2007 2008
i icit
-
2002 2003 2004 2005 2006 2007 2008
i icit
Need to do more to reduce budget deficit Current account weighed down by oil
import
8.8
8.6
8.4
8.2
8.0
7.8
7.6
7.4
7.2
% of GDP SrLanka: B udget Def10.0
-8.0
-6.0
-4.0
-2.0
0.0
% of GDP SrLanka: Current acount def
Second, the current account deficit remains another weak point
Sri Lanka, like India, has a large oil import bill which weighs on the current a
ccount balance.
The current account deficit was 9.3% in 2008 (Chart 2.16). To add to this, short
term debt in
Sri Lanka is also moderately high. Financially mobile capital was 58.7% of GDP.
An increase
in commodity prices tends to undermine the current account balance swiftly, as m
ost of the
imports are commodities.
20
First, while there is no urgency to tighten monetary policy given the low inflat
ion rate,
Sri Lanka s relatively higher propensity for inflation compared to other Asian
economies means that financial markets will be sensitive to signs of overaccommo
dative
monetary policy
The Central Bank of Sri Lanka is continuing to ease monetary conditions as the m
onetary
policy announcement of November 2009 said that inflation risks were benign and m
onetary
policy was focused on invigorating growth. Measures have included cuts to the re
po rate and
the reverse repo rate of 300 bps and 225 bps since the beginning of the year. At
the same
time the central bank has also granted suspensions for delayed debt payments for
certain
distressed industries.
In the longer term, modifications to the exchange rate regime could improve Sri
Lanka s
economic resilience:
Currency flexibility. Evidence from emerging market economies, such as Indonesia
and the Republic of Korea suggest that a more flexible exchange rate can help mi
tigate
external stresses by allowing the currency to adapt to market pressures. This is
particularly important as Sri Lanka s low foreign exchange reserve levels open it
to such
external pressures. The rising debt burden and higher oil prices will further in
crease
pressures on the exchange rate. The same has been recommended by the IMF in its
most recent Article IV assessment.
Communication of monetary policy. The central bank could expand its
communications on monetary policy decisions.
Second, fiscal measures should continue to be used to support growth given
continuing uncertainties in global demand
The government introduced an Economic Stimulus Package amounting to LKR16 billio
n
aimed at supporting the export and financial sectors.
Tea, rubber and cinnamon sector. The tea, rubber and cinnamon industry, primaril
y
catering to export demand, was given concessionary interest rate for working cap
ital,
supply of subsidized inputs, guaranteed price, etc.
Tourism: The tourism industry was supported through removal of fuel surcharge an
d the
Economic Service Change was suspended for a year.
Apparel and leather exporters. Incentives were also given to support apparel and
leather exporters.
However, the ability of the government to use fiscal policy will be limited due
to questions
over the sustainability of the public debt position. In the longer term, steps s
hould be taken to
create more fiscal space:
Defence spending savings. With the end of the war, savings could come from cuts
in
defence expenditures. Currently defence spending is the single largest cost cate
gory
accounting for 10% of expenditures. This can be brought down to around 6% by 201
1.
Enhance revenue. Budget planners should introduce policies to broaden the tax ba
se
and reduce exemptions.
21
Streamline subsidies. Subsidies need to be better targeted to avoid unnecessary
leakages.
Broaden tax base and plug leakages in tax administration.
22
CHAPTER 3: NEPAL
Nepal has remained fairly resilient in the face of the global financial crisis.
The country s
real GDP growth moderated slightly in 2008/09 (Table 3.1).
Nepal s resilience could be attributed in part to its relatively insulated financi
al sector.
The country s exposure to the global economy exists through remittances, tourism a
nd
trade.
Key risks include high unemployment and inflation. Reduced deployments of overse
as
Nepalese workers suggest that growth in remittance incomes may weaken. Also, the
economy has become dependent on imported food, making it more vulnerable to sudd
en
price shocks. The contagion effect from India s slowing demand could be a concern.
With political conflict at bay and better law and order, Nepal needs to push for
ward with
business, investor and tourist friendly policies.
Table 3.1: Breakdown GDP
% y/y 2004/05 2005/06 2006/07 2007/08 2008/09
GDP 3.5 3.4 3.3 5.4 4.7
Agriculture 3.5 1.7 0.9 4.7 2.2
Mining 6.8 8.3 1.5 2.8 2.5
Manufacturing 2.6 2.0 2.6 0.2 -0.5
Utilities 4.0 4.0 13.0 3.7 -1.1
Construction 2.9 7.7 2.5 3.1 5.7
Wholesale and retail trade -6.2 3.7 -4.5 7.0 4.7
Hotels and restaurants -5.4 6.0 3.5 8.5 5.1
Transport and communication 2.0 7.0 4.6 7.1 7.9
Financial service 24.3 24.4 11.4 13.8 3.3
Source: Collated by Centennial Group using report from the Nepal Ministry of Fin
ance.
