WORLD BANK ECA ECONOMIC UPDATE SPRING 2022 War in the Region Office of the Chief Economist © 2022 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved 1 2 3 4 25 24 23 22 This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Nothing herein shall constitute or be considered to be a limitation upon or waiver of the privileges and immunities of The World Bank, all of which are specifically reserved. Rights and Permissions This work is available under the Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO) http://creativecommons.org/licenses/by/3.0/igo. Under the Creative Commons Attribution license, you are free to copy, distribute, transmit, and adapt this work, including for commercial purposes, under the following conditions: Attribution —Please cite the work as follows: World Bank. 2022. “War in the Region” Europe and Central Asia Economic Update (Spring), Washington, DC: World Bank. Doi: 10.1596/978-1-4648-1866-0. License: Creative Commons Attribution CC BY 3.0 IGO Translations —If you create a translation of this work, please add the following disclaimer along with the attribution: This translation was not created by The World Bank and should not be considered an official World Bank translation. The World Bank shall not be liable for any content or error in this translation. Adaptations —If you create an adaptation of this work, please add the following disclaimer along with the attribution: This is an adaptation of an original work by The World Bank. Views and opinions expressed in the adaptation are the sole responsibility of the author or authors of the adaptation and are not endorsed by The World Bank. Third-party content —The World Bank does not necessarily own each component of the content contained within the work. The World Bank therefore does not warrant that the use of any third-party- owned individual component or part contained in the work will not infringe on the rights of those third parties. The risk of claims resulting from such infringement rests solely with you. If you wish to re-use a component of the work, it is your responsibility to determine whether permission is needed for that re- use and to obtain permission from the copyright owner. Examples of components can include, but are not limited to, tables, figures, or images. All queries on rights and licenses should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; e-mail: pubrights@worldbank.org. ISBN (electronic): 978-1-4648-1866-0 DOI: 10.1596/978-1-4648-1866-0 Cover design: Lauren Kaley Johnson Contents Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii Country Codes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix Regional Classification Used in this Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . x Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi PART I: War in the Region. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Global Context. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 The War’s Impact on the Global Economy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Europe and Central Asia: Implications of the War on the Regional Outlook . . . . . . . . . . 12 The War’s Immediate Effects on Regional Activity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Regional Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Spillovers from the War to the Regional Economy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Risks to the Regional and Global Outlook from Russia’s Invasion of Ukraine . . . . . . . . . . . . . . . . 43 Long-Term Challenges and Policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Data Annex and Forecast Conventions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 PART II: Selected Country Pages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Albania. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Armenia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Azerbaijan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Belarus. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Bosnia and Herzegovina. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Bulgaria. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Croatia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 Georgia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 Kazakhstan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 Kosovo. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 Kyrgyz Republic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 Moldova. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 Montenegro. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 North Macedonia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Poland. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 Romania. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 Russian Federation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 Serbia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 Tajikistan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 Turkey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 Ukraine. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 Uzbekistan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 iii iv  ●   World Bank ECA Economic Update Spring 2022 Boxes 1.1 Promoting COVID-19 vaccine acceptance in Europe and Central Asia. . . . . . . . . . . . . . . . . . . . . . . . . 13 1.2 Russian Federation’s global value chain participation and its impact on Europe and Central Asia. . . . 21 1.3 Implications of rising inflation for debt in Europe and Central Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 1.4 Actual and perceived inequality in Europe and Central Asia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 1.5 Assessing the economic consequences of the war in Ukraine. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Figures 1.1 Global economic activity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.2 Humanitarian impact of the war. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.3 Commodities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 1.4 Recent global economic trends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 B1.1.1 Current COVID-19 landscape in ECA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 B1.1.2 Drivers of gaps in vaccine acceptance in ECA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 1.5 Regional economic linkages with the Russian Federation, Ukraine, and the euro area. . . . . . . . . . . . . . 19 B1.2.1 Russian Federation’s imports and GVC participation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 1.6 ECA outlook. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 B1.3.1 Fiscal deficits and government debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 B1.3.2 Inflation, debt, currency depreciation, and the fiscal sustainability gap. . . . . . . . . . . . . . . . . . . . . . . . 28 B1.4.1 Gini index, by countries and regions, latest available data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 B1.4.2 Share of the population who agree that the gap between the rich and the poor should be reduced and the actual level of inequality (Gini). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 B1.5.1 Daily electricity consumption in Ukraine, February/March 2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Tables E.1 Regional classification used in this report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . x B1.1.1 5Cs framework. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 B1.1.2 Examples of 5C interventions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 1.1 Europe and Central Asia growth forecast summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 B1.3.1 Debt to GDP in 2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 1.2 Downside scenario. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 1.3 Heatmap: Direct country exposures to the Russian Federation and Ukraine . . . . . . . . . . . . . . . . . . . . 31 1.4 Europe and Central Asia country growth forecasts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Acknowledgments This Europe and Central Asia (ECA) Economic Update is a product of ECA’s Of- fice of the Chief Economist led by Asli Demirgüç-Kunt, in collaboration with the Macroeconomics, Trade and Investment and the Poverty and Equity Global Practices. Part I was prepared in collaboration with the Prospects Group and the ECA team in the Equitable Growth, Finance and Institutions Practice Group. The team included Collette Mari Wheeler, Julia Renee Roseman Norfleet, Alexandru Cojo- caru, Dhruv Devesh Gandhi, David Stephen Knight, Michael Lokshin, Maria Ha- zel Macadangdang, Lucia Quaglietti, Ivan Torre, Lucie Johanna Wuester, Debo- rah Elisabeth Winkler, and Salman Zaidi. Part I was closely coordinated with contributions from Part II authors. Useful comments were provided by Erdem Atas, Hans Beck, Olena Bogdan, Jasmin Chakeri, Nejma Cheikh, Marcel Chis- truga, Adanna Deborah Ugochi Chukwuma, Ileana Cristina Constantinescu, Ste- fano Curto, Mariam Dolidze, Andrei Silviu Dospinescu, Olga Emelyanova, Go- har Gyulumyan, Kiryl Haiduk, Sandra Hlivnjak, Tehmina Shaukat Khan, David Stephen Knight, Richard James Lowden Record, Sanja Madzarevic-Sujster, Sand- eep Mahajan, Armineh Manookian Salmasi, Vinayakraj Nagaraj, Evgenij Najdov, Desislava Enikova Nikolova, Arvind Nair, Jan-Peter Olters, Etkin Ozen, Nadir Ramazanov, Ilyas Sarsenov, Lazar Sestovic, Pinar Yasar, and Bakhrom Ziyaev. The team would like to thank Anna Bjerde, Xiaoqing Yu, and ECA regional lead- ership team for their guidance