East Asia and Pacific economic recovery threatened by Russia-Ukraine war, World Bank says

Russia's military offensive in Ukraine, and the subsequent sanctions imposed on Moscow as a result, threaten the uneven recovery of developing East Asia and Pacific countries from the Covid-19 pandemic, the World Bank has said.

The ongoing conflict has added to the woes caused by the economic distress due to the lingering Covid-19 pandemic and the financial tightening in the US, the Washington-based lender said in a report on Tuesday.

The war has disrupted supply chains, escalated financial stress and dampened global growth, the report said.

“Just as the economies of East Asia and the Pacific were recovering from the pandemic-induced shock, the war in Ukraine is weighing on growth momentum,” Manuela V Ferro, the World Bank’s vice president for the region, said.

“The region’s largely strong fundamentals and sound policies should help it weather these storms.”

The Russia-Ukraine crisis has already pushed global oil prices to multi-year highs, raising transport costs, worsening already high inflation levels, driving up the prices of basic goods and denting the tentative growth of a global economy that was just recovering from the Covid-19 pandemic and potentially tipping some countries into a recession.

While commodity producers and fiscally prudent countries in East Asia and Pacific may be better equipped to weather these shocks, the repercussions of these events will diminish the growth prospects of most in the region, the World Bank said.

The countries which are large importers of fuel, such as Mongolia and Thailand, and food — the Pacific Islands — are experiencing a decline in incomes. Whereas, the economies with large debt, like Laos and Mongolia, and high dependence on exports — like Malaysia and Vietnam — are susceptible to global financial and growth shocks, it added.

“The succession of shocks means that the growing economic pain of the people will have to face the shrinking financial capacity of their governments,” Aaditya Mattoo, World Bank’s East Asia and Pacific chief economist, said.

“A combination of fiscal, financial and trade reforms could mitigate risks, revive growth and reduce poverty.”

Overall economic growth in the region is expected to drop to 5 per cent this year — 0.4 percentage point less than expected in October. If global conditions worsen and national policy responses are weak, growth could further slow to 4 per cent, the lender said.

China, which accounts for 86 per cent of the regional output, is projected to grow 5 per cent in the baseline and 4 per cent in the downside scenario. Output in the rest of the region is projected to expand 4.8 per cent in the baseline and 4.2 per cent in the downside circumstances.

In the downside scenario, six million more people in the region would remain trapped in poverty this year at the $5.50/day poverty line, the report said.

The World Bank also recommended policy actions to control the situation.

Instead of price controls and unselective assistance, targeted support to households and firms would limit shocks and create space for growth enhancing investment, it said.

“Stress-testing financial institutions could help identify risks that fester behind the veil of regulatory forbearance. Reform of trade-related policies in goods and, especially, in still-protected services sectors, would enable countries to take advantage of shifts in the global trade landscape,” the report said.

Improving skills and enhancing competition would strengthen the capacity and incentive to adopt new digital technologies, it added.