Introduction

In spite of the financial turmoil in neighboring East Asia, most of the countries of South Asia continued to record satisfactory gross domestic product (GDP) and export growth in 1997. Foreign investment in the region continued to grow, with net long-term resource flows reaching the highest level on record. Nonetheless the region still receives just 3.6 percent of net private long-term flows to developing countries, accounts for only 1 percent of world trade, and is home to roughly 40 percent of the world's poor.

At 5.2 percent in 1997, South Asia's GDP growth was down almost 1 percent from 1996, mainly due to sluggish demand and stagnation in India's industrial sector and low cotton output in Pakistan. Estimated growth rates in fiscal 1998 are 5.5 percent in Bangladesh, 5.1 percent in India, 5.4 percent in Pakistan, and 5.8 percent in Sri Lanka.

The fiscal deficit in India rose to an estimated 6.1 percent of GDP compared to fiscal 1997's deficit of 4.9 percent, despite continued efforts by the government to reduce spending. Estimates indicate that Bangladesh's fiscal deficit remained unchanged from fiscal 1997, at 5.3 percent of GDP; Pakistan's fell to 5.4 percent from 6.3 percent of GDP the previous year; and Sri Lanka's to 6.5 percent from 7.6 percent of GDP in fiscal 1997.

Largely due to increased disbursements from official creditors, the region's long-term external debt rose by 3 percent, reaching $142 billion in 1997. Official debt continued to account for the bulk of the region's long-term liabilities. A 9 percent rise in export revenues led to an improvement in the debt-to-export ratio, which fell from 194 percent in 1996 to 183 percent in 1997. Despite this decrease, the ratio still exceeds the average for all developing countries (136 percent in 1997). Short-term external debt remained low, a factor that may have helped prevent spillover from the East Asian financial crisis. Financial sector regulations, which prohibited banks from fueling large credit booms, and small current account deficits also helped the region avoid financial crisis.

Growth in private capital flows leveled off in 1997 after jumping from an average of $5 billion between 1990-95 to $9 billion in 1996. India continued to attract the bulk, with net foreign direct investment flows rising to $3 billion in 1997, a 20 percent increase over the previous year. The World Bank continued to support clients in the region as they met the challenge of reducing poverty, stimulating faster economic growth, and focusing on a range of important development initiatives. Table 2-7 shows the sectoral distribution of lending to the region for the 1989-98 period. Table 2-8 compares commitments, disbursements, and net transfers to the region for fiscal years 1993-98, and table 2-9 shows operations in the South Asia region approved by the Board of Executive Directors during fiscal 1998 by country. Figure 2-4 shows IBRD and IDA commitments by sector.