How low-income countries are weathering high oil prices

• Pages: 288-289

Page 288

With oil prices at record highs recently in nominal terms, it is perhaps surprising that countries that import oil have not come under greater macroeconomic pressure and that the demand for IMF resources has not been greater. In a new Working Paper, a team in the IMF's Policy Development and Review Department examined the effect of the recent rise in oil prices on the balance of payments and fiscal positions of oil-importing low-income countries that are eligible for IMF assistance under its Poverty Reduction and Growth Facility (PRGF). The authors found that more favorable global economic and financial conditions, strong capital inflows, and lower oil import volumes-a response to the high pass-through of world prices to domestic prices- have helped countries cope with the higher prices.

Global output and trade have been much more vigorous in the current period of high petroleum prices than they were in earlier such periods. And although nominal oil prices reached new highs in 2005-06, real prices have remained below their 1980 peak. Moreover, consistent with demand-side pressures from global growth-in contrast to the sharp supply-side shocks of the 1970s-the price rise over 2003-05 occurred relatively gradually, allowing countries more time to adjust. Low-income countries were better positioned to absorb the shock because they entered the most recent period with larger reserves-at roughly double the import-cover ratios of the late 1970s.

Strong exports and capital inflows

The current account balances of low-income oil importers declined, on average, between 2003 and 2005, although, interestingly, the decline was driven in large part by increased non-oil imports. These countries' oil import bills rose, but the increase was attenuated by a small contraction in oil import volumes. Moreover, their exports increased in response to strong world demand and fully offset the impact of higher oil prices (see table). Expressed as a share of GDP, official transfers remained largely unchanged.

During 2003-05, the capital account of the typical low-income oil-importing country registered a strong improvement that, in turn, more than offset the current account deterioration. Higher official borrowing does not explain the capital account improvement, given that averages for both new borrowing and debt stocks fell. Although greater debt relief...