Slump in oil prices could shift growth to oil-importing countries: World Bank

The Dollar Business Bureau

Soft oil prices are expected to persist in 2015, says World Bank

  The year 2015 could witness significant real income shifts from oil-exporting to oil-importing countries due to the sharp decline in oil prices seen in the recent months, the World Bank has said in a report. The Ukraine crisis and other geopolitical factors have led to a decline in international oil prices in 2014, declining from around $105 per barrel in mid-2014 to below $50 per barrel in January 2015. The World Bank said that supply-side factors are behind the slump in oil prices. “The decline in oil prices reflects a confluence of factors, including several years of upward surprises in oil supply and downward surprises in demand, and receding geopolitical risks in some areas of the world,” said the report. However, this provides a window of opportunity for oil-importing developing countries to undertake fiscal policy and structural reforms as well as fund social programs, said Ayhan Kose, Director of Development Prospects, World Bank. According to the World Bank, some countries have already increased taxes on oil and removed subsidies without any protest from consumers, and policymakers should reduce oil subsidies further to boost economic growth as oil prices are expected to remain at low levels in 2015.

] Kaushik Basu, Senior Vice-President & Chief Economist, World Bank (Pic. source - World Bank)

“With oil likely to remain cheap for some time, oil-importing countries should lower or even eliminate fuel subsidies and rebuild the fiscal space needed to carry out future stimulus efforts,” said Kaushik Basu, Senior Vice-President and the first Indian Chief Economist at the World Bank. He suggests that this is the best time for developing countries to invest in infrastructure and support social schemes vital to poverty reduction. “Such policies can raise future productivity and reduce the fiscal deficit in the long run,” he added. The World Bank report also said that gains from low oil prices can increase significantly for oil-importing countries if global growth improves this year. However, global trade growth is expected to remain subdued this year mainly due to weak demand in high-income countries which account for around 65% of global imports. The report also highlighted that world trade has become less responsive to changes in global income because of slower expansions of global supply chains and a shift in demand from trade-intensive investment to less trade-intensive private and public consumption. This suggests that the expected recovery in global growth is unlikely to fuel a rapid growth in trade flows as seen in the pre-crisis years. Meanwhile, the changing global economy presents a challenge for oil exporters. The World Bank said that weak oil prices present significant challenges for major oil-exporting countries. Such countries will be adversely impacted by weakening growth prospects, and fiscal and external positions, which highlights the need for export diversification in such countries, said the World Bank. In oil-exporting countries, the sharp decline in oil prices is a reminder of significant vulnerabilities inherent in highly concentrated economic activity and the necessity to reinvigorate efforts to diversify over the medium and long term,” said Ayhan Kose.    

This article was published on January 8, 2015.