Note: (1) Fiscal year in Nepal ends on 15th July; (2) Numbers for 2008/09 are pr
eliminary estimates by
the Central Bureau of Statistics, calculated by producer prices.
First, the main drivers of growth remained relatively positive despite the globa
l crisis
Table 3.1 and Chart 3.1 show Nepal s resilience amid the global crisis.
GDP growth moderated slightly to 4.7% y/y in 2008/09 from 5.4% y/y in 2007/08 (C
hart
3.1). Consumption contributes 92% of GDP and has helped to drive growth.
Agricultural production - which contributes 35.7% of GDP - slowed due to unfavou
rable
monsoons in 2008/09. Agriculture growth dropped to 2.2% y/y in 2008/09 from 4.7%
y/y
in 2007/08 (Table 3.1). Paddy production decelerated from 16.8% y/y in 2007/08 t
o 5.2%
y/y in 2008/09. Other winter crops like wheat and barley also experienced a fall
in
production.
23
Manufacturing production continues to expand. Nepal s manufacturing industry is
dominated by agricultural products such as rice, wheat flour, animal feeds, soft
drinks,
noodles, biscuits, etc. The fact that such commodities are relatively inelastic
to external
demand helps prevent a sharp contraction in industrial activity. Meanwhile, prod
uction of
woollen carpets, garments, jute goods, iron rods, cement metal products and cabl
es etc.
declined in 2008/09 due to waning external demand. Notably, a high base effect c
ould
mask the country s manufacturing resilience.
Tourism took a hit from the crisis, after accelerating for four straight years (
Chart 3.2).
The formation of a stable political environment and improved security conditions
had
boosted the inflow of tourists in Nepal since 2006. But tourist arrivals dropped
0.9% y/y
in 2008/09, in stark contrast to a robust growth of 11.0% y/y in 2007/08. Arriva
l of tourists
from India fell by 2.3% y/y in 2008/09. Tourist inflows from other parts of the
world
dropped 0.5% y/y in 2008/09, worsening significantly from an increase of 21.0% y
/y in
2007/08. Tourism receipts made up 23% of GDP in 2008/09.
Chart 3.1 Chart 3.2
Nepal s economy looks fairly resilient Tourism took a hit from the crisis
2003200420052006200720082009
199819992000200120022003200420052006200720080.0
1.0
2.0
3.0
4.0
5.0
6.0
%y/y N epal: Real GDP N epal: Tourist Arrivals
-30.0
-20.0
-10.0
0.0
10.0
20.0
30.0
40.0
50.0
% y/y
Source: Collated by Centennial Group using the Nepal Ministry of Finance website
.
Remittance flows remain strong. Workers' remittances surged 47.0 % y/y in 2008/0
9
accelerating from an increase of 42.5 % y/y in 2007/08 (Chart 3.3). Qatar, Saudi
Arabia,
Malaysia and UAE are the main destinations for Nepalese workers. However, there
were
signs of some slowdown in demand. The Department of Foreign Employment granted
final approvals to 220,000 persons in 2008/09, down 11.6% y/y.
Exports held up reasonably well, expanding 13.5% y/y in 2008/09 reversing from a
contraction in the previous year (Chart 3.4). Exports to India rose by 6.2% y/y
compared
with a decline of 7.6% y/y in 2007/08. Exports to the rest of the world remained
astonishingly buoyant, expanding 26.9% y/y in 2008/09, accelerating from 17.3% y
/y in
2007/08. This could be explained in part by the depreciation of the NPR along wi
th the
weaker INR.
24
Chart 3.3 Chart 3.4
Remittance flows remain strong Trade held up fairly well
-
-
1990199219941996199820002002200420062008
0.0
10.0
20.0
30.0
40.0
50.0
60.0
2001/02
2002/03
2003/04
2004/05
2005/06
2006/07
2007/08
2008/09
%y /y Remittance Income
40.0
20.0
0.0
20.0
40.0
60.0
80.0
100.0
%y/y Trade
Exports
Imports
Source: Collated by Centennial Group using statistics from the Nepal Ministry of
Finance and Asian
Development Bank.
