Does South Asia Run the Risk of Rising Inflation?

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ImageI am old enough to remember the days when Latin America was the land of inflation. Hyperinflation in Bolivia, Brazil and Argentina made the news in the 1980s and early 1990s. At that time, Asia was seen as immune to the Latin disease. Since then, much water has gone under the bridge. Inflation came under control in the majority of Latin American countries. Today the median inflation rate in South Asia is more than twice the size of the median inflation rate in Latin America and the Caribbean. (See chart below)

Should South Asia’s policymakers look at this information and wonder whether they are doing something wrong?

In general, the recipe for hyperinflation is the monetization of budget deficits in countries afflicted by political instability or conflict. Even if the threat of mega inflation is far removed from the South Asia scenarios, the combination of big budget deficits and loose monetary policy seems to be present in some countries of the region.

From the price stability perspective the most worrying situation is that of the Maldives. There, the budget deficit is projected to reach 33% by the end of the year and a black market for foreign currency has emerged. The government has promised fiscal adjustment.


From the same perspective, the good news is that despite raging violent conflicts, Afghanistan has been able to keep its macroeconomic policy under control. But in Nepal, fiscal slippage could undermine macroeconomic stability and some tightening of monetary policy would be a good idea since real interest rates are negative. In India, widening budget deficits are the most visible obstacle to stable and sustainable growth.

Paying for increased current expenditures at the expense of instability in the future is a Faustian pact. Do you remember Dr. Faust, the respectable German academic who, unhappy with the limits of traditional knowledge, hired Mephistopheles’ services? The idea of selling one’s soul in exchange for knowledge inspired Marlowe’s play, Goethe’s book, and at least two important operas: Berlioz’s “The damnation of Faust” and John Adams’ "Dr. Atomic" (about Oppenheimer, the American Faust). You can listen to both at the Metropolitan Opera House Website and forget about inflation.

After all, it is possible that the higher inflation in South Asia is just a passing cloud blown by the spike in food prices. Is current accommodation by the monetary policy soon to give way to restraint as the global crisis subsides? Should we just forget about inflation and listen to Berlioz in harmony?


Eliana Cardoso

Former Acting Chief Economist

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