Sri Lanka is among three South Asian governments that increased borrowing from domestic banks to finance their record debt, and, as a result, sovereign-bank nexus increased, heightening the financial sector’s vulnerability, according to a World Bank report.

The other two countries are the Maldives and Pakistan, says a WB report, titled ‘A mixed bag for South Asian economies: Challenges and opportunities ahead.’

It said: “Banks in South Asia could also face liquidity problems if there are sudden deposit withdrawals, for example. Some countries, like Sri Lanka and Bangladesh, are especially vulnerable, given rising non-performing loan ratios—a key indicator of worsening asset quality—in the banking sector as well as non-bank financial institutions.

South Asia, battered by three years of upheaval from the Covid-19 pandemic, and spillovers from Russia’s invasion of Ukraine, faces a combination of good and bad news for its economies.  On the positive side, global energy and fertiliser prices are down, both tourism and business services continue to recover strongly, and the reopening of China’s economy is relaxing supply bottlenecks.

However, rising interest rates, and risks in the banking sector, in the United States and Europe, have increased uncertainties in South Asia’s outlook, given their significant impact on balance of payments, exchange rates, and financial markets.

Therefore, growth in South Asia is expected to slow down in 2023, according to our latest South Asia Economic Focus (SAEF). In this blog, we discuss the challenges and opportunities the region faces, and highlight expert opinions from the bi-annual survey of the South Asia Economic Policy Network (SAEPN)—a group of policy makers, academics, and macroeconomists across the region.

The bi-annual survey of the SAEPN reveals a more bearish outlook for the region, compared to last fall, reflecting the slowdown in economic growth and shift in risks for the economy:Forty-eight percent of the respondents—as opposed to 56 percent in the fall of 2022—believe that economic activity has recovered to at least 85 percent of the pre-COVID-19 level.