61097 Rising Food and Energy Prices in Europe and Central Asia Europe and Central Asia Region The World Bank Rising Food and Energy Prices in Europe and Central Asia Europe and Central Asia Region The World Bank Preface G l obal markets are again witnessing a period of rising commodity prices. Part of the current increase is attributed to temporary factors, while a portion is attributed to longer term trends in commodity markets. Of immediate concern has been the impact of rising fuel and food prices on global incomes, macroeconomic imbalances and national poverty. Countries that are large net food and fuel importers in global markets are particularly vulnerable to world price changes, as are countries where there is high food and fuel price inflation affecting the poor. This paper presents the possible impact of rising food and fuel prices on ECA countries' macroeconomic and poverty outcomes. Its purpose is to illustrate the possible short run consequences of rising prices and the coun- tries that are most likely to be significantly affected, both adversely and positively, while noting the importance of medium-term policy and non-policy related factors that could mitigate adverse consequences of commodity price increases. In ECA, low and lower middle income countries tend to be more vulnerable to rising food and fuel prices, while a handful of ECA countries export substantial amounts to world wheat and fuel markets. The paper presents an initial assessment of a still evolving situation. Further analysis at the country level will be undertaken as the situation evolves. Should the need arise, and collaborating with partners, the World Bank stands ready to assist clients in ensuring that food and finance reach the most affected countries, to work with countries in developing their social assistance systems as needed, and to develop and rationalize their agriculture and energy sectors. Philippe Le Houerou Vice President Europe and Central Asia Region The World Bank Acknowledgements T his paper was prepared through a cross-sectoral collaborative effort across departments of the World Bank's Europe and Central Asia Region. Substantive inputs were received from the Human Development (HD), Poverty Reduction and Economic Management (ECSPE), and Sustainable Development Network (SDN) with the overall coordination of ECSPE. The rapid response and effort of managers and staff in the Region are gratefully acknowledged. Contributors: Roumeen Islam led the writing of the report with contributions from Nicolas Ahouissoussi, Mohamed Ihsan Ajwad, Benu Bidani, Dina Umali Deininger, Sebastian Eckardt, Lire Ersado, Boryana Gotcheva, Mattias Grueninger, Jesko Hentschel, Aylin Isik-Dikmelik, Theo Janse Van Rensburg, Irina Kogay, Holger Kray, Alexander Kremer, Ranjit Lamech, Nadezhda Lepeshko, Kathy Lindert, Yulia Mironova, Snjezana Plevko, Clelia Rontoyanni, Yadviga Semikolenova, Alexander Sharabaroff, Kenneth Simler, Victoria Strokova, Victor Sulla, and Ramya Sundaram. Ricky Ubee and Olga Vybornaia provided excellent research assistance. Suggestions from Chiara Bronchi, Indermit Gill, Ronald Hood, Takuya Kamata, Elena Karaban, Andrew Kircher, Matija Laco, Sanja Madzarevic-Sujster, Martin Raiser, Pedro Rodriguez, Mark Roland Thomas, Eskender Trushin, Willem van Eeghen, Claudia Ines Vasquez, Salman Zaidi, Juan Zalduendo and Sally Zeiljon are deeply appreciated. Bruce Ross Larson edited the Summary. Susana Padilla formatted the docu- ment. This report was initiated and produced under the general guidance of Yvonne Tsikata. Country level data and information provided by: Marina Bakanova, Farid Bakshiyev, Oleksiy Balabushko, Iaroslav Banclajanschi, Zeljko Bogetic, R. Sudharshan Canagarajah, Souleymane Coulibaly, Mariam Dolidze, Bakyt Dubashov, Gohar Gyulumyan, Borko Handjiski, Ronald Hood, Stella IIieva, Faruk Khan, Vladimir Kolchin, Ewa Korczyc, Tigran Kostanyan, Matija Laco, Erjon Luci, Sanja Madzarevic-Sujster, Dino Merotto, Evgenij Najdov, Catalin Pauna, Ruslan Piontkivsky, Pedro Rodriguez, Kaspar Richter, Pablo Saavedra, Ilyas Sarsenov, Afsaneh Sedghi, Emilia Skrok, Mark Roland Thomas, Stepan Titov, Eskender Trushin, Sergei Ulatov, Ekaterine Vashakmadze, Danijela Vukajlovic-Grba, Marina Wes, and Cihan Yalcin. Table of Contents Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section.1 ...World.Commodity.Markets.and.Prices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section.2 ...Macroeconomic.Channels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 . 2 .1 .. Food.and.Energy.Price.Inflation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 . 2 .2 .. Current.Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 . 2 .3 .. Output.and.Growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 . 2 .4 .. Fiscal.Impact. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section.3 ..Poverty.Impacts.and.the.Response.of.Social.Assistance.Systems . . . . . . . . . . . . . 21 Section.4 ..Vulnerability.and.Policy.Interventions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 . 4 .1 .. Vulnerability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 . 4 .2 .. Policy.Interventions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section.5 ..Agriculture.in.ECA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section.6 ..Energy.in.ECA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Annex.1 ..World.Bank.Support.to.Clients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 . A-1 .1. World.Bank.Support.for.Fiscal.Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 . A-1 .2. World.Bank.Supported.Reforms.in.Social.Protection . . . . . . . . . . . . . . . . . . . . . . . 38 . A-1 .3. World.Bank.Support.to.Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 . . A-1 .4. World.Bank.Support.to.the.Energy.Sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Annex.2 ..Terms.of.Trade.and.Growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Annex.3 ..Simulating.Poverty.Impacts.of.Food.and.Energy.Inflation . . . . . . . . . . . . . . . . . . . . . 43 References:. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 List.of.Boxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii List.of.Figures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii List.of.Tables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii List.of.Acronyms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv List of Boxes Box.1:. Channels.through.which.Food.and.Energy.Prices.Affect.Economic.Conditions. . . . . . . 7 . Box.2:. Variation.in.Evolution.of.Food.Prices.in.Selected.ECA.Countries. . . . . . . . . . . . . . . . . 12 Box.3:. Modeling.an.Increase.in.the.Price.of.Oil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Box.4:. The.Hidden.and.Rising.Fiscal.Cost.of.Cheap.Energy.in.Belarus . . . . . . . . . . . . . . . . . 19 Box.5:. Global.Food.Price.Crisis.and.Safety.Nets.Response:.. . . Experience.of.IDA.Countries.in.ECA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Box.6:. Policy.Initiatives.in.Selected.ECA.Countries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Box.7:. Community.Seed.Funds.in.the.Kyrgyz.Republic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Box.8:. Export.Restrictions.Damage.Food.Security.in.the.Long.Run. . . . . . . . . . . . . . . . . . . . . 33 Box.9:. Reducing.Volatility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 List of figures Figure.I:. High.Trade.Deficits.in.Food.and.Energy.in.Some.Countries.. . Accompany.High.Current.Account.Deficits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Figure.II:. Some.Countries.Are.Vulnerable.in.Both.Macroeconomic.and. . Poverty.Outcomes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 . Figure.1:. Energy.and.Food.Price.Indices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Figure.2:. Wheat.Prices.Are.Still.Rising. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 . Figure.3:. High.Food.and.Energy.Price.Inflation.in.many.ECA.Countries,.2010. . . . . . . . . . . . 11 Figure.4:. Poorer.Countries.Have.Higher.Food.Price.Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Figure.5:. Some.Countries.Have.Large.Trade.Deficits.in.Food.and.Energy. . . . . . . . . . . . . . . . 13 Figure.6:. High.Trade.Deficits.in.Food.and.Energy.Accompany.. . . High.Current.Account.Deficits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Figure.7:. Some.Countries.with.a.Substantial.Dependence.on.Energy.Imports.. . . . . . . . . . . . 16 Figure.8 .1:. Coverage.of.Poverty.Targeted.Programs.is.Very.Low.. . in.Some.ECA.Countries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Figure.8 .2:. Targeting.Accuracy.of.Poverty.Targeted.Programs.in.ECA.. . Varies.among.Countries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Figure.8 .3:. Generosity.of.Poverty.Targeted.Programs.in.ECA.. . Could.be.Strengthened.in.Some.Countries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Figure.9:.Some.Countries.are.Vulnerable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 (contnuedonpage) List of figures(contnuedfrompage) Figure.10:.ECA.Countries.Use.Various.Policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Figure.11:. Fertilizer.Use.per.Hectare.in.Selected.Countries. . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Figure.12:. Some.ECA.Countries.May.Expand.their.Wheat.Production.Significantly. . . . . . . . . 31 Figure.13:. An.Increase.in.the.Long.Run.Marginal.Cost.of.Electricity.Generation. . . . . . . . . . . 36 Figure.14:. Some.ECA.Countries.Subsidize.Households.and.Others.Tax.Them. . . . . . . . . . . . 36 List of taBLes Table.1:. The.Impact.of.Increased.Food.and.Energy.Prices.on.the.Trade.Balance.. . May.Be.Significant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Table.2:. Oil.and.Gas.Revenues,.%.Share.in.Total.Fiscal.Revenues . . . . . . . . . . . . . . . . . . . . . 18 Table.3:. Oil.and.Gas.Revenues,.%.of.GDP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Table.4:. The.VAT.Effect:.Increased.Tax.Revenues.from.Food.and.Energy.Imports . . . . . . . . . 18 Table.5:. Poverty.Impact.by.Sub-Regional.Groupings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Table.6:. Simulation.Results.for.Poverty.Increases.Resulting.from.Higher.Food.. . and.Fuel.Price.Inflation.(US$2 .5/Day):. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Table.7:. Energy.Use.(kg.of.oil.equivalent).per.US$1,000.GDP. . . . . . . . . . . . . . . . . . . . . . . . . 35 List of acronyms AAA. Analytical.and.Advisory. FAO. Food.and.Agriculture. Activities Organization ARD. Agriculture.and.Rural. FBP. Family.Benefits.Program Development GDP. Gross.Domestic.Product CASAREM. Central.Asia/South.Asia. GFRP. Global.Food.Crisis.Response. Regional.Electricity.Market Program CIS. Commonwealth.of. IBRD. International.Bank. Independent.States IDA. International.Development. CPI. Consumer.Price.Inflation Association CSF. Community.Seed.Fund IMF. International.Monetary.Fund CTF.. Clean.Technology.Fund KOE. Energy.Use.per.Capita DEC. Development.Economics. LLMIC. Low.and.Lower.Middle.Income. Group,.World.Bank Countries DPO. Development.Policy.Operation LRSA. Last.Resort.Social.Assistance EBRD. European.Bank.for. OECD. Organization.for.Economic.Co- Reconstruction.and. operation.and.Development Development OGE. Oil.and.Gas.Exporters ECA. Europe.and.Central.Asia TA. Technical.Assistance ECAPOV. Poverty.in.Europe.and.Central. Asia.(Data.Bank) TOT. Terms.of.Trade EU. European.Union TSA. Targeted.Social.Assistance EU.CAP. European.Union.Common. VAT. Value.Added.Tax Agriculture.Policy WEO. World.Economic.Outlook EU10. New.Member.States WB. World.Bank v SummARy 1. Non-energy commodity prices rose for eight consecutive the crisis, governments are trying to rationalize fiscal months through February, crude oil prices for seven.The expenditurestocontaindeficits,preventthelargeexternal WorldBankfoodpriceindexhasmatcheditspeakof2008 deficits of the pre-crisis era, and support growth, while withtheenergypriceindexstillbelowtheJuly2008peak. continuingtoprotectthepoor. Theincreaseinfoodpricesin2010-11representsageneral- · InECAoverall,anaddtonal5.3mllonpeoplecould ized increase in the prices of several commodities. These become poor. Five low and lower middle income coun- commoditymarketdevelopmentsreflectacombinationof tries,Armenia,Georgia,theKyrgyzRepublic,Moldova, temporary and permanent factors. Rising incomes around andTajikistancouldseepotentiallyhighincreasesintheir the world, and particularly in emerging and developing povertyratesasaresultofhighfoodandfuelpriceinfla- countries, have increased demand for food and fuel. In tion.Theymayneedtoexpandcoverageandadequacyof addition, supply factors, related to fuel supply constraints theirtargetedsocialassistancesystemsinordertoprotect andinventories,haveaffectedpricesbothintheshortand theadditionalpoor. longerruns,whilepoliciessupportingbio-fuelproduction haveaffectedgrainprices.Intheshortrun,volatileweather ·Some countres could face addtonal external fnanc- conditions(suchasthedroughtinRussiaandthefloodsin ng needs or may need to constran domestc demand Australia)haveaffectedworldwheatpriceswhiletemporary to contan external balances. The same five countries policychangesbymajorexportersorimportershavetended and Kosovo have an average food and fuel trade deficit topushglobalmarketpricesabovelongerruntrends. of around 16% of GDP and will see current account balances deteriorating with rising food and fuel prices. 2. The purpose of this paper is to illustrate the channels Among middle income countries, Albania, Belarus, through which rising food and energy prices might Bosnia-Herzegovina and Montenegro also have double affect countries in the Europe and Central Asia Region digit food and fuel deficits or double digit current (ECA) in the short run and to indicate which countries account deficits, or both.These countries may need to are most likely to be significantly affected. While the findadditionalexternalfinancingfortheirhighercurrent focus is mostly on short run effects, the paper notes the accountdeficitsorhavetoreducedomesticdemand,for importanceofmedium-termpolicyandnon-policyrelated examplethroughtighterfiscalpolicy. factorsthatcouldmitigateormagnifytheconsequencesof commodity price increases. The paper presents an initial ·However, commodty exporters, partcularly large ol assessmentofastillevolvingsituation. and gas exporters such as Azerbajan, Kazakhstan and Russa,arebeneftngsubstantallyfromhghercommod- 3. As the Region recovers from the effects of the global typrceswhchareboostnggrowth,currentaccountand economic crisis, the global food and fuel price increases fscalbalances. represent a boon and an opportunity for commodity exporters but an additional source of vulnerability for ·Onaverage,thempactofthecurrentfoodandfuelprce ncreases on the EU member and accesson countres s many net importers. small. · Persstentlyhghandrsngcommodtyprceswllcom- ·ECA'sfoodandfuelsectorsaremportantnworldmar- plcate economc management for some ECA countres kets. Moreover, wheat production has the potential to recoverng from the global crss. During the 2008-09 double over the medium-term.To meet their potential, global economic crisis, growth declined, unemploy- ECAcountrieswillneedtoinvestinandreformpolicies ment increased and wages fell in most ECA countries. in their agro-food sectors. Food, and particularly wheat Throughout the region, fiscal revenues also fell while producers,canexpandproductionandexportsinasus- countries struggled to contain macroeconomic imbal- tainableway,withoutencroachingonforestsandprotect- ances and protect the vulnerable. In the recovery from edareas.Intheenergysector,a Figure I: High Trade Deficits in Food and Energy in Some Countries concertedeffortbygovernment Accompany High Current Account Deficits is needed to further improve energy efficiency, to encourage climatesmartinvestments,and tocontainfiscalrisks. macroeconomic and Poverty impacts 4. The short run impact on domes- tic food and fuel inflation, cur- rent account balances, and fiscal balances is large for some coun- tries. The medium-term growth impact of higher oil prices is likely to be small as long as prices remain at current levels. · Thefirstroundoffoodandenergypriceinflationishigh- plus.Azerbaijan'scurrentaccountsurpluswasover25% estamongthelowandlowermiddleincomecountries. ofGDPin2010,Kazakhstan's8%andRussia's5%(these Inthisgroup,foodinflationaveraged13%in2010and countriesarerepresentedintheupperrighthandcorner energy inflation averaged 15%. The Kyrgyz Republic of Figure I).1The EU member and accession countries hadfoodinflationof27%in2010andGeorgiaof23%. arelessaffectedthattheothergroupsandarenearerthe Forbothcountries,theweightoffoodintheCPIisover origininthefigure. 40%.Energyinflationisalsothehighestamongthelow andlowermiddleincomecountries. ·Oil price increases are likely to have higher adverse effects on output over the medium-term for large net ·Countries that have net food and fuel trade deficits of commodity importers which also have high energy closeto10%ofGDPoraboveandthatalsohavesub- intensity of production, though these effects will be stantial current account deficits are considered vulner- small if prices remain at current levels. Countries that able to rising food and fuel prices in terms of external fallinthiscategoryareBelarus,andfourlowandlower balances (shaded area in the lower left-hand section of middleincomecountries,theKyrgyzRepublic,Moldova, Figure I). Most of them also have high fiscal deficits. TajikistanandUkraine. Amongthelowandlowermiddleincomecountries,these 5. Measured at the US$2.5 level a day, an additional 5.3 are Armenia, Georgia, Kosovo, the Kyrgyz Republic, million people could be made poor in ECA because of MoldovaandTajikistan.Othermiddleincomecountries, the higher food and fuel inflation; most of the higher Albania, Belarus, Bosnia-Herzegovina and Montenegro poverty is due to the food price increase.Thepotential may also face additional financing needs as they have overallincreaseinthepovertyrateis1.3percentagepoints eitherdouble-digitfoodandfueltradedeficitsordouble forECA,intheabsenceofcountervailingmeasures,growth digit current account deficits, or both. However, the in wages and incomes, or changes in household behavior. effect of rising food and fuel prices on the current The countries in which poverty could increase the most accountsofnetimporterswillbemitigatedbyincreases are a group of low and lower middle income countries: inthepricesoftheirexports.Externalandfiscalbalances potentialincreasesare9percentagepointsforArmeniaand oftheoilandgasexportersareshowinganincreasingsur- Georgia,11fortheKyrgyzRepublic,around5forMoldova and8percentagepointsforTajikistan. 