1.4 Mounting external sector pressures

coPIng wItH sHocks: mIgRAtIon And tHe RoAd to ResIlIence

subsidies have short-term benefits: fertilizer subsidies can help farmers contain costs and avoid disruptions in food production, while price subsidies on basic food items alleviate burdens on poorer households and reduce the risk of food insecurity. But similar to fuel subsidies, food and fertilizer subsidies increase the government’s fiscal burden. Subsidies also distort domestic market prices, encourage overuse of fertilizers, and could contribute to rising trade and current account deficits.

Export restrictions sometimes can backfire and hurt the exporting country. For an exporter that produces a large share of the global market, export restrictions can raise global prices relative to domestic prices. Seeing the higher global prices, local producers could start hoarding to export at the higher price later. Research on the food crisis and countries’ policies during 2008-2010 suggests that export restrictions together with reactions by the importing countries can lead to a full transmission of higher prices to the exporting country (Anderson, Martin, and Nelgen 2010; Anderson and Nelgen 2012), and thus defeating the purpose of the export restrictions. Export restrictions that last for a longer period can also reduce domestic production as producers shift to goods and sectors without restrictions and with higher profits. Over time, export restrictions reduce importing countries’ perception of the exporters’ reliability as a supplier, thus impairing the exporters’ competitive position. Both the shortterm and long-term adjustments of local producers lead to a shortage in the local market, driving up domestic prices and defeating the initial goal of the restrictions.

1.4 Mounting external sector pressures

With shifting global and domestic economic situations, South Asian countries face rising trade deficits, stagnating remittance inflows, and increased net capital outflows. In Sri Lanka, pressures in the external sector have morphed into an economic crisis, while in Pakistan, foreign reserve levels are dangerously low.

Higher commodity prices have raised import prices for South Asian countries, contributing to rising trade deficits. Estimates based on countries’ recent historical trade flows and assuming no change in trade volumes show that global fuel and food price increases as of the end-May 2022 have had a large impact on the countries’ trade balances (Figure 1.11). The region is especially vulnerable to price surges in crude oil, coal, and palm oil, due to its large net import positions in these commodities. Afghanistan is particularly vulnerable to higher food prices, as the country has large negative trade balances in wheat and wheat products. While all countries in the region are vulnerable to fuel price increases, the impact is largest in Afghanistan and Maldives, as both are large net importers of petroleum products relative to the size of their economies. In Afghanistan, this is partially offset by its positive net export position in coal. India has large negative trade balances in coal and crude oil but is a net