Energy efficiency is emerging as one of the most viable options for climate change mitigation in South Asia, where urbanization, economic growth and expanding middle class is resulting in rapidly growing energy demand, which will continue to be fueled largely by fossil fuels. Realizing the fact that fostering energy efficiency is an impediment and not a choice anymore, these countries have started making major efforts to scale up energy efficiency as a part of meeting national goals through their low-carbon roadmaps and to help meet their global commitments through Nationally Determined Contributions (NDC) targets.
Transforming energy efficiency markets on scale requires addressing several barriers which most developing countries face. One way to leap-frog into scaling up efforts in the energy efficiency area is to learn from others on how to become more energy efficient and adapt and apply those implementation models. It was against this backdrop, that a group of energy practitioners from Bangladesh, India, Nepal, Pakistan and Sri Lanka came together in Korea on Feb 26 to March 2 this year, to learn from each other through the South-South Knowledge Exchange Program on Energy Efficiency. Organized by the Korea Energy Agency, in collaboration with the World Bank and with support from the Korea-World Bank Partnership Facility, this week-long training provided a great opportunity for 12 experts from South Asia, along with World Bank energy specialists and practitioners from Korean organizations to learn about energy efficiency policies, business models and financing mechanisms to promote demand-side energy efficiency improvements across different sectors.
This exchange program provided a platform for dissemination, sharing and exchange of knowledge, primarily drawing upon Korea’s extensive leadership in the area of energy efficiency and demand side management. This has been reinforced by robust policies and legislations since 1980, and supported by financial mechanisms, institutional development and increased awareness. Korea’s experience in energy efficiency is even more relevant – it meets 95% of its energy needs through imported resources, contributing almost a quarter of the country’s total imports. Through its energy efficiency and green growth strategies, Korea has been able to reduce its energy intensity in industries and buildings through the application of robust and innovative measures and targets. The knowledge exchange platform provided a chance to the World Bank specialists, country practitioners from South Asia and key players in energy efficiency from Korea to network amongst themselves and understand the challenges and solutions.
During this week, the participants attended a blend of classroom presentations and training in energy efficiency and demand side management at the headquarters of the Korea Energy Agency located in Yongin-si, Gyeounggi-do, about 40 kilometers outside of Seoul – as well as a visited a number of relevant stes in and around Seoul where modern, innovative energy efficiency solutions are put into practice. Leading Korean experts from the Korea Energy Agency, energy saving companies (ESCOs – firms which design, finance and implement energy savings projects) and other experts from Korea, along with the Global Green Growth Institute and the Green Climate Fund, met and discussed on a host of issues – ranging from industrial energy efficiency, energy efficiency in buildings and public facilities (e.g., street lighting) to ESCO and energy financing mechanisms, energy auditing, energy efficiency standards and labelling programs for appliances, building codes as well as financial mechanisms like soft loans and tax incentives to support energy efficiency investments. The participants actively engaged with the trainers to learn more about success factors and how those could be replicated in their respective countries.
Participants learned about the importance of concessional loans for energy efficiency investments. These are provided with an interest rate of 1.5% (below the market rate), up to 10 years tenor and with a grace period from three to seven years, in addition to a tax credit of up to 10%. The mandatory energy auditing introduced in Korea in 2007, targets 3,400 facilities of energy-intensive companies using more than 2,000 ton-oil-equivalent per year. Another topic that impressed the participants was Korea’s ESCO program with its Energy Use Rationalization Fund through which the banks lend (up to USD 18 million per project) to ESCO projects. With 310 registered ESCOs, their market and business in Korea has boomed in recent years, with USD 1.3 billion in loans to ESCOs during 2014 to 2016. The innovative ESCO factoring business model of financial transaction where a business sells its accounts receivable to a third party at a discount in exchange for immediate cash – has been successful in addressing the ESCO liability issues in Korea.
During the visit to Land and Housing “Smartium”, participants saw how Korean government housing policies and programs are supporting development of with buildings and homes with state-of-the-art energy efficient appliances and systems, ranging from intelligent refrigerators to smart dressers to organic waste recycling systems. The Seoul Metropolitan Government showcased a highly energy efficient building where more than 28 percent of the energy used comes from eco-friendly energy sources, like photovoltaic solar panels, solar thermal and geothermal – and the Lotte World Tower – Korea’s tallest building and the 5th tallest in the world, with a very modern, green construction practices have been adopted.
