The World Bank expects East Africa and other developing countries to benefit from global crude oil price decline by creating a buffer for weathering future economic shocks.
The bank’s director of development prospects Ayhan Kose said the fall in oil prices provides a window of opportunity for policymakers in importing countries to finance social programmes, undertake fiscal policy and structural reforms.
“In the oil exporting countries, sharp decline in prices is a reminder of vulnerabilities inherent in highly concentrated economic activity and necessity to reinvigorate efforts to diversify over the medium and long term,” he said.
The World Bank Group said gains from petroleum prices would be substantial for Kenya and other oil importers if they lead to stronger global growth.
Global crude prices have declined from $115 in June last year to less than $50 per barrel currently, translating into marginal reduction in retail prices of refined petroleum products in Kenya, Tanzania and Uganda.
The oil price decline is expected to persist in 2015, causing significant real income shifts from exporting to oil-importing countries and contributing to growth, reduced inflationary, external and fiscal pressures in East Africa.
The region is a net importer of refined petroleum products despite discovery of 600 million barrels of oil in Kenya and 6.5 billion barrels of resources in Uganda.
The two countries could start production in 2018. The decline in oil prices reflects several years of rising oil supply and reduced demand, receding geopolitical risks in some areas of the world, change in policy objectives of Organisation of Petroleum Exporting Countries and appreciation of the dollar.
Weak oil prices will weaken growth prospects, fiscal and external positions of major exporting countries.
READ: Fall in global oil prices: who wins, who loses?
Investment in new exploration or development could be undermined. If lower oil prices persist, it will put at risk investment in some low-income countries, or in unconventional sources such as shale oil, tar sands and deep sea oil fields.
“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,” said the 2014 Global Economic Prospects report of the World Bank.
For many developing economies, lower oil prices have provided a timely opportunity. In countries with elevated domestic debt or inflation, monetary policy options to deal with a potential slowdown are constrained.
Many developing countries have less fiscal space than prior to 2008, having used fiscal stimulus during the global financial crisis.
For a number of oil importing countries, lower crude oil prices offer a chance to improve fiscal positions more quickly than could have been possible before mid-2014.
World Bank’s Senior Vice President Kaushik Basu said importing countries should lower or eliminate fuel subsidies and rebuild fiscal space needed to carry out future stimulus efforts as oil is likely to remain cheap.
The East African
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