1 AzerbaijanisnotvisibleasitscurrentaccountbalancerelativetoGDPis extremelylargecomparedtoothercountriesinECA. Vulnerability and Figure II: Some Countries Are Vulnerable in Both Macroeconomic and Policy responses Poverty Outcomes 6. Countries that are the most vul- nerable in terms of both macro- economic outcomes and poten- tial poverty increases are all low and lower middle income countries: Armenia, Georgia, the Kyrgyz Republic, Moldova and Tajikistan (in Figure II).Inaddi- tion,Albania,Bosnia-Herzegovina, Kosovo and Montenegro, are vul- nerableintermsoffacingadditional externalfinancingneeds,buttheir potentialpovertyincreaseresulting from high food and fuel prices, is smallornegligible.Intheabsence ofadditionalfinancing,thesecountriesmayneedtocontain onfoodimports,relianceonstateprocurementanddistri- aggregatedemand.Atthesametime,vulnerablecountries bution to ease prices, price controls and staggered energy will need to find additional fiscal resources to protect the priceadjustments.In2010-11,allofthesepossibilitiesare poor, while expanding their targeted social assistance pro- back.However,thesepoliciesaremostlynotwelltargeted grams.The policy response to inflation in ECA countries to the poor. In addition, reductions in VAT rates reduce willdependonthepersistenceofinflationandtheoutlook importpricesandraisethefiscaldeficit,butdonotensure forothermacroeconomicvariables.Tightermonetarypolicy lowconsumerprices.Energysubsidies,implicitorexplicit, may be warranted in some countries if inflation pressures are often not well targeted and worsen the government's persistoverthemedium-term. fiscalposition.Exportrestrictionsandinappropriatepricing policies(suchaspricecontrols)intheagricultureandenergy 7. The effect of the price shocks on the poor in most ECA sectorshinderlongtermadjustmenttoglobalmarketcondi- countries could be offset by relatively modest increases in tions.Totheextentpossible,expansionofsocialassistance fiscal resources which could be distributed through cur- systems should be the preferred method of protecting the rent social safety net programs. MostECAcountrieshave poor. atleastonefairlywelltargetedsocialassistanceprogram.By increasing the fiscal resources allocated to these programs, 9. ECA's medium-term response to higher prices in global theycanincreasecoverageofthepoorandtheadequacyof food markets should be to expand its agro-food sector benefits.Overtime,astheadministrativecapacityofthese in a sustainable way and improve distribution; many systemsimprovesandoverallexpendituresarerationalized, countries have already embarked on this process. ECA's there can be fiscal savings. Fully compensating the poor- agro-food sector affects both regional and global markets; est 20% for higher inflation in the low and lower middle wheataccountsfor25%ofworldexportsonaverage.ECA incomecountrieswherepovertyisexpectedtoincreasethe coulddoubleitsproductionbyincreasingthelandthatis most (Armenia, Georgia, the Kyrgyz Republic, Moldova, currently under cultivation and increasing yields through andTajikistan),couldrequireupto1%oftheirGDP. betteruseofinputsandservices.Distributionaswellaspro- duction inefficiencies have further exacerbated food price 8. ECA countries responded to the 2007-08 increase in volatilityandinflationinlocalmarkets.Importantreforms food and fuel prices in a number of ways, but some poli- includeinvestingininfrastructureandirrigation,improving cies they adopted have negative long term consequences. post harvest logistics and waste reduction, and eliminat- Amongthemostusedpoliciesin2007-08weretraderestric- inggovernmentinterventionsthatprecludeadjustmentto tionsonfoodexports,reducedvalue-addedtax(VAT)rates changedprices. 3 10. Exports from ECA's three largest oil exporters account thegoalsofmacroeconomicstability,growthandpoverty for around 15% of world oil supply and 25% of non- reduction.TheBankisworkingwithclientson: OPEC oil supply. To contain fiscal pressures, sustain · Ratonalzng publc fnance and admnstraton. In oil and gas production and to be climate smart, many manyECAcountries,theBankissupportingsustain- ECAcountrieswillneedtorationalizetheirenergysector able fiscal planning, rationalization of overall expen- policies.Risingfuelpricesmakereformofpricingpolicies ditures to ensure fiscal sustainability, and tax reform andreducingenergyintensitymoreurgent.Theproblem includingimprovementoftaxadministration.Itissup- is pressing for countries with large energy trade deficits porting clients in implementing structural reforms in suchastheKyrgyzRepublicat20%ofGDP,followedby varioussectorsinordertoenhancefiscalsustainability. Georgia(14%)andUkraine(11%).InallECAcountries, the energy intensity of GDP has declined significantly ·Enhancngsocalassstancesystems.TheBankiswork- sincetheearlypartofthelastdecade,butcanbefurther ing with clients to provide greater coverage of the reducedifECAadoptspoliciestoenhanceitsenergyeffi- poor,increasetheeffectivenessofpublicspendingand ciencyandencourageclimatesmartinvestments. improvetargetingofoverallfiscalexpenditures. ·Enhancng productvty and realzng potental n Bank support to clients agrculture. The Bank is supporting improved water managementinagriculture,enhancedaccesstoinputs 11. The World Bank supported ECA countries during the orextensionsservicesandbetterlandadministrationas last commodity price hikes and during the global crisis; partofeffortstoenhanceproductivity.Ithasalsosup- it is already involved in measures that will help contain portedeffortstoincreaseaccesstofinanceforfarmers country vulnerabilities to global developments. ECA andtoreducevulnerabilitytoshocks. countriesarefacingamorechallengingexternalenviron- ment than before the global crisis.The Bank supported ·Energysectorreformandsustanableenergy.TheBank countriesintheireffortstoputinplacesustainablemac- is supporting improvements in energy efficiency, pro- roeconomicpoliciesandtoimplementmeasuresaimedat motionofprivateinvestmentintheenergysector,and shorttermprotectionofthepoor.Lending,policyadvice support for renewable energy production and climate and analytical work are being used in tandem to meet changemitigationinitiatives. InTRoduCTIon 1. The ECA region was hit hard by the global economic cri- itypricehikes.Governmentaccountshavebeenstrainedby sis and countries are facing the commodity price hikes of declines in revenues, the need to rationalize expenditures 2010-11 from a different situation than that prevailing andeffortstoprotectthepoor.Globalfinancialmarketsare at the time of the 2006-2008 commodity price increases. alsolessliquid;andexportsformanyECAcountriesarejust ECAcountrieswereinamuchstrongereconomicsituation beginningtopickup. before the global crisis with growth averaging almost 7% 3. In this context, the adjustment to higher commodity during 2005-08. Fiscal deficits were falling, as was public prices for many net commodity importers may be harder debt.Capital,availableatunprecedentedlylowrates,allowed than it was previously.CountriesinECAwillcontinueto many ECA countries to finance large current account rationalizefiscalspendingandmanagevolatilityinaworld deficitsastheygrew;remittancesbufferedtradedeficitsand inwhichfinancialmarketsandgrowthprospectsaremore provided income support for many. ECA's strong growth uncertainandriskperceptionsarehigh.Theglobalincrease was accompanied by decreasing unemployment and wage in food and energy prices will have differentiated impacts increases. Poverty declined dramatically during the 2000s. acrossECAcountriesdependingon(a)theirstatusasnet Rising commodity prices 2 added substantially to com- commodityexportersorimporters;(b)demandandsupply modity exporters' incomes. The negative impacts of high responses over time (e.g., for food production and energy commoditypricesonnetimporters'macroeconomieswere efficiency investments) in each country; and (c) initial mitigatedbythepositiveexternalenvironmentandglobal economic conditions. Internal redistribution from food liquidity.However,therewerewithincountrynegativedis- andenergyconsumerstoproducersisexpectedtoresultin tributionalimpactsofrisingpricesandthepoorsuffereda increasedpovertyatatimewhenunemploymentishigh.At riseinthecostoftheirconsumptionbasket. thetimeofthe2008commoditypricehikes,countrieshad 2. Today, in the changed global and domestic economic adopted measures to insulate their economies and/or the conditions, both macroeconomic and within country poor from these global market developments. Additional distributional impacts are potentially more severe, par- policieswereadoptedtoadjusttothe2009downturn.Not ticularly for the poorer countries in ECA. In2009most all of these policies were sustainable. ECA countries need of the ECA countries experienced negative growth rates to take measures in public finance, demand management, averaging -3.8%. For many, 2010 was the beginning of agriculture and energy that prepare them for higher and the recovery, and the average growth rate was around 3% morevolatilefoodandfuelprices. compared with a world average of 5.1% Recessions have 4. The purpose of this paper is to illustrate the channels leftECAcountrieswithmuchhigherunemploymentrates through which rising commodity prices might affect andlowerwages.Fiscalaccountshavebeenputundersig- countries in the Europe and Central Asia Region (ECA) nificant pressures as deficits and debt have increased.The in the short run and to indicate which countries are averagefiscalbalancein2007was1.3%ofGDPcompared most likely to be significantly affected.Whilethefocus to -5.8% in 2010 (with a maximum deficit of over 9%). ismostlyonshortruneffects,thepapernotestheimpor- TheaveragedebttoGDPratiohasjumped10percentage tanceofmedium-termpolicyandnon-policyrelatedfactors pointsofGDP.Forlowandlowermiddleincomecountries, that could mitigate the consequences of commodity price thefiscaldeficitjumpedfrom-1.8%to-5.8%ofGDP,these increases.Thepaperpresentsaninitialassessmentofastill countriesarealsomorevulnerabletothe2010-11commod- evolving situation in which commodity market develop- mentsareuncertain.Theeventualimpactsongrowthand 2 Commoditiesincludefood,rawmaterials,energyproducts,metalsand povertywilldependonthemacroeconomicpolicyenviron- minerals. 5 ment,thedurationandvolatilityofthepriceincreases,social theimpactofrisingprices.ItputstheECAexperiencein assistancepoliciesandotherdomesticpoliciesthatchange thecontextofthelastcommoditypriceincreaseaswellthe thestructureofdomesticmarkets.Dependingonthenature recent global economic crisis. Section 1 summarizes the oftheimpactsandtheinitialconditions,appropriatepolicy stateofglobalcommoditymarkets.Section2discussesthe responseswilldiffer.Countrypolicyresponsesintheregion mainmacroeconomicchannelsthroughwhichcommodity canhavesignificantimpactsonworldmarkets.Forexample, priceincreasesaffecttheeconomy.Section3discussesthe inthelastfoodpricecrisismajorexportingcountriesintro- potential poverty impacts of the price increases and the duced export taxes, export bans or other restrictions on abilityofcountries'socialassistancesystemstodealwiththe exportsofagriculturalproductsorincreasedhoardingand heightenedneedforsocialassistance.Italsodiscussescoun- thesepoliciesaffectedworldasmuchasnationalmarkets. tryresponsestothecrisistodatewithreferencetopolicies followed during the 2008 price hikes. Section 4 examines 5. This paper discusses the effects of the global food and ECA'sagriculturesectorandpotentialresponsestothecom- energy price increases on ECA countries from two per- moditypriceincreaseandpricevolatility.Section5discusses spectives: (a) impacts on the macro-economy through theenergysector.BanksupporttoECAcountriestohelp inflation, the trade balance, fiscal accounts and growth dealwithcommoditymarketdevelopmentsisdiscussedin and (b) distributional impacts within countries (Box Annex1. 1).Itaimstohighlightvulnerabilitiestorisingcommodity prices and discusses some policy interventions to mitigate Box 1: Channels through which Food and Energy Prices Affect Economic Conditions macroeconomic and PoVerty effects Alternatively,domesticdemandwillneedtodecline.Net food and energy exporters will face improved external Impact on inflation: Nationalinflationlevelsareaffected balances.Theeffectonthecurrentaccountovertimewill by rising world prices for commodities. The direct first dependonhowoveralltermsoftradeevolvebutalsothe roundeffectsonoverallconsumerpriceinflationdepend responsetothepriceincreaseinnationalmarkets(suchas on the weight of these commodities in the consumption substitutiontoother,nonimportedenergyorfoodsourc- basket;thisishigherforlowerincomecountries.Whether es,ordeclineinenergyconsumptionandthusimports,or these price changes affect core inflation rates (inflation increasesindomesticsupply),andexpectationsregarding measured without food and energy prices) depends on a the permanence of the shock. Diversification of energy numberoffactors,amongthempersistenceofworldinfla- sourcesoverthelongerruncouldhelpreducetheimpacts tion, domestic policies and expectations of future price of price volatility in oil markets. Similarly, the national developments. Allowing the first round effects of com- agriculturesectorshouldrespondtopermanentchangesin moditypriceinflationtobeaccommodatedwouldhelpthe foodprices.Actualresponseswillbedeterminedinpartby adjustment to the jump in commodity prices. However, countrypoliciesinthesesectors. inflationexpectationsneedtobeconsidered;totheextent thatthefoodandfuelpriceinflationraiseexpectationsof Impact on fiscal balances: Most immediate in terms long term inflation, monetary policy would need to be of nondiscretionary effects are the tax revenue increases tightened.Thelongtermincreaseincommoditypriceswill that will result from higher energy related income or feed into domestic inflation depending on the exchange profits made by oil and gas corporations. Azerbaijan, rateandmonetarypoliciesfollowedbycountries,thetaxes Kazakhstan and Russia have various taxes on oil and/or andsubsidiestheyimposeonthesegoods,howintegrated gasrelatedincome.Anothershortrunpositiveimpacton orisolatedtheirdomesticmarketsarefromworldmarkets, fiscalaccountscomesfromrisingtaxrevenuesonfoodand andthenatureofdomesticproduction.3 fuelimportswhicharesubjecttotheVAT.Increasesinthe valueofimports,giventaxrates,willraiserevenues,given Impact on external balances: Net food and energy inelastic demand in the short run. However, as demand importers will see deterioration in their current account andsupplyadjustovertime,theserevenuescoulddecline. balances4 with the magnitude depending on the impor- Countries face fiscal pressures because of the rising cost tance of net food and fuel imports in the economy.5 ofexistingsubsidiesintheagricultureandenergysectors. Current account deficits will need to be financed by an Discretionarychangesinfiscalpoliciessuchasreductions inflow of foreign funds or a reduction in demand. For or increases in subsidies have usually accompanied com- some vulnerable countries that are adversely affected in moditypriceincreases.Theseincludeareductionintaxes theshortrun,additionaldonorfinancingmaybeneeded. (e.g. VAT rates) to cushion the impact on consumers.6 3 Impacts of inflation on other macroeconomic variables such as These tend to worsen fiscal balances.To the extent that longterminterestratesortheshorttermimpactonthefinancial GDPgrowthisaffected,itwillalsoaffecttaxrevenues. sectorarenotdiscussedhere.Factorsconstrainingpass-throughof internationalpriceslowerthepriceelasticityofdemand.Seealso Impact on growth: Sustainedchangeinthetermsoftrade IMF2008/02. (TOT) affects growth as does volatility in the terms of 4 Totheextentthatfoodandfuelpurchasesaredeterminedbylong trade. Countries facing an increase in the terms of trade termcontracts,theeffectofrisingpricesonexpenditureswillbe would see higher growth; higher volatility in the terms muted. of trade can be expected to have a dampening effect on 5 Shorttermpriceelasticitiesofoildemandaregenerallybelievedto growth.Severalempiricalpapershaveassessedtheimpact below.IMF(2005),estimatesittorangefrom0.03-0.08.Thus ofchangesintheTOTongrowth(Annex1).Inaddition incomeeffectstendtodominateoilmarkets.Evensmallchanges insupplycanhavelargeeffectsonshorttermprices.Iflongerterm totheincometransferrelatedtoTOTchanges,theenergy priceelasticitiesarehigherthanshorttermones,thenshortterm priceswilltendtoovershootlongertermone. 6 SeealsoIMF2008. (contnuedonpage8) Box 1 (contnuedfrompage) priceincreaserepresentsasupplyshock.Fuel,beingafac- betweenoilpriceincreaseswhichtendtobecontraction- tor of production, also affects growth/GDP through the ary and oil price decreases which are less expansionary followingchannels.Thehighercostofoilwillreducethe thanincreasesarecontractionary.Theshortruncontrac- useofoilandproducerswillsubstitutetootherfactorsas tionary effects of oil price increases are enhanced when possible,butwillalsolowertheiruseoflaborandcapital. factorsofproductioncannotbeeasilyreallocatedbetween Onthedemandside,oilpriceincreaseswilltendtoreduce sectors.8 non-oildemandandlowerinvestmentinimportingcoun- Poverty effects: Inflationinfoodandfuelpriceslowers tries. In addition, oil price changes affect inflation and the purchasing power of poor people as food is often a exchangeratesandtherefore(givenmonetarypolicy)affect large share of the poor' s consumption basket. aggregatedemand.7Estimatesoftheeffectsofoilshocks Theimpactwilldependverymuchonthetypesofcoping vary but the effects have been found to be asymmetrical mechanismsthatareavailableintheshortrun. 