Foreign direct investment (FDI) inflows slowed. FDI inflows decreased 36.4% y/y
in
2008/09. There were some positive signs however. The number of joint venture pro
jects
increased from 212 in 2007/08 to 230 in 2008/09. Of these projects, 78 were for
the
services sector, 69 for the tourism sector, and 48 for production. India was the
largest
contributor of FDI, followed by the US, the PRC, the Republic of Korea, and the
UK.
Chart 3.5 Chart 3.6
Nepalese rupee depreciated sharply Inflation pushed up by rising food prices
Food
60.0
65.0
70.0
75.0
80.0
Jan-07
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Jan-09
NPR/USD Nepal: Exchange Rate
0.0
5.0
10.0
15.0
20.0
Jan-07
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Jan-09
%y/y Nepal: Consumer price inflation
Overall
Nonfood
Source: Collated by Centennial Group using statistics from the Nepal Ministry of
Finance.
Second, with fewer linkages to the global financial system, the monetary and fin
ancial
impact of the crisis was muted in Nepal
The Nepalese Rupee has depreciated since April 2008, with the decline exacerbate
d by
the onset of the global crisis in September 2008 (Chart 3.5). The fall was large
ly due to
the depreciation of the Indian Rupee, to which the Nepalese Rupee is pegged. Aft
er
depreciating 19.2% since January 2008, the Nepalese rupee stabilised around
November 2008 at approximately 78.0 NPR/US$ and maintained that value through
1H09.
Inflation remains elevated. Average consumer inflation rose to 13.2% y/y in 2008
/2009,
up from 7.7% y/y in 2007/2008. But the rise was mainly attributed to a 16.7% y/y
spike in
food prices (Chart 3.6). Non-food inflation came in at 9.5% in 2008/2009. Food a
nd nonfood
inflation stood at 10.1% and 5.1% respectively in 2007/2008.
25
3.2 Prospects for 2010
Overall prospects for the Nepali economy can be summarized as below:
2010 prospects depend heavily on India. The Nepali economy has deep linkages wit
h
India, especially for trade related activities. A lot of undocumented trade also
occurs
between the countries. As we see a strong rebound for India, this will probably
translate
into good news for Nepal too, though Nepal was not as affected by the global rec
ession
as India has been.
Threats to the outlook are mainly through remittance inflows and tourism.
Prospects for both these parameters are tentative. In the case of tourism, a ret
urn to precrisis
momentum is unlikely. Remittance inflows will remain somewhat resilient though
growth will moderate as the demand for workers falls.
The impact of the various transmission mechanisms has been collated in Table 3.2
.
Table 3.2: Transmission Mechanisms
Scenario for 2009/10
Trade Slowdown in external demand in the advanced economies
will hurt Nepalese exports trade is not a main driver of the
economy.
Competition from peers could also crowd out Nepalese
export commodities.
High cost of transportation, as Nepal is a landlocked
country, may also price out Nepalese exports.
Tour
ism Due to expensive accessibility for western economies, there
will be a protracted moderation in tourism revenues.
A strong recovery in India could help increase disposable
incomes and increased tourism activity, benefiting the
Nepalese tourism industry. However the growth of Indian
tourists will not balance the lost of tourists from the West.
FDI Disbursements in 2010 may slow due to financing difficulties
and extended dryness in the credit market.
Delays and suspension of current projects cannot be ruled
out.
Remittances We expect a lagged impact of a slowdown in remittance
inflows.
Softening demand for Nepalese workers in the Middle East
and Malaysia will lead to lower inflows in the following year.
However we do not expect a sudden exodus of retrenched
workers returning to Nepal.
Foreign aids and grants Aid mechanisms are not always linked to the economic sta
te
in the donating economy, making it difficult to project.
Conventional indicators would indicate some hold up in
disbursements for 2010.
26
3.3 Developing Nepal s economic resilience
i economic structure.
Table 3.3 tabulates the strengths and weaknesses of the NepalTable 3.3: Comparin
g Nepal s Strengths and Weaknesses
Strengths Weaknesses
Domestic demand can compensate for
some loss of external demand.
Improved export diversity and more export
destinations.
Services sector is slowly growing.
High remittance growth allows for a robust
current account surplus in spite of high
import growth.
Abundant foreign exchange reserves.
Political stability is the paramount
concern.
Fiscal mismanagement.
Insufficient domestic energy has created a
high dependence on foreign oil.
Agriculture sector is slowly shrinking,
making Nepal more dependent on
agricultural imports.
Political instability may lower efficient
governance and institutional
management.
