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Recovery Offers Chance to Build Back Better in Latin America and the Caribbean

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Latin America and the Caribbean (LAC) suffered more health and economic damage from the COVID 19 pandemic than any other region, although there is potential for significant transformation in key sectors as the region begins to rebound, according to a new World Bank Report.

Because of the pandemic, Gross Domestic Product (GDP) in the Latin America and Caribbean region (excluding Venezuela) fell 6.7% in 2020. A return to growth of 4.4% is expected in 2021. That compares to the Bank’s late 2020 forecast of a 7.9% GDP decline in 2020, and 4% expansion in 2021.

The immense disruption from the pandemic may lay the groundwork for higher productivity through economic restructuring and digitization. Other growth opportunities stem from innovations in the electricity sector, according to the World Bank LAC Semiannual report Renewing with Growth.

The damage has been severe and we’re seeing a lot of suffering, particularly among the most vulnerable,” said Carlos Felipe Jaramillo, World Bank Vice President for the Latin America and the Caribbean Region. “But we must always look ahead and seize on this opportunity to embrace the transformations needed to ensure a brighter future.”

The sharp contraction last year because of the pandemic had huge economic and social costs. Unemployment rates have generally increased and poverty rates shot up, although in some countries massive social transfers did much to cushion the social impact of the crisis.

The Covid-19 crisis will have a long-lasting impact on the economies of the region. Less learning and lower employment are bound to reduce future earnings, while high public and private debt may create stress for in financial sector and slow the recovery.

Despite the challenges, there are some bright spots. Global trade in goods held up relatively well, despite the sharp drop of trade in services, especially tourism. Most commodity prices are now higher than before the Covid-19 crisis, partly due to China’s quick rebound. This is good for exporters of agricultural and mining products. Remittances to the region are up compared to before the pandemic, which is very important to several countries in the Caribbean and Central America.

In addition, capital markets remained open to most countries in the region. Borrowing from abroad actually increased, which helped mitigate the economic and social impact of the Covid-19 crisis. Most countries in the region ran substantial budget deficits since the beginning of the pandemic, with the additional spending devoted to strengthening health systems, providing transfers to households, and helping firms. At the same time proactive measures helped debtors and reduced the risk of financial crises.

As economies rebound this year, some sectors and firms will gain and others will lose,” said Martín Rama, World Bank Chief Economist for the Latin America and the Caribbean region. “The pandemic has triggered a process of creative destruction that may lead to faster growth but may also amplify inequality within and across countries in the region.”

For example, hospitality and personal services may suffer long-term damage, but information technology, finance and logistics will expand. In the medium term, the gains could be larger than the losses. The biggest transformation could come from accelerated digitization, which could lead to greater dynamism in financial intermediation, international trade and labor markets.

Technology also brings the opportunity to transform the power sector. Latin America and the Caribbean has the cleanest electricity generation matrix of all developing regions, mainly due to the abundance of hydropower. The region should have the cheapest electricity in the developing world, but instead has the most expensive, mostly due to inefficiencies.

Firms and households in the region pay substantially more for the electricity they consume than it would cost to produce it. Inefficiencies are reflected in frequent power outages, technical and commercial losses, over-staffed state-owned utilities, and abuse of market power by private generators.

With the right institutional framework, technology could increase competition in the sector, bringing electricity prices down and increasing the share generated from renewable sources. For example, distributed generation could allow firms and households to rely on their own power sources, such as solar panels, to sell electricity to the grid or to buy from it depending on the hour of the day. In addition, increased cross-border electricity trade could capitalize on differences in installed capacity, generation cost and the timing of peak demand to generate mutual gains. However, these efficiency gains will only materialize if electricity can be sold and bought at the right price.

While there are signs that the economies of the region are rebounding and hopes that the disruption could have some positive outcomes, the outlook for this year remains uncertain. Vaccine rollout has been slow in most the region, and herd immunity may not be attained before the end of 2021 at the earliest. In addition, new waves of infection may come as new variants of the virus emerge. While actively preparing to build back better, protecting lives and livelihoods remains the priority.

