Abstract
Most Asian low-income countries (LICs) and Pacific Island economies (PICs) continued to experience healthy economic growth in the second half of 2010. Strong exports of commodities and garments, a pickup in investment, especially in commodity sectors, and a rebound in tourism have benefited the region, while greater political stability and macroeconomic policy credibility continue to pay off. Nevertheless, slower remittances have added to balance of payments pressures in some cases, while inflationary pressures from food and commodity prices have increased economic and social vulnerabilities. Looking ahead, many Asian LICs and PICs will share with the emerging market economies of the region the challenges of managing the social impact of higher commodity prices and of maintaining sound financial systems in the face of rising and volatile capital inflows. Indeed, section A shows that even though remittances and aid remain the main sources of foreign funding for Asian LICs, gross capital flows have accelerated after the global crisis in a number of these economies. Healthy banking systems will be key to absorbing these flows in an orderly manner. Section B shows that while banks in Asian LICs have emerged relatively unscathed from the global crisis, they are also exposed to risks and vulnerabilities, including from sudden drying up of cross-border liquidity. Turning to the opportunities and challenges from higher commodity prices, section C looks at the experience of Timor-Leste in restoring political stability and reducing poverty on the back of windfall gains from oil and gas, and section D highlights the vulnerability of PICs to commodity price shocks and offers policy options to address them.
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