The Bank, in its latest South Asia Economic Focus report dealing with Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka, said the region is making economic recovery.
However, it said the region also has a large number of poor people which could cause the momentum to falter without a stronger investment climate.
The South Asian countries together had a growth of 4.7 percent last year and the Bank said that could reach 5.5 percent this year with strengthened investment climate.
"How countries manage their economies in the face of uncertainties in the global environment will be critical not only for addressing near-term current account and fiscal deficits but also for tackling South Asia's long-term challenges," said Martin Rama, the Bank's chief economist for South Asia region.
The report explained the region faces widening current account balances, slowing foreign direct investments and persistently high inflation. This has limited its central banks ability to use monetary policy to fight any downturn.
Imports also make the region vulnerable with rising commodity prices.
The report said Maldives and Pakistan have seen their reserves dwindle to critical levels, while in India, Sri Lanka and Bhutan, fiscal deficits remain high. It called for improved tax revenue collection and curbing energy subsidies.
Fixed investments in the region grew 2.6 percent in 2012, down sharply from 16.7 percent in 2010.
Rama said exports and domestic consumption are expected to contribute only modestly to growth.
The economist said in the next 20 years, South Asian countries will see more than 1 million people enter their labor force every month, which means they must improve their business climate to attract private sector investments needed to help the new entrants find productive jobs.
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