World Bank Warns Against Increasing Poverty due to Ukraine War

The World Bank has warned that the war in Ukraine threatens to permanently damage the economies of low- and middle-income countries, push millions of people into poverty and push dozens of countries into a debt crisis.

Rising commodity prices, collapsing trade growth, rising interest rates and a stronger US dollar will exacerbate financial pressures in many countries, making it difficult for net importers in particular to service mounting debts, said Indermit Gill, Vice President for Equitable Growth.

Gill added that rising oil and wheat prices alone would be enough to severely hamper growth in many developing countries unless the war ended quickly. Oil importers such as China, Indonesia, South Africa and Turkey were particularly vulnerable.

"If wheat and oil prices remain elevated for six months to a year, that will reduce a percentage point from the growth rates we were expecting a little more than a month ago," he said.

He noted that growth in developing countries was already in a prolonged decline before the war began. In January, the World Bank projected average output growth in developing countries to be 6.3% in 2021, 4.6% this year, and 4.4% in 2023.

Gill said a percentage point reduction in growth might be manageable in some Asian countries "but for Turkey or Brazil, it's huge."

Last year, the World Bank warned that about 100 million people will either fall back into poverty, where people live on less than $1.90 a day, or they will fall into poverty for the first time as a result of the coronavirus pandemic.

About 40 low-income countries are already in debt distress or at risk of debt distress due to the pandemic, he said, adding: "With war, debt crises may come much sooner, and that can cause a lot of lasting damage."

Analysts said that the economic impact of the war will not be evenly distributed, and is likely to be exacerbated by further disruption to supply chains due to coronavirus's restrictions in China.

A recent report by the Institute of International Finance (IIF), a consortium of the financial industry, compared the impact of the war on emerging markets through merchandise exports, and the overall effects of trade and commodity prices on current account balances.

Czech Republic and Hungary are particularly exposed to disrupted trade

It found that Central European countries such as Poland, the Czech Republic and Hungary were particularly exposed through disrupted trade with Ukraine and Russia.

Turkey and Egypt

While Turkey and Egypt were most exposed through trade and their dependence on oil and wheat imports.

The Institute of International Finance noted that commodity exporters in Latin America would benefit from higher food and fuel prices. But it cautioned that any further escalation of war and sanctions against Russia would likely cause random outflows of capital from all emerging markets.

Mark Rosenberg, CEO of political risk consultancy GeoQuant, said some of the countries most at risk economically, including Egypt, Turkey, India, South Africa and Thailand, have favorable relations with Russia.

While this would allow them to continue importing food or fuel from Russia, as India has done, it could also leave them exposed to greater repercussions from Western sanctions on Russia, and possibly its trading partners.

Rosenberg said that Egypt was the most exposed to the war, given its trade relations and the high risk of political instability. Last week, the country requested support from the International Monetary Fund (IMF). He added that India was also vulnerable to geopolitical tensions, having "damaged its relations with those countries that formed an anti-Russian alliance".

Ghana and Sri Lanka

Jill of the World Bank said that the economic damage from the war is likely to be most severe in countries that have no or few economic ties with Russia, such as Ghana and Sri Lanka, but that their economies will be hurt through trade disruption and deteriorating global financial conditions.

Many countries have had limited damages associated with the pandemic by providing support to businesses and households through debt-financed public spending, made possible by extremely low global interest rates and very lenient policies by central banks of advanced economies. But with monetary policy tightening around the world, developing countries have already exhausted their fiscal space.

“The damage from the pandemic was reversible because it could be dealt with through local politics,” Gill said. “But we are very worried about the war. It is not in the hands of local policy makers and this can lead to irreversible effects.”