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Potanin’s core business unfazed by personal sanctions

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The news agencies’ report that Vladimir Potanin the president of MMC Norilsk Nickel PJSC was first mentioned in the UK government’s restrictive measures caused an immediate increase in the price of metals used by electric car production clusters around the world and, as a consequence, worries about the labor market.

Great Britain on Wednesday announced sanctions against Potanin, news agencies reported.

Potanin, known as Russia’s “Nickel King”, was included in the latest wave of sanctions by Britain which included entrepreneurs, banks and other entities.

Potanin is one of Russia’s richest people, although his net worth depends largely on the value of his stake in Nornickel, the world’s largest producer of palladium and refined nickel.

Bloomberg reports that, palladium rose as much as 7.7% on the news, while nickel prices jumped 9.2% before paring gains.

The turnover of Norilsk Nickel in finnish Harjavalta last year amounted to about 1.2 billion euros, and the raw materials it processes come mainly from Russia, according to the Finnish business outlet Kauppalehti.

The Harjavalta Refinery is the main reason why the value of Russian nickel imports to Finland has outstripped oil imports, according to the Finnish customs data.

At Harjavalta, Norilsk Nickel produces about 5% of the world’s pure nickel supply.

In Finland, Norilsk Nickel is closely linked to the industrial center of Harjavalta, which employs a total of 1,000 people. Nornickel Harjavalta employs about 300 people.

If the EU and the US follow the UK’s lead, Nornickel could face a production freeze and nickel prices could soar. This, in turn, jeopardizes EU’s planned investments in battery factories, according to Kauppalehti.

As explained by the law firm Neuschwil and Bayer, unlike US sanctions, British sanctions apply to companies only if the sanctioned person owns 50 percent of its shares or over.

The other two big shareholders of the Russian nickel giant, Oleg Deripaska and Roman Abramovich, are under UK and US sanctions, and together with Potanin, their combined stake exceeds 50 percent.

As Neuschwil and Bayer explained, as long as only Potanin is involved in the operational management of Norilsk Nickel, there is no risk of sanctions for the company, even if other countries introduce sanctions against Potanin.

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Uganda Can Rein in Debt by Managing its Public Investments Better

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In the wake of a waning COVID-19 (coronavirus) pandemic and upon full re-opening of the economy, optimism—regarding expected acceleration of growth and a clearer outlook for oil production with the signing of the Final Investment Decision in February 2022—has been dampened by new global shocks, including the impacts of the war in Ukraine.

The 19th edition of the Uganda Economic Update (UEU): Fiscal Sustainability through Deeper Reform of Public Investment Management, a biannual analysis of Uganda’s near-term macroeconomic outlook, estimates growth at 3.7 percent in 2022, which is lower than pre-COVID-19 projections of over 6 percent. Uganda’s gross national income per capita stood at about $840 in FY21 and has increased only marginally in the year since.

Real gross domestic product grew by 4.3 percent in the first half of 2022 supported by a strong and speedy recovery of the service sector upon the opening of the leisure and entertainment industry, accommodation, and food services, as well as sustained buoyancy of the information and communications sector. The report projects a 5.1 percent growth rate in FY23, 0.5 percentage point below the December 2021 forecast, increasing to about 6 percent in FY24.

Rising commodity prices and the overall increase in cost of living pose new risks to livelihoods, that had just begun recovering from the effects of COVID-19. These and other shocks are threatening to stall socio-economic transformation, thus increasing the likelihood of the people falling deeper into poverty,” said Mukami Kariuki, World Bank Country Manager for Uganda. “It is therefore crucial for the Government of Uganda to adopt targeted interventions to support the vulnerable while managing debt and rising inflation.”

The UEU proposes four policy actions that will enable Uganda to sustain a resilient and inclusive recovery: i) accelerate vaccination efforts against COVID-19; ii) adopt targeted interventions to support the vulnerable – such as building shock responsive social protection systems; iii) maintain prudent fiscal and debt management to support the fiscal consolidation agenda; and iv) cautious monetary tightening in the face of rising inflationary pressures.