7 For example, higher oil prices may mean higher money demand (realbalancesfallwithinflation)andthereforehigherinterestrates andlowereconomicgrowth.(BrownandYucel,2002). 8 Hamilton,(2009). 8 SECTIon 1. WoRld CommodITy mARkETS And PRICES 6. Non-energy commodity prices Figure 1: Energy and Food Price Indices rose for eight consecutive months FoodPricesHaveSurpassedTheir2008Peak through February, crude oil prices 2000=100,constant2000US$ for seven.Figure1belowshowsthe evolution of world food and energy prices since 2005.The energy price index is still below its July 2008 peak,thoughtheWorldBank(WB) food price index had matched the peakofJuly2008byJanuary2011. Theincreaseinfoodpricesin2010 represents a generalized increase in thepricesofseveralcommodities.In theECAregion,wheatisanimpor- tant staple. Wheat prices are still belowtheir2008peak(Figures1-2). 7. Commodity market developments reflect a combination of temporary and permanent fac- biofuelshaveaffectedgrainprices.Intheshortrun,volatile tors. Risingincomesaroundtheworld,andparticularlyin weatherconditions(suchasRussia'sdroughtandAustralia's emerginganddevelopingcountrieshaveincreaseddemand floods)havesignificantlyaffectedworldwheatsupplyand forfoodandfuel.Inaddition,supplyfactors,relatedtofuel prices while temporary policy changes by major exporters supplyconstraintsandinventorieshaveaffectedpricesboth orimportershavetendedtopushpricesabovelongerrun intheshortandoverthelongerrun,whilepoliciesregarding trends. To the extent that many commodities substitute foreachother(e.g.cornversuswheatorrice),increasesin Figure 2: Wheat Prices are Still Rising thepriceofonegoodhavetranslatedinto Wheat,Canada,US$/mt,current increasesinthepricesofothergoods.Inthe longrun,thesupplyelasticityoffoodcould be substantial both in the ECA region itself and globally, and larger than that of conventionalenergyforms.9,10Intermsof 9 Commoditypriceboomsareusuallyfollowed by periods of falling prices as supply condi- tions adjust, but the substantial decline in commodity prices during 2009 was due in large part to the global economic crisis and slowdownineconomicactivity.Inthecaseof food,theweatherwasalsofavorable. 10 IMF,2008,Chapter5 volatility, both food and energy prices have become more Ukraine are also significant wheat exporters that have the volatiletodaythantheyhavebeenintherecentpast. potential to affect world markets. However, due to poor weatherconditions,Russiawasanetimporterthisyear.11 8. Among ECA countries, fuel is a principal source of export earnings for Azerbaijan, Russia, Kazakhstan 11 Azerbaijan, Kazakhstan, Russia,Turkmenistan and Uzbekistan ben- and Turkmenistan. For Tajikistan and Ukraine non-fuel efitedthemostfromtermsoftrade(TOT)changesin2006-08while commodityexportsareimportant.Russia,Kazakhstanand TOTworsenedforcountriessuchasArmenia,andTajikistan. 0 SECTIon 2. mACRoEConomIC ChAnnElS 2.1.FoodandEnergy Figure 3: High Food and Energy Price Inflation in Many PriceInflation ECA Countries, 2010 9. Food price inflation varies substantially among ECA countries with poorer coun- tries tending to experience higher inflation rates. Food price inflation was over 20% in two countries in 2010- the Kyrgyz Republic and Georgia. For another nine countries, it was over 10% (Figure 3). For almost a third of ECA coun- tries, the weight of food in the consumption basket used to estimate the CPI is around 50%.12,13 For another 20% it accounts for around 40% of the CPI.Thus, any changes in food price inflation have a sig- nificantimpactonoverallinfla- Figure 4: Poorer Countries Have Higher Food Price Inflation tion rates. Ukraine had food price inflation of 10.6% and thefoodweightintheCPIwas 53.5% while Armenia's food price inflation was 15.2% and the share of food in the CPI 48%.Asagroup,theCaucasus experienced the highest food 12 Amongthelowerincomedecilesfood accounts for a larger share of con- sumption than for the upper income deciles.InAzerbaijan,foodaccounted for 66% of the consumption basket of the two lowest income deciles; in Armeniaitaccountedfor63%. 13 Some importing countries did not allowfullpass-throughofinternation- alpricesintodomesticprices(in2007, anIMFsurveyshowedthatlessthanhalfasampleof43developing inflationinemergingeconomies.Thefirstroundeffecton2007cur- and emerging market countries allowed for full pass-through). In rentaccountbalancesexceeded1%ofGDPindevelopingcountries 2007,foodpriceinflationaccountedforalmost70%of2007headline (IMF,2008). priceinflationwhiletheBalkans Box 2: Variation in Evolution of Food Prices in faced the lowest (see also Box Selected ECA Countries 2). Figure 4 shows that poorer countries tended to have higher Foodpricesreflectvaryingconsumptionbasketsindifferentcountries,though food price inflation.The reason breadisamajorstapleinallECAcountries.Breadpriceincreasescanhavequite for this pattern may be related significanteffectsontheoverallCPI,andsignificantsocialeffects.InTajkstan, to differences in the abilities of whichimportssubstantialamountsofwheat,wheatpriceswere37%higherin markets in these countries to DecemberthaninJune2010.IntheKyrgyzRepublcbreadpriceshavenotrisen respond to supply or demand to their 2008 peaks, though different cities are facing varying inflation rates. changes. For example, suppliers The most noticeable increase in food prices in Azerbajan was for imported inrichercountriesmayhavebet- breadgrain.SinceSeptember,flourhasbecomeupto20%moreexpensiveand terstocksordistributionsystems inBaku,thepriceofloafhasrisenbyone-third.Thebreadpriceincreaseis andcanmoderatetheimpactof observedparticularlyinurbanareaswhereimportedflourplaysagreaterrolein priceshocks. meetingdomesticdemand;wheatismostlyimported.In2010,importsofgrain 10. Energy price inflation also var- fromKazakhstanhavedoubledreplacingimportsfromRussia. ies substantially across coun- InUzbekstan,foodpricesareregulatedanditimports1/3ofdomesticwheat tries, being highest in the consumptionneeds.Russahasexperiencedtheworstdroughtindecades,con- low and lower middle income tributingtoalargedropintheharvestandhigherfoodprices.Intheperiod country group (LLMIC), on June-December2010,foodpricesrose7.7%.InAlbana,contrarytotheexpe- average.14 Energypriceinflation riences of many other ECA countries, recent concerns have mostly centered is25%ormoreinMoldovaand around weather-related increases in the prices of vegetables; bread prices are Uzbekistan and around 10% or beginningtoincreasebuttheyarenotaroundprevioushighs.Foodprices,espe- more in another 13 countries ciallybreadandcerealsprices,beganclimbingrapidlyinKosovofromAugust (Figure3)includingtheBaltics, 2010.ThebreadandcerealsCPIinDecember2010stoodat169.0compared and Hungary as well as, Russia, to160.4inMay2008.Otherfooditemswithlargepricehikesareoilsandfats. Uzbekistan and Tajikistan. InFYRMacedona,overallfoodinflationwasonly3.2%in2010.Thismasks Uzbekistan,whichhadthelow- relativelylargedifferencesbetweenproducts.Pricesof"oilsandfats"increased estfoodpriceinflationrate,had by 35% and fruits were almost 13% more expensive. In contrast, bread and the highest energy price infla- cereals prices only increased by 0.7%, while prices of vegetables actually fell tion rate, whereas the Kyrgyz by4.6%.LowwheatyieldsinSerbathisyear,combinedwiththeincreasein Republic suffered high inflation wheatpricesglobally,mightleadtoasharpincreaseinflourandbreadprices. ratesonboth(27%infoodand ProductionofsugarbeetandsunfloweriswithinaveragesforSerbiaandshould 15% in energy). Montenegro's havenoimpactonpricesofsugarandoil. decline in energy prices is strik- ing and is the result of a sub- stantial increase in domestic hydro-energy production as well as a decline in business of12.1%and11.6%respectivelybutoverallinflationwas demand reflecting the fall in overall economic activity.15 only5.4%. Though the increases in food and energy price inflation 11. The impact of world commodity price changes on are large for many countries, not all countries with very domestic inflation is affected by several policy related highinflationrateshadoverallhighinflationasthecom- factors.Policiessuchastaxes,pricecontrolsandsubsidies, binedweightofenergyandfoodintheCPIisnothigh. limit the pass through of international price increases to Estoniaforexample,hadhighfoodandenergyinflation domestic inflation. In the past for example, some ECA 14 The LLMIC group includes Armenia, Georgia, Kosovo, the Kyrgyz countries temporarily reduced taxes on food/energy, in Republic,Moldova,Tajikistan,UkraineandUzbekistan. order to limit price increases. Changes in exchange rates 15 Inaddition,regulatedpriceswereloweredin2010,tocompensatefor relative to the dollar, and the currency in which com- largeincreasesin2009. modity prices are quoted, could Figure 5: Some Countries Have Large Trade Deficits in Food and haveasubstantialeffectoninfla- Energy; a Few Have Very Large Surpluses tion. Many ECA countries have exchange rates pegged to the euro;iftheeurodepreciatesrela- tivetothedollar,thesecountries willseeanincreaseinfoodprices even if world prices do not rise. Countrieswithflexibleexchange rates, if their exchange rates depreciate relative to the dollar, will face the same fate. If mon- etary policy remains or becomes expansionary, then inflation in food prices may be sustained. It is important to remain alert to inflation risks particularly in the contextofbothvolatileandrising commodityprices,buttheinfla- tionrisksofmonetaryeasinginECAcountrieshavetobe topexportersintermsofGDPwereUkraine,Belarusand weighedagainstthenegativeeffectofmonetarytightening Serbia. Neither Russia nor Kazakhstan, both top grain onthenascenteconomicrecoveryandoncountries'finan- producers,werenetfoodexporters;theseveredroughtin cialsystems. 2010hasledRussiatobeawheatimporterthisyear. 14. Seven LLMIC countries in ECA have energy trade 2.2.CurrentAccount deficits of 7% or more of GDP. In addition, Ukraine, 12. The immediate impact of changes in commodity prices Belarus and Bulgaria are very dependent on energy on the current account will vary according to whether imports.17Apartfromtheoilandgasexporters(OGE)18 the country is a net exporter or importer of food and andUzbekistan,mostEUmemberandaccessioncountries energy products, and the volume of trade in these com- are less dependent on energy imports, with exceptions modities. Overthelongerrun,quantitiesdemandedand beingBulgaria,andLithuania,bothofwhichhaveenergy supplied change in response to price changes; however, trade deficits above 6% of GDP. As food production is in the short run, it is assumed that quantities imported widespreadbutenergyproductionislessso,thevariation do not adjust as the demand for food and energy tends in the food trade balance is between 2.7 and -8.2% of to be inelastic in the short run.16 The magnitude of the GDPwhilethatforenergyisbetween44.8and-20%of initialdeficitsinfoodandfueltradebalanceshelpprovide GDP (reflecting standard deviations of 2.96 and 12.40 anestimateofthemagnitudeoftheinitialimpactofan respectively). increaseincommoditypricesonthecurrentaccount. 15. Some ECA countries have high combined food and 13. Five LLMIC countries, Albania, Armenia, Kosovo, the energy trade deficits and their external balances are Kyrgyz Republic, and Tajikistan have food trade defi- sensitive to commodity price changes. Five LLMIC, cits around or above 5% of GDP.Amongmiddleincome Armenia, Georgia, Kosovo, the Kyrgyz Republic and countries (MIC), Bosnia-Herzegovina and Montenegro alsofallintothehighdeficitcategorywherenetimports 17 Insomecountries,suchasBelarusandUkraine,energypricesarenot accountfor7.1%and-21.7%ofGDPrespectively.Several marketdeterminedbuttheresultofagreementsbetweenthecountries ECA countries were net exporters of food in 2010; the andRussia.However,thesepriceshavebeenadjustedasworldprices haveincreasedinrecentyears(seeEnergySection). 16 Theremaybesubstitutionbetweenproductsandtonon-tradeditems 18 CountriesthatareoilandgasexportersincludeAzerbaijan,Kazakhstan intheshortrunbuttheseeffectsarenotconsidered. andRussia. 3 Tajikistan,andtwoupperMICsBosnia-Herzegovinaand Table 1: The Impact of Increased Food and Montenegro,havethehighestfoodandfueltradedeficits Energy Prices on the Trade Balance atover10%ofGDP.Bycontrast,Polandhassubstantial May Be Significant coalreservesandalsoimportsfuelfromRussiabasedon long term contracts which limit price volatility. Poland Food and Change in alsohasasmallsurplusonitsfoodaccount.ThusPoland Energy Food and Food and Trade Energy islessvulnerabletoafoodandfuelpriceshockthanare Energy Balance, Trade the countries mentioned above.19 As Figure 5 shows, Trade % GDP, Balance, Azerbaijan, Kazakhstan and Russia have large combined Balance, 30% price % GDP, 30% Country % GDP increase price increase trade surpluses because of the surplus in energy trade. Overall,theimpactofenergypricestendstobehigheron Azerbaijan 45.3 58.9 13.6 thecurrentaccountthantheimpactoffoodpricesbecause Kazakhstan 22.9 29.7 6.9 theproductionoffoodtendstobewidespreadwhilepro- Russia 15.6 20.3 4.7 ductionoffuelismuchmoreconcentrated;consumption Uzbekistan 9.6 12.5 2.9 offuelislinkedmorecloselytotradeinfuel. Poland -1.7 -2.2 -0.5 16. Estimates of the impact of rising food and fuel prices Estonia -2.1 -2.7 -0.6 on the trade balance shows substantial potential deterioration for a few countries.Whileeachcountry's Romania -2.5 -3.2 -0.7 overall food and fuel balance depends on the prices and Hungary -2.9 -3.8 -0.9 shares of individual commodities in the trade basket, a Serbia -3.0 -3.8 -0.9 first approximation of the impact of price increases on Turkey -3.6 -4.7 -1.1 thetradebalanceisdoneassuminganaverageincreaseof 30%inthepricesofimportsforallcountries.20Increases Czech.Republic -3.9 -5.0 -1.2 in food prices have a positive trade impact on exporters Croatia -4.8 -6.2 -1.4 offood.ThenumberspresentedinTable1showpossible Latvia -4.8 -6.2 -1.4 impacts.Thetableshowsthata30%increaseinthevalue Slovenia -5.1 -6.6 -1.5 ofthenetfoodandfuelimportbasketraisesthetradedefi- citforfiveLLMIC,Armenia,Georgia,Kosovo,theKyrgyz Lithuania -5.1 -6.7 -1.5 Republic and Tajikistan by over 3 percentage points of Slovakia -5.7 -7.4 -1.7 GDP.Bosnia-HerzegovinaandMontenegroamongMICs, Belarus -7.2 -9.4 -2.2 alsohavepotentiallylargeimpactsontheirfoodandfuel Albania -7.6 -9.8 -2.3 deficits.21However,totheextentthattherearesimultane- Ukraine -8.3 -10.8 -2.5 ous increases in the prices of commodities exported, the impactofrisingfoodandfuelpricesontheoverallcurrent Bulgaria -8.4 -10.9 -2.5 account balance would be reduced. For example, rising Moldova -8.6 -11.1 -2.6 cotton prices mean higher export revenues forTajikistan FYR.Macedonia -8.6 -11.2 -2.6 whileFYRMacedoniabenefitsfromhigherpricesformet- Armenia -11.4 -14.8 -3.4 alsthatitexports. Bosnia-Herzegovina -12.7 -16.5 -3.8 Tajikistan -16.3 -21.2 -4.9 19 The terms of trade decline in 2010 is estimated to be 3% for the KyrgyzRepublic,and3.5%forTajikistan.Georgiasawanimprove- Kosovo -16.5 -21.4 -4.9 mentof2.6%. Georgia -17.8 -23.1 -5.3 20 Thecorrelationbetweenfoodandfuelpriceshasalsoincreasedover Montenegro -17.8 -23.1 -5.3 timeIMF(2008). 21 Totheextentthatpricesandquantitiesaresetbylongtermcontracts, Kyrgyz.Republic -25.2 -32.8 -7.6 theywillnotbeaffectedimmediately.Itisassumedinthisstatement Source: World Bank staff estimates based on National Sources thatpricesadjustfastbutquantitiestakelongertoadjust. 17. If the combined deficit in food Figure 6: High Trade Deficits in Food and Energy Accompany and energy trade is large and High Current Account Deficits the country already has a sub- stantial current account defi- cit, then its external account is vulnerable to increases in prices. Countries with high foodandfueltradedeficitsand high current account deficits may face external financing needs/constraints. In contrast, if the country is running a current account surplus, an increaseinthefoodandenergy trade deficit will reduce the surplus (or if large enough turnitintoadeficit)butthese countries are not considered vulnerableasthesechangeswill notstrainexternalbalances.Acountrythatisalreadybor- OGEwillreapfurtherbenefitsfromrisingfuelprices;two rowing large amounts of funds from abroad to finance oftheOGEalsoproducesubstantialamountsofwheat. domestic demand, may find it difficult to borrow more. Thus, the increase in food and energy prices, assuming 2.3.OutputandGrowth thatothergoodspricesareconstant,couldhaveasignifi- 18. There have been substantial changes in the terms of cantimpactonthosecountriesthatarelargenetimporters trade of ECA countries in recent years. Commodity of food and energy products and also have large current pricechangeshaveledtolargeincometransfersbetween accountdeficits.22InFigure6,thelowerthecountriesare commodity exporters and importers that have differed inthebottomleftquadrant,themorevulnerableistheir substantiallyfromyeartoyear,particularlyduring2007- externalaccounttoatermsoftradeshock.Amongthese 2010. In 2008-09, the effect of the downturn in the countriesaresixLLMIC,Armenia,Georgia,Kosovo,the global economy overtook the underlying trend of rising KyrgyzRepublic,MoldovaandTajikistan.Exceptforthe commodity prices. In 2010, these trends are again vis- Kyrgyz Republic and Tajikistan, they all have current ible. In addition, increases in energy prices represent a account deficits of 10% or more in 2010. However, the supplyshocktofirmsasenergyisanimportantfactorof Kyrgyz Republic andTajikistan have among the highest production.24 Estimates indicate that Albania's terms of deficits in food and fuel (-25.2% and -16.3% respec- tradeimproved12%in2009(thusbufferingthedecline tively). In addition, four other MICs, Albania, Belarus, ineconomicactivityresultingfromtheglobaldownturn) Bosnia-Herzegovina, and Montenegro have vulnerability butdeteriorated12%in2010.Ukraine,ametalandwheat on external accounts.23The EU10 on average will show exportersawtheopposite:a12.6%declineintheTOTin muchsmallerimpactsontheirexternalaccountsandthe 2009wasfollowedbyanimprovementof2.9%in2010. FortheOGEexporters,theimpactoftheTOTimprove- 22 TableA1intheAnnexliststhecountriesintermsofincreasingdeficits ment was muted by the extent of food imports; Russia, in food and energy trade and also in terms of their overall current traditionally a wheat exporter, became a net importer of accountdeficitsatend2010.Thethirdcolumnordersthemaccording tothesizeoftheircurrentaccountandfoodandenergytradebalances. wheatin2010.Theextentandnatureoftheresponsein Thatis,thecountrywiththesmallestdeficit(largestsurplus)onfood economiesdependsonhowmuchoftheoilpricechangeis andenergyandthatalsohasthesmallestcurrentaccountdeficit(larg- perceivedtobepermanentortemporaryandhowmuchthe estcurrentaccountsurplus)istheleastvulnerable. 