As fears of stagflation increase, the World Bank and the IMF argue for more open trade

Credit: Iken

As the risk of stagflation spreads around the world, the World Bank and the International Monetary Fund (IMF) see opportunities in the reduction of trade barriers and incentives for higher production.

The World Bank has raised Nigeria’s economic growth forecast for 2022 to 3.4 percent, up 0.9 percentage points from 2.5 percent in its January Global Economic Prospect. Growth is forecast to decline to 3.2 percent next year and 3.2 percent through 2024, which is 40 basis points higher than its previous position.

Nigeria’s growth forecast for the year is somewhat lower than Sub-Saharan Africa’s 3.7 percent, but it represents a moderate increase over Q1’s 3.11 percent.

Rising inflation and policy tightening are countering the benefit of favorable commodity prices on Nigeria’s economy, according to the World Bank’s June Global Economic Prospects report.

Global growth is likely to slow from 5.7 percent in 2021 to 2.9 percent in 2022, a considerable reduction from the 4.1 percent forecast in January. From 2023 to 2024, it is likely to maintain that pace as the war in Ukraine interrupts activity and pent-up demand diminishes as fiscal and monetary policy accommodation is reduced.

“Higher oil prices are boosting activity in Angola and Nigeria, the region’s two largest oil-producing economies” (SSA). Increased oil revenues and a strong recovery in non-oil sectors boosted Nigeria’s growth in the first half of the year. However, the country’s main port’s closure following severe floods has exacerbated supply chain disruptions linked to Russia’s invasion of Ukraine and mobility restrictions in China in response to pandemic outbreaks. Despite significant improvement in the economic situation, the World Bank notes that “large public debt constrains state spending, notably investment.”

According to the World Bank, governments must prepare for the prospect of stagflation, but a rise in output and a relaxation in trade restrictions could assist to moderate critical prices and salvage the situation. It urged governments to take intentional steps to lower trade barriers in order to avoid supply chain disruptions.

“Growth is being hampered by the war in Ukraine, Chinese lockdowns, supply-chain disruptions, and the prospect of stagflation.” A recession will be difficult to avert for many nations,” warned David Malpass, President of the World Bank Group.

“Because markets are forward-looking, it is critical to boost production while avoiding trade prohibitions.” To combat capital misallocation and inequality, he noted, “changes in fiscal, monetary, climate, and debt policy are required.”

The World Bank warns that countries should prepare for stagflation, but adds that increased production and less trade restrictions could assist to temper prices and preserve the situation. It urged governments to take intentional steps to lower trade barriers in order to avoid supply chain disruptions.

Global growth is likely to slow from 5.7 percent in 2021 to 2.9 percent in 2022, a considerable reduction from the 4.1 percent forecast in January. From 2023 to 2024, it is likely to maintain that pace as the war in Ukraine interrupts activity and pent-up demand diminishes as fiscal and monetary policy accommodation is reduced.

The Bretton Woods institutions acknowledge in their separate assessments that the threat of stagflation, an economic crisis marked by stagnant growth and high rising prices, is genuine, and that rising energy and food prices could push more people into poverty, particularly in low-income nations.

The International Monetary Fund (IMF) points out in a report titled “Fiscal Policy for Mitigating the Social Impact of High Energy and Food Prices,” published yesterday, that the surge in energy and food prices, which began about two years ago, represents a term of trade loss for importing countries’ real income to those at the bottom of the wealth distribution.

According to the Fund, the government must strike a balance between food and energy access and policy normalization following a long period of experimenting with standard treatments to counteract the COVID-19 pandemic’s effects. It makes policy recommendations for countries with strong social safety nets (SSNs), countries with weak SSNs and no current energy/food subsidies, and countries with weak SSNs and existing energy/food subsidies.

The first group is advised to allow complete pass-through of higher international fuel prices to domestic users while giving targeted and temporary financial transfers to disadvantaged households, among other things.

The IMF proposes one-time cash incentives and energy bill discounts when existing SSNs do not assist middle-class households. It also advises governments in countries with weak SSNs to examine child benefits and minimize school, health, and transportation costs while enhancing their safety net programs, when applicable.

“Food accounts for a far larger proportion of the consumption basket in low-income households than it does in high-income ones. Food expenditures can account for up to 44% of a household’s consumption basket in a low-income country (compared to 28% in emerging market economies and 16% in advanced economies), making food a particularly significant contributor to inflation in these countries.

“Within a country, for example, in the United States, food accounts for 27% of household consumption in the poorest income quintile vs 77% in the richest income quintile. Higher food prices imposed further strain on many households already weakened by the pandemic, with an estimated 800 million people undernourished by 2020 (10 percent of the world’s population). Higher-income households have a higher proportion of energy in their consumption basket. The energy basket’s composition varies by commodity and by location, according to the IMF.

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