Agriculture output vulnerable to adverse
weather changes.
Nepal has not yet been affected by the global recession because it has few links
to global
financial markets. However, indirect effects are likely to be felt by remittance
s, exports, and
tourism. Following are some areas where improvement is needed:
First, the impact of large scale out-migration hurts the availability and produc
tivity of
human capital
While remittances are a source of income and balancer to the external account, t
he nation is
also losing among the more dynamic and talented of its workforce. This can under
mine
productivity growth, making the domestic economy less competitive.
Major brain drain problem at all income levels. This is a popularly discussed is
sue in
Nepal with several contrasting view points. Nepalis find it more lucrative to wo
rk abroad
than try to develop their careers within Nepal.
No safety net. The lack of any kind of governmental support scheme, barring some
occasional cash transfers, is a major reason why unskilled workers leave the cou
ntry.
Not being connected to the turbulent politics of the country, remittance inflows
offer a
buffer to households in Nepal against sudden economic or political turmoil.
Poor education system. The Ministry of Education estimates that about 12,000
students go abroad (excluding India) to study annually. About 40 students come t
o the
ministry everyday for recommendation letters for visa applications. These figure
s are
testament to the scepticism among students about studying within Nepal.
Infrastructure spending can be channelled to meet education needs, improving hum
an
capital, labour productivity, and living conditions.
Second, power shortages constrain growth
Nepal experienced a nationwide power crisis in January 2009, which significantly
reduced
the hours of electricity supply. This was a reduction in standard of living for
households, as
well as additional costs for the industrial sector. While the 2009 conditions we
re worse than
27
normal, the country becomes a net importer of energy every winter when it is una
ble to tap
its hydroelectric projects, which are inefficient in sub-zero conditions.
Thus industry performance will remain sluggish in the backdrop of lack of availa
bility of
quality human resources (which also get entangled in periodic unrests) and power
shortages.
With little impact from the global crisis and with domestic considerations such
as the
evolution of the political system dominating over other factors, we believe that
there is little
issue with short term macro-economic management. The focus of policy in this con
text
should be on improving economic resilience.
Solving the power problem
The issue of power shortages in the winter months cannot be solved overnight but
through
long term planning and investments into the non-hydroelectric power. With an imp
roved
business environment, and eager investors looking for new markets in Asia, the g
overnment
should offer large power projects to the private sector as part of its public-pr
ivate partnership
scheme.
Developing human capital
Government needs to look into developing human capital. The establishment of a s
table
political environment offers an opportune time to drive in a fresh business envi
ronment.
Incentive schemes. These should be created to attract overseas Nepali workers ba
ck to
the country, through tax breaks and other fiscal incentives.
Invest into social infrastructure. There is a critical need to retail human capi
tal. This
should start at a young age. The government should focus its attention of enhanc
ing the
quality of its primary and secondary education. At the same time healthcare faci
lities and
hygiene facilities should be ramped up.
28
CHAPTER 4: BHUTAN
Bhutan s economy has barely been touched by the global recession as the economy ha
s
few linkages with the rest of the world.
The transmission mechanisms of the recession to Bhutan work through its associat
ion
with India, through steel and electricity exports and Indian tourists. As electr
icity exports
to India are already signed in long term contracts, tourism and steel exports ar
e the only
major channels of impact.
After spectacular growth in 2007 driven by the construction of a new hydroelectr
ic power
station, the economy slowed, alongside the deceleration of growth in India (Tabl
e 4.1).
We expect the Bhutanese economy to remain resilient in the coming years; though
growth will remain lower than 2002-2007 due to a high base effect. The only conc
ern, if
any, would be a lagged affect of tourist inflows from India.
Table 4.1: Bhutan GDP by Industry Breakdown
% y/y 2003 2004 2005 2006 2007
GDP 7.2 6.8 7.0 8.5 21.4
Agriculture 2.1 2.1 0.1 1.7 0.4
Mining and Quarrying -1.1 -5.2 17.1 63.0 23.1
Manufacturing 6.4 5.4 3.3 3.0 5.8
Electricity and water 18.3 -1.7 10.2 35.3 120.8
Construction 2.8 8.3 -2.5 -9.7 5.7
Wholesale & retail trade 11.7 18.5 15.0 3.7 7.5
Transport, storage and communication 0.4 21.9 8.7 18.3 11.3
Finance, insurance and real estate 22.1 12.4 26.0 17.0 5.2
Community, social and personal services 7.8 0.6 13.2 6.4 3.2
Source: Collated by Centennial Group using statistics from the Bhutan Statistica
l Yearbook 2007.
