WASHINGTON: South Asia’s economic growth outlook has dimmed amid global uncertainties, with the World Bank downgrading projections for most countries in the region. The latest South Asia Development Update suggests that enhancing domestic revenue mobilization could stabilize fiscal positions and bolster resilience against potential future shocks.
The report, titled “Taxing Times,” forecasts regional growth to decelerate to 5.8 percent in 2025, which is 0.4 percentage points lower than previous estimates. A slight recovery is expected in 2026, with growth projected at 6.1 percent. The outlook remains precarious due to global uncertainties and domestic vulnerabilities, such as limited fiscal space.
“South Asian countries face challenges due to multiple shocks over the past decade, affecting their capacity to handle a tough global environment,” stated Martin Raiser, World Bank Vice President for South Asia. He emphasized the need for reforms to boost economic resilience and foster growth and job creation, advocating for increased trade, modernization of agriculture, and enhanced private sector activity.
A significant element of economic resilience is domestic revenue mobilization. Despite relatively high tax rates compared to other developing economies, South Asia’s tax revenues fall short. From 2019 to 2023, government revenues averaged 18 percent of GDP in South Asia, compared to 24 percent in other developing regions. The report identifies substantial tax revenue gaps, particularly in consumption, corporate, and personal income taxes.
Franziska Ohnsorge, World Bank Chief Economist for South Asia, pointed out that low tax revenues contribute to fiscal fragility, posing a risk to macroeconomic stability during uncertain times. She noted that while tax rates are high, weak collection results in a heavy burden on taxpayers and insufficient funds for essential services.
To address these issues, the report suggests policies to improve tax revenues by closing loopholes, streamlining tax codes, and enhancing enforcement and compliance. Recommendations include reducing tax exemptions, simplifying the tax regime to discourage informality, and employing digital tools for better tax collection. Pollution pricing is also proposed as a dual solution for environmental and fiscal challenges.
The report provides a mixed outlook for individual countries in the region. Afghanistan’s growth is predicted to remain modest, while Bangladesh faces political and financial challenges. Bhutan’s growth prospects improve with expected hydropower developments. India anticipates a slowdown due to global economic uncertainties. The Maldives benefit from infrastructure upgrades but face debt risks. Nepal’s growth is hindered by natural disasters and financial weaknesses. Pakistan shows signs of recovery amid ongoing challenges. Sri Lanka is projected to see investment and demand-driven growth following debt restructuring efforts.
The World Bank’s update underscores the need for strategic reforms and revenue enhancements to navigate the economic headwinds facing South Asia.