Over the time, the World Bank Group has funded several energy efficiency efforts worldwide, with the Bank’s own resources supplemented by Clean Technology Fund (CTF) and Global Environment Facility (GEF) and other resources. The financing mechanisms included credit lines, risk sharing facilities, dedicated funds, program-for-results (PforR), and development policy loans. One of best case practice in this respect is the proposed new US$300 million PforR-cum-guarantee India Energy Efficiency Scale Up Operation with EESL which should leverage over $1.5 billion of demand side energy efficiency investments across residential and public sectors in this South Asian nation. This knowledge exchange program provided an opportunity for the participants to also share knowledge based on the experience from their own countries in South Asia and engage in active discussions to explore ideas that they could pursue upon their return home. For instance, they learned about the successful story of the largest Light Emitting Diode (LED) bulb distribution program in the world (about 300 million LED bulbs) in India implemented under the ULAJA program by Energy Efficiency Services Limited (EESL), the world’s largest public ESCO.
The one-week interaction in Korea added a new page to the successful partnership and cooperation in energy efficiency between the World Bank and the Korea Energy Agency that started over ten years ago. At the end of the one-week training, the participants noted that the program was very rewarding. They were not only content about the level of knowledge they acquired and of which their countries can potentially benefit from, but also that they were able to learn from each other about their accomplishments and challenges, especially given that some of these South Asian nations are in their early stage on the path towards more energy efficient economies.
The Monetary Policy of Pakistan: SBP Maintains the Policy Rate
The State Bank of Pakistan (SBP) announced its bi-monthly monetary policy yesterday, 27th July 2021. Pakistan’s Central bank retained the benchmark interest rate at 7% after reviewing the national economy in midst of a fourth wave of the coronavirus surging throughout the country. The policy rate is a huge factor that relents the growth and inflationary pressures in an economy. The rate was majorly retained due to the growing consumer and business confidence as the global economy rebounds from the coronavirus. The State Bank had slashed the interest rate by 625 basis points to 7% back in the March-June 2020 in the wake of the covid pandemic wreaking havoc on the struggling industries of Pakistan. In a poll conducted earlier, about 89% of the participants expected this outcome of the session. It was a leap of confidence from the last poll conducted in May when 73% of the participants expected the State Bank to hold the discount rate at this level.
The State Bank Governor, Dr. Raza Baqir, emphasized that the Monetary Policy Committee (MPC) has resorted to holding the 7% discount rate to allow the economy to recover properly. He added that the central bank would not hike the interest rate until the demand shows noticeable growth and becomes sustainable. He echoed the sage economists by reminding them that the State Bank wants to relay a breather to Pakistan’s economy before pushing the brakes. The MPC further asserted that the Real Discount Rate (adjusted for inflation) currently stands at -3% which has significantly cushioned the economy and encouraged smaller industries to grow despite the throes of the pandemic.
Dr. Raza Baqir further went on to discuss the current account deficit staged last month. He added that the 11-month streak of the current account surplus was cut short largely due to the loan payments made in June. The MPC further explained that multiple factors including an impending expiration of the federal budget, concurrent payments due to lenders, and import of vaccines, weighed heavily down on the national exchequer. He further iterated that the State Bank expects a rise in exports along with a sustained recovery in the remittance flow till the end of 2021 to once again upend the current account into surplus. Dr. Raza Baqir assured that the current level of the current account deficit (standing at 3% of the GDP) is stable. The MPC reminded that majority of the developing countries stand with a current account deficit due to growth prospects and import dependency. The claims were backed as Dr. Raza Baqir voiced his optimism regarding the GDP growth extending from 3.9% to 5% by the end of FY21-22.
Regarding currency depreciation, Dr. Baqir added that the downfall is largely associated with the strengthening greenback in the global market coupled with high volatility in the oil market which disgruntled almost every oil-importing country, including Pakistan. He further remarked, however, that as the global economy is vying stability, the situation would brighten up in the forthcoming months. Mr. Baqir emphasized that the current account deficit stands at the lowest level in the last decade while the remittances have grown by 25% relative to yesteryear. Combined with proceeds from the recently floated Eurobonds and financial assistance from international lenders including the IMF and the World Bank, both the currency and the deficit would eventually recover as the global market corrects in the following months.
Lastly, the Governor State Bank addressed the rampant inflation in the economy. He stated that despite a hyperinflation scenario that clocked 8.9% inflation last month, the discount rates are deliberately kept below. Mr. Baqir added that the inflation rate was largely within the limits of 7-9% inflation gauged by the State Bank earlier this year. However, he further added that the State Bank is making efforts to curb the unrelenting inflation. He remarked that as the peak summer demand is closing with July, the one-way pressure on the rupee would subsequently plummet and would allow relief in prices.