Economic activity signs of stabilising and poised for a turnaround
GDP reported by various sources showed a deceleration in growth. According to th
e
ADB, the country s GDP expanded 11.5% in 2008 compared with a 21.4% growth in
2007.
Tourist arrivals and revenues declined by almost a third between the first quart
er of 2008
and the first quarter of 2009 (Chart 4.1). Now comparing the second quarters of
the two
years, tourist arrivals are 15% higher and revenues 11% higher indicating a rebo
und.
After the fall in steel demand from India, steel production in Bhutan also contr
acted. 60%
of steel production in Bhutan is exported to India. As a counter-cyclical policy
, the
government introduced policies such as reduced penalties for late payment of pow
er
bills, deferral of bank loan payments and import duty waivers. Recently steel pr
ices have
increased and so has the demand from India.
29
-50
0
50
100
150
iiIChart 4.1 Chart 4.2
Tourism revenues declined Disinflationary pressure rising
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Jan-09
Mar-09
May-09
% y/y B hutan: Toursm Revenues
0.0
2.0
4.0
6.0
8.0
10.0
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
% y/y Bhutan: Consumer Prce ndex
Source: Collated by Centennial Group using statistics from the Royal Monetary Au
thority of Bhutan.
After the rise in inflation of 2007/2008, there are signs that prices are easing
(Chart 4.2).
Bhutan s currency is pegged to the Indian Rupee and price movements in Bhutan foll
ow
Indian prices. Bhutan s headline inflation rate has fallen to 7.2% in the first qu
arter of
2009, from 9.2% in the preceding quarter.
-100
0
50
100 To Ild
-8
-6
-4
-2
0
2
4
2004 2005 2006 2007 2008
Chart 4.3 Chart 4.4
Fall in exports to India a cyclical factor Fiscal deficit remains manageable...
-50
1Q08
2Q08
3Q08
4Q08
1Q09
% y/y B hutan: Exports
ndia
Rest of the Wor% of GDP B hutan: Fiscal B alance
Source: Collated by Centennial Group from various sources. Exports data is from
the Royal Monetary
Authority of Bhutan; Fiscal balance is from the ADB.
Bhutan s trade balance is now deteriorating. After recovering in 2007 to US$13 mil
lion
the balance fell to a deficit of US$77 million in 2008. Total exports to India f
ell in Q1 2009
but this is most likely a cyclical factor (Chart 4.3).
Fiscal deficits turned out lower than originally projected for 2008/2009. More i
mportantly,
the deficit remains manageable, mostly financed by grants from India and receipt
s from
hydropower projects. The 2008 deficit was 3.2% of the GDP, increasing from the 0
.6%
recorded in 2007 (Chart 4.4).
30
Overall prospects for the Bhutanese economy can be summarized as follows:
It will continue to reap benefits of its comparative advantage in hydropower. GD
P
will continue to be driven by hydropower exports to India. The demand for power
in India
will tend to increase as India has an electricity shortage.
Tourism should recover. The tourism industry is susceptible to consumer spending
in
India which has been mildly affected by the crisis. However, as the recovery in
India is
already taking shape, we expect tourism to pick up in 2010.
Inflationary pressure increase in line with India. With over 70% of its imports
coming
from India, prices in Bhutan and highly correlated with prices in India.
The impact of various transmission mechanisms on the Bhutanese economy have been
collated in Table 4.2.
Table 4.2: Transmission Mechanisms
Trade Exports of the principal commodity i.e. electricity will
increase in 2010 as demand in India increases.
Steel exports to India will also increase but could face
volatility if global steel prices fluctuate and India introduces
protectionist measures.
However exports to other parts of the world may fall slightly.
Tourism A strong recovery in India could help increase disposable
incomes and increased tourism activity, benefiting the
Bhutanese tourism industry.
FDI FDI flows will remain strong. These will be directed into
hydroelectric projects, some of which are already in the
pipeline.
The government is presently planning four new hydroelectric
projects.
Foreign aids and grants Aim mechanisms are not always linked to the economic
state in the donating economy, making it difficult to project.
Conventional indicators would indicate some hold up in
disbursements for 2010.
4.3 Developing Bhutan s economic resilience
Table 4.3 tabulates the strengths and weaknesses of the resilience framework of
Bhutan.
Table 4.3: Bhutan s Strengths and Weaknesses in Economic Resilience
Main export commodity is quite resilient.
Political conditions are quite stable with a
newly formed democratic system.
No serious worry from capital inflows as
the equity market is trivial.
