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December 2008
I. INTRODUCTION
1. The ongoing global economic and financial crisis has underscored the importance of maintaining the stability and soundness of financial and economic systems across the globe. In an increasingly interlinked global economy, distress in one market can easily spill over to the world's financial markets and into the real economy. Asia, which earlier appeared relatively immune to fallout from the financial crisis, is now facing greater risks due to the global slowdown. Recent discussions at the Group of 20 (G-20) Summit1 highlighted the need to take decisive and bold actions at the individual country level as well as to closely coordinate across
national boundaries to counter the scale and global nature of the crisis.
2. The global economic and financial crisis is impacting South Asia at a time when it was already preoccupied with the adverse effects of a severe terms-of-trade shock (reflected in a worsening of macroeconomic balances) and strong inflationary pressures. Policymakers in South Asia (as elsewhere in the world) now face the challenge of simultaneously coping with a sudden recession in most developed economies, a collapse in commodity prices, a severe liquidity crunch, and, most of all, loss of confidence. If the current crisis persists, its impact on growth is likely to be pronounced and could significantly delay the region's achieving its development goals toward poverty reduction and inclusive growth. Particularly for smaller economies in the region with large balance-of-payments and fiscal deficits, adverse impact to growth will be significant. Such countries will have larger financing and adjustment needs and if capital dries up, this will put a deep strain on the balance sheets of domestic firms and banks, potentially leading to a cascade of bankruptcies and bank failures. There is a growing consensus that much can and should be done to address weaknesses in South Asian financial systems as well as to restore growth and stability in the real economy. Despite its being the least financially integrated subregion, the global crisis confronts South Asia (in varying degrees) with daunting macroeconomic challenges.
3. Following the recently concluded joint Asian Development Bank (ADB) and The World Bank's South Asia Bond Markets Conference2 in Hong Kong, developing member countries (DMCs) in South Asia suggested that ADB support for exchange of views and learning from experiences in the context of the evolving economic and financial crisis necessitate consideration particularly for smaller economies. Accordingly, the proposed research and development technical assistance (TA) project provides a forum for discussions among South Asian and other DMCs on national and regional responses to the crisis in dealing with systemic risks, identify mechanisms that could maintain financial stability and shore up investor confidence, and assist in designing and implementing fiscal and investment strategies and policies to stimulate the domestic economies. In-depth status papers will be prepared and international experts will be invited to facilitate knowledge sharing in the forums. The proposed TA will feed into broader interventions planned by the Asian Development Bank Institute. The design and monitoring framework is in Appendix 1.3
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