The MPC has retained the discount rate at 7% for the fifth consecutive time. The policy shows that despite a rebound in growth and prosperity, the threat of the delta variant still looms. Karachi, Pakistan’s busiest metropolis and commercial hub, has recently witnessed a considerable surge in infections. The positivity ratio clocked 26% in Karachi as the national figure inched towards 7% positivity. The worrisome situation warrants the decision of the State Bank of Pakistan. Dr. Raza Baqir concluded the session by assuring that despite raging inflation, the State Bank would not resort to a rate hike until the economy fully returns to the pre-pandemic levels of employment and production. He further assuaged the concerns by signifying the future hike in the policy rate would be gradual in nature, contrast to the 2019 hike that shuffled the markets beyond expectation.
Reforms Key to Romania’s Resilient Recovery
Over the past decade, Romania has achieved a remarkable track record of high economic growth, sustained poverty reduction, and rising household incomes. An EU member since 2007, the country’s economic growth was one of the highest in the EU during the period 2010-2020.
Like the rest of the world, however, Romania has been profoundly impacted by the COVID-19 pandemic. In 2020, the economy contracted by 3.9 percent and the unemployment rate reached 5.5 percent in July before dropping slightly to 5.3 percent in December. Trade and services decreased by 4.7 percent, while sectors such as tourism and hospitality were severely affected. Hard won gains in poverty reduction were temporarily reversed and social and economic inequality increased.
The Romanian government acted swiftly in response to the crisis, providing a fiscal stimulus of 4.4 percent of GDP in 2020 to help keep the economy moving. Economic activity was also supported by a resilient private sector. Today, Romania’s economy is showing good signs of recovery and is projected to grow at around 7 percent in 2021, making it one of the few EU economies expected to reach pre-pandemic growth levels this year. This is very promising.
Yet the road ahead remains highly uncertain, and Romania faces several important challenges.
The pandemic has exposed the vulnerability of Romania’s institutions to adverse shocks, exacerbated existing fiscal pressures, and widened gaps in healthcare, education, employment, and social protection.
Poverty increased significantly among the population in 2020, especially among vulnerable communities such as the Roma, and remains elevated in 2021 due to the triple-hit of the ongoing pandemic, poor agricultural yields, and declining remittance incomes.
Frontline workers, low-skilled and temporary workers, the self-employed, women, youth, and small businesses have all been disproportionately impacted by the crisis, including through lost salaries, jobs, and opportunities.
The pandemic has also highlighted deep-rooted inequalities. Jobs in the informal sector and critical income via remittances from abroad have been severely limited for communities that depend on them most, especially the Roma, the country’s most vulnerable group.
How can Romania address these challenges and ensure a green, resilient, and inclusive recovery for all?
Reforms in several key areas can pave the way forward.
First, tax policy and administration require further progress. If Romania is to spend more on pensions, education, or health, it must boost revenue collection. Currently, Romania collects less than 27 percent of GDP in budget revenue, which is the second lowest share in the EU. Measures to increase revenues and efficiency could include improving tax revenue collection, including through digitalization of tax administration and removal of tax exemptions, for example.
Second, public expenditure priorities require adjustment. With the third lowest public spending per GDP among EU countries, Romania already has limited space to cut expenditures, but could focus on making them more efficient, while addressing pressures stemming from its large public sector wage bill. Public employment and wages, for instance, would benefit from a review of wage structures and linking pay with performance.
Third, ensuring sustainability of the country’s pension fund is a high priority. The deficit of the pension fund is currently around 2 percent of GDP, which is subsidized from the state budget. The fund would therefore benefit from closer examination of the pension indexation formula, the number of years of contribution, and the role of special pensions.
Fourth is reform and restructuring of State-Owned Enterprises, which play a significant role in Romania’s economy. SOEs account for about 4.5 percent of employment and are dominant in vital sectors such as transport and energy. Immediate steps could include improving corporate governance of SOEs and careful analysis of the selection and reward of SOE executives and non-executive bodies, which must be done objectively to ensure that management acts in the best interest of companies.
Finally, enhancing social protection must be central to the government’s efforts to boost effectiveness of the public sector and deliver better services for citizens. Better targeted social assistance will be more effective in reaching and supporting vulnerable households and individuals. Strategic investments in infrastructure, people’s skills development, and public services can also help close the large gaps that exist across regions.
None of this will be possible without sustained commitment and dedicated resources. Fortunately, Romania will be able to access significant EU funds through its National Recovery and Resilience Plan, which will enable greater investment in large and important sectors such as transportation, infrastructure to support greater deployment of renewable energy, education, and healthcare.
Achieving a resilient post-pandemic recovery will also mean advancing in critical areas like green transition and digital transformation – major new opportunities to generate substantial returns on investment for Romania’s economy.