23 AlbaniaandMontenegrohaveobtainedfinancingontheEurobond 24 While there are other explanations for the impact on GDP and markettomeetfinancingneeds. growth,thissectionfocusesonthesetwochannels. 5 increased uncertainty in global Figure 7: Some Countries With a Substantial Dependence on Energy markets (reflected in price vola- Imports also Have High Energy Intensity tility) will deter investment. Though it is often hard to distinguish between temporary and permanent components of shocks, the recent upsurge in oil (and overall food and fuel) prices is believed to have a strong permanent component due to the factors discussed in Section 1. 19. ECA countries' growth Energy Intensity, 2007 impacts will be differentiated Sources: World Development Indicators, World Bank Note: Net trade Figures are for World Bank staff estimates based on National Sources 2010; energy intensity for 2007. by the particular commodi- ties they export and import, the value of exports and imports and the evolution of market conditions over be greater in these countries. In addition, the larger the net time, and, in the case of energy, on the energy intensity energy trade deficit, the greater the TOT impact. Taken of GDP. For example, even if the rise in the price of oil has together, these two aspects are important determinants a negative immediate impact on importers, many of them of fuel price increases on output. Kazakhstan, Ukraine, export commodities such as metals or cotton whose prices Turkmenistan and Uzbekistan have energy use per value are also rising; the rise in these prices would mitigate the of GDP, far above the other ECA countries. Figure 7 negative effects for food and fuel importers. The longer shows ECA countries along two dimensions: net trade in run impacts may differ from the immediate or shorter energy as a ratio to GDP and energy intensity. Among the run impacts. Box 3 examines the impact of an oil price OGE, Azerbaijan, Kazakhstan and Russia are very energy shock on the GDP of ECA countries. Models examining intensive (they are not shown as they are energy exporters. the effect of oil price shocks give varying results because of The further down countries are in the lower right hand the different assumptions they make and the magnitude of corner, the more vulnerable they are to a negative GDP the price changes they examine. The two most important from the oil price increases.32 These countries are Belarus, (non-policy) channels considered are the TOT effect and the Kyrgyz Republic, Moldova, Tajikistan, and Ukraine. the importance of energy in production. The net trade in On average, the EU 10 countries are the least vulnerable. fuel (in this case oil) reflects the magnitude of the overall effect on income from energy price changes.25 The energy 2.4. Fiscal Impact intensity of GDP reflects the importance of GDP in the 21. The fiscal impact of the food and energy price increases production process and thus the magnitude of the shock is large and positive for energy exporters. The fiscal to production. impact of food and fuel price increases depends on some 20. The energy intensity of GDP has declined over time non-discretionary (or automatic) changes in revenues: for ECA countries on average, but some still have however, usually governments adopt fiscal policies to high energy intensity, reflecting countries' different mitigate the impact of rising prices in revenues. This sec- economic structures, energy pricing policies and tech- tion will briefly consider both aspects. The most obvious nological efficiency in energy use. Countries that are sources of fiscal impacts are three: taxation of profits/rev- more energy intensive are more vulnerable to an oil price enues of energy companies, subsidization of consumption shock, as the effect on production from high oil prices will of food and energy, income support in production (e.g. 25 The net trade in food and fuel would be a wider proxy for the magni- 32 This statement reflects the importance of oil in their economies but tude of the overall commodity TOT effect on growth. does not account for compensating TOT effects. Box 3: Modeling an Increase in the Price of Oil AWorldBankmacroeconomicmodelwasusedtoexamine occurs in a context of rising commodity prices overall theimpactofanoilpriceshockonGDPandgrowthin which is a more realistic scenario than assuming that all ECAcountries,assumingthatthisisapermanentshock. other prices are constant.These model outcomes reflect Oil prices averaged US$79 a barrel in 2010, up from the impact of changes in the respective country's overall around US$62 a barrel in 2009. In this scenario it is TOT and the global (trade) transmission mechanisms.29 assumedthatoilpriceswillrisefurthertoaverageUS$85 TheimpactoftheoilpriceshockontheECAregionison in 2011 and vary between US$90 and US$95 during parwithwhathappensindevelopingcountriesinaggre- 2011-2015,26 compared to a baseline view that sees the gate. Other estimates show much larger effects because long run equilibrium price of oil at US$83 /bbl in real (a)theyassumethatthepricesofothercommoditiesdo terms.Thebaselineprojectionsforthetermsoftradeinthe notchange;(b)theyassumemuchlargerincreasesinthe modelassumethatothercommoditypriceswillalsoevolve price of oil; and (c) some take account of asymmetric according to trend.27 The impact of an oil price shock adjustmentcosts.Inaddition,someestimatesincludethe depictsascenariowherethebaselineoilpriceincreasesby costsofvariabilityintheTOT.Estimatesoftheeffectof US$10 over and above the projected baseline trend over a similar increase in oil prices have been around 0.4% theentireperiod;i.e.itisapermanentshock.Themodel of GDP for the US. Another paper (Jimenez-Rodriguez islinearinitseffects.28 Simulationsindicatethatboththe andSanchez,2004)estimatesthatinthepre-2008period impactandlongertermeffectsonGDPandGDPgrowth output losses resulting from a doubling of oil prices30 are relatively small, with GDP levels in the ECA region wouldbeintherangeofupto3-5%inindividualeuro declining by about 0.06% in 2012; the effects rise to a areacountries.However,atpresent,indicationsarethatoil cumulative0.12%by2015.Animplicationofthelinearity pricesareunlikelytodoublefromtheir2009levels,evenif ofthemodelisthatanotherUS$10increaseintheprice theyhaverisensubstantiallyin2010.Someotherstudies of oil could double the impact on GDP and so on.The (conductedpriortothe2006-08boom)havefoundGDP effects are negligible as oil exporters such as Azerbaijan, wouldbe0.4%lowerinayearinOECDcountriesifoil Kazakhstan and Russia make up for GDP losses in oil- pricesincreasedUS$10abarrel.31Inaddition,someesti- importingcountrieselsewhereintheregion. matesincludethecostsofvariabilityintheTOT. TheimpactontheEU12(EU10plusCroatiaplusTurkey) is also marginal,while the impacton the oil exportersis 29 Itisimportanttonotethatintheoilshockscenarioanalysis,it positiveandlarger,theimpactonlargenetoilimporters wasassumedthatoilpriceschangebyUS$10/barrelabovethe negative.Thebaselinesimulationsalsoprojectanincrease expected baseline trend increase in the price of oil and other commodities.Inreality,manycommoditypricestendtomove inothercommodityprices,notjustoil.Thus,theoilshock in tandem, and the impact on a respective country's terms of trade could be exacerbated/softened depending on how other 26 Baselineassumptions,DEC,WB. pricesrespondwhenoilpricechange.Also,itwasassumedthat 27 BaselineprojectionsaretakenfromtheWB(2011a). exchangeratesremainunchangedfromthebaselinescenario. 28 RecentevidenceusingnonlinearspecificationsforOECDcoun- 30 Thisstudyusesbothlinearandnon-linearestimation. triesfoundlargeimpactswhenoilpricesdoubled. 31 IEA,(2004). in agriculture), or tax revenues arising from increased/ from the taxation of energy. Energy's share in revenues reduced VAT on consumption. Tables 2 and 3 on the increased dramatically during the energy price boom in next page show the amount three oil and gas export- 2006-2008 for Azerbaijan and more moderately for the ers have collected in revenues over the last decade from othertwo.Thevolatilityinrevenuesisvisible:revenuesfell energy exports. Azerbaijan's dependence on oil revenues dramaticallyasashareofGDPinallthreecountriesduring isremarkableasthree-fourthsofitsfiscalrevenuescome 2009,buttheincreasein2010isalsosubstantial.Withoil Table 2: Oil and Gas Revenues, % Share in Total Fiscal Revenues 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Azerbaijan 22.0 12.9 39.9 44.3 38.0 39.2 49.3 53.1 73.9 65.8 75.5 Kazakhstan 14.8 18.8 15.5 21.4 26.3 33.1 35.0 27.6 42.8 35.2 41.4 Russia -- 16.2 15.1 15.0 31.2 24.3 27.5 26.5 26.8 22.1 25.0 Average 18.4 16.1 23.5 26.9 31.7 32.4 37.6 36.0 45.8 41.7 44.7 Source:.World Bank staff; National Sources Table 3: Oil and Gas Revenues, % of GDP 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Azerbaijan 4.5 2.4 10.8 12.3 10.2 9.9 13.4 15.2 38.3 27.4 36.6 Kazakhstan 3.2 4.7 3.5 5.3 6.2 9.4 10.0 8.1 12.3 8.1 11.4 Russia -- 6.5 7.5 6.0 12.4 10.2 11.1 10.6 10.4 7.6 8.6 Average 3.8 4.5 7.3 7.9 9.6 9.8 11.5 11.3 19.8 14.3 17.8 Source: World Bank staff; National Sources pricescontinuingtorise,themajor Table 4: The VAT Effect: Increased Tax Revenues from Food oilexporterswillhaveachanceto and Energy Imports replenishthereservestheyhadput aside from oil revenues before the 2010 Increase of value of imports by 30% global crisis.33 They may also use Imports of Food Increase in VAT Increase in VAT and Energy, collection, % of collection, theserevenuestomitigatethenega- VAT rate, % % GDP total 2010 revenue % of GDP tivedistributionalimpactofrising Armenia 20 13.07 3.3 0.78 oilpriceswithinthecountries.All threecountrieswillneedtoensure Bosnia-Herzegovina 17 18.82 2.2 0.96 thattheiroilfundsareusedstrate- Bulgaria 20 19.00 2.9 1.14 gically and that reserves are built Georgia 18 19.89 3.7 1.07 up to handle volatility in markets Ukraine 20 17.60 2.4 1.06 when needed. In these countries, animportantissuewillbepotential Source: World Bank staff estimates based on National Data currencyappreciationanditseffect onotherexports. nextpageshowshowanincreaseof30%inthevalueof importscouldhaveasubstantialincreaseinVATrevenues. 22. Higher prices for food and fuel, whose demand is Inthetablebelow,itisassumedthatimportsareattheir relatively inelastic in the short run, mean higher VAT 2010levelsbutthatcommoditypricesincreaseby30%.34 revenues. InECAcountries,VATrevenuesincreasewith Thisisnotaslargeanincreaseasitmayseemgivencur- increasesinthevalueofimports;thequantitiesimported rent commodity price increases.The price of oil was as offoodandfuelareassumedtobemostlyunchangedinthe lowasUS$62abarrelin2009andisalreadyexpectedto shortrun,butasimportsadjust,the"VATeffect"declines. average around US$85 in 2011.The table shows that a Overthelongerrun,thepricechangesareexpectedtobe 30%increaseinthefoodandenergyimportvaluecould moderatedbychangesindemandorsupply.Table4onthe 34 Thiscouldbeduetoanincreaseindollarpricesoracombination 33 InRussia'scaseforexample,theoilstabilizationfundwasusedtofund ofacurrencydepreciationrelativetothedollarandanincreasein thelargefiscalstimulusduring2008-09. thedollarpriceofimports. 8 raiseVATrevenuesbyaround Box 4: The Hidden and Rising Fiscal Cost of Cheap Energy in Belarus 1% of GDP in the countries below. The larger the initial In Belarus, the energy market is substantially affected by rising prices for energy importbill,thegreaterwillbe importsfromRussia.BelarusisheavilyreliantonnaturalgasimportsfromRussia the potential positive impact whichitobtainsatbelowmarketprices.Belarusgeneratesabout97%ofitselectric- on revenues, all else given. ityfromnaturalgasbasedthermalpowerplants,while87%ofitsheatgeneration However,changesindemand is based on natural gas. While import prices for natural gas and oil continue to and supply conditions will be below European market prices, as a result of Russia's drive to introduce mar- change imports over time; if ket-based prices for its energy exports to the CIS countries (Albania, Azerbaijan, they are reduced, then the Belarus, Georgia, Kazakhstan, Kosovo, Moldova, the Kyrgyz Republic, Russia, "VAT effect" declines. Some Tajikistan,Turkmenistan, Ukraine and Uzbekistan), import prices of natural gas countries have reduced VAT more than tripled over the past 5 years, presenting the sector with significant ratesinpreviousyearsinorder challenges. tomitigatetheimpactofris- ing food and fuel prices on Reluctancetopassthroughincreasesinproductioncoststoresidentialconsumers consumers. In that case, the hasledtoadeteriorationofcostrecoverylevelsonelectricity,gasandheatsupplied table reflects the loss in rev- toresidentialconsumersandhasunderminedthefinancialviabilityofthesector. enuesresultingfromadecline Energytariffsforresidentialconsumershaveremainedflatinrealtermssince2005 in taxes proportionate to the keepinghouseholdexpendituresonutilityservicesinBelarusbelow10%ofhouse- priceincrease.Anyincreasein holdincome,muchlowerthaninmostcountriesintheregion.Lowpriceshave VATrevenuescouldbebetter underminedthefinancialviabilityandsustainabilityofthesector.Operatinglosses used to increase transfers to incurredbyutilitycompanieshavegrownto1.7%ofGDPin2009.Theyarecom- poor households in targeted pensatedfortheselossesthroughacomplex,non-transparentsystemofsubsidies social assistance systems, and accountingfor0.3%ofGDPand,toalargerextent,crosssubsidizationbetween toraisecoverageandadequa- commercialandresidentialconsumers,accountingfor2%ofGDPin2009. cyofthesesystems. While imposing a rising fiscal cost, energy subsidies are untargeted and largely 23. The fiscal impact of subsi- inequitable.Theybenefitthehigherincomepopulationthathashigherpercapita dies and transfers based on consumptionofenergy.45%oftotalenergysubsidiesforutilitiesflowstothetop current prices will increase 30%householdsintheincomedistributioncomparedto15%forthepoorest30% and adjustments will be ofhouseholds.Householdsinurbanareasreceive82%ofthesubsidy.Inaddition, needed to maintain a neutral persistentunder-pricinghasdeprivedenergysuppliersofthefinancingneededto fiscal impact. Governments carry out routine maintenance activities and investments reducing efficiency and in many countries provide reliabilityofenergysupply.Lowenergypricesalsodistortpricesignalstohouse- subsidiesandtransfersinvari- holds leading to energy inefficient consumption patterns while cross-subsidies ousformsforfoodconsump- betweencommercialandresidentialconsumersimposeanimplicittaxonthebusi- tion, agricultural production nesssector,addingtoanalreadylargetaxburden andenergyconsumption.The Respondingtogrowingfiscalpressures,theGovernmenthasbeguntoaddressthese costofmaintainingconsump- challenges. With energy costs expected to rise, the importance of higher energy tionsubsidies(preventingpass priceshasbeenwellrecognizedinBelarus.Torestorethefinancialviabilityofthe through of prices) increases sector, the State Program for the Development of the Belarusian Energy System whenthemarketpriceofthe (2011-2015)inAugust 2010callsforacomprehensive tariffreform andgradual commodity increases.35 This eliminationofcross-subsidizationinnaturalgassupplyby2013,andinelectricity andheatsupplyby2014.Ifimplementedasplanned,thesereformswillgenerate 35 In2008,theIMFestimatedfoodand significantfiscalsavings,buttheywillrequiresteepincreasesintariffsthatwillhurt fuel subsidies to amount to around the poorer households, necessitating compensating increases in the coverage and 2% of GDP in Ukraine and 6% of GDP in Turkmenistan (IMF 2008, adequacyoftargetedsocialassistance. Chapter3). is a source of fiscal strain. In some ECA countries for ManyECAcountriesareunderpressuretocontainexpen- example,consumptionofenergyissubsidized,particularly ditures. forhouseholds.Box4illustratesthenatureofsomeofthe 25. Countries with the largest fiscal deficits/debt will be quasifiscalissuesintheenergysector. under the greatest strain to rationalize fiscal systems, 24. Additional discretionary measures to protect consum- (for example, by reducing subsidies) when fuel prices ers (or agriculture producers) will raise fiscal costs. rise or if GDP rises less than expected. Georgia, the Another source of fiscal strain is the adoption of new Kyrgyz Republic,Tajikistan, and Ukraine have had defi- policiestoprotectdifferentgroupsinresponsetofoodand citscloseto6%ofGDPorabovein2010.Inaddition, fuel price increases. For example, countries may reduce Albania(arounda5%deficit),andtheKyrgyzRepublic taxes on food and fuel. Also, more people may become have debt to GDP ratios over 60%, while Armenia and eligibleforgovernmentsuppliedfoodatpricesthatdonot Georgia have ratios of 40% and 45% respectively. Some reflectcostsofpurchasingandstoringfood,whenmarket of the highest deficit countries are in the EU but their prices rise. Many ECA countries increased public sector economiesarelessvulnerabletooilpriceshocksand,these wagesandpensionsduringthelastcommoditypricesurge countrieshavesmallersubsidiestoenergyandfoodthan (2006-08),anactionthatwasasourceofunsustainablefis- dosomeofthelowerincomecountries.Amongthefiscally calexpansion.Intheensuingglobalcrisis,fiscalrevenues vulnerable countries, countries as diverse as the Kyrgyz plummeted. These policies strained fiscal budgets when Republic and Ukraine both have high fiscal deficits and tax revenues fell in 2009 and many are being reversed. significantsubsidies,oftenimplicit,forfuel. 