Even as growth prospects remain good for next year, high oil prices and the increasing current account deficit of the United States and its role in imbalances in the global financial system could be cause for concern, says Nigerian Finance Minister Dr. Shamsuddeen Usman.
Minister Usman in delivering opening remarks on the World Economic Outlook and Prospects in the first plenary session of the Commonwealth Finance Ministers Meeting (CFMM) yesterday morning noted that the world economy grew by over 5.2% in 2004-2005 and in 2006 by 5.5% – highlighting that this was widespread across countries.
This session was held at the Guyana International Conference Centre (GICC), Liliendaal, East Coast Demerara. The CFMM ends today. “This growth has been more widespread across countries, with two-thirds of countries growing by 4% or more. Only 5% of countries grew by less than 1%,” the Nigerian Finance Minister said in a prepared statement.
The outlook for 2007-2008 remains bright, he noted, with a projected real growth rate of 5.2%, albeit a lower one than in 2006.
It was pointed out that this follows the sub-prime lending crisis in the United States, the impact of high oil prices and possibly the adjustment to the global imbalances.
“But the key message,” the minister said, “is the need for increased international cooperation to ensure a soft landing for the global economy.”
Dr. Usman observed that while it is true that high oil prices have not had too many negative impacts, it has contributed to a source of extra burden to poor importing markets. And even for oil producers it is an important macro-economic policy issue for the management of the windfall from oil profits. Oil prices, he noted, were around US$85 per barrel.
“Both the level and volatility of oil prices are driven primarily by increased demand from major emerging economies, uncertainties over future supplies in the Middle East as well as by bottlenecks in the refinery industry, rather than by physical shortage of crude oil,” he said.
OPEC countries such as Nigeria were said to be producing at near full capacity and committing fresh resources into new oil and gas investments.
“In the meantime, a combination of improved consumption efficiency and downstream market reforms would help ease the pressure,” suggested Dr. Usman.
Another source of concern was the global imbalances such as the widening current account deficit in the United States, which in 2006 was 6.4% of their Gross Domestic Product (GDP). Minister Usman stressed that if a poor country had this deficit the International Monetary Fund (IMF) would have been “up in arms.”
“Taking a global view, one country’s deficit is another country’s surplus, which translates into capital flows to the deficit country, driven in part by interest rate differentials.”
In the case of the US, it was noted that the inflows have largely been held in the form of treasury bills and bonds, as well as in the form of equities and Foreign Direct Investment (FDI).
“This raises a question about the sustainability of such imbalances and their impact on the wider international financial system,” the minister argued.
The weakening dollar is also impacting countries that peg their currencies against the dollar and the challenge, he said, is how to restore equilibrium.
“The challenge facing the international financial community is how to restore the system to equilibrium in an orderly manner.”
This, he noted, can be done through market-driven adjustment of exchange rates to correct the imbalances although the peculiar circumstances of developing countries must be given special consideration and time for proper adjustment. This, it was noted, should be in addition to introducing structural measures to restore balance between imports and exports and policies to restore interest rate differentials to a level that is consistent with sustainable capital flows. Dr. Usman remarked that developing countries have continued to account for a larger share of the world’s output, with Africa growing by 5.5% on average. This growth, he mentioned, is a reflection of better policies, the commodity boom, accountability and greater transparency.
The level of assistance given to developing countries also came under the microscope and the Nigerian Finance Minister called for the scaling-up of development assistance to these countries. Many developing countries are not in a position to meet the Millennium Development Goals by 2015, and Dr. Usman called for traditional aid givers and the non-traditional donors to coordinate among themselves.
The eight millennium goals to be achieved by 2015 are: eradicate extreme poverty and hunger; achieve universal primary education; promote gender equality and empower women; reduce child mortality; improve maternal health; combat HIV/AIDS, malaria and other diseases; ensure environmental sustainability and develop a global partnership for development.
Nigeria, the finance minister said, hosted the first African conference on Financing for Development in 2006 and at the conference pledges of support to scale-up development assistance were supported by the United Kingdom and others toward realizing these goals.
“We use this forum (conference) to call on our development partners to substantially scale-up this assistance under tight guidelines regarding the deployment of such extra resources.”
As called for before by the Commonwealth Deputy Secretary General Ransford Smith in the opening of the CFMM, Minister Usman also stated that there was need for an equitable resolution of the Doha Round trade negotiations (these negotiations began in 2001) and he said the ministers need to push this even though “the prospects are not very bright.”
Critical areas like agriculture, he indicated, continue to be the subject of trade distortions, “for the benefit of small but powerful interest groups in advanced countries.”
According to Usman, “Comprehensive and sharp reduction of tariffs in the advanced countries will deliver huge development gains. Trade-distorting subsidies need to be reduced in order for the Round to be able to live up to its name as the “Development Round.” (Nicosia Smith)