I recently returned from my first official trip to Romania where I met with country and government leaders, civil society representatives, academia, and members of the local community. We discussed a wide range of topics including reforms, fiscal consolidation, social inclusion, renewably energy, and disaster risk management. I was highly impressed by their determination to see Romania emerge even stronger from the pandemic. I believe it is possible. To this end, I reiterated the World Bank’s continued support to all Romanians for a safe, bright, and prosperous future.
First appeared in Romanian language in Digi24.ro, via World Bank
US Economic Turmoil: The Paradox of Recovery and Inflation
The US economy has been a rollercoaster since the pandemic cinched the world last year. As lockdowns turned into routine and the buzz of a bustling life came to a sudden halt, a problem manifested itself to the US regime. The problem of sustaining economic activity while simultaneously fighting the virus. It was the intent of ‘The American Rescue Plan’ to provide aid to the US citizens, expand healthcare, and help buoy the population as the recession was all but imminent. Now as the global economy starts to rebound in apparent post-pandemic reality, the US regime faces a dilemma. Either tighten the screws on the overheating economy and risk putting an early break on recovery or let the economy expand and face a prospect of unrelenting inflation for years to follow.
The Consumer Price Index, the core measure of inflation, has been off the radar over the past few months. The CPI remained largely over the 4% mark in the second quarter, clocking a colossal figure of 5.4% last month. While the inflation is deemed transitionary, heated by supply bottlenecks coinciding with swelling demand, the pandemic-related causes only explain a partial reality of the blooming clout of prices. Bloomberg data shows that transitory factors pushing the prices haywire account for hotel fares, airline costs, and rentals. Industries facing an offshoot surge in prices include the automobile industry and the Real estate market. However, the main factors driving the prices are shortages of core raw materials like computer chips and timber (essential to the efficient supply functions of the respective industries). Despite accounting for the temporal effect of certain factors, however, the inflation seems hardly controlled; perverse to the position opined by Fed Chair Jerome Powell.
The Fed already insinuated earlier that the economy recovered sooner than originally expected, making it worthwhile to ponder over pulling the plug on the doveish leverage that allowed the economy to persevere through the pandemic. The main cause was the rampant inflation – way off the 2% targetted inflation level. However, the alluded remarks were deftly handled to avoid a panic in an already fragile road to recovery. The economic figures shed some light on the true nature of the US economy which baffled the Fed. The consumer expectations, as per Bloomberg’s data, show that prices are to inflate further by 4.8% over the course of the following 12 months. Moreover, the data shows that the investor sentiment gauged from the bond market rally is also up to 2.5% expected inflation over the corresponding period. Furthermore, a survey from the National Federation of Independent Business (NFIB) suggested that net 47 companies have raised their average prices since May by seven percentage points; the largest surge in four decades. It is all too much to overwhelm any reader that the data shows the economy is reeling with inflation – and the Fed is not clear whether it is transitionary or would outlast the pandemic itself.
Economists, however, have shown faith in the tools and nerves of the Federal Reserve. Even the IMF commended the Fed’s response and tactical strategies implemented to trestle the battered economy. However, much averse to the celebration of a win over the pandemic, the fight is still not through the trough. As the Delta variant continues to amass cases in the United States, the championed vaccinations are being questioned. While it is explicable that the surge is almost distinctly in the unvaccinated or low-vaccinated states, the threat is all that is enough to drive fear and speculation throughout the country. The effects are showing as, despite a lucrative economic rebound, over 9 million positions lay vacant for employment. The prices are billowing yet the growth is stagnating as supply is still lukewarm and people are still wary of returning to work. The job market casts a recession-like scenario while the demand is strong which in turn is driving the wages into the competitive territory. This wage-price spiral would fuel inflation, presumably for years as embedded expectations of employees would be hard to nudge lower. Remember prices and wages are always sticky downwards!
Now the paradox stands. As Congress is allegedly embarking on signing a $4 trillion economic plan, presented by president Joe Bidden, the matters are to turn all the more complex and difficult to follow. While the infrastructure bill would not be a hard press on short-term inflation, the iteration of tax credits and social spending programs would most likely fuel the inflation further. It is true that if the virus resurges, there won’t be any other option to keep the economy afloat. However, a bustling inflationary environment would eventually push the Fed to put the brakes on by either raising the interest rates or by gradually ceasing its Asset Purchase Program. Both the tools, however, would risk a premature contraction which could pull the United States into an economic spiral quite similar to that of the deflating Japanese economy. It is, therefore, a tough stance to take whether a whiff of stagflation today is merely provisional or are these some insidious early signs to be heeded in a deliberate fashion and rectified immediately.
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