WASHINGTON—Amid increasing uncertainty in the global economy, South Asia’s growth prospects have weakened, with projections downgraded in most countries in the region. Stepping up domestic revenue mobilization could help the region strengthen fragile fiscal positions and increase resilience against future shocks, says the World Bank in its twice-yearly regional outlook.
Released today, the
latest South Asia Development Update, Taxing Times, projects regional growth to slow to 5.8 percent in
2025—0.4 percentage points below October projections—before ticking up to 6.1
percent in 2026. This outlook is subject to heightened risks, including from a
highly uncertain global landscape, combined with domestic vulnerabilities
including constrained fiscal space.
“Multiple shocks over the past decade have left South Asian countries
with limited buffers to withstand an increasingly challenging global
environment,” said Martin Raiser, World Bank Vice President for South Asia. “The region needs targeted reforms to address
vulnerabilities such as fragile fiscal positions, backward agricultural
sectors, and the impact of climate related shocks.”
Although tax rates in
South Asia are often above the average in developing economies, most tax
revenues are lower. On average during 2019–23, government revenues in South
Asia totaled 18 percent of GDP—below the 24 percent of GDP average for other
developing economies. Revenue shortfalls are particularly pronounced for
consumption taxes but are also sizable for corporate and personal income taxes.
Tax revenues in South
Asia are estimated to be 1 to 7 percentage points of GDP below their potential,
based on existing tax rates. Some of this shortfall is explained by the
widespread informality and large agricultural sectors in the region. However,
even after taking this into account, sizable tax gaps remain, highlighting the
need for improved tax policy and administration.
“Low revenues are at the root of South Asia’s fiscal fragility and
could threaten macroeconomic stability, especially in times of elevated
uncertainty,” said Franziska Ohnsorge, World Bank Chief Economist for South Asia. “South Asian tax rates are relatively high,
but collection is weak, leaving those who pay taxes with high burdens and
governments with insufficient funds to improve basic services.”
The report recommends
a range of policies to improve tax revenues by eliminating loopholes,
streamlining tax codes, tightening enforcement, and facilitating tax
compliance. This includes paring back tax exemptions; simplifying and unifying
the tax regime to reduce incentives to operate in the informal sector; and
using digital technology to identify taxpayers and facilitate collection. The
report notes the potential of adopting pollution pricing, which could help
address the high levels of air and water pollution while raising government
revenues.
Country Outlooks
·
In Afghanistan, with aid declining, the
economy is estimated to have grown by 2.5 percent in FY24-25, slower than the
pace of population growth and growth is forecast to increase only moderately to
2.2 percent in 2025/26.
·
In Bangladesh, growth is expected to slow
in FY24/25 to 3.3 percent amid political uncertainty and persistent financial
challenges, and the growth rebound in FY25/26 has been downgraded to 4.9
percent.
·
In Bhutan, the forecast for FY24/25 has
been downgraded to 6.6 percent due to weak agriculture sector growth but
upgraded in FY25/26 to 7.6 percent due to expected strength in hydropower
construction.
·
In India, growth is expected to slow from
6.5 percent in FY24/25 to 6.3 percent as in FY25/26 as the benefits to private
investment from monetary easing and regulatory streamlining are expected to be
offset by global economic weakness and policy uncertainty.
·
In Maldives, the completion of a new
airport terminal will contribute to 5.7 percent growth in 2025, although
challenges in meeting external debt obligations continue to pose a downside
risk.
·
In Nepal, the forecast has been
downgraded to 4.5 percent in FY24/25, due to damage from floods and landslides,
and to 5.2 percent in FY25/26, as a result of persistent weakness in the
financial system.
·
In Pakistan, the economy continues to
recover from a combination of natural disasters, external pressures, and
inflation, and is expected grow by 2.7 percent in FY24/25 and 3.1 percent in
FY25/26.
·
In Sri Lanka, the government has made
further progress with debt restructuring, and a projected rebound in investment
and external demand is expected to lift growth in 2025 to 3.5 percent before it
returns to 3.1 percent in 2026.
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