The Asian Development Bank (ADB) says that governments should focus more attention on curtailing inflation rather than concentrating on growth.
In its flagship report, Asian Development Outlook, released in April, the bank had estimated that inflation in the Asian and Pacific regions would be about 5.1 percent.
However, an updated version of the report, released yesterday, says that inflation is projected to reach 7.8 percent in 2008 and about 6 percent in 2009.
The report warned that inflationary pressures in the region are mounting and could boil over if left unaddressed.
After registering 9 percent growth last year, developing Asian countries are expected to slow down to about 7.5 percent this year and 7.2 percent in 2009.
The report says that food prices, although moderating, will never again reach 2007 levels (despite a record harvest in food grains as predicted by the FAO).
`Demand for food continues to outstrip supply. Asia is just one supply shock away from another grain price hike,` Chief Economist of ADB, Ifzal Ali, said in a statement.
Oil prices, peaking at US $ 148 a barrel earlier this year, currently below US$ 95, is expected to remain high and volatile.
`The recent drop in oil prices will be short lived,` the report says.
However, the report says that the Asian region would still be the fastest growing region in the world.
ADB Country Director for Sri Lanka, Dr. Richard Vokes, said that although world oil and food prices aggravated inflation, the loose monetary and fiscal policies contributed 60 percent to the inflationary trend.
The report says that excessive aggregate demand and inflation expectations accounted for a larger share of variations in domestic price inflation.
Dr. Vokes was quoting Ali, who said that the impact of food and oil on inflation had been muted in most of Asia.
`This central finding has vast implications for monetary policies in the region. It means that monetary tightening (by increasing interest rates) will continue to be the principle instrument for fighting inflation in Asia,` Ali said in statement.
The report says that emerging economies were still affected by what was taking place in developing countries.
`The worsening outlook for major industrial economies is buffeting developing Asia s export, equity and offshore bond market,` the report said.
India s performance could affect the way other countries in the South Asian region performed in this `turbulent, disturbing, uncertain global economic environment,` as Dr. Vokes put it.
India, contributing 75 percent to South Asia s GDP, is expected to see inflation rise to 11.5 percent in 2008 and 7.5 percent in 2009.
India s inflation rate was 9.5 percent for the first quarter of this financial year, up from 5.3 percent for the same period the previous year. Grow during the two periods were 9.2 percent and 7.9 percent respectively.
India has begun to implement a tighter monetary policy and as a result growth is expected to comedown to about 7 percent in 2009.
The Asian Development Outlook said that this pause in India s growth would set the stage for a higher growth trajectory over the medium term if prudent macro economic management and reforms to improve efficiencies and productivity were employed.
The Asian Development Outlook report which was published in April this year said that soaring global prices for fuel and food and high government bank borrowing were the main causes for the doubling of inflation in the Sri Lanka Consumer Price Index, from 9.6 percent to 20.2 percent.
It said that the anticipated economic slowdown in the US and EU and escalating conflict with the LTTE will add to the downside risks to economic growth.
Economic growth is forecasted at 6 percent for 2008 and 2009 partly because private sector investment is expected to slowdown as investors appear to be hesitant.
`Inflation will stay relatively high in 2008. Continued tightening of monetary policy will restrict the growth of private sector credit but is unlikely to reduce inflation pressure unless it dovetails with fiscal policies that reduce bank borrowing,` it said in April.
While the updated version of the report looked only at major economies, thus leaving out Sri Lanka, Dr. Vokes said that looking back at the previous estimates Sri Lanka did not seem to have deviated too far from it.
`Sri Lanka began to tighten its policy rates and eliminate subsidies long before most other countries realized that these measures were important to fight inflation in the long run,` he said.
The ADB s Chief Economist said that countries should be prepared to accept short term pain for long term gain.
If country s failed in passing on the increased prices to its consumers, it would result in increasing fiscal imbalances and more consumption of commodities, leading to further price increases.