The World Bank Group has projected that COVID-19 pandemic, the Russia-Ukraine conflict and the impacts of climate change would have intense implications for developing economies over the coming years.
The Breton Woods institution, in statement hoisted on its website on Friday reflecting the findings of its new report titled ‘Commodity Markets: Evolution, Challenges, and Policies’ indicated that global commodity markets were being reshaped in lasting ways as a result of the global crises.
It stated that the study offered the first comprehensive analysis encompassing all major commodities of how these markets evolved over the past 100 years and the directions they are likely to take over the next 30 years.
According to the World Bank Group, the study predicts that growth in overall global demand for commodities is likely to decelerate as population growth slows and developing economies mature, although demand for some commodities is likely to rise as “the transition to cleaner energy is likely to be challenging.’’
Based on the report findings, the Washington-based development finance institution, also projected that demand for metals necessary to build the infrastructure for renewable energy and to produce electric vehicles was likely to surge in the coming decades, thereby pushing up the price of metals and delivering windfall gains for countries that export them.
Noting that although renewable energy is fast becoming the lowest-cost source of energy in many countries, the World Bank further predicted that fossil fuels would probably retain some of their appeal, especially in countries with ample domestic reserves.
According to the bank, in the short-run, with inadequate investment in low-carbon technologies, just one-third of the required level, energy demand could continue to outstrip supply, keeping prices at elevated levels.
Commenting on the report findings, the World Bank Group President, David Malpass, said: “Amid overlapping crises over the past two years and the ongoing transition to lower carbon intensity, commodity markets are being reshaped.
“These changes will have major implications for growth and poverty reduction in developing economies, two-thirds of which are commodity exporters.
“A sound goal is for the shifts in commodity markets to encourage good outcomes for both development and environmental sustainability”, Malpass added.
The bank further stated that the study also threw new light on the causes and consequences of volatility in commodity markets, indicating a troubling insight for commodity exporters, adding that price increases do not materially boost economic growth for an extended period in developing countries, alternatively, price declines tend to reduce growth significantly and for several years.
In his remarks, the World Bank’s Managing Director for Development Policy and Partnerships,Mari Pangestu, explained that the “boom-and-bust cycles in commodity markets are enormously disruptive to progress in developing economies, especially the poorest countries.
“Still, too many countries maintain an excessive dependence on exports of just a few types of commodities”, he added.
Pangestu said the ongoing crisis was a wake-up call for governments to renew their efforts to value their natural capital in a sustainable way, diversify their economies, and reduce their vulnerability to commodity shocks.
The bank advised that policymakers could manage commodity-market shocks in at least three ways, including fiscal, monetary, and regulatory frameworks, measures to moderate boom-bust cycles and economic diversification.
It also recommended that governments should put in place fiscal frameworks that used periods of high prices to build rainy-day funds that can be deployed quickly in an emergency.
The bank further stated: “Exchange-rate regimes need to be agile to work effectively in combination with well-defined monetary policy frameworks.
“Regulators should put in measures to prevent the accumulation of excessive financial-sector risks, especially with respect to capital inflows and foreign-currency debt”, it added.
On measures to moderate boom-bust cycles, the Breton Woods institution noted that governments tended to resort to subsidies or trade protections to reduce the effects of commodity-price movements on consumers.
It further clarified: “Commodity-exporting countries often attempt to mitigate market volatility by reaching agreements to regulate supplies.
“History shows that such efforts usually are costly and counterproductive. A better approach is to adopt market-based risk mechanisms to limit exposure to price movements”, the bank stressed
Making further clarifications on economic diversification, the bank advised countries facing a long-term decline in fossil-fuel demand, to continue to diversify their economies while also recommending that “low-income countries that depend heavily on agricultural exports would also benefit from reforms that help expand other sectors of their economy.’’
