Developing Asian economies will continue to grow strongly this year but will face the risk of surging prices, says the Asian Development Bank’s annual economic outlook released Wednesday. The bank lauded China’s recent interest rate hike as an appropriate move to tackle inflation.
Rhee Changyong, chief economist of the ADB, says economic growth among developing nations in Asia will average 8 percent both this year and next.
However, economic activity could slow if governments fail to adequately tackle surging food and commodity prices. Pakistan is expected to suffer the highest rate of inflation this year at 16 percent, followed by Vietnam at 13.3 percent.
Rhee says with developing Asia home to two-thirds of the world’s poor, governments need to make inflation a top priority.
On Tuesday, China raised interest rates for the fourth time since October to help curb rising prices. Rhee said China is moving in the right direction.
"Still I believe there is room to tighten monetary policy a little bit more because their policy rate [interest rate] compared with inflation rate is still at a modest level," Rhee said.
India, Indonesia, the Philippines, Thailand and South Korea have also raised interest rates in recent months.
Rhee said the economic impact of the March 11 earthquake and tsunami on the Japanese economy will be large in the next two quarters, but will moderate in the long run as reconstruction spending kicks in.
The earthquake forced some Japanese companies to halt production, disrupting the supply of key materials to other Asian countries. Some international banks have also shifted staff from Tokyo to other financial centers such as Hong Kong and Singapore because of fears of radiation from the crippled Fukushima nuclear power plant.
"Under the assumption that there will be no further deterioration of the nuclear situation, we believe the impact of the Japanese earthquake on other Asian regions will be contained and not very big," Rhee said.
The non-profit lender also said the region needs to develop new sources of growth for the future, such as enhancing trade and investment with other economies in the southern hemisphere. The report finds considerable potential to broaden links between Asia and fast growing emerging economies in Latin America, Africa and the Middle East if policy makers remove barriers to trade and investment.
The bank says Southeast Asia’s economic expansion will slow this year to 5.5 percent from 7.8 percent last year. Indonesia will be the fastest growing economy in the region, at 6.4 percent.
In South Asia, India is expected to continue to expand strongly at 8.2 percent but faces risks from inflation, a drop in private investment and structural constraints such as poor agricultural productivity.
The bank says the resource-rich Central Asian region has been benefiting from high prices for oil and gas, metals, cotton and gold. The region’s growth is forecast to rise by 6.7 percent this year, up from 6.6 percent last year.