World Bank: Russia's Invasion of Ukraine is hampering Post-Pandemic Economic Recovery

World | October 6, 2022, Thursday // 11:31
Bulgaria: World Bank: Russia's Invasion of Ukraine is hampering Post-Pandemic Economic Recovery

For Bulgaria, the growth forecast is 2.9% for this year.

The ongoing war in Ukraine has clouded prospects for post-pandemic economic recovery in emerging and developing economies in the Europe and Central Asia region, according to the World Bank's latest economic report on the region.

Economic activity will remain subdued next year, with marginal growth of 0.3% in 2023 as energy price shocks continue to affect the region. So far, however, the region has weathered the storm of the Russian invasion of Ukraine better than predicted. Manufacturing in the region is expected to contract by 0.2 percent this year, reporting stronger-than-expected growth in some of the region's largest economies and cautiously extending stimulus programs since the pandemic.

Ukraine's economy is now expected to shrink by 35% this year, although economic activity has been marked by the destruction of productive capacity, damage to farmland and reduced labor supply as more than 14 million people are estimated to be were displaced. According to the latest World Bank estimates, investment needs for recovery and reconstruction in the country's social, manufacturing and infrastructure sectors amount to at least $349 billion, which is more than 1.5 times the size of Ukraine's pre-war economy in 2021.

"The Russian invasion of Ukraine has caused one of the largest displacements and severe damage to economic life and ordinary people," said Anna Bjerde, the World Bank's vice president for the Europe and Central Asia region. "Ukraine needs both massive financial support while this unnecessary war continues, as well as recovery and reconstruction projects that can be quickly implemented."

The world economy has been weakened by the war due to significant trade disruptions and food and fuel price shocks, all of which contribute to high inflation and the subsequent tightening of financing globally. Economic activity in the Eurozone, the largest economic partner of emerging and developing economies (EMDEs) in Europe and Central Asia, deteriorated significantly in the second half of 2022 due to supply chain problems, financial difficulties and a decline in consumer confidence and business. The most damaging effects of the invasion of Ukraine have been related to the spike in energy prices amid major cuts in Russian energy supplies.

Downgrades to growth forecasts in 2023 are widespread across emerging and developing economies in Europe and Central Asia, as the region's outlook is particularly uncertain. A continuation and escalation of war could cause significantly greater economic and environmental damage and bring greater potential for the fragmentation of international trade and investment. The risk of financial stress also remains high given high levels of debt and inflation.

An additional part of the report dwells on the aspects of the energy crisis in the region. Global oil, gas and coal prices have been rising since the start of 2021, but their levels hit record highs after Russia's invasion of Ukraine, pumping inflation to levels not seen in decades. This unprecedented crisis has implications for consumers and governments alike – it constrains fiscal space, corporate productivity; and household welfare.

Countries with medium to high dependence on natural gas imports for heating (representing 30% of energy demand), industry or electricity generation, as well as countries closely linked to energy markets of the EU, will be most affected by the energy crisis. These countries should prepare for gas shortages and put in place contingency plans to mitigate the worst impacts on households and businesses, including energy conservation, increasing energy efficiency and implementing quotas. Other actions that require relatively minimal investment and have an immediate impact include conducting campaigns to change consumer behavior with a particular focus on heating efficiency in homes and buildings, such as sealing windows and adding insulation.

"The overlapping crises - the war in Ukraine, the ongoing pandemic and the spike in food and fuel prices - are a painful reminder to governments that they need to be prepared to manage massive, unexpected shocks that develop very quickly," Ms Bierde said. "The social protection systems that underpin anti-poverty efforts must be modernized to become effective in shocks as well as longer-term challenges."

The report also includes a special chapter on social protection systems in the region, which have played an important role in supporting households and businesses during the pandemic, as well as in meeting the consequences of the war in Ukraine.

Two broad policy instruments – income protection measures and job protection measures – were used in response to the pandemic in the region. The report assesses the effectiveness of these measures in promoting economic growth, reducing poverty and preserving jobs. The research finds that, in the short term, higher spending on job protection measures is associated with higher employment and less poverty. However, the effect of these growth-stimulating measures is not so categorically clear.

The lessons of the pandemic are important for policymakers to make social protection systems adaptive and inclusive to effectively address both short-term shocks to the economy and longer-term trends that are changing labor markets, including globalization, demographic trends, technological innovation and the impact of climate change and climate policies.

Policy interventions to build social protection systems in the future may include a combination of (a) guaranteed minimum income support designed to protect individuals and households from adverse shocks, (b) regulatory reforms that gradually remove restrictions on hiring practices, and redundancies and ultimately support private sector job creation and the reduction of the informal sector; (c) enhanced coverage and protection of vulnerable groups; and (d) digitization to improve the quality and quantity of services provided.

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