0 SECTIon 3. PovERTy ImPACTS And ThE RESPonSE oF SoCIAl ASSISTAnCE SySTEmS 26. The food price increases are exacerbating the weakened and energy prices constitute a further negative shock to conditions of many households affected by unemploy- already poor households and strained fiscal systems. In ment and lower wages in the global crisis. The2010-11 addition, by lowering real incomes, they are expected to foodandenergypriceincreases,ifsustained,couldhavea throwadditionalpeopleintopoverty. strongernegativeimpactonpovertythandidthe2006-08 28. Simulations based on the most recent household survey priceincreasesastheyareoccurringatatimewhenECA data in each country indicate that average household countriesarejustbeginningtorecoverfromtheglobaleco- consumption in ECA may have fallen by as much as nomiccrisis.Thefirstroundofpriceincreasesoccurredata 5.3% in real terms.38 Food prices account for a large timewhenGDPgrowthhadbeenstrongforawhile,labor partofthatshock(4.1%ofthe5.3%),withthebalance marketsweretight,wageswererisingandremittanceswere coming from higher energy prices (Table 5). Because high.In2009-10,thesituationhasbeenverydifferent.In poor people allocate a larger share of their budgets to order to cope with unemployment, wage cuts and lower food,thesimulateddeclineinrealconsumptionfromthe transfersfrommanysources,householdsreducedsavings, foodpriceincreaseisapproximately5.7%inthepoorest increased borrowing, or reduced consumption (of both quintile,withlossesreaching7.0%whenbothfoodand goods and services such as health). Food consumption energypriceincreasesareconsidered.Unlesscounteractive declined- either in quality or quantity. Crisis Response measuresaretaken,thecombinedfoodandenergyprice Surveys in six countries indicate that food expenditures shockshavethepotentialtoincreasetheextremepoverty werecutduringthe2009crisis)36andhouseholdsputoff rate(belowUS$2.5/day)inECAfrom5.5%to6.7%.If expendituresthatcouldbedelayed(e.g.healthvisits,extra thisoccursitwouldtranslatetoanadditional5.3million expendituresforeducation,andsoon). peopleinECAlivingonlessthanUS$2.5perday.Growth 27. At the same time, governments used fiscal measures inincomesandwagesin2011willmitigatethisimpact. to protect households against income losses. In the AsshowninTable5,thefoodpriceshockisresponsible period prior to the crisis, during the 2006-08 food and formostoftheincreaseinpovertyacrossallsub-regions energypriceincreases,manyECAgovernmentswerealso within ECA, as food is a much larger share of the con- increasing pensions and public sector wages. Given the sumptionbasketofthepoorestthanisenergy. significantweightofthepublicsectorintheseeconomies, 29. The projected impact across ECA countries is hetero- and the prevalence of poor pensioners, these measures, geneous, reflecting not only the differences in food and though untargeted for the most part and unsustainable, energy price inflation but also the differing conditions didalleviatethepotentialpovertyimpactsofrisingfood across countries. The negative impacts are expected to prices.ManyECAcountriesalsotooktheopportunityto be most pronounced in the low-income CIS countries begintorationalizetheirsocialassistancesystems,improv- of Central Asia and the Southern Caucasus, which are ingtargetingandcoverageofthepoor(seeBox5onnext among the poorest in ECA, with people having high pageandBox6inSection4).Theprogramsofparticular foodbudgetsharesandwhererelativelylargesharesofthe interest are the Last Resort Social Assistance programs (LRSA).37 The reforms initiated will take time to be implemented fully. Against this background, rising food 38 SeeAnnex2foradescriptionofthesimulationmethodologyanddata used.Theseestimatesdonotdifferentiatebetweennetproducersand consumersoffood:poornetproducersmaygain.Thepovertyimpacts 36 WorldBank(2011),Forthcoming. aregreateriftheyarenetconsumersofcommodities,andifothercop- 37 Thisisthelargestprogramthatistargetedinacountryandwiththe ingmechanismsfail(e.g.theydonothavesavingsorcannotborrow), primaryobjectiveofpovertyalleviation. andtheydonotsubstitutetowardscheaperalternatives. Box 5: Global Food Price Crisis and Safety Net Response: Experience of IDA Countries in ECA The implications of higher food prices for low-income In June 2008, the World Bank rapidly mobilized addi- ECA countries, where food represents a substantial part tionalfinancingofUS$6millionundertheactiveHealth of the household consumption basket (50-60 %), have and Social Protection Project (SWAP) to assist Kyrgyz been significant.The impact of the food crisis has been Republic in two ways: (i) to protect and improve the most severely felt in the three poorest countries in the healthandnutritionalstatusofvulnerablepopulationsby region ­ Moldova, the Kyrgyz Republic, and Tajikistan. providing nutritional supplements and nutrition educa- In2007,foodpriceinflationintheKyrgyzRepublichita tiontopregnant/lactatingwomenandinfantsandyoung recordhighamongECAcountriesat31.5%;inTajikistan, children;and(ii)tohelppoorfamiliesmitigatethefood it reached 27.5 %. With 28 % of its population living priceshocksandprotectconsumptionbyscalingupand in poverty, a sudden increase in food prices by 24 % in strengthening targeted cash transfers. The cash transfer May2008comparedto2007ledtoseriousfoodsecurity component was designed to "top up" the monthly pay- andsafetynetconcernsinMoldova.Thegovernmentsof mentsundertheUMBprogramtocompensatethepoor all three IDA countries requested World Bank assistance forthelossofpurchasingpowerlivingduetorisingfood on an emergency basis and obtained financing for safety prices. The European Commission supported this pro- netsandnutritionalsupplementsundertheGlobalFood gram. Higher institutional safety net capacity in Kyrgyz ResponseProgram(GFRP).39 Republic,duetotheexistingUMB,greatlyfacilitatedthe GFRPinvolvement. TheresponseoftheWorldBankinMoldova,TheKyrgyz Republic, andTajikistan built on active programs agreed In contrast, the state of existing safety net system in with the governments. The approach to addressing the Moldovadidnotofferthesameopportunitiesforscaling issuewasthesameineachcase:addingfinancingtoon- up.Atthetimeofthecrisis,Moldovawasspendingnearly going Health and Social Protection projects. Since these 1.4 % of GDP on 15 cash transfer programs, none of projectswerealreadyinplace,theyprovidedaconvenient whichwerewelltargetedtothepoor.However,Moldova waytodeliveradditionalandrapidfinancingtomitigate operatedanetworkofspecializedinstitutionsthatprovid- theimpactofthecrisis.Inaddition,existingclientrelations edsocialservicestovulnerablegroups;thisnetworkserved and the extensive knowledge base that had already been as a basis for leveraging the GFRP response. The WB's developedwiththeseoperationsfacilitatedtheprocess. HealthServicesandSocialAssistanceProjectreceivedan additionalfinancingofUS$7millionundertheFoodPrice The Kyrgyz Republicalreadyoperatedamoderatelywell CrisisResponseTrustFund.Thoughtoppingupatargeted targeted program, the Unified Monthly Benefit (UMB). programwouldhavebeenpreferable,thisalternativedid succeed in providing additional funding for nutritional 39 The program was set up by the Bank in 2008 following the suppliesreachingvulnerablegroups,suchasorphans,the approvalofUS$1.2billioninfundsforthemostvulnerableand disabledandelderly.Moldovahasalsobeguntheprocess poorestcountries.Thisinitiativecomplementedtheeffortsofthe UnitedNationsHigh-TaskForceonfoodsecurity. (contnuedonpage3) populationareveryclosetothepovertyline.Thisisalso by600,000(Table6).Wheatprovidesmorethanhalfthe thesub-regionthathasseenthesharpestincreaseinfood caloriesintheaveragedietinTajikistan.InTajikistan,food prices.TheKyrgyzRepublicisprojectedtobetheworst andfuelpriceincreasescouldincreasetheextremepoverty affected country. In 2010 the price of wheat--which rate by 8.4 percentage points, as an additional 586,000 providesapproximately40%ofcaloriesconsumedinthat people fall below the extreme poverty line (US$2.5 per country--increased by 54%. In the absence of counter- day). In Georgia simulations show that extreme poverty vailing measures, food and fuel price inflation of 15.1% couldincreaseby9.1percentagepoints,whileinArmenia, couldincreasetheextremepovertyrateby11.4percentage extreme poverty could rise by 9.4 percentage points at points, increasing the number of extremely poor people 2010inflationratesforfoodandfuel. Box 5 (contnuedfrompage) ofestablishinganLRSAprograminresponsetothe2008 ofnutritionsupplementsandnutritioneducation,andto crisis.Thenumberofhouseholdscoveredinthepilotpro- improvethemonitoringofchildrenunderfiveinprimary gramhasincreasedfromaround20,000to50,000during carecenters.Decadesofmalnutritionofwomenandchil- 2010.TheWBisplanningtechnicalassistanceforexpan- drenhadalreadyledtowidespreadmicronutrient,vitamin sionofthisprogram. A, and iodine deficiencies. The food crisis raised fears thattheextentanddepthofthisproblemcouldintensify. Tajikistan did not operate an effective safety net that The additional financing thus focused on the provision could be leveraged to protect the poor when the food of maternal and child nutritional supplements and the crisis hit in 2008 and Tajikistan was only spending less involvement proved effective. Moreover, 1,200 primary than 1 % of GDP on safety nets. The benefits mainly care facilities received weighing equipment. To improve includedgas/energysubsidiesandacashtransferprogram. the effectiveness of the existing safety net system, the None of the programs were well-targeted or could trace Governmenthasjustlaunchedapilottestingthescoring distribution of benefits. Lack of a functional safety net formula(proxy-meanstest),andconsolidatedthetwolarg- system presented a challenge for the implementation of estsocialassistanceprogramsintoasingleone,targetedto the GFRP response. However, Tajikistan received US$4 thepoorest20%ofthepopulation. million in additional financing for the Community and BasicHealthProjectinJuly2008tosupporttheprovision Source:WorldBank(2011) 30. Higher food and energy prices may also lead to sub- 10%,butwerestillsubstantiallylowerthanthoseinthe stantial increases in the number of poor people unless SouthernCaucasusandCentralAsiancountries.Because countervailing actions are taken, though the poverty poverty rates are much lower in these countries, the rate increase would be small in large middle-income proportion of the population vulnerable to falling into countries such as Ukraine, Turkey and Russia. Food poverty or extreme poverty from a price shock is much and energy price increases in these countries exceeded smaller,rangingfrom0.2to1.6percentagepoints.Despite the small impact in proportional Table 5: Poverty Impact by Sub-Regional Groupings terms, these populous countries wouldcontributelargenumbersof Low- Middle- the"newpoor."Itisestimatedthat All income income Western thenumberofextremepoorcould ECA EU-10 CIS CIS Balkans increase by 1.2 million inTurkey, Baseline 600,000inRussia,and100,000in Poverty rate at US$2.5/day (%) 5.6 1.9 32.9 1 8.8 Ukraine.40 However, these effects Foodinflationonly would be muted as wages and Increase in poverty rate at US$2.5/day (% pts) 1 0.3 7.8 0.4 0.7 employment grow. For example, Foodandenergyinflation for Russia, there are indications Increase in poverty rate at US$2.5/day (% pts) 1.3 0.4 9.4 0.5 0.9 thatgrowthinwagesandpensions have mitigated the potential pov- Source:.ECA Databank (ECAPOV), World Bank; WB Simulations ertyimpactofhighprices. EU-10.countries.are: Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, Slovenia Low.income.CIS.countries.are: Kyrgyz Republic and Tajikistan Middle.income.countries.are: Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kosovo, Moldova, 40 Allthepovertyreferencesareforpov- Russia, Turkmenistan, Ukraine, Uzbekistan ertymeasuredatpeoplelivingbelow theUS$2.5adaylevel. Western.Balkans.countries.are:.Albania, Bosnia-Herzegovina, Croatia, FYR Macedonia, Montenegro, Serbia, Kosovo 3 31. The poverty impacts in the EU New Table 6: Simulation Results for Poverty Increases Resulting Member States and Western Balkans are from Higher Food and Energy Price Inflation expected to be modest in comparison to (US$2.5/Day) the effects on their neighbors. Ingeneral, Food and Energy foodpriceinflationhasbeenmuchlowerin Price Increases Food Price Increases thesecountries:lessthan5%inabouthalf Increase Increase of the countries, and surpassing 10% only in Estonia (11.6%) and Serbia (10.7%). Headcount Number Headcount Number Ratio of poor in Ratio of poor in Compared to other ECA countries, the (% points) 1,000s (% points) 1,000s EU-10, and to some extent the Western Albania 1.8 57 1.15 36 Balkans, tend to have lower food budget shares,lowerinitialpovertyrates,andlower Armenia 9.4 290 8.36 258 shares of the population that are only Azerbaijan 1.56 137 1.41 124 slightlyabovethepovertyline.Amongthese Belarus 0.12 11 0.12 11 countries the most negative impacts are expectedtohaveoccurredinEstonia,where Bosnia.Herzegovina 0.06 2 0.06 2 higherfoodandenergypricescouldincrease Bulgaria 0.57 43 0.42 32 extreme poverty by 1.5 percentage points, Croatia 0.07 3 0 0 and Romania, where the corresponding estimateis0.9percentagepoints. Estonia. 1.46 20 1.22 16 32. In the aggregate for the ECA region, the FYR.Macedonia 0.31 6 0.31 6 amount required to compensate poor Georgia 9.11 388 8.22 350 households for the losses associated with Hungary 0.21 21 0.12 12 energy and food price shocks is marginal, but there are large differences across Kazakhstan 1.47 233 1.47 233 countries. The compensation needed to Kosovo 2.09 38 1.92 35 offsetthenegativeshocksonthepoorisa Kyrgyz.Republic 11.37 605 10.69 569 function of the effectiveness of the social assistance programs and the proportion of Latvia 0.39 9 0.24 5 the increase in the aggregate poverty gap. Lithuania 0.28 9 0.15 5 Itisestimatedthatapproximately0.1%of Moldova 4.85 175 2.4 86 the ECA region's overall GDP would be needed to compensate the poor based on Montenegro 0 0 0.17 1 themagnitudeofthepriceshocksandeffec- Poland 0.14 54 0.08 31 tivenessoftheexistingprograms.Inmostof Romania 0.92 198 0.72 155 thecountries,theeffectofthepriceshocks on the extreme and moderate poor could Russian.Federation 0.42 603 0.37 518 beoffsetbymodesttransfersandcouldbe Serbia 0.75 55 0.63 46 distributed by the current social safety net Slovenia 0 0 0 0 programs.TheECAaveragemonetaryloss maskssignificantregionalandcountrylevel Tajikistan 8.43 586 6.01 418 differences.InadditiontheUS$2.5poverty Turkey 1.6 1,193 1.22 909 lineimpliesdifferentlevelsofpovertyindif- Ukraine 0.24 111 0.2 93 ferentECAcountries.Forexample,inlow incomecountries,amuchlargershareofthe Source: ECA Databank (ECAPOV), World Bank populationwillbedefinedas"poor"using Note:.Simulations reflect the increase in poverty rates from food and fuel price inflation at the rates experienced in 2010. this measure as opposed to Figure 8.1: Coverage of Poverty Targeted Programs Is Very Low in Some higherincomecountries.In ECA Countries the low and lower middle income countries where poverty is expected to increasethemost(Armenia, Georgia, the Kyrgyz Republic, Moldova, and Tajikistan), the additional fiscal cost of compensating the poorest 20% of house- holdsforthefoodandfuel priceincreaseswouldbeup to1%oftheirGDP. 33. In ECA countries, the capacities of social assis- Figure 8.2: Targeting Accuracy of Poverty Targeted Programs in ECA Varies tance programs to help among Countries buffer the price shocks vary widely.Safetynetscan be leveraged as important crisisresponsemechanisms. However, the ability of countries to respond with speed depends critically on the capacity of core social assistance systems before a crisis hits. Three aspects of social assistance systems that determine their ability toprotectthepoorarecov- erage, targeting and gener- osity. Coverage in this case refers to the portion of the Figure 8.3: Generosity of Poverty Targeted Programs in ECA Could Be poorest quintile receiving Strengthened in Some Countries transfers. Generosity refers to how much the transfer represents of post transfer consumption. Targeting refers to the portion of fis- calexpendituresreachingthe poorest.Theseareshownin Figures8.1-8.3.Fortunately, mostcountriesinECAhave at least one well targeted safety net program, and many also have additional 5 programs to protect vulnerable groups such as children accuracy, transferring more than 55% of total social andthedisabled. assistancebenefitstothepoorestquintile(seeFigure8.2). Finally,bothprogramsalsohavereasonablegenerosity.A 34. Among the ECA countries that are expected to be littlemorethan50%oftheconsumptionofbeneficiaries the most affected by higher food prices, Armenia and ofGeorgia'sTSAprogramcomesfromtheTSAtransfer, Georgia are best positioned to provide safety nets for while about 30% of the consumption of beneficiaries of the poor. Both countries have well-established targeted Armenia's FRB program is from the transfer (see Figure cash transfer programs ­ the Family Benefits Program 8.3). Both Armenia's FPB program as well as Georgia's (FPB) in Armenia, and the Targeted Social Assistance TSAprogramrespondedrobustlytothefood-fuel-finan- (TSA) program in Georgia.The Armenia FPB program cial crisis of 2008.The Kyrgyz Republic UMB program covers about 40% of individuals in the poorest quintile, has reasonable coverage and targeting accuracy, but very whiletheGeorgiaTSAprogramcoversabout20%(Figure lowgenerosity. 