The report also recommends accelerating longer term structural reforms to (i) strengthen revenue mobilization through the implementation of the Domestic Revenue Mobilization Strategy; (ii) improve public investment management; (iii) rationalize public expenditure to support faster, sustainable, and inclusive growth by investing strongly in human capital development; and (iv) improve the trade and business environment and enable green investments.

The UEU notes that fiscal consolidation is needed to rein in debt and to create the necessary space to respond to shocks that could hurt or stall recovery. This can be done through better Public Investment Management (PIM) building on important reforms that have been undertaken by the government.  The benefits of these efforts are starting to show.

Uganda has a great opportunity to harness Public Investment Management by making sure that beyond preparing good projects, effort is also directed at ensuring that they are efficiently funded, implemented, monitored, operated, maintained, and evaluated.  These steps ensure that the country can reap the maximum value of public investments,” said Rachel Sebudde, World Bank Senior Economist and the lead author of the Uganda Economic Update. Strategic capacity building for government officials is crucial as it will improve the Ministries, Departments and Agencies’ effectiveness across the PIM cycle.”

Notwithstanding the progress achieved in the PIM process, key challenges remain. These include low execution rates on donor and own-budget projects; long implementation delays; cost- and time-overruns on projects; and high commitment fees in the case of non-concessional externally funded projects. Overall, the improvements around the administrative processes of the pre-investment phase of PIM are being discounted by challenges in critical areas, including project prioritization and selection, budgeting, and implementation.

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Cambodia’s Economy Growing but Must Weather Oil Price Shock

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Cambodia’s economy will grow by 4.5 percent in 2022, according to the latest World Bank projections. Weathering the Oil Price Shock, the Bank’s June 2022 economic update for Cambodia, shows that while domestic economic activity and goods exports continue to recover from the slowdown caused by COVID-19, growth remains uneven, with the war in Ukraine driving inflation.

The report shows that during the first quarter of 2022, goods exports rose to $4.8 billion, up by 26 percent on last year. Traditional growth drivers, especially garments, travel goods, and footwear continue to expand but newer manufacturing industries, such as for electrical and vehicle parts, are also emerging, while exports to the US are surging.

Although domestic economic momentum is strong, recovery is held back by deteriorating global demand. Rising global energy and food prices are fueling higher inflation, and in Cambodia, poor and vulnerable households with limited savings are likely to bear the brunt of the oil price shock. The fiscal deficit is expected to widen to 6.3 percent of GDP, as the government will need to continue spending programs to support the poor.

“The government’s Living with COVID-19 strategy has allowed Cambodia to reopen, enabling economic recovery,” said Maryam Salim, World Bank Country Manager for Cambodia. “However, the road ahead remains unclear. Rising energy and food prices due to the war in Ukraine are imposing additional burdens on the poor, and this will slow the pace of poverty reduction. The government’s cash transfer program, which has been vital to poor households during the pandemic, will continue to be needed.”

Over the medium term, the economy is expected to grow at around 6 percent annually, with the new investment law, together with free trade agreements, helping to boost investment and trade. The report recommends policies that can help sustain economic recovery. These include continued efforts to contain COVID-19 infection, strengthening consumer and investor confidence, promotion of exports, particularly in agricultural commodities, by facilitating trade and reducing the costs of doing business, and stabilization of retail prices.

The report also includes a special focus section on post-pandemic supply chain disruptions. It suggests strategies for reducing logistic costs and emphasizes that efforts to increase Cambodia’s trade competitiveness and enhance its connectivity will require a systematic approach that goes beyond improvement of physical assets. Efforts are needed to strengthen the entire supply chain by monitoring the efficiency of trade gateways and routes, expanding the “Best Trader scheme” to the wider logistics sector, developing a longer-term business plan for railways, and establishing the “Roadwatch,” hotline, through which traders and citizens can report irregularities. Implementing these reforms will require an institutional approach and a lead government agency that can oversee logistics development at the national and gateway levels.  

The Cambodia Economic Update is a biannual report that provides up-to-date information on short- and medium-term macroeconomic developments in Cambodia.

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