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• Mr Ayhan Kose — Director of Development, World Bank

Fiscal buffers needed to face economic slowdown— World Bank report

Faced with weaker export prospects, an impending rise in global interest rates and fragile financial market sentiment, developing countries need to rebuild fiscal buffers to support economic activity in case of a growth slowdown, the new edition of Global Economic Prospects report by the World Bank Group has said. 

The report, released on January 7, 2015, said for many developing economies, lower by Browser Shop" href="#">oil prices have provided a timely opportunity for doing so.

According to the report, monetary policy options to deal with a potential slowdown are constrained in countries with elevated domestic debt or inflation.

Soaring levels of debt

Ghana has soaring levels of debt, constituting about 55 per cent of the value of all goods and services produced within the economy (GDP). Inflation reached a five-year high of 17.00 per cent in November 2014.

“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 analysed.

A key finding from the analysis in the report is that in countries where debt and deficits have widened from pre-crisis levels, each fiscal dollar spent on activities designed to boost consumption and national income would have roughly a third less impact than it did in the run-up to the global financial crisis. 

“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.” 

For a number of oil-importing countries, lower by Browser Shop" href="#">oil prices offer a chance to improve fiscal positions more quickly than might have been possible before mid-2014. 

But Ghana is a net exporter of oil and finds itself in between hope and despair.

Lower or even eliminate fuel subsidies

"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, while on the policy front, both the size and the quality of fiscal deficits matter, as do spending decisions,” Senior Vice President and Chief Economist at the World Bank, Mr Kaushik Basu, said.

He added that emerging market economies would do well to invest in infrastructure and support social schemes vital to poverty reduction, saying “such policies can raise future productivity and reduce the fiscal deficit in the long run".  

The Director of Development Prospects at the World Bank, Ayhan Kose, said "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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