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Energy Shock Hitting Poorer Nations Reliant on Imports Hardest

A vendor preparing pakora is illuminated by a fire and a solar-powered bulb at a store in Sujawal, Sindh, Pakistan, on Tuesday, April 10, 2018. Rural Pakistanis are increasingly turning to renewable energy to circumvent the country’s notoriously unreliable power supply. Photographer: Asim Hafeez/Bloomberg

The commodity price spike that’s been worsened by Russia’s invasion of Ukraine isn’t an equal-opportunity dispenser of economic distress.

The surging energy costs are causing headaches for governments around the world, but they’re especially painful for poorer nations that rely heavily on imported fuels. These countries don’t have the fiscal buffer enjoyed by wealthier peers, and can’t count on increased revenue from their own exports.

Morocco, Thailand, Vietnam and Pakistan are some of the most-affected larger economies, based on energy import and gross domestic product data from the United Nations. Poorer families in those countries — and others — will find it tougher to buy basic goods, manufacturing sectors that support millions of jobs will be at risk, and some governments may even find themselves under threat.

Energy Exposure

“Consumers will see their spending power decline and businesses will face increasing production costs,” said Matteo Lanzafame, a senior economist at the Asian Development Bank. The energy shock could push up inflation by 2 percentage points in emerging markets this year, or even more for nations where transport looms large in the CPI basket, he said.

The effects of the fuel crunch are already filtering down to the real economy. Sri Lanka was forced to hike gasoline prices by more than 40% last week after its rupee plunged to record lows. Bangladesh and Pakistan are becoming increasingly desperate for spot shipments of liquefied natural gas, with both issuing tenders this week.

See also: Shock Waves From the War in Ukraine Threaten to Swamp Sri Lanka

Pakistan is also struggling to buy enough diesel to power its economy as European nations outbid it to make up for shunned Russian supplies. The situation is straining government finances after Prime Minister Imran Khan cut domestic fuel and electricity prices at the start of March, jeopardizing a bailout from the International Monetary Fund.

“Countries like Pakistan will be really stretched financially and will require financial support to import LNG and pass through all the costs downstream,” said Ira Joseph, head of gas and power analytics at S&P Global Commodity Insights. “End users in many countries will be unable to afford burning gas at these prices, so someone will have to pick up the spread between the import price and the price at the point of consumption to keep the economy going.”

The rising prices are an extra drag on state finances for governments that subsidize transport and cooking fuel. Indonesia is considering raising fuel prices to keep its deficit in check, while Thailand said last week it can maintain diesel subsidies until possibly May.

Energy Imports as Percentage of GDP

India is expected to sharply increase energy prices this month after freezing them in the run-up to state elections. Coal India Ltd., the world’s largest miner of the fuel, has warned that production may be hampered if it isn’t able to raise prices. The economy will grow slower than previously forecast this year, in part because of rising commodity costs, the government said last month.

The problems are being exacerbated by the strengthening dollar, the currency of choice for global energy markets. A more valuable greenback means it takes more local currency to buy the same amount of oil, gas or coal, although it also makes the poorer nations’ exports relatively cheaper.

There are a variety of policy tools that can be used to try and mitigate the impacts of the energy crunch. The ADB’s Lanzafame suggests giving subsidies to the poorest segments of the population, who spend disproportionately more of their income on energy. Some governments may also roll back fuel taxes.

In the longer run, though, the best solution is to become less reliant on imported fuel, according to Yanting Zhou, principal economist at Wood Mackenzie Ltd. That can be done by increasing the share of renewables in the energy mix, or by securing more oil, gas and coal. There’s scope right now to do the latter, as Western oil majors are keen to sell assets.

“With developed economies and energy companies looking to diversify from oil, gas, and coal assets, developing countries may get a better chance increase ownership of fossil fuel assets,” Zhou said.


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