US financial crisis affects South Asia - Commentary

US financial crisis affects South Asia
By: Kamal Raj Sidgel
Posted: 11/6/08

The unexpected U.S. financial crash and its ripple effects have thrashed the weak economies in South Asia, which were already reeling from the food crisis and the rising price of oil. India, despite being the most powerful economy in South Asia, was not immune to the impact of the financial crisis.

India has significant foreign capital inflow but, following the credit crunch in the U.S. and Europe, investors have started withdrawing their money from India. The Bombay Stock Exchange fell sharply in return. Thankfully, recent developments show new hopes of a rebound. Nevertheless, liquidity concerns in the Indian market have proven to be the biggest and most visible problem. The Indian central bank has responded by cutting the interest rate to 8 percent as a means to boost liquidity and stabilize India's finances.

Although India's central bank has been claiming that the country's economy is strong enough to absorb the impact of the financial crisis, there is no denying that India's technology sectors will be especially hard hit. This is because many of the information technology companies depend on the U.S. for business.

Pakistan is another country in South Asia that has been severely affected by the financial crisis. In fact, Pakistan seems to be one of the hardest hit. Its economy, already on the brink of collapse, is destined for bankruptcy because fleeing foreign investors have caused a significant depreciation in its currency, the rupee. Pakistan is also facing a serious liquidity crunch, with the only solution being international support.

Pakistan's request for Chinese support, however, has been denied because of Pakistan's alleged involvement in terrorist activities in China's Muslim-dominated areas. Saudi Arabia has refused to give Pakistan a financial concession on the oil trade, as well. The only option for Pakistan is to approach the International Monetary Fund, which will set highly stringent conditions for the nation. Nepal's economy is suffering, as well.

The recently elected Maoist government has unveiled a $3.5 billion annual budget - of which more than half is expected to be foreign aid. The donor countries, however, are all facing liquidity crunches and will have difficulty making their donations. Not receiving foreign aid would undoubtedly deal a heavy blow to Nepal, which is also witnessing the depreciation of its currency against the U.S. dollar.In Bangladesh, political instability has been the main factor behind its poor, private capital inflow.

Now, with Bangladesh's major trading partners in a financial crisis, the country's main trading sectors will be the hardest hit. Bangladesh's apparel industry, for example, had laid down an ambitious target of exporting an equivalent of $25 billion and creating an extra 2 million jobs in the next five years. It is doubtful whether this will be able to occur. Bangladesh's leaders, however, have a ready-made excuse: their economy cannot grow unless the current political situation is stabilized.

Sri Lanka, on the other hand, is expected to be less affected by the financial crisis. Although foreign investors have begun to pull their money out of the country's stock market, the government has been saying that this will not have any detrimental impact on the economy.

The Colombo Stock Market has shown some negative impacts, but analysts claim that it's part of a normal ebb and flow. Nevertheless, Sri Lankan apparel and tea industries are vulnerable to the crisis, as the U.S. is one of their major export destinations. Although the U.S. financial crisis has impacted South Asian countries differently, it would be simplistic to blame it for the economic recessions in most of these countries. Severe political unrest is probably the largest cause behind the economic distress of Nepal, Bangladesh, Pakistan and Sri Lanka.

Nepal is just emerging out of a decade-long Maoist insurgency. Bangladesh is under military rule with serious political turmoil. Pakistan is struggling to establish democracy after Benazir Bhutto's assassination and Pervez Musharraf's ouster. Sri Lanka, although new hopes have emerged, has been continuously fighting with separatist rebels.Each of these nations will have a strong economy only with the establishment of a stable democracy. And India, a major economic force in South Asia, has a large role to play in helping bring about a democratic and stable future in the region.
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