Gains
from low oil prices can be substantial for d e v e l o p i n g - c o u n
t r y importers if supported by stronger global growth, says a World
Bank Group analysis of the oil price decline, contained in the latest
edition of Global Economic Prospects. The decline in oil prices reflects
a confluence of factors, including several years of upward surprises in
oil supply and downward surprises in demand, receding geopolitical
risks in some areas of the world, a significant change in policy
objectives of the Organization of the Petroleum Exporting Countries
(OPEC), and appreciation of the U.S. dollar. Although the relative
strength of the forces driving the recent plunge in prices remains
uncertain, supply related factors appear to have played a dominant role.
Soft oil prices are expected to persist in 2015 and will be accompanied
by significant real income shifts from oil-exporting to oil-importing
countries. For many oil-importing countries, lower prices contribute to
growth and reduce inflationary, external, and fiscal pressures.
However,
weak oil prices present significant challenges for major oil-exporting
countries, which will be adversely impacted by weakening growth
prospects, and fiscal and external positions. If lower oil prices
persist, they could also undermine investment in new exploration or
development. For policymakers in oil-importing developing countries, the
fall in oil prices provides a window of opportunity to undertake fiscal
policy and structural reforms as well as fund social programs. 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, Director of Development
Prospects at the World Bank.
The
analysis on oil prices in Global Economic Prospects is complemented by
two special features on how trends in global trade and remittance flows
are impacting developing countries. Global trade weak on cyclical and
long-term factors. Global trade expanded by less than 3.5 percent in
2012 and 2013, well below the pre-crisis average annual rate of 7
percent, holding back developing country growth in recent years. Weak
demand, mainly in investment but also in consumer demand, is one of the
main causes of the deceleration in trade growth. With high-income
countries accounting for some 65 percent of global imports, the
lingering weakness of their economies five years after the crisis
suggests that weak demand continues to adversely impact the recovery in
global trade. However, long-term trends have also slowed trade growth,
including the changing relationship between trade and income. The
analysis finds that these long-term factors affecting trade will also
shape the behavior of trade flows in the years ahead in particular, that
the expected recovery in global growth is not likely to be accompanied
by the rapid growth in trade flows observed in the pre-crisis years.
Remittances have potential to smooth consumption
A
second special feature reports that remittance flows to many low- and
middle-income countries are not only significant relative to GDP but
also comparable in value to foreign direct investment (FDI) and foreign
aid. Since 2000, remittances to developing countries have averaged about
60 percent of the volume of total foreign direct investment flows.
For many developing countries, remittances are the single largest source of foreign exchange.
The
study finds that, in addition to their considerable volume, remittances
are more stable than other types of capital flows, even during episodes
of financial stress. For example, during past sudden stops, when
capital flows fell on average by 14.8 percent, remittances increased by
6.6 percent. The stable nature of remittance flows, the analysis
concludes, means that they can help smooth consumption in developing
countries, which often experience macroeconomic volatility.
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