8.1). In addition, both programs have good targeting SECTIon 4. vulnERAbIlITy And PolICy InTERvEnTIonS 4.1.Vulnerability Figure 9: Some Countries Are Vulnerable in Both Macroeconomic 35. Countries in ECA are con- and Poverty Outcomes sidered most vulnerable to the food and energy price shocks if they could have large increases in poverty rates due to high inflation and if, at the same time, the impact on their macroeco- nomic accounts is potentially significant. In ECA, current account imbalances preceding the last crisis magnified the region's vulnerability to exter- nal shocks. During the global crisis, current account imbal- ances improved in ECA coun- triesbecauseconsumption(and therefore imports) tended to fallsosharplythattheyoutweighedthedeclineinexports ECAcountriesalongmacroeconomicandpovertydimen- causedbylowerexternaldemand.AstheECAeconomies sionsisshowninFigure9.42 haverecovered,sohasconsumption.Currentaccountdefi- 36. In assessing vulnerabilities, it is important to differ- citshaveremainedlowerthaninthepre-crisisperiod,but entiate among three groups of countries: EU member theyhavebeenrisinginmany.Thefoodandenergyprice and accession countries, some particularly vulnerable increaseswillhaveanegativeimpactonmanycountries' low and lower middle income countries, and the OGE. external balances; the higher the overall deficit to begin Countriesthataredeemedthemostvulnerabletothefood with,thegreaterthevulnerabilitytoshocksandthegreater andenergypriceincreasesfromanoverallmacroeconomic theadditionalfinancingneed.41Intermsoffiscalvulner- anddistributionalperspectivearethelowandlowermiddle abilities,countrieswithhigherdeficitsareconsideredmore incomecountries:Armenia,Georgia,theKyrgyzRepublic, vulnerablefromamacroeconomicperspective,particularly Moldova, and Tajikistan. They are represented in the countries with higher deficits that also may have high shadedupperrighthandsegmentofFigure9.Thereare potential increases in poverty rates. The distribution of countriesthatarepotentialvulnerableontheirmacroeco- 41 Even if the food and energy trade balance is in deficit, the current nomicoutcomesbutarenotexpectedtohavehighpoverty account may be in surplus (and vice versa). A higher food and fuel increases.TheseareAlbania,Bosnia-Herzegovina,Kosovo deficitmayreducethesurplus;however,itisassumedthatacountry and Montenegro. If food and fuel prices continue to facing a lower overall surplus is much less vulnerable to external shocks(e.g.theriskofcapitaloutflows)thanacountrywithadeficit. increasesubstantially,theycouldfacedeterioratingexter- In Table A1 in Annex 2, the countries that will face the strongest nalbalances.EUcountriesaretheleastvulnerable.Their external financing pressures are listed at the bottom of the column macroeconomicpositionreflectsmostlymanyoftheEU CombinedOrdering.Totheextentthatthesecountriesexportprices increasealongwithfoodandfuelprices,theirpotentialvulnerability isreduced. 42 TheMacroVulnerabilityIndicatorisbasedonWBstaffestimates. member and accession countries' Figure 10: ECA Countries Used Various Policies to Contain the largerfiscaldeficits,buttheimpact Impacts of Food and Energy Price Increases in 2008 of additional price increases is on averagesmall.TheOGEcountries aretheleastvulnerable,andare,in fact,outliers. 4.2.PolicyInterventions 37. Governments in ECA countries tried to soften the impact of food prices through a range of inter- ventions in response to the 2008 commodity price hikes. These wereaimedatprotectingdomestic consumers of food and energy.43 These include export quotas (for foodexportingcountries),domes- tic (formal and informal) price controls, greater use of state pro- curement at lower-than-market prices, and topping up cies (at the time of writing) to manage the effects on existing social assistance and other transfers. In a couple their economies. However,thesituationisstillevolving of countries, however, import VAT was reduced to help and countries may adopt policies to protect the poor or lowerimportedgrainprices.Forenergypriceincreases,the containmacroeconomicimpacts.Anumberofcountries favoredresponsebyGovernmentswasprimarilytostagger have adopted plans or strategies to improve productivity domesticpriceincreases. and/or efficiency in the agriculture and energy sectors 38. In response to the current hike in commodity prices, (Section4and5);someofthesestrategies/plansbeganin some, but not all governments have adopted new poli- connection with EU accession or in response to fast ris- ingfoodandenergypricesinthepre-crisisperiod.Box6 43 WorldBank(2008). belowsummarizessomeinitiatives. Box 6: Policy Initiatives in Selected ECA Countries Armenia has had an Energy Efficiency Action Plan governmentenvisionsreducingenergyintensityofGDPby since2010andanewtaxationsystemwasintroducedto 50%in2015relativetothe2005levelandtoreducethe enhance efficiency in 2010. Additional fiscal resources shareofrenewableenergyfrom20%in2009to32-34% wereallocatedtopensionsandtofamilybenefitstooffset in2020.Theaveragegasimportpriceincreasedby25%; gastariffincreasesin2010. householdtariffsdidnotincreasebutindustrialconsum- erssawanincreasehigherthantheincreaseinprices.For Azerbaijan has had subsidies for fertilizers, fuel, seeds, heating,subsidiesareprovidedfromlocalbudgetsamount- seedlings,hectaresunderwheatandricecultivationdur- ingto0.25%ofGDPonaveragep.a.during2007-2010. ing 2007-2010. In Dec 2010 it temporarily suspended 10.7%ofhouseholdsreceivedafoodsubsidyin2010. theVATonwheatimportsandtheexemptionisprovided untilAug2011. Bulgariahasanenergyefficiencystrategyinplacein2010. Meanstestedheatingallowancesandsocialassistancefor Belarushascontrolsoverpricesoffoodstuffsandregulates individualsandfamiliesexist. agriculturalproducts.InAug2010,agovernmentresolu- tionsettargetsforenergyefficiencyanddiversification.The (contnuedonpage) 8 Box 6 (contnuedfrompage8) Croatiahasundertakenseveralenergyefficiencymeasures. TradeLawwasamendedtoallowgovernmenttosetprice Italsohasasubsidyondieselforfarmers,andhasreduced capsonsociallyimportantfoodproductsforamaximum theexcisetaxonderivatives. periodof90days;gasolinetaxeshavebeenraised,trans- port taxes lowered; the government is selling from its Georgia. The Tblisi municipality has opened groceries stockpile in drought affected areas; it has adopted some givinga20%discountonbasicproductsforthevulner- energyefficiencyinitiatives;andhouseholdenergytariffs able. Subsidies were estimated at 11.1 million for 2011; slowlybeingraisedtocovercosts. thisisaonetimetransferofUS$11perpersontocover theenergybill. Tajikistan. An export restriction of locally produced wheat to neighboring countries was introduced by one Kazakhstan imposed a ban on exports of selected food region;thereareenergyefficiencyinitiativesinplaceand items on Oct 2010, excepting exports to Belarus and itaimstocovercostsforgasby2011;oneregionhasbeen Russia;anewlawgivesgovernmentthepowertosetprice exemptedfromVATpaymentonadeliveryofcoal;energy capsonsociallyimportantfooditemsforaperiodofup tariffincreasesareplanned. to90days.Theyhaveadoptedsomereformstoenhance energyefficiencyinpublicinstitutions. Turkmenistan prohibited fertilizer exports; the state has establishedmonthlyquantitiesofwater,salt,gasandelec- The Kyrgyz Republichascompensationpaymentstothe tricity to be delivered free of charge to poor households poorforhighfoodpricesandisplanningotherinterven- until2030. tions. Latvia has adopted some energy efficiency initiatives Turkeytemporarilyeasedthebeefimportduty;alawon related to EU accession; it has a subsidy on diesel used fooddistributionistobeenactedinMarch2011which byfarmersandotheragriculturalsubsidies,asubsidyfor aims to reduce volatility and improve distribution; the biofuelandfoodsubsidiesinplace. consumptiontaxonoilproductswasraisedinJan2010; effortstoenhanceenergyefficiencyareunderway. FYR Macedonia reducedtheimporttariffonsugarfrom 30%to5%;ithasaGEFprojectrestructuredtofocuson Ukraine has adopted quotas on grain exports through energyefficiency;agriculturesubsidieswereincreasedfrom March 2011; the list of socially important food whose 0.3%ofGDPin2006to1.5%in2010. pricesarecontrolledwasextendedtoincludebuckwheat; theexciseongasolinewasincreasedandthetransportation Moldovahasbannedwheatexportsuntilthenextharvest; duty reduced; began increasing tariffs for gas, electricity compensationforenergyexpenditureswere0.5%ofGDP and heat, introduced fines for nonpayment; households and recently another .35% of GDP subsidy has been receivedanadditional0.5%ofGDPforgascosts. addedforatotalof0.85%ofGDP. Uzbekistan does not allow grain/flour/rice exports since Poland has ongoing energy efficiency initiatives for EU 1994,thoughoccasionallythegovernmentmaydecideto compliance; an energy subsidy for vulnerable consumers export some grain and flour; export of locally produced hasbeenlaunchedandallocationstothegovernmentpro- cookingoilissuspended;governmentiskeepingpriceslow gram"supportforameal"wereincreasedin2010. by selling more flour from state resources; for 2011, the Romaniameanstestedsubsidiesforresidentialconsumers government adopted a program of farmland reservation forheatingremainaswellasproducersubsidiesforheat- forgrain,vegetables,fruits,andforageforcattlebreeding ingbutithascutasmallsurchargeongasoline.Thereare toensureself-sufficiencyinfood;heatingtariffscontinue ongoingEUrelatedenergyefficiencyinitiatives. to be increased; there is a 2011-15, program aimed at powersectormodernization. Russia has imposed an export ban on wheat and other grains from Aug. 15th to end-June 2011; the existing SECTIon 5. AgRICulTuRE In ECA 39. Agricultural prices in ECA are spiking upwards for the hike,highcommoditypricesdidnotalwayssubstantially second time in three years; not only are prices rising raiseagriculturalincomesandthe2011responsemaybe but the variance of price levels for grains, sugar and similar.WhilecountriesinECAdifferintermsofagricul- rice has increased substantially. At the beginning of turalstructureandpoliciesanumberoffactorsmighthin- 2011, food prices were back to the 2008 peak levels. In derfarmersfromgainingwhenagriculturalpricesrise.46,47 terms of individual commodities, the world wheat price Theseinclude: is still below its 2008 peak and the maize price has sur- passedit.Asin2008,the2011thepricepeakforfoodis · Imperfect prce transmsson:48 High international grainpricesoftentransmitonlytoalimitedextentto relatedtotheevolutionofenergyprices.Energyandfossil the farm gate because (i) many farmers, particularly fuelfertilizersareanimportantinputinagriculture;also smaller ones, do not have storage facilities and thus biofuelproductionisincreasingpressuresoninternational need to sell their produce right at harvest time when foodmarkets.In2011priceincreasesaremorewidespread pricesarethelowest,and/or(ii)policymeasuressuch acrossalargenumberofcommoditiesthantheywerein asexportbansmaykeepdomesticpriceslow. 2008andarenotdrivenonlybycereals.InJanuary2011, shorttermfoodpricevolatilityreachedthehighestlevels · Increasesnprcesforfarmnputs:Dramaticincreases since the 1970s. Increasing volatility and market anxiety inthepricesfortradableinputssuchasenergy,fertil- isduetoweatherrelatedshockswhichhamperthesupply izer,andpesticidesincreasedthevariablecostofagri- sideofthemarketandtoenergypricevolatility.Inaddi- culturalproductionbyanestimated20%.Farmersmay tion,reportednaturaldisastersareincreasinggloballyand notbeabletopayforthemorecostlyfertilizer. theimpactofclimatechangeonagriculturehasstartedto emerge. · Increases n land use prces: In many ECA countries, landrentpricesaredeterminedingrainpriceequiva- 40. Lower agricultural production in some ECA coun- lentsandthusincreasealongsidewithgrainwholesale tries contributed to the 2010 global price increases. prices,irrespectiveofwhethertheseleadtoincreasesin In 2010, planting intentions were slow to materialize in farm-gateprices.Evenwhenlandpricesarenotexplic- manyCentralandEasternEuropeancountriesbecauseof itlydeterminedingrainpricesequivalents,grainprices theweather.44HeavyOctoberrainsinBulgaria,Hungary haveanimpactonpricespaidforthelease/purchaseof andPolanddelayedsowing.InBelarus,Moldova,Russia agriculturalland. andUkraine,aggregatecerealproductionwasabout25% · Increases n costs of feedng lvestock: Increased grain lowerthaninthepreviousyearandthelowestlevelsince pricesmeanhighercostoffeedforlivestockanddairy 2005.45ThesharpestdeclinewasinRussiawherethecere- farmers. alcropfellby1/3rdcomparedtotheleveloftheprevious year.FloodandhaildamageaffectedoutputinMoldova 46 Forexample,smallfarmersmaynothaveaccesstocredittofinance and Ukraine and Russia suffered from drought and hot moreexpensivefertilizerseveniftheirmarginalproductispositive. weather. 47 Moreover,inmanycountries,thereisaveryunequaldistributionof farmsize;inRomaniaforexample,lessthan10%ofthefarmsculti- 41. High agricultural prices do not always boost agricul- vatemorethan90%oftheland. tural incomes for several reasons.Inthepreviousprice 48 The Bank's ECA Agiculture and Rural Development group has entered into a research partnership with the Leibnitz Institute for AgriculturalDevelopment,Germany,toassessagriculturalpriceshock 44 FAO(2010). transmissionamongselectedECAcountries,amongthemthosecon- 45 TheEU'saggregatecerealoutputin2010isestimatedtohavebeen stitutingmaingrainproducersandthosemostvulnerabletofoodprice 6%lowerthanthatofthepreviousyear. shocks. 30 42. Despite these weaknesses that Figure 11: Fertilizer Use per Hectare in Selected Countries constrain short term price responsiveness in ECA, a large untapped potential exists to respond to price increases over the medium term.ECAcould enhance its status as a supplier of global scale and enhance its role as a buffer to commod- ity price shocks. It has land areas that can be brought into agricultural production (with relatively good infrastructure) and huge yield gaps compared to its peers in higher income countries.The lower bound of arable land expansion potential in Belarus, Kazakhstan the EU and the USA. Kazakhstan, Russia, and Ukraine and Ukraine, without encroaching on the forests and haveemergedasthreeofthetopnineexportersofwheat, protected areas, is estimated at 10-15 million hectares.49 currently accounting for about 25% of global exports WhilemostlandareaswouldnotrequireirrigationasECA of wheat and wheat flour, and Ukraine has become the enjoysatemperateclimatewithoutseriousenvironmental world'slargestexporterofsunfloweroil.Figure12below constraints, there will be some areas that would need showswheatproductionpotentialusingadditionallandin investmentinirrigationanddevelopmentofon-farmand thethreemainexporters.MeetingECAcountries'export post-harvestlogistics. potential in agriculture means a substantial increase in world food supply. Policies that enhance efficiency and 43. Even on current areas of cultivated land, ECA may improvedistributionwouldsupporttheseobjectives. significantly increase its grain production. Simply by an intensification of production, ECA (through opti- 44. Though stakeholders demand bold immediate respons- mizedtechnologies,e.g.,useoffertilizers,modernseeds, es to the currently emerging food price spike, in agronomic skills) could more than double its output agriculture itself, there is a very limited set of short and make it less volatile. For example, fertilizer use in ECA Figure 12: Some ECA Countries May Expand Their Wheat is much below that in Western Production Significantly Europe (Figure 11), and farm practices are much less sophis- ticated. These factors translate into highly volatile production and exports from the northern Black Sea Region. This region has recently increased its export positions for some agricultural commodities, especially grains, comparedtothetraditionalpro- ducerssuchasAustralia,Canada, 49 EBRD, and FAO (2008), Deininger andByerlee(2011). 