Reflections on World Bank’s Global Economic Prospects Report, 2022

Dr Kenneth Creamer

School of Economics and Finance

University of the Witwatersrand

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22 March 2022

The GEP Report identifies 3 major challenges for the world economy

• Dealing with record levels of debt in the wake of large fiscal response to the COVID pandemic
• Rising levels of income inequality within and across countries in the wake of the COVID pandemic
• Rising levels of uncertainty due to possible ongoing impact of Covid Pandemic and other looming causes of uncertainty such as climate change, energy insecurity and food insecurity and supply chain disruption (all which risk have intensified given the invasion by Russia of the Ukraine subsequent to the publication of the GEP Report)

GEP Policy agenda to address 3 major challenges

• To deal with debt: Mobilise finance and assist with debt relief for the world’s poorest countries who face around $35-bn in debt service payments in 2022
• To deal with inequality: Reforms to promote productivity, trade and investment, as well as access to digital services and “access to continuous electricity supply” in developing countries
• To deal with rising uncertainty: No ready solutions and disruption of supply chains has been made even more uncertain by the war

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Reflections on certain issues in a rich and detailed review of the global economy

• Reduced fiscal space and Rising Public Debt
• Lower Investment levels
• Energy Transition and Commodity prices

Reduced fiscal space and Rising Public Debt

• Due to the Covid pandemic fiscal space has been reduced – (1) Tax revenues have been subdued and (2) Support measures have required increased spending (usually with non-permanent commitments)
• New spending pressures include spending on energy transition, climate adaptation, and defence
• The GEP suggest that this require “a careful review and prioritization of public spending, subsidies and measures to expand the tax base” and “reprofiling of debt to spread out repayments and reduce exchange rate risks”

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Fiscal Space in SA context

• In the SA context the following are priorities:
• containment of national debt,
• better management of Eskom debt,
• full interrogation of proposals that increased social spending can be finance by borrowing or taxation (with risk of reducing size of tax base)
• COP26 concessional finance offer – is there sufficient consensus to take forward this process, just transition requires pathways for communities and workers negatively affected by coal decommissioning, need massive investment in renewables or it will not be possible to commission even very old power stations in the context of a shortage of electricity and load-shedding

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Lower Investment levels

• For advanced countries the GEP report projects that output and investment will return to pre-Covid levels in 2023 (Question – what will be the impact of the war?)
• For emerging markets and developing countries the GEP report projects that output and investment “will remain markedly below [pre-Covid levels], owing to lower vaccination rates, tighter fiscal and monetary policies, and more persistent scarring from the pandemic”

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Investment in SA context

• In the SA context – GDFI is at historic low levels (currently around 15% of GDP with NDP target of over 25%)
• Leading to a decay in infrastructure, made worse by the fact that public sector infrastructure project management capabilities are declining and infrastructure budgets are being squeezed out by
• rising wages,
• rising social spending,
• rising debt servicing payments
• Social compact around reforms to lift private sector investment (e.g. 100MW electricity reform and wider energy transition)

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Energy Transition and commodity prices

• The GEP argues that the energy transition away form fossil fuels will tend to “amplify” commodity price swings and as such countries should reduce their reliance on commodity-related revenues by diversifying exports and their national asset portfolios
• Since after the GEP was released, what impact will the War have on this ongoing energy transition?
• Prices of oil, gas, coal all rising due to supply disruptions and rising prices will likely accelerate the energy transition due to the relative price advantage of renewable energy source
• Also Geopolitically, renewable energy sources are more geographically dispersed based on wind and solar resources in many countries rather than oil and gas resources in a handful of countries
• There will be geopolitical implications of increased need for Energy metals – like copper, cobalt, zinc, and vanadium

Energy transition and commodities in SA context

• SA needs to accelerate its energy transition by accelerating investment in renewable energy
• SA must promote upstream solar panels and wind towers investment
• Energy transition will enable downstream green hydrogen and Electric Vehicles, etc.,
• It may be possible to tweak the fuel price formula to make some downward adjustment to fuel price
• But it will be very important to avoid policy errors such as the state taking up ownership of fuel refineries that are in the process of switching to storage facilities
• As a commodity exporter SA needs to accelerate exploration for energy metals in SA and in the wider region – SA, Zambia, Congo, Mozambique, Namibia

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Conclusions

• The GEP highlights important issues
• For South Africa and the World there is much to reflect on in this report
• I would like to congratulate World Bank Researchers for the quality and relevance of the work that they have produced
• And thank you for the opportunity to reflect on some of the issues raised in the latest edition of the GEP report