Too much dependence on India which
may be harmful if India suffers a very
sharp recession in the future.
Steel exports are vulnerable to Indian
steel demand and Indian steel policy.
31
A large part of the fiscal balance is funded
by grants from India, ADB and others.
These are not always through long term
agreements and disbursements could
decelerate during a crisis in the donor
country.
4.4 Policy suggestions
While the Bhutanese economy has been quite isolated from the current crisis, thi
s may not
always be the case, especially if the Indian economy falls deeper into a recessi
on.
Promote economic diversification
To develop its resilience and overall economic growth the government should form
ulate
policies to enhance the diversity of the economy.
Develop labour-intensive industries. Hydroelectric power setups are highly capit
alintensive
and require a few highly engineers. 2007 data shows that unemployment stood
at 3.7% in the year compared to 1.3% in 2003. The 10th Five Year Plan targets fu
ll
employment which is achievable in Bhutan. By engaging the private sector and Ind
ian
investors, Bhutan should aim to develop some labour intensive industries to enga
ge the
population.
Better vocational training. It is not enough to create new labour intensive indu
stries
without the support of a suitable workforce. Initiatives to introduce vocational
training
should be in place. Technical institutes should be setup to support the need for
technicians as the manufacturing sector expands.
Encourage higher education. The government should introduce schemes to encourage
workers to pursue higher education. Scholarship schemes should be in place to fu
nd
higher education abroad on the condition that the recipient returns to work in B
hutan.
Fiscal responsibility
As is the case with other South Asian economies, fiscal consolidation should be
formulated
into the legal framework to guide governments to spend within constraints.
32
CHAPTER 5: MALDIVES
As a small island nation, the Maldives has a limited domestic market and is ther
efore
heavily dependent on external developments.
As such, the impact of the crisis has been harsh on the Maldives with its heavy
reliance
on tourism to fuel its GDP and fund its external accounts. The tourism sector of
the
economy, which accounts for over one-quarter of the Maldives GDP, was drastically
affected by the global financial crisis.
Also, the economy is still struggling with major fiscal and current account imba
lances,
which have worsened due to (a) slowing of foreign private capital inflows; and (
b) a
decelerating tourism sector.
A protracted period of slow growth in the US and Europe bodes poorly for Maldive
s
which needs to diversify its economy but building upon its current resilience fr
amework.
Table 5.1: Breakdown of Maldives GDP
% y/y 2004 2005 2006 2007 2008Weight in
GDP (2008)
GDP 100.00
Primary sector 7.4
Fisheries 5.0
Secondary 16.7
sector
Manufacturing 7.0
Construction 5.1
Tertiary sector 79.7
Tourism 24.6
Transport and
communication 19.2
Government
administration 19.5
-4.6
11.8
17.6
2.9
-10.1
15.2
-8.2
-33.1
15.4
14.2
18.0
-0.3
-0.9
15.8
14.6
20.5
21.3
42.3
18.5
13.8
7.2 5.8 -1.3
-14.9 -1.3 9.8
-21.8 -2.6 15.4
10.0 8.5 -8.0
3.3 4.6 -0.4
19.6 16.3 -24.2
9.1 5.8 -0.9
9.4 3.0 -10.5
8.3 6.3 1.1
15.7 13.7 12.5
Source: Collated by Centennial Group using data from the Ministry of Planning an
d National
Development.
Economic activity took a big hit
Real GDP growth fell sharply to -1.3% in 2008/09 from 5.8% in 2007/08 (Table 5.1
and
Chart 5.1). The construction and tourism sectors sustained contractions.
Tourist arrivals recorded a decline of 9% y/y in January-August 2009 (Chart 5.2)
. The
costs associated with travelling to Maldives were an obvious deterrent to Europe
an
tourists, who form the largest share of Maldivian tourists. In the same period,
bed-nights
fell by 8% y/y. Capacity utilization fell to 69.9% in January-August 2009 from 7
9.9% in
January-August 2008. Tourism, as a percentage of GDP, has been gradually
33
decreasing, falling to 24.6% in 2009 from over 30% and 27.2% in 2007 and 2008
respectively.
2003 2004 2005 2006 2007 2008
ldi-
-
liiChart 5.1 Chart 5.2
Growth decelerating sharply Tourism took a hit amid crisis
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
%y/y Maves: GDP Growth
20.0
10.0
0.0
10.0
20.0
30.0
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Jan-09
Mar-09
May-09
Jul-09
%y/y Madives: Tourst Arrvals
Source: Collated by Centennial Group using statistics from the Maldives Monetary
Authority and
Maldives Customs Service.
