Why Nigeria, others are struggling in managing inflation cycle-World Bank

World Bank

By Motolani Oseni

World Bank Group has explained why policymakers in emerging markets and developing economies have limited room to manage the most pronounced global inflation cycle in decades.

To this end, the global bank advised Nigeria and other developing economies on the need to carefully calibrate monetary and fiscal policies, clearly communicate their plans, and get ready for a period of even higher volatility in global financial and commodity markets.

This is even as the World Bank warned that the shrinking value of the currencies of most developing economies is driving up food and fuel prices in ways that could deepen the food and energy crises that many of them already face.

World Bank made these disclosures in its latest Commodity Markets Outlook report, stating that the price of Brent crude oil is expected to average $92 a barrel in 2023, which would be well above the five-year average of $60 a barrel. Both natural gas and coal prices are projected to ease in 2023 from record highs in 2022.

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According to the report, from the Russian invasion of Ukraine in February 2022 through the end of last month, the price of Brent crude oil in U.S. dollars fell nearly 6 per cent. Yet, because of currency depreciations, almost 60 per cent of oil-importing emerging-market and developing economies saw an increase in domestic-currency oil prices during this period.

“Nearly 90 per cent of these economies also saw a larger increase in wheat prices in local-currency terms compared to the rise in U.S. dollars. Elevated prices of energy commodities that serve as inputs to agricultural production have been driving up food prices.

“During the first three quarters of 2022, food-price inflation in South Asia averaged more than 20 per cent. Food price inflation in other regions, including Latin America and the Caribbean, the Middle East and North Africa, Sub-Saharan Africa, and Eastern Europe and Central Asia, averaged between 12 and 15 per cent”, the report stated.

The World Bank’s Vice President for Equitable Growth, Finance, and Institutions, Pablo Saavedra, said, “Although many commodity prices have retreated from their peaks, they are still high compared to their average level over the past five years. A further spike in world food prices could prolong the challenges of food insecurity across developing countries. An array of policies is needed to foster supply, facilitate distribution, and support real incomes.”

Since the outbreak of the war in Ukraine, energy prices have been quite volatile but are now expected to decline. After surging by about 60 per cent in 2022, energy prices are projected to decline 11 per cent in 2023. Despite this moderation, energy prices next year will still be 75 per cent above their average over the past five years.

The price of Brent crude oil is expected to average $92 a barrel in 2023—well above the five-year average of $60 a barrel. Both natural gas and coal prices are projected to ease in 2023 from record highs in 2022. However, by 2024, Australian coal and U.S. natural-gas prices are still expected to double their average over the past five years, while European natural gas prices could be nearly four times higher. Coal production is projected to significantly increase as several major exporters boost output, putting climate-change goals at risk.

Ayhan Kose, Director of the World Bank’s Prospects Group and EFI Chief Economist on his part said “the combination of elevated commodity prices and persistent currency depreciations translates into higher inflation in many countries,” said which produces the Outlook report.

Agricultural prices are expected to decline five per cent next year. Wheat prices in the third quarter of 2022 fell nearly 20 per cent but remain 24 per cent higher than a year ago. The decline in agricultural prices in 2023 reflects a better-than-projected global wheat crop, stable supplies in the rice market, and the resumption of grain exports from Ukraine. Metal prices are projected to decline 15 per cent in 2023, largely because of weaker global growth and concerns about a slowdown in China.

The outlook for commodity prices is subject to many risks, while energy markets face significant supply concerns as worries about the availability of energy during the upcoming winter will intensify in Europe.

The global bank, therefore, noted that higher-than-expected energy prices could feed through to non-energy prices, especially food, prolonging challenges associated with food insecurity. A sharper slowdown in global growth also presents a key risk, especially for crude oil and metals prices.

“The forecast of a decline in agricultural prices is subject to an array of risks,” said John Baffes, Senior Economist in the World Bank’s Prospects Group.

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Ihesiulo Grace

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