World Bank hints of future global economic crises

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Minister Claver Gatete arrives at Parliament to read last year?s Budget. (File)
Minister Claver Gatete arrives at Parliament to read last year?s Budget. (File)
Spining

The full report containing the analysis will be released on Monday, but what the Bank analysts say has already been highlighterd by other observers in recent months and all point to a foggy economic future.

Minister Claver Gatete arrives at Parliament to read last year?s Budget. (File)
Minister Claver Gatete arrives at Parliament to read last year?s Budget. (File)

?In countries with elevated domestic debt or inflation, monetary policy options to deal with a potential slowdown are constrained and in the foreseeable future, these countries may need to employ financial stimulus measures to support growth,? the report reads in part.

Unfortunately, WB says many countries currently have less financial space than they did prior to 2008, having used fiscal stimulus during the global financial crisis and in recent years, private debt levels have increased substantially in some developing countries.

In simple terms, financial policy means the use of government revenue collections (mainly taxes) and expenditure (spending) to influence economic growth.

An economist at the World Bank office in Rwanda, who spoke off record (because of a strict media policy) says a forecast in the external sector points to weak growth in major economies which could weaken international price and hurt export earnings for many countries.

?With fewer inflows due to weak export performance, countries will earn less and this could widen financial deficit among importing countries,? the source said.

The negative global growth prospect is mainly being based on the current weak demand for oil which has forced prices to fall to their lowest since 2009 and economists are attributing this trend to general weak economic activity in advanced economies.

World Bank analysts say while low oil prices are good news to fuel importers, weak oil prices present significant challenges for major oil-exporting countries, which will be adversely impacted by weakening growth prospects, and fiscal and external positions.

?If lower oil prices persist, they could also undermine investment in new exploration or development. This would especially put at risk investment in some low-income countries, or in unconventional sources such as shale oil, tar sands, and deep sea oil fields,? the Bank says.

In a recent interview, Dr Thomas Kigabo, the chief economist of the central bank, said precisely what the World Bank analysts are saying now.

According to Kigabo, while low oil prices mean Rwanda will get oil imports on the cheap, the weak global demand that has contributed to the low prices could also hurt demand for the country?s exports, which could enlarge the country?s financial deficit.

Financial deficit is an economic phenomenon where government?s total expenditure surpasses revenue generated.

?On one hand, you want to have low fuel prices but on the other, you want strong global growth to support demand for exports, if we don?t have that, it could hurt our export performance,? Kigabo said.

Rwanda?s growth

Last year ended on a promising note for Rwanda whose economy grew by 7.8 per cent in the 3rd quarter of 2014 and was tipped to surpass the projected annual growth of 6 per cent, which would signal recovery from the 4.6 per cent growth in 2013.

However, the increased whispers of a possible slowdown could hurt Rwanda?s renewed economic growth especially in form of weak demand for its exports whose value increased by 4.9 per cent between January and November 2014.

But 2015 presents some kind of irony; just as the US economy strengthens with an anticipated growth of 3.1 per cent this year, economies of other influential countries threaten to drag it down.

The irony is in an old adage that ?when the US sneezes, the rest of the world catches a cold,? this time around, observers think the rest of the world will sneeze and the US will fall sick.

The rest of the world in this case means China, Japan and the Europe area; growth in all those parts will be wobbly in 2015 and that is likely to weaken international prices for exports due to poor demand.

Growth in Europe has been tepid since the 2008 crisis and in 2014 averaged 0.8 per cent, which is expected to reach 1.3 per cent growth this year, the highest since 2012 when it was -0.7 per cent.

However, Europe?s renewed growth may not be enough to support global demand.

In 2014, China, the second largest economy, grew by 7.4 per cent, but this will drop to just 7.1 per cent this year and is expected to hurt international demand for exports, especially minerals.

Japan, the third largest economy, grew by just 0.9 per cent, which is expected to slow further to 0.8 per cent this year. Sluggish growth will also be experienced in Russia, France, Italy and Brazil.

The total sum of the effect of slow growth in all those economies, experts say, will be felt in form of weak demand for Rwandan traditional exports, coffee, tea and minerals.

And in the region, the World Bank says oil prospecting countries such as Uganda and Kenya are likely to lose huge amounts of Foreign Direct Investment (FDI) as investors will be reluctant in invest in oil given the current low international prices.

Way out

The foggy economic future, according to economists, requires countries to embark on prudent fiscal planning and avoid expansive budgets in the next financial year.

More than 60 per cent of Rwanda?s budget is funded locally through domestic tax revenues with the rest coming from foreign aid.

In 2012, donors suspended their support which led to a growth slowdown in 2013. However, most donors restored their support in 2014 which has helped to facilitate economic recovery with an anticipated growth of more than 6 per cent.

However, to ensure financial stability, government has since put in place precautionary measures to guard against external shocks as well as ensuring steady flow of funding for priority areas such as energy.

A national debt monitoring unit under the Ministry of Finance and Economic Planning will ensure government doesn?t rack up unnecessary debts, especially at a time when World Bank is warning of high interest rates that will increase cost of borrowing.

In a recent interview, central bank governor John Rwangombwa said while national debt ratio to GDP is still low, there won?t be a rush to return to the international market to borrow following the successful issuance of the $400 million bond.

Rwangombwa emphasised strategic borrowing for priority spending and that while the doors to private funding are open, Rwanda will be cautious.

Domestically, the economist at the World Bank Rwanda office said, in addition, Rwanda should take the same precautionary approach to domestic borrowing to avoid elbowing private sector.

?If we are headed for difficult financial times, you want to keep the private sector well liquidated to invest and drive growth without competing for scarce funds with government on the local market,? he said.

Kenneth Agutamba, The New Times

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