The International Monetary Fund (IMF) on Tuesday revised down its 2021 economic growth forecast for Asia to 6.5 percent, down by 1.1 percentage points from its April projection, according to a newly released regional economic outlook.

"The resurgence of the pandemic, amid initially low vaccination rates, slowed the recovery in the Asia-Pacific region, especially in emerging market and developing economies," Changyong Rhee, director of the IMF's Asia and Pacific Department, said at a virtual press conference.

Noting that the Asia-Pacific remains the fastest growing region in the world, Rhee said as vaccination rates accelerate, the region is expected to grow by 4.9 percent in 2022, 0.4 percentage points faster than projected in April.

For advanced economies, the latest IMF forecast is broadly unchanged for 2021 with upgrades in South Korea and New Zealand, and downgrades in Japan and Australia, according to the report.

Most of the downgrades in the region come from emerging market and low-income countries, led by India and the Association of Southeast Asian Nations.

China is projected to grow by 8.0 percent in 2021, down by 0.4 percentage point from the April projection, according to the report.

India is projected to grow by 9.5 percent after a sharp decline in 2020. While the pandemic surge earlier this year had a large adverse impact on growth, the subsequent rebound in activity has gained strength, the report showed.

The ASEAN-5 countries (Indonesia, Malaysia, the Philippines, Singapore, Thailand), are still facing "severe challenges" from a resurgent virus and weakness in contact-intensive sectors.

"The divergence between Asian advanced economies and developing economies is deepening, with output levels in the emerging market economies and low-income countries expected to remain below pre-pandemic trends in the coming years, reflecting differences in policy support and vaccination rollout," Rhee said.

In its latest World Economic Outlook released last week, the IMF highlighted a great vaccine divide and a great financing divide in global recovery. While almost 60 percent of the population in advanced economies are fully vaccinated and some are now receiving booster shots, about 96 percent of the population in low-income countries remain unvaccinated, according to the IMF.

Rhee warned that the main downside risk for Asian economy is related to evolving pandemic dynamics, such as the possibility of COVID-19 becoming an endemic, and lower vaccine efficacy against new variants.

Other factors such as persistent global supply disruptions and weakening global value chain participation, elevated financial vulnerabilities in the corporate and real estate sectors in some countries, and potential financial spillovers from U.S. monetary policy tightening also pose important risks for the region, he said.

The IMF official noted that following the global financial crisis, Asia relied on large stimulus packages, which continued during the COVID-19 crisis. Because of limited policy space, Asian countries have increased leverage overall, creating heightened risk for the region.

"So, the higher interest rate in the United States can cause a capital outflow from the region, that can cause a depreciation, that can cause a domestic financing market cost increase," he continued.

In another scenario, if U.S. economy continues to grow, which leads to higher inflation and an increase in interest rate, then the impact on Asia would be "mixed," as Asian economies could boost exports to the United States, while seeing tightened global financial conditions, Rhee said.

Given these challenges, the IMF official said the first priority is to address the health crisis, noting that swift and broad vaccinations and equitable sharing of vaccines globally are critical.

Rhee urged policymakers to articulate credible medium-term fiscal frameworks to ensure debt sustainability while acknowledging the need to maintain accommodative policies with improved targeting in the short run where the recovery is fragile, and inflation is under control.

He also noted that all countries must take steps to avoid long-term scarring from the pandemic, rising inequality and poverty, and setbacks in human capital accumulation.

The regional economic outlook highlighted the importance of trade liberalization, which has historically been a powerful driver of growth in Asia. Empirical estimates and model-based simulations indicate "significant" macroeconomic benefits from reducing non-tariff barriers, with GDP increasing by about 1.6 percent five years after a major reform effort.