The World Bank urged developing economies in East Asia and the Pacific Tuesday to avoid short-term economic fixes to contain soaring food and energy prices.
“As countries of the region seek to shield households and firms from higher food and energy prices, current policy measures provide much-needed relief, but add to existing policy distortions,” a statement said.
“Controls on food prices and energy subsidies benefit the wealthy and draw government spending away from infrastructure, health and education.
“Lingering regulatory forbearance, aimed to ease lending through the pandemic, can trap resources in failing firms and divert capital from the most dynamic sectors or businesses.”
‘TOUGH TRADE-OFF’
Aaditya Mattoo, the bank’s chief economist for the Asia-Pacific region, said policymakers faced a “tough trade-off” between tackling inflation and supporting economic recovery.
“Controls and subsidies muddy price signals and hurt productivity. Better policies for food, fuel, and finance would spur growth and insure against inflation,” he said.
The bank said more efficient measures like income transfers could provide relief and even spur growth if combined with reforms of long-standing policy distortions.
“Support through income transfers is preferable to price regulation because it does not distort choices and can be targeted to those most in need,” it said.
“In food, governments should shift focus from rice-centric food security to nutrition security by reducing subsidies and trade barriers that favour rice, thereby encouraging diversified production of nutritious foods.
“In fuel, policy responses should help meet the immediate need for affordable energy without compromising energy security and sustainability.
“Encouraging investment in renewables could reduce exposure to fossil fuel price volatility and help meet emission reductions commitments.”
Deeper reforms — in service industries, for example — could also help offset the impact of recent shocks, it said.
The World Bank meanwhile warned that currency depreciations in the region could worsen country debt burdens.
“Rising inflation abroad has provoked interest rate increases, which in turn have caused capital outflows and currency depreciations in some East Asia and Pacific countries,” it said.
“These developments have increased the burden of servicing debt and shrunk fiscal space, hurting countries that entered the pandemic with a high debt burden.”
GLOBAL SLOWDOWN DAMPENS REGIONAL OUTLOOK
In its latest economic update released in Washington Monday evening, the bank forecast growth in developing East Asia and the Pacific outside of China to more than double from 2.6 percent last year to 5.3 percent this year.
Amid stringent lockdowns to contain COVID-19, growth in China — an estimated 86 percent of the region’s economic activity — is forecast to slow from 8.1 percent last year to 2.8 percent this year.
“Growth in much of East Asia and the Pacific has been driven by recovery in domestic demand, enabled by a relaxation of COVID-related restrictions, and growth in exports,” the bank said.
But “the global economic slowdown is beginning to dampen demand for the region’s exports of commodities and manufactured goods,” it warned.
Manuela Ferro, the bank’s vice president for East Asia and the Pacific, noted that recoveries were underway in most economies in the region.
“As they prepare for slowing global growth, countries should address domestic policy distortions that are an impediment to longer term development,” she said.
OUTLOOK FOR CAMBODIA AND OTHER ASEAN ECONOMIES
For Cambodia, the bank upgraded its growth forecast for this year from 4.5 percent in April to 4.8 percent.
The revised forecast is higher than the latest projections for Thailand (3.1 percent), Myanmar (3.0 percent) and Laos (2.5 percent) but lower than those for Vietnam (7.2 percent), the Philippines (6.5 percent), Malaysia (6.4 percent) and Indonesia (5.1 percent).
With 5.2 percent growth forecast for next year, Cambodia is expected to have the fastest growth among seven ASEAN developing countries after Vietnam (6.7 percent) and the Philippines (5.2 percent).
Slower growth is forecast for Indonesia (5.1 percent), Malaysia (4.2 percent), Thailand (4.1 percent) and Laos (3.8 percent). A forecast for Myanmar next year was not available.
For all developing economies in East Asia and the Pacific including China, the bank forecast 3.2 percent growth this year and 4.6 percent next year.
But it highlighted the risk of recent price and interest rate shocks shaving 0.4 percentage points off regional growth.
“Inefficient instruments would soften the impact on current welfare but magnify the growth cost,” the bank warned.

Source: Agency Kampuchea Press