The current low crude oil prices present an opportunity for commodities-dependent economies like Nigeria to review their energy pricing policies as they look forward to the post-COVIC-19 pandemic era, the World Bank has said.
The Bank said in a report published on Wednesday that energy-importing developing countries need to move away from costly subsidy schemes and allocate their limited fiscal resources to improving public health and education.
The report, titled, “Adding Fuel to the Fire: Cheap Oil during the Pandemic”, was published ahead of the release of the World Bank Group’s Global Economic Prospects report scheduled for June 8.
Adjustments during COVID-19
Since the crash in crude oil prices last March, the Nigerian National Petroleum Corporation (NNPC) has removed fuel subsidy from the pricing template for petroleum products.
The 2020 Budget was pegged on a $57 per barrel crude oil price benchmark. With the crash of crude oil prices, the benchmark was reviewed, initially to $30 per barrel, and later to about $25 per barrel.
The government has also reviewed downward the retail price for premium motor spirit (PMS), popularly called petrol, three times, in a move to end the corruption-prone subsidy scheme.
Initially, the pump price was reduced from N145 per litre (the prevailing price since 2016) to N125 per litre; N123.50 per litre, and last week to N121 per litre.
With the World Bank and the International Monetary Fund (IMF) warning of imminent global economic recession, the Minister of Finance, Budget and National Planning, Zainab Ahmed, has said the Nigerian economy would slip into another recession.
Worsening economic slowdown
The World Bank report said deep economic recessions associated with the pandemic would likely exacerbate the multi-decade slowdown in global economic growth and productivity, which are the primary drivers of higher living standards and poverty reduction.
“The emerging and developing countries with weak health systems; those that rely heavily on global trade, tourism, or remittances from abroad, and those that depend on commodities exports would be particularly hard-hit”, the analysis report said.
In the long-term, the World Bank analysis said the pandemic would leave lasting damage through multiple channels, including lower investments; erosion of physical and human capital due to the closure of businesses and loss of schooling and jobs, and a retreat from global trade and supply linkages.
These effects, the report noted, would lower economic output and labour productivity well into the future.
“Pre-existing vulnerabilities, fading demographic dividends and structural bottlenecks will amplify the long-term damage of deep recessions associated with the pandemic.”
COVID-19 impact on oil prices
“The outbreak of COVID-19 and the wide-ranging measures needed to slow its advancement have precipitated an unprecedented collapse in crude oil demand, a surge in oil inventories, and, in March, the steepest one-month decline in oil prices on record.
“In the context of the current restrictions on a broad swath of economic activity, low crude oil prices are unlikely to do much to buffer the effects of the pandemic, but they may provide some initial support for a recovery once these restrictions begin to be lifted.
“Like other countries, energy-exporting emerging market and developing economies (EMDEs) face an unprecedented public health crisis, but their fiscal positions were already strained even before the recent collapse in oil revenues.
“To help retain access to market-based financing for fiscal support programmes, these EMDEs will need to make credible commitments to a sustainable medium-term fiscal position. For some of them, current low crude oil prices provide an opportunity to implement energy-pricing policies that yield efficiency and fiscal gains over the medium term,” the report said.
When the pandemic broke out, the report said many emerging and developing economies were already vulnerable due to record-high debt levels and much weaker growth.
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The World Bank Group Vice President for Equitable Growth, Finance and Institutions, Ceyla Pazarbasioglu, said the impact of the pandemic would worsen the long-term damage of deep recessions associated with the existing structural bottlenecks in the economy.
He said urgent measures would be needed to limit the damage, rebuild the economy, and make growth more robust, resilient and sustainable.
Policies to rebuild both in the short and long-term, he said, entail strengthening health services and putting in place very targeted stimulus measures to help reignite growth.
“This includes efforts to maintain the private sector and get money directly to people so that we may see a quicker return to business creation after this pandemic has passed.
“During the mitigation period, countries should focus on sustaining economic activity with targeted support to provide liquidity to households, firms and government essential services. At the same time, policymakers should remain vigilant to counter potential financial disruptions.
“In the short-term, while restrictions on transport and travel remain in place, low crude oil prices are unlikely to provide much support for growth.”
Rather, he said it may compound the damage by the pandemic by further weakening the finances of producers.
The Director of the World Bank’s Prospects Group, Ayhan Kose, said low oil prices are likely to provide at best marginal support to global activity early in the recovery, as oil-exporting emerging and developing countries are currently experiencing sharp economic downturns as their export revenues nosedive.
“Even if oil prices rise as global oil demand recovers, the recent plunge in prices is another reminder for oil-exporting countries of the urgency to continue with reforms to diversify their economies,” he said.