Both volume and earning of fish exports fell sharply. Total fish catch and the v
olume of
fish exports plunged 15% y/y and 38% y/y in January-August 2009. However, the
intensity of the contraction has eased in the recent months alongside a recovery
in
external demand. Total value of fish exports contracted 22.4% in October 2009,
decelerating from a contraction of 30.1% in September 2009. Notably, tuna prices
in the
international market are also lower compared to last year. Like tourism, fisheri
es as a
percentage of GDP fell from over 7% in 2007 to 4.2% in 2008, but edged up slight
ly to
5% in 2009.
JulJulldiiiiIChart 5.3 Chart 5.4
Deterioration in fish export earnings Inflation still on a downward trend
0.0
5.0
10.0
15.0
20.0
Jan-08
Mar-08
May-08
-08
Sep-08
Nov-08
Jan-09
Mar-09
May-09
-09
USD mn Maves: F sh Export Earnings
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0 Jun-06
Sep-06
Dec-06
Mar-07
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
%y/y Maldves: Consumer Prce nflation
Authority.
34
The external accounts proved fairly resilient
-
-
-
-
-
-
19992000200120022003200420052006200720082009
ldilJulil
) I)
Chart 5. 5 Chart 5. 6
Current account position looking bad Import cover improving
60.0
50.0
40.0
30.0
20.0
10.0
0.0
% of GDP Maves: Current Account Baance
1.5
2.0
2.5
3.0
0.0
100.0
200.0
300.0
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
-09
Aug-09
USD mn Maldves: Internationareserves and
import cover
Gross Reserves (LHSmport Cover (RHS
Authority.
The current account deficit widened to 45.5% in 2009 (Chart 5.5). Imports fell s
lower
than exports largely due to domestic demand and high commodity prices.
Import cover improved despite deteriorating foreign reserves. The slowdown in to
urism is
hurting the accumulation of foreign reserves. Declining from US$69.2 million in
August
2008, gross international reserves have fallen to US$209.3 million in August 200
9.
However due to a simultaneous fall in imports, import cover has improved from 2.
3 in
August 2008 to 2.9 in October 2009.
To augment the economy s ability to respond to the crisis, the IMF approved a Stan
d-By
arrangement of about US$92.5 million in December 2009. Similarly, the ADB also e
xtended
support to the Maldives government through a loan and technical assistance packa
ge of
US$39.5 million in December 2009.
As a result, price pressures are restrained
Inflation is still on downward trend. Consumer price inflation has experienced a
downward
trend since October 2008. Inflation dropped from 11.7% in August 2008 to 6.3% in
August
2009. Inflation excluding fish prices was 7.4% in August 2009. Price development
s were
largely influenced by waning effects of the food price shocks in 2008 and a damp
ened real
estate market.
The Maldives government has responded to the adverse effects on tourism and fish
eries by
extending the leases of resorts from 35 years to 50 years, which would postpone
timelines
for payment of rents. This, in turn, will help the resort operators to smoothen
their cash flows.
The postponement of rent payments, however, will intensify the fiscal deficit, w
hich soared
after the 2004 tsunami as unconstrained relief measures were needed. Debt financ
ing will
continue to post a serious problem in Maldives.
In addition, the government has promised to find foreign funding to develop reso
rts,
extended the development period for all resorts under construction by 1 year, di
versified the
tourism industry, and promoted cultural tourism. The Ministry of Fisheries has c
reated a floor
price to reflect international prices, and stopped distributing licenses to inte
rnational parties
for fishing in the Exclusive Economic Zone. The government has also been decentr
alized in
35
order to create jobs and the atoll level, and organized vocational training aime
d at youth
employment to remove reliance on expatriate employment.
Table 5.2 summarizes the prospects for various transmission mechanisms in the co
ming
years.
Trade Falling exports due to a reduced fish catch and a higher import bill
from rising commodity prices are expected for 2009/10, causing a
widened trade deficit.
Tourism The US and EU are only now beginning to recover, but sustained
recovery is necessary for tourism to rebound.
Also the possibility of sustained increase in fuel costs will increase
fuel surcharges on flights disincentivizing tourists from US and
Europe to travel long distances.
FDI Since most developed countries are beginning to recover, investor
confidence may pick up in 2010, causing an increase in growth of
FDI inflow.
Commodity Prices Rising global commodity prices will likely cause a higher impor
t
bill. The Maldives imports most of its food and energy, and with
the current rise in global food and oil prices, the Maldives will
probably suffer a widened trade deficit in 2009.
