ADB says inflation ‘top priority’ for Asia

The Asian Development Bank (ADB) has said that controlling inflation should be the “top priority” for Asia as strong growth, turmoil in the Middle East and Japan’s nuclear crisis drive up oil prices.

The warned some developing economies were showing signs of “potential overheating” and said more flexible exchange rates and capital controls could help curb soaring consumer costs and ease pressure on the poor.

Pakistan could see inflation of 16 percent, the maximum in the region, Vietnam could reach 13.3 percent this year, the second highest in the region, the ADB said.

Risks to growth included soft job and housing markets in the United States, Europe's debt problems, the economic impact of last month's massive earthquake in Japan and rising commodity prices, which are being stoked by upheavals in North Africa and the Middle East.

"The region's outlook, however, is for continued strong growth in 2011- 2012, but with the threat of inflation looming closer," said in the report.

The ADB said the impact of Japan's disaster was hard to quantify, but was likely to be temporary and limited.

"This benign baseline scenario assumes no major aftershocks, extended power shortages, or massive radiation leaks from the Fukushima plant."

The ADB said there were two important challenges for Asia to sustain growth that would cut poverty: the need to tackle rising inflation and foster new sources of growth.

"High and volatile oil and food prices will in particular reverberate through the world economy, and they are likely to stay that way in 2011-2012. They will thus be a significant source of global inflation, especially in developing countries where recovery is firmly under way.

"Asia's strong recovery from the global financial crisis has seen its central banks raise interest rates to try to stem inflationary pressures. On Tuesday, China raised interest rates for the fourth time since October.

A surge in inflation, particularly food price inflation, could pull down those who are currently just above the poverty line, making it a social as well as economic concern.

The report said recent estimates showed a 10 percent rise in domestic food prices would raise the number of poor in developing Asia by about 64 million, or more than 7 percent.

"High inflation is a direct threat to stable and inclusive growth since rising domestic prices can lead to social tensions," the ADB said, singling out Vietnam as among the most at risk from rising prices.

Inflation in Vietnam could reach 13.3 percent this year, the second highest in the region after Pakistan, which could see inflation of 16 percent, the ADB said.But tackling inflation driven by global and supply-side factors can put policymakers in a difficult position.

The ADB said growth in Asia’s gross domestic product would likely slow to 7.8 percent this year from 9.0 percent in 2010 as the powerhouse economies of China and India braked slightly.

China, the world’s second-largest economy, was expected to grow 9.6 percent this year compared with a blistering 10.3 percent in 2010 as industrial production and fixed-asset investment eased.

India was tipped to grow 8.2 percent for the fiscal year ending March 31, 2012 compared with an expected 8.6 percent last year.

The ADB acknowledged that managing inflationary pressures was not easy and a “coherent” policy mix was the key to success.

“More flexible exchange rates may be a better policy for countries with persistent current account imbalances and misalignment between their exchange rate and fundamentals,” the ADB said, in a thinly veiled reference to China.