Rising inflation threat seen in South Asia

Rising inflation is posing a threat to South Asia, with the situation most worrying in the Maldives where a foreign currency black market has emerged, a senior World Bank economist has warned.

Noting that the median inflation rate in South Asia was more than twice that of Latin America and the Caribbean, economist Eliana Cardoso asked whether policymakers in the region should be concerned "and wonder whether they are doing something wrong."

In the third quarter of 2009, inflation in South Asia, which aside from the Maldives comprises India, Pakistan, Nepal, Bangladesh, Afghanistan, Sri Lanka and Bhutan, hit an average 10.9 percent, the World Bank said.

It compares with just 2.9 percent in Latin America and the Caribbean.

"From the price stability perspective the most worrying situation is that of the Maldives," Cardoso, the bank's chief economist for the South Asian region, wrote on the "World Bank's End Poverty in South Asia" blog.

She said that the budget deficit in Maldives, the region's most exotic tourist des tination, was projected to reach 33 percent by the end of the year and "a black market for foreign currency has emerged."

Cardoso noted that the Maldives government had promised fiscal adjustment.

President Mohamed Nasheed has said that his atoll nation was facing its worst economic crisis ever because of a sharp fall in tourist numbers and chronic government overspending.

While Afghanistan, despite raging violent conflicts, has been able to keep its macroeconomic policy under control, fiscal slippage in Nepal could undermine macroeconomic stability, Cordoso said.

She proposed tightening of monetary policy in the Himalayan nation since real interest rates were negative at present.

In India, the South Asian giant, widening budget deficits are the most visible obstacle to stable and sustainable growth, Cardoso said.

New Delhi has forecast that inflation could hit 6.5 percent by the end of the financial year to March 2010 amid speculation the central bank could be forced to raise benchmark borrowing rates early in the new year in an attempt to check rising prices.

But the Indian government is keen for the bank to hold off on rate rises for as long as possible in order to sustain India's fragile economic recovery.

The International Monetary Fund expects the inflation rate in India to be 8.6 percent in 2009.

Pakistan was set to have the highest rate at 20.7 percent, followed by Nepal at 13.2 percent and Bangladesh at 5.2 percent this year, the fund said.

Cardoso said that in general, the recipe for hyperinflation was the monetization of budget deficits in countries afflicted by political instability or conflict.

Monetization usually refers to the printing of money by central banks.

"Even if the threat of mega inflation is far removed from the South Asia scenarios, the combination of big budget deficits and loose monetary policy seems to be present in some countries of the region," Cardoso said.

She pointed out that it was possible that the higher inflation in South Asia was "just a passing cloud blown by the spike in food prices."

The Brazilian economist recalled the days when Latin America was the land of inflation with hyperinflation in Bolivia, Brazil and Argentina hogging the news in the 1980s and early 1990s.

"At that time, Asia was seen as immune to the Latin disease. Since then, much water has gone under the bridge."