Falling oil price ‘is opportunity to create fiscal space’

8 Jan 15
The falling price of oil has provided a ‘window of opportunity’ for emerging and developing countries to push ahead with fiscal policy and structural reforms, according to the World Bank.

By Judith Ugwumadu | 8 January 2015

The falling price of oil has provided a ‘window of opportunity’ for emerging and developing countries to push ahead with fiscal policy and structural reforms, according to the World Bank.

Its latest Global Economic Prospects report urged developing countries to use the opportunity of plunging oil prices to reform fuel subsidies or energy taxes to bring in extra cash for public spending. Over the medium-term, developing countries should rebuild their fiscal buffers, by reducing debt and closing deficits, to support economic activity in case of a growth slowdown.

The bank stressed that governments should have extra resources available to support spending and needed to ‘weather growth slowdowns’. It pointed out that, as a result of using their fiscal space during the recession of 2008/09, developing countries have still not restored funds to pre-crisis levels.

‘For many countries, soft oil prices provide a window of opportunity to implement subsidy reforms that help build fiscal space while, at the same time, removing long-standing distortions,’ the bank said.

It said many of these emerging and developing economies, including Estonia, Ukraine and Zimbabwe, faced downside risks such as weaker export prospects, an impending rise in global interest rates and fragile financial market outlook.

The report stated: ‘Over the medium term, credible and well-designed institutional arrangements, such as fiscal rules, stabilisation funds, and medium-term expenditure frameworks, can help build fiscal space and strengthen policy outcomes.’

Kaushik Basu, senior vice president and chief economist at the bank, said that, with the extra funds, emerging market economies ‘would do well to invest in infrastructure and support social schemes vital to poverty reduction’.

He said: ‘Such policies can raise future productivity and reduce the fiscal deficit in the long run.’

Ayhan Kose, director of development prospects at the bank, added: ‘The rebuilding of fiscal buffers will provide the room required to support activity during times of economic stress.

‘The need for additional fiscal buffers is more pronounced now in an environment of uncertain growth prospects, limited policy options, and likely tighter global financial conditions.’

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