W’Bank urges developing countries to rebuild fiscal buffers

World Bank headquarters

World Bank headquarters

08 January 2015, Lagos – Faced with weaker export prospects, an impending rise in global interest rates, and fragile financial market sentiment, the World Bank Group has advised developing countries to rebuild fiscal buffers in order to support their economic activities in the event of growth slowdown.The multilateral institution stated this in the new edition of its Global Economic Prospects released on Wednesday.

It pointed out that for a lot of developing economies, lower oil prices provides a timely opportunity for rebuilding fiscal buffers, adding that in countries with elevated domestic debt or inflation, monetary policy options to deal with a potential slowdown are constrained.

“In the foreseeable future, these countries may 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.

“And in recent years, private debt levels have risen substantially in some developing countries,” it added.

A key finding from the analysis in the report was that in countries where debt and deficits had widened from pre-crisis levels, each fiscal dollar spent would 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.

According to the report, because “the so-called fiscal multiplier effect is weaker now for many developing countries; they need to rebuild budgets in the medium-term, at a pace determined to country-specific conditions.”

Furthermore, it noted 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.

Senior Vice President and Chief Economist at the World Bank, Kaushik Basu stated that 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.

Basu added: “On the policy front, both the size and the quality of fiscal deficits matter, as do spending decisions. Emerging market economies would do well 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.

“This year’s Global Economic Prospects now goes beyond prediction and deepens our understanding of our global economic predicament.”

The report also documented how well-designed and credible institutional mechanisms-such as fiscal rules, stabilisation funds, and medium- term expenditure frameworks-are instrumental in fostering growth and restoring depleted fiscal buffers.

To the Director of Development Prospects at the World Bank, Ayhan Kose, the rebuilding of fiscal buffers will provide the room required to support activity during times of economic stress.

Kose also said the need for additional fiscal buffers was more pronounced now in an environment of uncertain growth prospects, limited policy options, and likely tighter global financial conditions.
*Obinna Chima – Thisday

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