3 1 term remedies. Thisispartlybecauseofthe Box 7: Community Seed Funds in the Kyrgyz Republic longproductioncyclesinagriculture­ECA countriestypicallyproduceoneannualgrain Limitedaccesstoqualityseedsandfertilizerremainsawellrecog- harvest. The time needed for a meaningful nized constraint to food security in the Kyrgyz Republic. Under supply response to price increases is also a theGFRPadditionalfinancingfortheAgricultureInvestmentsand function of when the price increase occurs. ServicesProject(US$4.0million)wasprovidedtofurtherdevelop Grainisusuallyplantedinfallwithaharvest the Community Seed Fund (CSF) program. This has proven to taking place the following summer with a be a sustainable institutional arrangement to ensure community- limitedwindowavailableforoptimalfertiliz- drivenaccesstoqualityseedsforfarmers.NewCSFsaresupported erapplication.Livestockproductionactivities throughoutthecountryunderaWB-financedprojectandincoop- typicallyrequirepriorinvestmentsinproduc- erationwithanumberofotherdonorsandlocalNGOs.ANational tion technology and/or livestock. In larger FederationofCommunitySeedFundswasformedandisresponsible scale, export oriented crop production, the forcontinuedmonitoring,operationalsupport,liaisonwithdonors, twoshortterminterventionswiththegreat- andpromotionoftheinterestsoftheCSFsatthenationallevel. estimpactwouldbetheuse(orprovision)of high quality seed and of chemical fertilizers Although the CSFs primary objective is poverty alleviation, they to farmers but the application of both is alsodemonstratethevalueofgoodseedandinputsandprovidea only possible at particular times, logistically sustainable,self-helpapproachwherebyfarmers,who,evenifthey difficult, and must be considered against a donothaveaccesstocash,canstillobtainseedandfertilizer.CSFs set of appropriate social and environmental receive improved seeds for wheat, maize, oilseeds, vegetables and safeguards.Insmallerscalecropproduction, foddercropssuchaslucerne,sainfoin,barleyandoats.Eachyearthe whereshort-terminterventionsmainlyaimat equivalentof120%oftheseedandfertilizervaluereceivedmustbe strengtheningtheroleoflocalagricultureasa returnedtotheCSFforsubsequentdistributiontonewmembers. bufferagainstpriceshocks,targetedprovision Of the CSFs already established, about 80% have maintained or ofseedandfertilizerassistancehasprovento increasedthevalueoftheirfunds,andmosthavenowreplenished beaneffectiveshorttermmeasureasinthe theinitialseedprovidedwithnewseedand/orhaveswappedseedfor KyrgyzRepublicandTajikistan(seeBox7). otherspeciesorinputs.AnumberofCSFshavealsoestablishedsub- stantialsavingsfundsforotheractivities,andsomeofthemoresuc- 45. In response to rising world food prices, cessfularenowregisteringasformalcooperatives.Overaperiodof many countries have adopted policies twoyears,thetotalnumberofbeneficiariesandtheacreagecovered which have hindered them from realizing hasmorethandoubledandthe12,000beneficiaryfamilieswould their potential in the past. Policiesreducing representanaggregategrainproductionofabout80,000tons. domesticproductpricesthroughtraderestric- tions(e.g.exportrestrictionsinKazakhstan, Russia and Ukraine), input availability (e.g. Uzbekistan'sfertilizerexportprovisionsthatreducedfertil- changemitigationthatwouldhaveaverysignificanteffect izer availability inTajikistan) and reduction in access to on the food system ­ ECA countries recognize that the high-quality modern seeds (as in Moldova orTajikistan) challenge of feeding a larger global population must be duetooverlystringentphyto-sanitaryrequirementsactas metwhiledeliveringasteepreductioningreenhousegas disincentives to a positive supply response. Investments emissions. in productivity-enhancing public goods are needed too, 47. Commitment to a framework for reform over the a but when policies discourage private investments, the medium-term in ECA would contribute to achieving returns of public investments are diminished. Access to both (a)asignificantlyenhancedcontributionofECAto servicesandmarketsdifferamongcountriesandbetween globalcommoditymarketsand(b)animprovedresilience smallandlargefarmswithincountries.Moreover,growing topriceshocksinECA'slocal/regionalfoodsystems.Such demandforfoodmustbemetagainstabackdropofrising aframeworkwouldneedtobecenteredaround: global temperatures and changing patterns of precipita- tion.ECAisdevelopingstrategiesandpoliciesforclimate 3 Box 8: Export Restrictions Damage Food Security Box 9: Reducing Volatility in the Long Run investment in irrigation and employment OnOctober4,2010,Ukraineimposedgrainexport quotasthatareexpectedtobeinplaceuntiltheendof The Irrigation Rehabilitation Emergency Project March2011.Thismeasurewasmotivatedbyconcerns in Armenia, effective since October 2009, support overincreasinggrainandbreadpricesandtheneedto investments in irrigation systems to enhance agri- securefoodsupplies.However,bothonfoodsecurity cultural productivity, reduce production volatility, grounds as well as from an economic perspective, and stimulate short term employment. The project export quotas are not desirable. Export quotas have has been designed to improve water use efficiency proventobeoflimitedeffectincontrollingdomestic byrehabilitating83kmofirrigationcanalstoreduce prices as producers tend to hold back grain from waterlosseswhilefosteringimmediateruralemploy- domesticmarketsiftheyunderstandthemeasureto ment. Since October 2009, 50 km of canals have betemporary,andfarmersreduceproductioninorder already been rehabilitated and water losses have to keep future prices high. In addition, processors been reduced by 12%; a further reduction to 20% maynottransmitcheaperinputpricestoconsumers, isexpectedbytheendoftheproject.Asaresult,the but instead, increase their profit margin. Importing increaseintheirrigatedareaisexpectedtobeabout countriestendtomatchexportrestrictionsbyreduc- 7,000habyJune2011. ingimportbarriersinordertoreducepricesfortheir consumers.Whengovernmentskeepproducerprices cell-phone Based Weather forecasting down,producerslackincentivestoundertakeinvest- Turkey'sKastamonuProvinceinitiatedanagricultural mentsnecessarytoincreaseproduction,thuslimiting earlywarningserviceinspring2008tohelpfarmers thesupplyresponsethatwouldbeneededtoreduce copewithchangingclimateaffectingtheproductivity theglobalpriceleveloverthelongerrunandreducing ofappleorchards.Inrecentyears,fruittreesseemed theamountofgrainavailablefordomesticconsump- tobudearlierinspringwhileoccasionalfrostlingered tionandexportsinthefuture.Exportrestrictionsalso later.Asaresultfrostriskwasrisingandoverallapple damageacountry'sreputationasanattractiveinvest- productionhadbeenindecline.Protectinganorchard mentlocationandreliablesupplierofglobalmarkets, from overnight frost is a laborious task. An accu- furtherreducinginvestmentsandbusinessopportuni- rately-targetedinterventioncansavecropsthatwould ties. Therefore, ironically, export restrictions based otherwise be destroyed. The provincial directorate on food security concerns reduce a country's food of agriculture designed an information system that securityinthelongrunandcandamageacountry's providesfarmerswithaccurateovernightwarningsof overalleconomicdevelopment. (contnuedonpage3) ·Improvngpolcesandgovernanceofagro-foodsystems allow sustanable producton ncreases. Agriculture is to encourage nvestment. This means (a) eliminating anincreasinglyknowledgeintensivefield.Agricultural governmentinterventioninmarketsthatprecludemar- information and knowledge systems (see Box 10), ketadjustmentstochangedconditions(Ukraineexport including advisory services and adaptive agricultural quotas), providing better public services; (b) institu- research,spreadingbestpractice,promotinginvestment tional development and regulatory reforms (e.g., land innewlong-termadaptiveagriculturalresearch(higher markets,riskmanagement,finance);(c)linkingsmaller yield,adaptedand/orweathertolerantproductiontech- farmers to markets through infrastructure provision niques) are necessaryto raise the limits of sustainable or support of infrastructure provision; (d) improving production,andreduceoutputvolatility. environmentalsustainability. ·Promotng nvestments n post-harvest logstcs and ·Investng n knowledge, scence, and technology to reducngwaste.Logisticalcapacitiesandefficiencycon- enhanceproductvtyandreduceyeldvolatltyandto stitute a critical bottleneck for reaching the potential 3 3 levelofproductionandexportsinmanyECA countries.Grainstorageandtransportlogistics Box 9 (contnuedfrompage33) (e.g.availabilityofrailcars)constituteamain frostriskthroughSMStexts.Thesewarningsdrawonthe hurdleinbothRussiaandUkraine'seffortsto nationalweatherforecast,ahistoryoflocaldatathatenables ship larger amounts to international ports. In "tuning"ofregionalforecaststolocalconditions,andlocal ECA, waste reduction measures are needed measuringstationsthatsetoffcellphonealarmsiftempera- to reduce pressure on resources needed for turesdropintothedangerzone.Withthesethreelayersof foodproduction,andtolowergreenhousegas information,frostriskshavebeenaccuratelytargeted,false emissions. alarms avoided, and farmers in the program have not lost ·Investng n rrgaton and land admns- cropssincetheprogrambegan. traton. Improving the functioning of land markets and tenure security through Land Following this example, a World Bank team sought to Administration Systems will promote invest- undertake a simpler program in the Kyrgyz Republic. mentbyfacilitatingaccesstocredit.Reflecting Normally, Kyrgyz Republic farmers must manage on one- past collectivization and restitution processes, day forecasts delivered on television. In this pilot, farmers ECAfarmersstillhaveconsiderabledifficulties regularlyreceivedforecasts3daysaheadbycellphone.Jalal- in securing sufficient investment and oper- Abadexperiencedarainyandcoldspring,andmanyfarmers ational capital. In South East Europe and haddifficultyidentifyingwhentoplant,ordidnotsucceed Central Asia there is an increasing need to inplantingatall.ButallfarmerswhowererecipientsofSMS adjust production techniques and systems to weathermessagesundertheWBpilotsucceededinplanting meet water resource management challenges. theircrops.Farmersnotoriginallyincludedinthepilothave Manyirrigationsystemshavedeteriorateddue askedtojoin. toinadequateoperationandmaintenance. 3 SECTIon 6. EnERgy In ECA 47. ECA countries have been facing ris- Table 7: Energy Use (kg of oil equivalent) per US$1,000 GDP ing oil and gas prices since global economic conditions have improved. CountryGroupAverages InFebruary2011,internationaloilpric- Group 1992 2000 2005 2006 2007 es surged past US$100 per barrel for LLMC 742.6 789.7 539.8 492.2 459.8 the first time since 2008 though they UMIC 403.6 277.7 254.6 254.7 240.6 are still below the July 2008 peak. By Balkans 159.2 158.7 147.4 164 158 January 2009, they declined to one third of their peak level. Since then, Caucasus 651.6 424.1 282.9 231.6 182.7 global oil prices have been increasing CIS 159.2 158.7 147.4 164 158 steadily at an average monthly rate of EU10+2 651.6 424.1 282.9 231.6 182.7 1.7% over the past twelve months, to above US$100 in early February 2011. EU 163.1 140.5 134.7 130.3 125.0 Prices for natural gas have registered AllECA 434.6 298.7 264.1 261.3 247.4 a similar evolution. The average EU Source: World Development Indicators, World Bank pipeline import price tripled between Note: The numbers are for GDP measured at 2005 PPP prices in USD. Averages are 2002 and 2008 to above US$400 per weighted by GDP. EU10+2 includes Croatia and Turkey. thousand cubic meters (mcm). This in turnstimulatedasignificantincreaseof gaspricesinintra-CIStrade.Until2005,countriesinthe thelowandmiddleincomecountryaverageenergyinten- CIShadbeenabletosecureimportedgasatbelowmarket sity in ECA is greater than in other regions and double prices.Thesubsequentdeclineingaspricesinearly2009 thehigh-incomeOECDaverage.Turkmenistan,Ukraine, easedCISprices.However,asEuropeangaspricesadjust andUzbekistanhavehighenergyintensities--morethan to the benchmark of oil and oil product prices over the 450 Kg of oil equivalent (koe) to produce US$1,000 of nextfewmonths,ECAcountriesarelikelytofaceincreas- GDP (constant 2005 PPP).The energy intensity in net ingpressuresforfurtheradjustmentsofimportpricesto energy importers such as Belarus, the Kyrgyz Republic, international gas market levels. To the extent that their Moldova, Tajikistan, and Ukraine was higher than 250 prices move together, all countries are affected by oil Koe/US$1,000GDPormorein2007,farabovethe144 priceincreases.Somecountries,suchasMoldova,import Koe/US$1000GDPofmostcountriesinCentralEurope muchmoregasthanoil,whileothers,suchastheKyrgyz andhigherthantheallECAaverage.TheBalkancountries RepublicRepublicandBulgariaimportmoreoilthangas. andtheCISshowthelowestenergyintensity,andalsoare Historically,thesetwopriceshavetendedtomovetogether theonesthathavereducedenergyintensitytheleastinthe thoughsometimeswithalagorlead. lasttwodecades(Table7).TheOGEexportershavehigh energy intensities, such as Russia at 340 koe/US$1,000 48. In ECA, high energy intensity underscores the coun- GDPandKazakstanat418koe/US1,000GDPin2007, tries' vulnerability to increases in energy prices. The thelastyearforwhichcomparabledataareavailable. highenergyintensityinECAcountriesimpliesthatrising energy prices will affect production more in ECA than 49. Energy policies in many ECA countries are not sus- other regions. ECA countries' level of energy intensity, tainable in view of the rising costs of energy and the thoughithasdeclinedsubstantiallyovertimeisonaverage need for efficiency enhancing investments. Increasing fivetimesthatofthecountriesinWesternEurope.Today gas prices will have an impact on electricity costs across 3 5 the region.The long run mar- Figure 13: An Increase in the Long Run Marginal Cost of Electricity ginalcostofgenerationwillrise Generation Will Require Price Adjustments for fromroughly7.5to8.5cents/ Many Countries kWh, excluding costs associ- atedwithtransmissionanddis- tribution (these are shown by the red and dotted green lines respectively).). This estimate is based on the construction of a new gas fired combined cycle power plant assuming a gaspriceincreasefromUS$250 to the forecasted US$350 per thousandcubicmetersin2011. Althoughmostofthecountries in Eastern Europe were cover- ing their long run marginal costofgenerationin2010(see Figure13),ifthelong-runmar- ginalcostofgenerationwereto increase, many of the countries would need to increase of household energy consumption (Figure 14). If energy electricity tariffs to adequately cover long run marginal companies are not allowed to recoup the high cost of costs. energy, quasi-fiscal liabilities may accumulate. In some countries,thishasalreadybeenanissue. 50. Increasing electricity cost would threaten the financial viability of the power sector, unless consumer prices are 51. In view of the expected increase in energy prices, some adjusted accordingly. Duringthe2008pricehikeandthe policy reforms are imperative in ECA countries and onsetoftheeconomiccrisissomegovernmentspostponed many have begun the process of reform.Keyamongthe tariffincreasesinordertoprotectcustomers.InUkraine, reformareasare: for example, the Government cappedtariffsforallcustomers Figure 14: Some ECA Countries Subsidize Households and and moved certain industrial Others Tax Them customers into the subsidized tariff category. The situation was made worse by currency depreciation in energy import- ing countries. Because of fall- ing revenues and rising costs, theprofitabilityofpowersector companiesincountriessuchas Armenia,RomaniaandUkraine declinedsignificantly.Percapita residential electricity and heat consumptionvarysubstantially across ECA countries, partly reflectingtheirpricingpolicies. Insomecountries,thereisalso substantial cross subsidization 3 ·ImprovngEnergyEffcency.Investinginenergyeffi- instance, developments to support a steady increase ciency will reduce import dependence in ECA, lower oil and gas production in the region are estimated to vulnerabilitytoenergypriceincreasesandlowergreen- requirecapitalinvestmentaveragingmorethanUS$56 house gas emissions. Investment in energy efficiency billion per year over the next twenty years. Although couldbehigherinECAifenergypriceswerenotkept capital investments increased before the economic artificiallylowandtherewaspaymentdiscipline,there crisis,theyarestillwellbelowtherequiredlevels.This was more competition among contractors and service highlightsthelargefinancialchallengesforthesectorin companiesandfewerfinancingconstraints. theshorttomediumterm. ·Industry Responses ­ Meetng Investment Needs.The ·Investng n Renewable Energy. ECA countries, par- revenueprojections(bothfiscalandcorporate)suggest ticularly the EU accession countries, have begun that the oil and gas producing countries should have investinginrenewableenergy.Inviewofrisingprices thefinancialcapacitytomeetfutureinvestmentneeds forfossilfuels,volatilityinthepriceofenergyandthe intheirenergysectors.However,effectivemanagement imperative to reduce greenhouse gas emissions, ECA oftheseresourcesmustbeapriorityifthesecountries countries would benefit from exploring alternative are to sustain their current levels of production. For energysources. 3 AnnEx 1. WoRld bAnk SuPPoRT To ClIEnTS Bank support to clients cover several key areas such as tural reforms to ensure fiscal sustainability in Bosnia- fiscal reform, social assistance reform, agriculture and Herzegovina,Croatia,Latvia,Russia,Romania,Serbia, energy sector reform. Poland and Turkey. In Belarus, an ongoing public expenditurereviewsupportstheGovernmentiniden- A-1.1WorldBankSupportforFiscalReform tifyingefficiencygainsinselectedareasofthebudget, and providing options for expenditure and revenue TheBankissupportingECAclientsthroughanalyticalwork, policiesthatarebetteralignedtotheenvisagedstruc- policy advice and lending to rationalize their fiscal systems. turalreformagendaofthecountry. Thisinvolvesbothpolicyandinstitutionalreforms.Keyanalyt- icalworkonpublicexpendituresandfunctionalorganization ·AnongoingfunctionalreviewinRomaniawhichana- of government is aimed at identifying sustainable efficiency lyzes 12 key sectors of government, among these, the gains,strategicallocationofpublicresourcestosupportgrowth Cabinet and General Secretariat of the Government, andenhancingeffortstoprotectthepoor.Throughacombi- publicfinancemanagement,transport,education,agri- nation of Technical Assistance, Development Policy Loans, cultureandcompetitionpolicyhavebeencompleted. KnowledgeProductsandPolicyDialogue,theBankiswork- ·Technicalassistanceforefficiencygainsinworkprocess ing with clients towards (a) more sustainable fiscal planning optimization in Armenia; program-based budgeting through appropriate instruments, including fiscal rules and and performance-oriented budgeting in Albania and multi-annualfiscalframeworks,(b)makingpolicyandstruc- theRussianFederation;advisorysupporttotheRussian turalchangesthatwillhelpcontainoverallbudgetsanddebt Governmentinmonitoringtheeffectivenessofpublic and(c)policychangesthatrationalizeexpenditureallocations expenditure through performance indicators for pro- andtaxationpatternsand(d)taxadministration.TheBankhas gramsandsub-nationalgovernments. beensupportingclientstoputinplacesystemstobettertrack expenditures(e.g.Treasurysystems,publicemploymentregis- ·Investmentlending/grantsforTreasurymodernization ters)andachievesustainablesavings(e.g.throughoptimization inAlbania,RussiaandUkraine. ofworkprocessesandprocurementreforms).TheBankisalso ·Technical assistance and investment lending for rev- advising clients to organize their budgets on a programmatic enue administration modernization in Croatia, the basisandtolinkprogramstopolicyobjectivesandmeasurable CzechRepublic,Kazakhstan,Russia,andUkraine. results. On the revenue side, the Bank is assisting clients in movingtowardsmoreefficientrevenueadministrationsystems A-1.2WorldBankSupportedReformsin (e.g.risk-basedaudits,e-filing),whichincreaserevenuecollec- SocialProtection tion, while cutting administrative costs for the public sector WorldBanksupporttogovernmentshasfocusedonimprov- andreducingcompliancecostsfortaxpayers.Atthesametime, ing social assistance systems and support for employment theBank,togetherwithotherpartners,hasbeenworkingwith generation. clients to rationalize tax policies and the system of transfers andsubsidies. a) Socialassistancereformhasincluded: a) Bankassistanceforfiscalreformhasincluded: ·Supporting Albania through various lending instru- mentsfollowedbyaProgramforResults.Thereforms · Public expenditure reviews and Development Policy include improving benefits administration, improving Operations (DPOs) with a focus on rationalization targetingaccuracyandincreasingcoverageamongthe of public spending, sustainability of public finances, extreme poor for the last resort social assistance pro- efficiency gains in public administration, and struc- gram(LRSA). 