Currency pain, capital outflows will persist, says ADB’s Asakawa

Addressing a press conference during the ADB’s 55th annual meeting, Asakawa said the multilateral lender is working to support developing member-countries through these challenging conditions.

He cautioned that the risks related to capital outflows and currency depreciation would persist amid monetary tightening in advanced economies, especially by the Federal Reserve.

At ADB’s first partially in-person meeting since 2019, the multilateral lender is discussing Asia’s path to recovery and the new uncertainties and headwinds including food security, inflation and debt crises.

“The social and economic conditions have been challenging. The pandemic was difficult and continues to impact many aspects of life. In 2020, developing Asia and Pacific saw its first contraction of economic growth in nearly six decades. We now see economies in recovery, but the outlook has started to worsen,” said Asakawa.

ADB has revised down the growth forecasts for 2022 for developing Asia and Pacific to 4.3% from 5.2% estimated in April, and to 4.9% for 2023 from 5.3% estimated earlier. It also lowered its growth forecast for India to 7% for 2022-23 from 7.2% estimated in July citing inflation and monetary tightening. It also cut the GDP growth estimate for 2023-24 to 7.2% compared to 7.8% estimated in its supplementary outlook in July.

Elevated oil and commodity prices and high inflation will likely require the continued tightening of monetary policy to ensure that inflation expectations do not get entrenched, which would likely hinder economic growth in the short run.

“I am afraid, the risks or the possibilities of abrupt capital outflows from this region or sharp currency depreciation will continue for some time… which is mainly to do with the very aggressive policy tightening by some economies, especially the Federal Reserve,” said Asakawa.

He added that while the current account balance position and foreign reserves have improved compared to the financial crisis 1997-98 in this region, it’s important to be vigilant.

“The current account balance position has improved…so the resilience of the system as a whole against any financial turbulence has been enhanced. Nonetheless, the movement of capital, especially portfolio, is very, very fast and volatile. So, it’s always a good thing to be very vigilant on this volatile capital always…,” said Asakawa.

The rupee depreciated to a lifetime-low on Monday to close at 81.25 against the dollar. It followed a 75 basis points rate hike by the Fed. Meanwhile, India’s forex reserves have dropped by almost $80 billion since the Russia Ukraine tensions.

India’s retail inflation is hovering at record levels of 7%, remaining over the Reserve Bank of India’s tolerance band of 4-6% for eight straight months, largely led by higher food prices and pressures from rising global oil and commodity prices.

“The supply chain issues from the pandemic and the Russian invasion of Ukraine have contributed to food prices that have soared to record highs this year. We also have to keep in mind that the current food security crisis will get even worse if we fail to address climate change,” said Asakawa.