Softer oil prices provide window for fiscal buffer boost
Restoring the depleted fiscal buffers that were used to ride out the 2008 global financial crisis has emerged as critical for developing countries to survive another economic slowdown, with the softer oil prices providing a window of opportunity to do just that.
A new report by the World Bank has revealed that developing countries currently had less fiscal space than they did prior to the 2008 global financial crisis, with private debt levels rising substantially in some emerging economies, in an environment of uncertain growth prospects, limited policy options and likely tighter global financial conditions.
The 'Global Economic Prospects' report warned that, faced with weaker export prospects, an impending rise in global interest rates and fragile financial market sentiment, developing countries needed to rebuild fiscal buffers to support economic activity “in case” of a growth slowdown.
In countries where debt and deficits have widened from precrisis levels, each fiscal dollar spent would support activities that contributed to consumption and boosted national income by roughly one-third less than in the run-up to the global financial crisis.
However, the lower oil prices, which this week plunged to multiyear lows and hovered around the $50/bl mark, have provided a “timely opportunity” to improve fiscal positions more quickly than might have been possible before mid-2014.
Oil prices fell sharply in the second half of 2014, bringing an end to a four-year period of stability around $105/bl and possibly an end to a price supercycle, the report indicated.
The prices were expected to remain low in 2015 and rise only marginally in 2016, supporting economic activity and reducing inflationary, external and fiscal pressures.
For many oil-importing countries, the soft oil prices enabled the reform of energy taxes and fuel subsidies to help rebuild the fiscal space needed to carry out future stimulus efforts, while removing “long-standing distortions” associated with these subsidies.
If sustained, lower oil prices would contribute to global growth and lead to “sizeable real income shifts” to oil importers from oil exporters and diversify oil-reliant economies.
However, for the adversely impacted oil-exporting countries, the slump could result in slower economic activity, loss of oil revenues and the erosion of their fiscal space, as well as affect investor sentiment about oil-exporting emerging market economies, leading to substantial volatility in financial markets by triggering capital outflows, reserve losses, sharp depreciations or rising sovereign spreads.
Credible and well-designed institutional arrangements, such as fiscal rules, stabilisation funds, and medium-term expenditure frameworks, were expected to, over the medium-term, help build fiscal space and strengthen policy outcomes.
The report pointed out that emerging market economies would also do well to invest in infrastructure and support social schemes vital to poverty reduction.
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