and inputs during the preparation of the report. Part II was prepared by teams from the Macroeconomics, Trade and Invest- ment Global Practice (led by Andrew Burns, Lalita M. Moorty, Sandeep Mahajan, and Jasmin Chakeri) and the Poverty and Equity Global Practice (led by Salman Zaidi). These teams included the following staff: Azamat Agaidarov, Reena Badi- ani-Magnusson, Javier Eduardo Baez Ramirez, Hans Anand Beck, Olena Bogdan, Tom Bundervoet, Marie-Anne Chambonnier, Marcel Chistruga, Stefano Curto, Mariam Dolidze, Andrei Silviu Dospinescu, Bakyt Dubashov, Olga Emelyanova, Samuel Freije-Rodriguez, Alan Fuchs, Josip Funda, Anastasia Golovach, Gohar Gyulumyan, Alexander Haider, Kiryl Haiduk, Sandra Hlivnjak, Saida Ismailak- hunova, Fang Liu, Tehmina Shaukat Khan, David Stephen Knight, Milan La- kicevic, Leonardo Ramiro Lucchetti, Sanja Madzarevic-Sujster, Armineh Ma- nookian Salmasi, Monika Anna Matyja, Kristina Cathrine Tan Mercado, Besart Myderrizi, Vinayakraj Nagaraj, Evgenij Najdov, Arvind Nair, Metin Nebiler, Trang Van Nguyen, Nga Thi Viet Nguyen, Desislava Enikova Nikolova, Kristina v vi  ●   World Bank ECA Economic Update Spring 2022 Noelle Vaughan, Natsuko Kiso Nozaki, Ana Maria Oviedo, Catalin Pauna, Mona Prasad, Alisher Rajabov, Sjamsu Rahardja, Nadir Ramazanov, Richard James Lowden Record, Natasha Rovo, Ilyas Sarsenov, Cristina Savescu, Marc Tobias Schiffbauer, William Hutchins Seitz, Lazar Sestovic, Hilda Shijaku, Maryna Sida- renka, Karlis Smits, Tihomir Stucka, Thi Thanh Thanh Bui, Eskender Trushin, Christoph Ungerer, Pinar Yasar, and Bakhrom Ziyaev. Sandra Gain provided the editorial support and Michael Alwan typeset the report. Indira Chand, Paul Anthony Clare, Carl Patrick Hanlon, Artem Kolesn- ikov, Aaron Wesley Korenewsky, Sona V. Panajyan, and Amy Stilwell provided communications and outreach support. Ekaterina Ushakova oversaw the layout and production of the report. Abbreviations bbl barrel BGN Bulgarian lev BHAS Agency for Statistics of Bosnia and Herzegovina BiH Bosnia and Herzegovina bn billion BYN Belarusian Ruble CA Central Asia CAB Current Account Balance CAD Current Account Deficit CAIT Climate Analysis Indicators Tool CBA Central Bank of Azerbaijan CBA Central Bank of Armenia CBR Central Bank of the Russian Federation CE Central Europe CIS Commonwealth of Independent States COVAX COVID-19 Vaccines Global Access CPI Consumer Price Index CROSTAT Croatian Bureau of Statistics EAEU Eurasian Economic Union EBRD European Bank for Reconstruction and Development ECA Europe and Central Asia ECAPOV ECAPOV (ECA Poverty) database of standardized household surveys ECB European Central Bank ECDC European Centre for Disease Prevention and Control EE Eastern Europe EMDEs emerging markets and developing economies EU European Union EU-SILK European Union Statistics on Income and Living Conditions FAO Food and Agriculture Organization FDI foreign direct investment FLFP female labor force participation FX foreign exchange GAP Growth Acceleration Plan GDP gross domestic product GEM Global Economic Model Geostat National Statistics Office of Georgia GHG greenhouse gas emissions GNI gross national income GUS Central Statistical Office of Poland GVCs global value chains GWh gigawatt hours ICT Information and communication technologies IEA International Energy Agency IFI International Financial Institution ILCS Integrated Living Conditions Survey vii viii  ●   World Bank ECA Economic Update Spring 2022 ILO International Labour Organization IMF International Monetary Fund INSTAT Institute of Statistics (Albania) KIHS Kyrgyz Integrated Household Survey LCU local currency unit LFS Labour Force Survey lhs left-hand side MONSTAT Statistical Office of Montenegro mtCO2e million tons carbon dioxide equvialent NBG National Bank of Georgia NBR National Bank of Romania NBRB National Bank of the Republic of Belarus NBT National Bank of Tajikistan NGEU Next Generation EU NPL non-performing loan NRRP National Recovery and Resilience Plan OECD Organisation for Economic Co-operation and Development OPEC Organization of the Petroleum Exporting Countries pp percentage point PPI producer price index PPP purchasing power parity q/q quarter over quarter rhs right-hand side ROA return on assets ROE return on equity RVC regional value chains SCC South Caucasus SDR Special Drawing Rights SILC Statistics on Income and Living Conditions SOE state-owned enterprise SOFAZ State Oil Fund of the Republic of Azerbaijan SWIFT Society for Worldwide Interbank Financial Telecommunication TajStat Agency on Statistics of Tajikistan UNDP United Nations Development Programme UNHCR United Nations High Commissioner for Refugees UNICEF United Nations Children’s Fund UNOCHA United Nations Office for the Coordination of Humanitarian Affairs