Ukraine's economy will shrink an estimated 45 per cent this year as a result of Russia's military offensive in the country, with emerging market and developing countries in Europe and Central Asia expected to bear the brunt of the conflict, according to the World Bank.
The magnitude of Ukraine's contraction will depend on the duration and intensity of the war, the Washington-based lender said on Sunday.
“Ukraine needs massive financial support immediately as it struggles to keep its economy going and the government running to support Ukrainian citizens who are suffering and coping with an extreme situation,” said Anna Bjerde, World Bank Vice President for Europe and Central Asia.
The economy of Russia, which sent its troops into Ukraine on February 24, is forecast to contract about 11 per cent, the bank said. The economy of the world's second largest energy exporter has plunged into a recession as the US and its allies impose various sanctions against it for the war in Ukraine. Russia's economy is projected to contract 15 per cent this year, according to the Institute of International Finance.
Output of emerging market and developing countries in Europe and Central Asia is expected to shrink 4.1 per cent this year, compared with the pre-war 3 per cent growth forecast, due to the compounded impact of the economic shocks from the war and the ongoing Covid-19 pandemic, the World Bank said. This would be the second contraction in as many years, and twice as large as the pandemic-induced contraction in 2020.
The conflict, which has entered its second month, is likely to compel the International Monetary Fund to lower its projections for the global economy, when it releases them this month. The fund had already lowered its global growth projection for 2022 to 4.4 per cent. The estimate in January was half a percentage point lower than its October 2021 projection as a result of weaker economic momentum in the US and China amid rising inflation and higher energy prices.
The war could reduce global gross domestic product by as much as 1 per cent by 2023, or about $1 trillion, and add up to 3 per cent to global inflation in 2022 and about 2 percentage points in 2023, the UK’s National Institute for Economic and Social Research has said.
The sharp rise in oil and gas prices will further stoke inflation and crimp growth, putting some of the emerging market economies, with little policy headroom, in a difficult spot.
"The war has added to mounting concerns of a sharp global slowdown, surging inflation and debt, and a spike in poverty levels. The economic impact has reverberated through multiple channels, including commodity and financial markets, trade and migration links and adverse impact on confidence," the World Bank said.
Emerging and developing economies of Europe and Central Asia, already heading for an economic slowdown this year from the ongoing effects of the pandemic have been hit hard by the reverberations of the Ukraine war.
Belarus, Kyrgyz Republic, Moldova and Tajikistan are projected to fall into recession this year, while growth projections have been downgraded in all regional economies due to spillovers from the war, weaker-than-expected growth in the euro area, and commodity, trade and financing shocks, the World Bank said.
Russia and Ukraine account for about 40 per cent of wheat imports in the region and about 75 per cent or more in Central Asia and the South Caucasus. Russia is also a major export destination for many countries, while remittances from Russia are close to 30 per cent of gross domestic product in some Central Asian economies, said the bank.
“Governments in the region should fortify their macroeconomic buffers and credibility of their policies to contain risks and deal with potential fragmentation of trade and investment channels; strengthen their social safety nets to protect the most vulnerable, including the refugees; and not lose focus on improving energy efficiency to ensure a sustainable future,” said Asli Demirguc-Kunt, World Bank chief economist for Europe and Central Asia.
The lender said a surge in global oil prices to multi-year highs underscores the need to ensure energy security through boosting supply from renewable sources and accelerating the design and implementation of large-scale energy efficiency measures.
Oil prices have retreated from 14-year highs in March. Brent, the global benchmark for two thirds of the world's oil, was 2.35 per cent lower trading at $100.4 a barrel at 8.11am UAE time on Monday. West Texas Intermediate, the gauge that tracks US crude, was 2.47 per cent lower at $95.83 a barrel. Brent hit $139.13 a barrel on March 7 and WTI $130.50.