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Impacts of high and volatile oil prices and policy choices

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

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Impacts of high and volatile oil prices and policy choices

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  1. Impacts of high and volatile oil prices and policy choices ShikhaJha

  2. Country-level impacts • Trade balance • Inflation • Fiscal balance • Households

  3. Winners and losers of global food and oil price fluctuations Net commodity export position of selected countries (% of GDP) 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.

  4. 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

  5. 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)

  6. Fiscal buffers have declined with fiscal stimulus Fiscal balance (% of GDP)

  7. Higher fiscal deficits are associated with higher public debts 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.

  8. Most of the world’s poor live in Asia Share of population living below $1.25-a-day poverty line, 2008 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 Source: 2011. Wan and Sebastian. Poverty in Asia and the Pacific: An Update

  9. 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

  10. Policy choices to reduce trade deficit • Set domestic prices right to create demand response • Seek local sources of energy • Improve energy efficiency

  11. 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.

  12. 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)

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