UNWTO United Nations World Tourism Organization USD US dollars VAT value added tax WBK Western Balkans WDI World Development Indicators WFP World Food Programme WHO World Health Organization y/y year-over-year CAIT Climate Analysis Indicators Tool Country Codes Albania ALB Latvia LVA Armenia ARM Lithuania LTU Austria AUT Luxembourg LUX Azerbaijan AZE Malta MLT Belarus BLR Moldova MDA Belgium BEL Montenegro MNE Bosnia and Herzegovina BIH Netherlands NLD Bulgaria BGR Norway NOR Croatia HRV Poland POL Cyprus CYP Portugal PRT Czech Republic CZE Republic of North Macedonia MKD Denmark DNK Romania ROU Estonia EST Russian Federation RUS Finland FIN Serbia SRB France FRA Slovak Republic SVK Georgia GEO Slovenia SVN Germany DEU Spain ESP Greece GRC Sweden SWE Hungary HUN Switzerland CHE Iceland ISL Tajikistan TJK Ireland IRL Turkey TUR Italy ITA Turkmenistan TKM Kazakhstan KAZ Ukraine UKR Kosovo XKX United Kingdom GBR Kyrgyz Republic KGZ Uzbekistan UZB ix Regional Classification Used in this Report This report covers 50 countries referred to as Europe and Central Asia (ECA) countries. These are divided into 10 groups: Central Asia, Central Europe and the Baltic Countries, Eastern Europe, Northern Europe, South Caucasus, Southern Europe, Western Balkans, Western Europe, Russia, and Turkey. TABLE E.1  Regional classification used in this report Central Europe and Central Asia Baltic Countries Eastern Europe Northern Europe Kazakhstan Bulgaria Belarus Denmark Kyrgyz Republic Croatia Moldova Finland Tajikistan Czech Republic Ukraine Iceland Turkmenistan Estonia Norway Uzbekistan Hungary Sweden Latvia Lithuania Poland Romania Slovak Republic Slovenia South Caucasus Southern Europe Western Balkans Western Europe Armenia Cyprus Albania Austria Azerbaijan Greece Bosnia and Herzegovina Belgium Georgia Italy Kosovo France Malta Republic of North Macedonia Germany Portugal Montenegro Ireland Spain Serbia Luxembourg Netherlands Switzerland United Kingdom Russian Federation Turkey x Executive Summary In February 2022, the world was shocked by the Russian Federation’s invasion of Ukraine. The war is having a devastating impact on human life and causing eco- nomic destruction in both countries, and will lead to significant economic losses in the Europe and Central Asia (ECA) region and the rest of the world. It is the second major shock in two years to trigger an economic contraction in the region, with output in 2022 forecast to contract 4.1 percent—twice as steep as the reces- sion in 2020 from the COVID-19 pandemic. Countries in the region were already bracing for a slowdown in the COVID-19 recovery that began in 2021, due to reduced growth and trade, inflationary pres- sures, debt sustainability concerns, and rising interest rates. Continued CO- VID-19 disruptions and escalating geopolitical tensions were also among the concerns. The war has added to the deterioration in the outlook, and the economic impact of the conflict is felt through multiple channels, including commodity and financial markets, trade and migration links, and investor confidence. Neighboring ECA countries are likely to suffer considerable economic dam- age because of their strong trade, financial, and migration links with Russia and Ukraine. Russia is a major exporter of energy and industrial metals, and Russia and Ukraine together supply over 25 percent of world exports of wheat. Europe is particularly dependent on Russian energy, with 47 percent of natural gas and 25 percent of oil imported from Russia. Armenia, Georgia, Kazakhstan, and Tur- key import over 75 percent of their wheat from Russia and Ukraine, and many countries in the Middle East and Africa rely on imports of wheat and other com- modities from Russia and Ukraine, which could lead to food insecurity. Supply shortages and higher prices of energy and food will fuel inflation, af- fecting countries in the region, as well as the rest of the world. Moreover, al- though Russia and Ukraine account for less than 3 percent of global exports, the war and the sanctions have frayed connectivity by disrupting trade routes and increasing shipping and insurance costs. This magnifies existing strains on global value chains, impacting a wide range of industries, including food, automobiles, construction, petrochemicals, and transport. Together with higher commodity prices, additional strains on global value chains are further fueling inflationary pressures. Russia is a critical export destination for many countries in Eastern Europe, the South Caucasus, Central Asia, and the Baltics, accounting for over 10 percent of their exports and around 25 percent for Armenia and over 40 percent for Be- larus. Remittances from Russia account for close to 30 percent of gross domestic product in some Central