WB sees silver lining in falling crude oil

Advises developing economies to use the opportunity to rebuild their fiscal buffers in the medium term, to better enable growth-promoting policies at a later stage

The dip in global crude oil prices is disrupting the capital markets but it also has a silver lining for developing and oil importing countries, in building fiscal buffers and taking counter-cyclical measures to tackle a slowing economy, says the World Bank.

In chapters 3 and 4 of its Global economic prospects report, issued on Thursday morning, the Bank said developing countries need to do this. “For many developing economies, lower oil prices have provided a timely opportunity for doing so,” it said.

In countries with elevated domestic debt or inflation, monetary policy options to deal with a potential slowdown are constrained, the Bank said.

“In the foreseeable future, these countries might need to employ fiscal stimulus measures to support growth. But many developing countries have less fiscal space now than they did prior to 2008, having used fiscal stimulus during the global financial crisis,” it said.

Though inflation is now at lower levels in India, the Reserve Bank of India has been refusing to cut rates to spur economic growth, due to upside risks for the rate of price rise. Consumer Price Index-based inflation fell to a low of 4.38 per cent in November 2014; Wholesale Price Index-based inflation was zero for the month.

In countries where debt and deficits have widened from pre-crisis levels, each fiscal dollar spent will support activities that contribute to consumption and boost national income by roughly a third less than in the run-up to the global financial crisis, the Bank said. Since the so-called fiscal multiplier effect is weaker now for many developing countries, they need to rebuild their budgets in the medium term, at a pace suiting country-specific conditions.

“For a number of oil importing countries, lower oil prices offer a chance to improve fiscal positions more quickly than might have been possible before mid-2014,” it said.

The report said after four years of stability at around $105/barrel, oil prices fell sharply in the second half of 2014. Compared to the early 2011 commodity price peaks, the decline in oil prices was much larger than in non-oil commodity price indices. Brent crude fell under $50 intra-day on Wednesday for the first time since 2009, before recovering.

In India, the Centre’s fiscal deficit was expected to come down to three per cent of gross domestic product by 2008-09. In fact, the Budget for that year was a bit ambitious and pegged the deficit at 2.5 per cent of GDP. However, the collapse of US financial services icon Lehman Brothers and resultant worsening of the global economy saw the government announcing a stimulus to industry in phases. The result was that the Centre’s fiscal deficit had widened to close to six per cent that year.