Remarks of IMF Deputy Managing Director Bo Li at the OEDNE Constituency Meeting
September 15, 2022
Good morning! Thank you Chairman Tegeltija, Minister Turković, and Governor Softić, and all members of the hosting team. And thanks to everyone who has traveled from near and far to join us in Sarajevo—a city that is both beautiful and resilient.
This constituency, and all of Europe, can draw inspiration from this place, to know that you can weather the harshest winter—and move “from crisis to recovery.”
The crises include the war in Ukraine, the ongoing pandemic, and a global increase in severe weather events linked to climate change. Together, they prove that we live in a more shock-prone world, with consequences for every economy—from high food and energy prices, to supply chain disruptions.
The economic outlook for Europe and the world is not good. The IMF has downgraded our growth forecast for Europe twice since the war began. We now know the global economy shrank two percent in the second quarter. And data coming in since then suggest the full year will be tough. We see slowdowns in each of the world’s largest economies—Europe, the U.S., and China.
Challenges and risks in OEDNE
Looking at additional challenges in the OEDNE[1] constituency, the Ukrainian people continue to bear the damages of war. And neighboring countries continue the substantial work of supporting nearly seven million refugees.
Headline inflation in the constituency in July, the latest available data, ranges from around five percent in Israel to nearly 32 percent in Moldova, with an average of nearly 13 percent. While food and energy account for nearly three-quarters of that, inflation has become more broad-based over the last year.
Going forward, downside risks predominate. For instance, an especially harsh winter could push gas prices even higher, and oil prices could rise as well. Droughts and heatwaves could worsen food insecurity next year. The pandemic could flare up again. And geoeconomic fragmentation could make all these problems worse, by undermining the ability of countries to work together to address them.
To avoid another bad experience with sustained high inflation, like many of your countries experienced not too long ago, policymakers will need to stay vigilant—and take further actions as needed to properly anchor inflation expectations.
But bringing down inflation will take time. Action is needed to minimize the people’s pain this winter, and beyond. So countries should provide relief from high food and energy prices. They also need to urgently bolster energy security, and advance the green energy transition.
High energy prices and initial policy responses
Some brief context on energy: Global fossil fuel prices recovered in 2021 from early-pandemic lows, then soared when the war in Ukraine broke out. Russia accounted for about 20 percent of global natural gas exports, 10 percent for crude oil, and 5 percent for coal. And Russia is deeply integrated into Europe’s energy markets and distribution networks.
Despite some recent relief, prices are still much higher than before the pandemic—nearly double for oil, and more than four times as much for coal. But the most extreme spike is in European natural gas prices—still more than 15 times pre-pandemic levels.
Retail energy prices vary by country based on regulations, policies, market structures, and contracting practices. In this constituency, the most common policy responses to price spikes have been broad-based price-suppressing measures, including subsidies, tax cuts and price controls.
In the Western Balkans specifically, several countries have maintained household electricity tariffs unchanged, while most countries have introduced price caps or profit margin limits on fuel, food, or both.
Suppressing the pass-through to retail prices only delays the needed adjustment—because it reduces incentives for households and businesses to save energy, and to switch out of fossil fuels. And it keeps global energy demand and prices higher than they would otherwise be.
To be blunt, excessive price suppression is also unaffordable—especially as global financial conditions continue to tighten. In many countries, the cost of holding down energy prices will exceed 1.5 percent of GDP this year.
Better ways to help families weather the energy crisis
So with fiscal space running low in most countries, policy should move toward allowing price signals to operate more freely. Countries like North Macedonia are taking necessary and prudent steps to move away from temporary tax cuts or unchanged electricity tariffs. But much more action is needed.
As they move away from broad price suppression, countries should focus their effort on targeted relief.
Countries that already have good safety nets and guaranteed minimum income programs can provide a fast response at a low administrative cost. The Netherlands, for instance, provided a one-off €800 energy allowance to social assistance recipients.
Where safety nets are fragmented, or do not reach some vulnerable households, uniform lump-sum transfers can be used instead. These can be vouchers, or discounts on energy bills. Where possible, they should be linked to income and household size. For instance, Moldova plans to help families pay heating bills this winter based on their income, the share of income spent on energy, type of home heating system, and household size.
At the current high level of energy prices, some middle class households that are not covered by existing safety nets may also need help. Where fiscal space allows, governments could try to reach them with direct transfers or through the tax system.
In countries where fiscal space is limited, support programs should be funded without increasing deficits, for example by raising progressive taxes or cutting lower priority spending.
Enhancing energy security and the green transition
The price shocks provide an opportunity to secure diverse energy supplies, increase energy efficiency and speed the green transition.
In the short term, Serbia is looking at buying Azerbaijani gas, and building a connection to Bulgaria’s pipeline. While it is not a member of this constituency, Serbia’s example as a neighbor is useful. Croatia plans to expand its liquified natural gas import terminal. And the Southern Pipeline also provides the Western Balkans with access to diverse gas supplies. But it is important to avoid substantial new long-term investments in fossil fuels, which would set back our progress on climate goals.
Gas emits less carbon than other fossil fuels, but burning gas cannot delay urgently needed progress on the green transition. Energy conservation, strengthened incentives to invest in low carbon sources, storage, and interconnections are essential.
The Western Balkans could strengthen its renewable supplies and climate policies and regulations. Bosnia and Herzegovina, for instance, could benefit from a state energy law to develop the market for renewables, boost competition, and encourage investment.
Done right, the green transition will ultimately also enhance energy security.
I’ve focused on energy issues because there is much room to strengthen policy in this area. But before I conclude, let me speak briefly about food—the biggest driver of inflation in many lower-income OEDNE countries.
High food prices are weighing heaviest on families with lower incomes, and targeted support is critical. The immediate supports I’ve mentioned for energy will help on food as well. And governments should start now on steps to improve targeting and efficiency in the medium-term. Western Balkan countries, for instance, could collect more data on household incomes and enhance the coverage of social safety nets.
The role of the IMF
Addressing all the crises we have discussed today will be difficult. But Europe and the countries of this constituency do not face them alone. Among your many friends are the World Bank and, of course, the IMF.
From the early days of the pandemic, through the war in Ukraine, to this day, the Fund has worked to support your countries. We have brought our full toolkit of policy advice, capacity building, and lending to bear.
For example, we provided policy advice on labor market issues to countries including the Netherlands. We helped the Israeli authorities expand their macro-modeling capacity. And we provided financing to Armenia, Moldova, and Ukraine—in addition to last year’s allocation of special drawing rights that benefitted all members.
Going forward, we will work with members throughout the OEDNE constituency to understand your needs even better. And we will strive to further improve our services to you.
On the road from crisis to recovery, we hope you will continue to see the IMF as your trusted partner.
Thank you.
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[1] The OEDNE constituency is comprised of Andorra, Armenia, Belgium, Bosnia and Herzegovina, Bulgaria, Croatia, Cyprus, Georgia, Israel, Luxembourg, Moldova, Montenegro, Netherlands, Republic of North Macedonia, Romania, and Ukraine.