COVID-19 subsides, South Asia faces stronger headwinds and shifting risks

Inflation: the new COVID

With the risk of the pandemic waning, thanks to robust vaccination rates across South Asia and the adaptation of governments and citizens to new patterns of behavior, inflation has become the biggest short-term risk. term for South Asian economies.

Even before the war in Ukraine, consumer prices for edible oils rose by 20% across much of South Asia, with transport fuel prices hitting double digits in some countries. The war-induced rise in commodity prices further aggravated inflationary pressures. The world price of wheat rose 20% and the price of Brent crude oil rose 15% in early April. With Ukraine supplying nearly half of the world’s sunflower oil, cooking oil prices have skyrocketed: The average retail price of sunflower oil in India has increased by 12% in the first three weeks after the start of the war.

Although the effect of world oil prices is relatively small on consumer prices, it exerts a strong influence on producer prices. In India, Pakistan and Sri Lanka, the wholesale price of crude oil and petroleum products has historically been highly correlated to world oil prices. Rising global energy prices can (1) increase fertilizer prices, which will drive up food prices, and (2) increase operating and transportation costs for manufacturing, thereby reducing margins producers’ beneficiaries.

Governments in the region use fuel subsidies to reduce the burden of global energy prices on consumers. However, as we argue in Reshaping the standardsa better alternative may lie in policies that discourage the use of dirty fossil fuels and promote the green transition.