5.3 Developing Maldives s economic resilience
We assess the strengths and weakness of the Maldives economic resilience in Table
5.3.
Table 5.3: Analysing Maldives s Resilience
No serious worry from capital inflows as
there are few financial instruments which
attract disruptive short term capital.
The banking industry is still in a relatively
early stage of development. Some banks
have links in India but as Indian banks are
well capitalized, the threat for Maldives is
low.
Too much dependence on tourist inflows,
especially from the advanced economies.
Inflexible rufiyaa has resulted in a
indiscriminate black market and pressures
on the foreign exchange reserves.
Fiscal mismanagement reduces ability to
react through fiscal means.
We would like to focus on two main issues regarding the Maldives resilience:
Past fiscal mismanagement being felt during the current crisis
Chronic overspending in the past has gravely handicapped the government s ability
to react
to the current crisis. President Nasheed, newly elected in 2009, inherited a hea
vily indebted
government. Government expenditures were 65.8% of GDP in 2007, and estimated to
be
68.3% in 20086. A part of the reason has been the expenditures for the relief op
erations post
2004 Tsunami.
Maldives Article IV report, IMF 2008.
36
However, President Nasheed has been proactive in cutting fiscal expenditure as m
uch as
possible. Current expenditure has been reduced. Temporary salary cuts of civil s
ervants of
up to 20% were announced in October 2009. Capital expenditure has also been redu
ced.
Reforms in the revenue department have also been considered. Currently the gover
nment
revenue lacks taxes on personal or corporate income. There is also no sales tax
or VAT.
Instead, government revenue is generated by import duties, resort and land lease
payments,
dividend transfers from public enterprises, and tourist taxes. This creates a na
rrow tax base
which is unable to react swiftly to a crisis on this magnitude.
Thus, the most critical change required in Maldives is a consolidation of its fi
scal balance to
better prepare the economy for an externally originating crisis.
Unbalanced development
The Maldives infrastructure development is largely centred in Male. Expanding inf
rastructure
development into other smaller islands will create jobs in the construction, tra
nsportation and
communication sectors. Once islands become more habitable and trade friendly, do
mestic
trade between islands can be made possible.
This balanced growth strategy has proven to be difficult to implement. First, th
ese islands
are hard to access, meaning the transportation and communication costs will be h
igh.
Secondly, setting up power plants, water and sewage facilities on each designate
d island is
a large fiscal cost. Thus it is no surprise that Maldives has a high Gini Coeffi
cient of 0.41 as
of 2004.
Fiscal consolidation is paramount. The weakening fiscal capacity is the main con
cern.
Leadership shown by the current President is in the right direction. Expenditure
reduction
needs to first start within the government. The volume of the civil service shou
ld also be
reduced.
Monetary policy needs modification. Currently, the primary role of monetary poli
cy is
to preserve the exchange rate peg to the US Dollar. While the fixed exchange rat
e policy
is appropriate for the Maldivian economy, we suggest that the peg be against a b
asket of
currency rather than a single currency.
Spread development into islands. The government needs to decentralize some of it
s
operations out of Male to local authorities. As the fiscal situation improves th
ere should
be an increase in attention towards these lower income islands to boost developm
ent.
Encourage private participation in non-tourist sectors. The Maldives, being heav
ily
dependent on tourism as a growth engine, must ease reliance on tourism by gradua
lly
diversifying its economy. Since tourism includes many services, innovation in se
rvices
would be a good way to create jobs and take away some pressure from services. Al
so,
the fisheries sector can be more specialized in terms of labour. Value added on
fish
products would help raise export revenue.
37
Report 5
Bangladesh, Sri Lanka, Nepal, Bhutan, Maldives
About the Asian Development Bank
ADB s vision is an Asia and Pacific region free of poverty. Its mission is to help
its
developing member countries substantially reduce poverty and improve the quality
of life
of their people. Despite the region s many successes, it remains home to two-third
s of the
world s poor: 1.8 billion people who live on less than $2 a day, with 903 million
struggling
on less than $1.25 a day. ADB is committed to reducing poverty through inclusive
economic growth, environmentally sustainable growth, and regional integration.
Based in Manila, ADB is owned by 67 members, including 48 from the region. Its m
ain
instruments for helping its developing member countries are policy dialogue, loa
ns, equity
investments, guarantees, grants, and technical assistance.
Asian Development Bank
6 ADB Avenue, Mandaluyong City
1550 Metro Manila, Philippines
www.adb.org Printed in the Philippines

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