Impacts of high and volatile oil prices and policy choices

Shikha Jha

Country-level impacts Trade balance Inflation Fiscal balance Households

Winners and losers of global food and oil price fluctuations

Corn Wheat Soy Rice Oil Gas Coal Rubber Palm TOTAL

PRC 0.0 0.0 -0.4 0.0 -2.0 -0.2 -0.2 -0.1 -0.1 -3.0

HKG 0.0 0.0 0.0 -0.1 -6.1 -0.5 -0.5 0.0 0.0 -7.2

IND 0.0 0.0 0.0 0.2 -2.3 0.0 -0.8 0.0 0.0 -2.9

INO -0.1 -0.3 -0.1 -0.2 -1.0 2.5 3.0 1.4 2.0 7.2

KOR -0.2 -0.1 -0.1 0.0 -6.1 -2.7 -1.6 -0.2 0.0 -11.1

MAL -0.3 -0.2 -0.1 -0.2 1.8 6.1 -0.8 0.7 5.4 12.4

PHI 0.0 -0.4 0.0 -0.2 -3.7 -0.2 -0.2 0.0 0.0 -4.7

SIN 0.0 0.0 0.0 -0.1 -3.4 -1.8 0.0 0.0 -0.2 -5.5

TAP 0.0 0.0 0.0 -0.5 -5.1 -2.0 -2.0 0.1 -0.1 -9.5

THA 0.0 -0.1 -0.3 1.9 -9.1 -1.4 -0.4 3.8 0.1 -5.5

Note: Darker red cells = biggest net importer of that commodity , lighter green cells = largest net exporter of that commodity Source: Credit Suisse. 2012. Asia: Winners and losers from commodity price moves. 13 Aug.

Net commodity export position of selected countries (% of GDP)

Higher energy prices add to inflation

• Energy carries a large weight in CPI– Headline versus core inflation

• High energy prices increase inflation– First and second-round effects

High subsidies imply high fiscal deficits

• Countries that subsidize more of gasoline, diesel, or kerosene run relatively higher fiscal deficits1

– Bangladesh– Lao PDR– Pakistan– Sri Lanka– Viet Nam

• The fiscal cost of fuel tax decreases and higher fuel subsidies accounted for average 63% of the total increase in fiscal cost between 2006 & 20082

1Source: Jha et al (2009) , 2 IMF (2008)

Fiscal buffers have declined with fiscal stimulus

AFGBANBHU IND MALNEP PAK SRI-12

-10

-8

-6

-4

-2

0

2

2008 2011

CAM INO

LAO

MAL

MYA PHI

SIN THA VIE-8-7-6-5-4-3-2-1012

2008 2011

Fiscal balance (% of GDP)

Higher fiscal deficits are associated with higher public debts

-8 -6 -4 -2 0 2 4 6 8 100

10

20

30

40

50

60

70

80

90

Fiscal deficit-GDP

Pub

lic d

ebt-

GD

P (

%)

Sources: ADB 2008a; CEIC Data Company, Ltd.; Economic Intelligence Unit country reports; IMF country reports; Bank Negara Malaysia; Bureau of the Treasury, Philippines; Central Bank of Sri Lanka; Directorate General of Debt Management, Indonesia; Maldives Monetary Authority Monthly Statistical Report; Ministry of Finance, India; Ministry of Finance, Pakistan; Ministry of Finance, Thailand; Ministry of Strategy and Finance, Korea; National Bureau of Statistics of China.

Most of the world’s poor live in Asia

8

Sub Sa-haran Africa33%

Develop-ing Asia

63%

Rest of the World

4%

Source: 2011. Wan and Sebastian. Poverty in Asia and the Pacific: An Update

Home to 2/3rd of the world’s poor

The poor spend larger % of income on energy

… and get much higher energy price shock than the rich

Share of population living below $1.25-a-day poverty line, 2008

Impacts on living standards

• Reduced consumption of fuels and changes energy composition (traditional and commercial)

• Costlier heating & cooking worsen the poor’s standard of living

• Adversely affect women and children

• Higher household expenditure on fuels reduce purchasing power and health & education spending

Policy choices to reduce trade deficit

• Set domestic prices right to create demand response• Seek local sources of energy• Improve energy efficiency

Policy choices to reduce fiscal deficit and debt

• By not fully passing on the world oil prices, governments risk incurring large fiscal costs and public debt

• Integrate subsidies financed through off-budget funds into the budget process to make fiscal risks transparent

• Reduce unproductive expenditures which reduce the impact of fiscal measures – minimize waste, inefficiency, pilferage and leakage

• Establish a debt stabilization program.

Policies to reduce the Social Cost

• Target fuel subsidies at the poor (e.g., coupons or voucher schemes).

• Introduce direct income support for the affected poor (extend existing schemes, such as CCTs, or introduce new schemes).

• Strengthen automatic stabilizers (unemployment benefits, state transfers & taxes)