38 ·InCroatia,Banksupportforthegovernment'sactions in2010toprovideagriculturalproductioninputsand to improve the targeting of non-contributory social critical livestock-related inputs to the poorest farmers welfareprograms. andfemale-headedhouseholds. ·InLatviaWBsupportfortheexpansionoftheLRSA ·SupporttotheKyrgyzRepublicforagriculturalinvest- programbyincreasingeligibilitythresholds(leadingto mentsandservicesaimingtoimprovetheinstitutional increasedcoverageandgenerosity). and infrastructure environment for more productive, profitable and sustainable livestock and crop produc- ·In FYR Macedonia WB help focusing on improving tionandreducingtheeconomicimpactofthezoonotic benefits administration through the development of diseaseburdeninthehumanpopulation. an integrated database for all cash benefits with the ultimategoalofconsolidationoffragmentedprograms. ·Project Support to Armenia to improve productivity The WB also supports the introduction of a condi- and sustainability of pasture/livestock livelihood sys- tionalcashtransferprogram. temsinselectedcommunities. ·InMoldova,throughtechnicalassistance,Banksupport ·Technical assistance for improved water management: forimprovedbenefitsadministrationandtheexpansion InRomania,toachievemoreeconomicuseofirrigation oftheLRSAprogram,andenhancedimplementation resources through changes in farmers' and the Land capacityamongotherthings. Reclamation Agency's behavior and increase agricul- turalproductivityinprojectarea. ·Together with the other donors, supporting ongoing reformsthatthegovernmentofTajikistanisundertak- ·SupporttoSerbiainimplementinganirrigationproject ingtoimprovethesocialassistancesystem. to address a range of interconnected sector issues by financingrehabilitationoffloodcontrol,irrigationand b)Supportforemploymentgenerationoverall drainage infrastructure, providing support in raising hasincluded: thetechnicalcapacityofweather-forecasting,andsup- ·LendingtoArmeniaduringthecrisis.TheGovernment portingpreparationofwater-relatedlegislation. protected or increased spending on the priority social ·In Kazakhstan an irrigation project aims to improve programssuchaspensions,last-resortsocialassistance, water resources management in the Kazakh part of unemploymentbenefits,andpublicworksprograms. theSyrDaryaBasinbyincreasingthetimelyirrigation · Lending to Bosnia-Herzegovina to introduce means- water supply to agricultural areas, increasing fisheries testing for all types of non-contributory social assis- production,andenhancinghumansafetyandenviron- tance. Planned support includes support to improve ment.The WB also provides support to Albania and the targeting accuracy of the LRSA, family and child Bosnia-Herzegovinatopromoteinstitutionaldevelop- benefits,anddisabilityassistance. ment for sustainable water management and reha- bilitationandmodernizationofirrigationanddrainage ·InLatvia,WBsupporttotheWorkplaceswithStipends systems. program. ·Supporting better land administration in Romania to A-1.3WorldBankSupporttoAgriculture complete the property title registration of land assets ECA's lending program in the agriculture sector has covered inruralareasandtoimprovethesecurityoflandrights threemainareas,enhancingagriculturalproductivity,linking andreducetransactioncostsonrurallandmarkets. farmerstomarketsandvaluechaindevelopment,andreducing ·Support to Russia to improve its land administration vulnerability. aswellasArmeniaandTajikistanforsustainableland management. a) Enhancingagriculturalproductivity: ·Supporting access to inputs in the Kyrgyz Republic b)Linkingfarmerstomarketsandvaluechain through the GFRP ­ Agricultural Investments and development: ServicesProject.SimilarlyTajikistanalsoreceivedfund- ·ProjectsupporttoAzerbaijan,UzbekistanandKazakhstan ingthroughGFRPin2008andtheRussiaTrustFund aimstoimproveaccesstofinancetofarmers. 3 ·InTajikistanaprojectprovidesacreditlinetoginners energy,therebyimprovingthediversificationoftheenergymix forpurchasingseedcotton. andreducingthedependenceonfossilfuels.Atthesametime, thecurrentprogramalsoincludesemergencyprojectssupport- ·Support to government of Romania to modernize its ingTajikistanandKyrgyzRepublicinmeetingtheirdomestic agricultural knowledge and information systems to energydemand. comply with the agricultural acquis communautaire andtohelptheagro-foodsectortakeadvantageofthe a) WBactivitiescanbesummarizedasfollows: benefits and opportunities arising from EU member- ship. Uzbekistan's rural enterprise support project ·Supportingsupplyefficiencythroughhydroandther- aims at increasing the productivity and financial and mal rehabilitation (Ukraine, Turkey); transmission environmental sustainability of agriculture and the and distribution upgrading to support loss reduc- profitabilityofagribusiness.TheWBalsoprovidessup- tion (Kazakhstan, Turkey; Ukraine, Serbia, Georgia, port to Kyrgyz Republic and Moldova for promoting Tajikistan,Azerbaijan,andGeorgia),anddistrictheating agribusinessdevelopment. infrastructure(Croatia,Moldova,Belarus,Armenia). c) Reducingvulnerability: ·Supportforclimatechangemitigationprogramsusing CleanTechnologyFund(CTF)concessionalresources ·Under the GFRP, Moldova provided cash transfers to topromotelow-carbonprogramsandprojects(Turkey); socialinstitutionstomeettheiradditionalfoodbudget CarbonFinanceprograms(Russia,Uzbekistan);techni- needsanddistributedfoodpackagestopregnantwomen cal assistance to finance wholesale emission reduction andchildrenunder2.TheKyrgyzRepublicagricultural projectsthroughthesaleofAssignedAmountUnitsin, productivityproject,inadditiontoimprovingaccessto theCzechRepublic,Latvia,Poland,andUkraine). finance,supportsstrengtheninghydrometeorologyand sendingweatherforecaststofamers. ·Renewableenergyandenergyefficiencyinitiativesare receiving accelerated attention to mitigate greenhouse d)OtherWorldBankAssistanceincluding gasemissions.Wholesaleapproachesthroughfinancial knowledgeproductsinagriculture intermediariesandenergyefficiencyfundsaresupport- Severalknowledgeproductsprovideclientsupport: ed in Bulgaria, Croatia, FYR Macedonia,Turkey and Ukraine; Global Environment Facility programs exist ·Impact of climate change on agriculture (South East in(Armenia,CroatiaandPoland)DevelopmentPolicy Europe, Caucasus) and water resources (South East Loanssupportenergyefficiencyprograms(Polandand Europe, Azerbaijan); Agriculture Sector Reviews (e.g., Turkey)whiletechnicalassistanceandreviewssupport Ukraine, Kyrgyz Republic); Price ShockTransmission theWesternBalkans,Poland,andRussia. andImpactofFoodCrisisonCentralAsiaandRoleof Kazakhstan,Russia,andUkraine. ·Loans to support the establishment of an integrat- ed regional market in the Energy Community of ·Technical assistance forTurkey Food Safety; Moldova South East Europe (Albania, Bosnia-Herzegovina, Food Security; EU CAP programming in several FYR Macedonia, Montenegro, Romania, Serbia and ECCU4/5 countries; Romania Functional Review Turkey), and to support the Central Asia/South Asia towardspolicyandinstitutionalreform;Establishment RegionalElectricityMarket(CASAREM). ofEurasianCenterforFoodSecurityinRussia. ·Promotingprivatesectorinvestmentthroughtheprovi- A-1-4.WorldBankSupporttotheEnergy sion of Partial Risk Guarantees to promote electricity Sector distributionprivatization(RomaniaandAlbania),tech- Theenergysectorprogramfocusesonimprovingexistinginfra- nical assistance to support governments in privatizing structureinpowergenerationandtransmissionandenhancing infrastructureservices,anddesignprivate-publicpart- energy efficiency through both the supply and demand side. nerships,andguaranteestoprivateinvestors(Kosovo, Several projects also aim to promote the use of renewable Tajikistan,Montenegro). 0 taBLe a1 Food and energy trade Food trade balance, Energy trade balance, CAB, % GDP balance, % GDP Combined Ordering % GDP % GDP rank 2010 rank 2010 rank 2010 rank 2010 rank 2010 1 Azerbaijan 27.5 1 Azerbaijan 45.3 1 Azerbaijan 1.0 1 Ukraine 2.7 1 Azerbaijan 44.8 2 Kazakhstan 8.1 2 Kazakhstan 22.9 2 Kazakhstan 2.0 2 Belarus 2.6 2 Kazakhstan 23.6 3 Russia 5.0 3 Russia 15.6 3 Russia 3.0 3 Serbia 2.5 3 Russia 17.2 4 Uzbekistan 4.3 4 Uzbekistan 9.6 4 Uzbekistan 4.0 4 Lithuania 1.3 4 Uzbekistan 9.0 5 Latvia 4.0 5 Poland -1.7 5 Estonia 6.0 5 Hungary 1.2 5 Estonia -1.2 6 Estonia 3.0 6 Estonia -2.1 6 Hungary 8.0 6 Uzbekistan 0.6 6 Romania -1.7 7 Lithuania 1.4 7 Romania -2.5 7 Latvia 9.0 7 Poland 0.5 7 Poland -2.2 8 Hungary 1.2 8 Hungary -2.9 8 Poland 9.5 8 Azerbaijan 0.5 8 Albania -2.7 9 Bulgaria -0.8 9 Serbia -3.0 9 Lithuania 11.0 9 Turkey 0.4 9 Czech -3.0 Republic 10 Slovenia -1.3 10 Turkey -3.6 10 Croatia 12.0 10 Kazakhstan -0.7 10 Croatia -3.6 11 Ukraine -1.9 11 Czech -3.9 11 Czech 12.0 11 Estonia -0.8 11 Slovenia -3.7 Republic Republic 12 Croatia -2.1 12 Croatia -4.8 12 Slovenia 12.0 12 Romania -0.8 12 Latvia -3.9 13 Czech -2.5 13 Latvia -4.8 13 Romania 13.0 13 Czech -0.8 13 Turkey -4.0 Republic Republic 14 Poland -3.3 14 Slovenia -5.1 14 Bulgaria 14.5 14 Latvia -0.9 14 Hungary -4.1 15 Kyrgyz -3.5 15 Lithuania -5.1 15 Ukraine 15.0 15 Slovakia -1.0 15 Slovakia -4.7 Republic 16 Macedonia -3.5 16 Slovakia -5.7 16 Serbia 15.5 16 Croatia -1.2 16 Serbia -5.4 17 Tajikistan -3.5 17 Belarus -7.2 17 Turkey 15.5 17 Bulgaria -1.2 17 Bosnia- Herzegovina -5.6 18 Slovak -3.8 18 Albania -7.6 18 Slovakia 17.0 18 Slovenia -1.4 18 Montenegro -5.9 Republic 19 Romania -4.3 19 Ukraine -8.3 19 Macedonia 19.0 19 Russia -1.6 19 Lithuania -6.5 20 Bosnia- -5.5 20 Bulgaria -8.4 20 Albania 21.0 20 Moldova -1.9 20 Macedonia -6.5 Herzegovina 21 Turkey -6.5 21 Moldova -8.6 21 Tajikistan 21.0 21 Macedonia -2.1 21 Moldova -6.7 22 Serbia -9.3 22 Macedonia -8.6 22 Kyrgyz 21.5 22 Georgia -3.6 22 Armenia -6.7 Republic 23 Georgia -10.0 23 Armenia -11.4 23 Belarus 22.0 23 Armenia -4.7 23 Bulgaria -7.1 24 Albania -12.1 24 Bosnia- -12.7 24 Bosnia- 22.0 24 Albania -4.9 24 Kosovo -8.3 Herzegovina Herzegovina 25 Moldova -12.5 25 Tajikistan -16.3 25 Moldova 23.0 25 Kyrgyz -5.2 25 Tajikistan -8.8 Republic 26 Armenia -14.3 26 Kosovo -16.5 26 Armenia 24.5 26 Bosnia- -7.1 26 Belarus -9.8 Herzegovina 27 Belarus -16.0 27 Georgia -17.8 27 Georgia 25.0 27 Tajikistan -7.5 27 Ukraine -11.0 28 Montenegro -22.1 28 Montenegro -17.8 28 Kosovo 27.5 28 Kosovo -8.2 28 Georgia -14.2 29 Kosovo -26.2 29 Kyrgyz -25.2 29 Montenegro 28.5 29 Montenegro -11.9 29 Kyrgyz -20.1 Republic Republic AnnEx 2. TERmS oF TRAdE And gRoWTh Severalpapershavebeenwrittenabouttheimpactofchangesinthetermsoftradeongrowth.Easterly,PritchettandSummers (1993)documentthekeyrolethattermsoftradeplayininfluencinglongrungrowthandBarroandSala-i-Martin(1995)find thatthegrowtheffectsoftermsoftradearecomparablewiththatofeducationalattainment,publicexpendituresoneducation,and humancapital.BrodaandTille(2003)findthatimprovementsinthetermsoftradeleadtohighergrowthandconversely.Across countries,itisestimatedthatabout10%ofthevariationinGDPgrowthand25%ofthevariationingrowthvolatilitycanbe explainedbyobserveddifferencesinthevolatltyoftermsoftradechanges(Easterlyetal,1993,HnatkovskaandLoayza,2005). Somepapersaddresstheimpactoftermsoftradechangesindifferentconditions.Forexample,LoayzaandRaddatz(2007)find thattheimpactoftermsoftradeshocksdependonothercharacteristicsoftheeconomy.Forexample,moreopencountriesaremore affectedbytermsoftradechanges,particularlynegativeones.Financialdepthindomesticmarketsservestoreducetheimpactof negativeshocksandcomplementstradeandfinancialopenness.Inaddition,labormarketflexibilitydampenstheeffectofnegative termsoftradeshocks;'easeoffirmentrymagnifiesthepositiveimpactoftermsoftradeshocks.Macroeconomicpoliciesalsoplay asignificantroleindeterminingtheeffectsoftermsoftradeshocks.BrodaandTille(2003)findthattheexchangerateregimehas asignificantimpactonhowchangesinthetermsoftradeaffectoutputgrowth.Theyfindthatcountrieswithaflexibleexchange ratewillhavemuchmildercontractionsintheiroutputinresponsetoanegativetermsoftradedevelopment,thancountrieswith afixedexchangerate.Forexample,inmanyoftheCISstatesthatbenefitedfromhighcommoditypricesandlittlesparecapacity in2006-08,monetarypolicywasconstrainedinaffectinginflationandslowingoverheatingbecauseofinflexibleexchangerate regimes.Mendoza(1995)estimatesthattermsoftradeshocksaccountfornearlyhalfofGDPvariability. AnnEx 3. SImulATIng PovERTy ImPACTS oF Food And EnERgy InFlATIon Methodologyforsimulatingpovertyimpactsoffoodandenergypriceincreases Theimpactoftheincreaseinfoodandenergypriceshocksonthewelfareofthepopulationissimulatedusingthe householdlossapproachdevelopedbyFreundandWallich(1995),whichwasoriginallydesignedforestimatingthe impactofenergytariffsonwelfare.Inthismodel,theconsumptionlossforhouseholdsisafunctionof(1)theincrease inthepricesofthecommoditiesinquestion,(2)theshareofhouseholdconsumptionallocatedtothosecommodi- ties,and(3)thesubstitutioneffectexpressedasanabilitytoreducetheconsumptionfollowingthepriceshocks.The analysispresentedhereuseshousehold-specificbudgetsharesfromthemostrecenthouseholdsurveyandcountry- specificfoodandenergypriceinflationratesfor2010.Forthepresentanalysisitisassumedthatpoorhouseholds arenotabletosubstitutecommoditiesinresponsetochangesinrelativeprices(seeSullaandTiongson2008),and thereforethesubstitutionelasticityissettozero.Ahousehold'stotallossfromtheincreaseinfoodandenergypricesis basedonthelossinnominalincomeduetofoodandenergyinflation.Thechangesinpovertyratesandpovertygap indicatorsareestimatedbasedonthesimulatedconsumptionaggregateequaltotheinitialconsumptionaggregated ofthehouseholds'minustheestimatedlossoftheconsumptionduetothepriceshocks. Thelossinwelfareforeachhouseholdiscalculatedasfollows: Loss=Q0(p-p0)(+e*(p-p0)/p0), whereLossisthemonetarylossofthehouseholdsduetoincreaseintheprices,Qisquantityconsumed,pisprice, eisthepriceelasticityofdemand,thesubscripts0andrefertotheperiodsbeforeandafterthepricechange,respec- tively.Asquantitiesofthehouseholds'utilitiesconsumptionarenotavailableintheHBS,thelossiscalculatedusing theexpendituresonutilities(fromtheHBS)andtheresidentialtariffs,asfollows: Loss=EXP0 *[(p-p0)/p0]*(+e*(p-p0)/p0), whereEXPishouseholds'expenditurefortheanalyzedutilitycomponent.Weused3alternativelevelsofelasticity (e)fortheanalysis:0,-0.4and-0.285. Thesimulationsprovideafrstorderestimationoftheimpactofthefoodandenergypriceshocks.Furthermore, becauseofdatalimitations,severalcaveatsshouldbenoted.Inparticular,(1)themodeldoesnottakeintoaccount anygainsinincomethatmayberealizedbyhouseholdsthatproduceandsellfoodcommoditiesthatareincreasingin price;(2)substitutioneffects,suchasswitchingtorelativelylessexpensivecommodities,arenoconsidered;(3)second ordereffectssuchasnominalwageincreasesormitigatingpoliciesthatoftenfollowpriceshocksarenotincluded; and(4)theindirectimpactofhigherenergypricesonothergoods(whichuseenergyasanintermediateinput)are notincluded.Becauseoflimitations(1)­(3),thesimulationmodelislikelytooverestimatetheimpactofthefood priceshock,especiallyinruralareas.Incontrast,limitation(4)islikelytounderstatethewelfareimpactofenergy priceincreases. Thepovertyheadcountratesand poverty.gapindicatorsarethemainwelfareindicatorsusedinthisanalysis.The headcount index is the %age of the total population living in households below the corresponding international 3 povertyline.Thepovertygapindextakesintoaccountboththeincidenceandthedepthofpoverty.Specifically,the povertygapistheheadcountindexmultipliedtimesthe"consumptiongap"betweentheaveragetotalconsumption forhouseholdsclassifiedaslivinginpovertyandthepovertyline,asaproportionofthepovertyline.Thusthepoverty gapissensitivetobothchangesinpovertyincidenceandchangesintheaverageincomeofthosewhoremainpoor. DataSources The microdata for the simulations come from the ECA Household Survey Data Archve. The ECA data bank includesstandardizednationallyrepresentativehouseholdbudgetsurveysfor25countries,coveringcloseto95%of theECApopulation.Thestandardizedconsumptionaggregatesareconstructedbasedonthemethodologydeveloped byDeatonandZaidi(2002),usingauniformsetofconsumptioncomponentsthataredeflatedforspatialpricedif- ferenceswithinthecountry(formostcountries),andovertimeusingtheCPI.Householdconsumptionpercapita isconvertedtointernationaldollartermsusingICPconversionfactorsandnationalCPIdata.ThestandardECA povertylinesofUS$2.5andUS$5.00perdayhavebeenusedforthisanalysis(seeAlamandSulla(2008)forthe discussiononthemethodofestimation).Foreachcountry,themostrecenthouseholdbudgetorLSMSsurveyhas beenused,withthemajorityofthesurveydatacollectedin2008and2009. 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