The Ukraine War’s economic consequences for developing countries

Developing countries in general, and especially those which are net importers of oil are in a real fix as to how to manage macroeconomic challenges like high inflation, balance of payments concerns, and debt sustainability, on one hand, and on the other make needed development expenditures, especially in the health  sector, along with providing enough stimulus, and subsidy to support people in the lower income echelons, which are many and most likely quite rapidly rising in numbers over the pandemic.- Advertisement –

War in Ukraine has made all this all the more difficult, and as Jayati Ghosh rightly pointed, requires a significant amount of support from both rich, advanced countries, and multilateral institutions. Yet this support in any significant way, has remained mostly eluded over the many months during the pandemic. On top of that, oil prices which took a nose-dive and settled to around $20 a barrel in around the later part of April 2020, saw a fast-paced rise in the later part of the same year, due to demand improvement, but sadly also significantly at the back of artificially reduced supply.

Resultantly, oil prices had already risen to above $90 a barrel before the war began, and have now seen reaching around $130 a barrel. Imagine the precarious situation in which developing countries find themselves. For how long they can manage pressures on fiscal balance on account of providing subsidies, and on the balance of payments on account of higher import costs?

Pakistan imported around 80-90 percent of its total wheat imports from Russia and Ukraine in 2020, and therefore a war has meant that the country is likely to face longer timelines, and higher prices with regard to wheat that needs to be imported.

And cutting development expenditures would mean a negative impact on growth recovery, and overall fall into stagflationary consequences. The war will likely exacerbate these pressures on macroeconomic accounts, with consequences of such rise in commodity prices already producing ripples in the political domains of developing countries in general; a repeat of similar consequences seen as the commodity prices increased as an outcome of the Global Financial Crisis of late 2000s.

Criticising this rather self-centred approach by OPEC+ group of countries, a recent Financial Times (FT) quoted the head of International Energy Agency (IEA) in an article ‘IEA ready to release more oil to ease soaring energy prices, says chief’ recently as follows: ‘The head of the International Energy Agency said the group’s members were ready to release more oil from emergency stockpiles to ease soaring energy prices, as he criticised Saudi Arabia and the United Arab Emirates for refusing to pump more crude.

Fatih Birol said the co-ordinated release last week by the US and other big energy-consuming nations of 60mn barrels was an “initial response” and that the IEA was ready to do “everything” to reduce the volatility in energy markets driven by Russia’s invasion of Ukraine.’

A global commodity supply shock had already sky-rocketed food prices, and the war will only add to it, for instance in terms of essential natured commodities like wheat and fertilizer. The same article by Jayati Ghosh pointed out in this regard ‘Before the war, Ukraine was the world’s fifth-largest wheat exporter, and also a major exporter of barley, corn, rapeseed, and sunflower oil.

The prices of these commodities in global trade have risen significantly, adding to recent increases in crop prices generally. …Crop production in developing countries could also be hit by fertilizer shortages. Russia, the world’s largest wheat exporter, is also a major fertilizer producer, and disruptions to these exports will push global food prices even higher.’

Highlighting the rising level of commodity prices, a March 3 FT published article ‘Commodity prices soar to highest level since 2008 over Russia supply fear’ indicated ‘The S&P GSCI index, a broad barometer for the price of global raw materials, has jumped 16 per cent this week, leaving it on track for the sharpest rise on records dating back to 1970, according to Refinitiv data.

It is now at its highest level since 2008. US oil prices also hit the highest level since 2008 on Thursday. Wheat futures in Chicago shot above $12 a bushel. Other commodities including aluminium and coal have also soared this week, in a move that will have profound effects on global businesses and consumers.’- Advertisement –

Similarly, another FT article ‘Food crisis looms as Ukrainian wheat shipments grind to halt’ pointed out with regard to rising food prices that ‘Russia and Ukraine supply almost a third of the world’s wheat exports and since the Russian assault on its neighbour, ports on the Black Sea have come to a virtual standstill.

As a result, wheat prices have soared to record highs, overtaking levels seen during the food crisis of 2007-08. …The surge in prices will fuel soaring food inflation – already at a seven-year high of 7.8 per cent in January – and the biggest impact will be on the food security of poorer grain importers, warned analysts and food aid organisations.

’ As per the same article, Pakistan imported around 80-90 percent of its total wheat imports from Russia and Ukraine in 2020, and therefore a war has meant that the country is likely to face longer timelines, and higher prices with regard to wheat that needs to be imported.

Courtesy : PT