Asian countries, such as the Kyrgyz Republic and Tajiki- stan. Russian and Ukrainian tourists account for more than 10 percent of arrivals in about half of ECA’s economies, including those reliant on tourism, such as Georgia, Montenegro, and Turkey. xi xii  ●   World Bank ECA Economic Update Spring 2022 The war and the financial sanctions on Russia have severely hampered the country’s financial system and restricted its ability to meet its financial obliga- tions, impacting financial systems in the region and beyond. Continued conflict is likely to cause further weakening of investor confidence and renewed portfolio outflows and currency depreciation in the region. The countries particularly at risk are those with high current account deficits or large shares of foreign ex- change-denominated, nonresident-held, or short-term debt, and they could struggle to roll over debt or face significantly higher debt service obligations. The war is also causing a destabilizing wave of refugees. More than 4 million people have fled Ukraine, with over half crossing into Poland and many entering Hungary, Moldova, and Romania. With the number of refugees estimated to grow in the coming months, the host countries will need to rise to the challenge of accommodating them. Additional financial resources and humanitarian aid will need to be swiftly mobilized to scale up capacity and ensure delivery of basic services. The war will increase poverty in the region due to the recession and food price inflation. In Ukraine, 6.5 million people are already estimated to be internally displaced and about one-third of the population requires emergency humanitarian assistance. The impact of the war on the region’s economic outlook hinges on how the ongoing conflict will evolve. If there is a resolution in the coming months, the losses can be contained and the recovery can begin. A more protracted conflict could increase human and economic costs, heighten policy uncertainty, fragment regional integration, and disrupt critical trade and investment links. During these difficult times, policy makers must fortify macroeconomic pol- icy buffers and institutions to strengthen stability; promote an inclusive and more equal recovery by strengthening social protection systems to protect the most vulnerable, including refugees; and maintain focus on improving energy efficiency and the green transition to secure a sustainable future. Addressing the negative consequences of climate change is one of the most urgent issues of our time. The war and the spike in conventional energy prices further demonstrate the attractiveness of renewables and the importance of transitioning energy sys- tems to cheaper, cleaner, and more reliable power. Improving energy efficiency, reducing waste in energy consumption, and using technological innovations could allow the economies in the region to mitigate the impact of the war on economic growth. PART I War in the Region Global Context The Russian Federation’s invasion of Ukraine has triggered a catastrophic humanitarian crisis and threatened the stability of geopolitical relations. The war is the second major shock in two years to trigger an economic contraction in Europe and Central Asia (ECA), with regional output forecast to shrink over 4 percent in 2022. Moreover, the war has added to mounting concerns of a sharp global growth slowdown, surging inflation and debt, and a spike in poverty levels. The economic impact of the conflict has reverberated through multiple global channels, including commodity and financial markets, trade and migration links, and confidence. Neighboring ECA countries are likely to suffer consider- able economic damage because of their strong trade, financial, and migration links with Russia and Ukraine. The war has also led to a destabilizing wave of refugees and increased the risk of widespread financial stresses among some emerging markets and developing economies (EMDEs), a de-anchoring of inflation expectations, and rising poverty and food insecurity. A protracted conflict is likely to heighten policy uncertainty further, magnify existing strains on global supply chains, and fragment global trade and invest- ment networks. Policy makers need to ensure that they are better prepared to handle fu- ture crises as part of a commitment to a comprehensive approach to bolster resilient, in- clusive, and green development. They should fortify their macroeconomic policy buffers and institutions to strengthen stability; promote an inclusive and more equal recovery by strengthening their social protection systems to protect the most vulnerable, including the refugees; and keep their focus on improving energy efficiency and the green transition to secure a sustainable future. The War’s Impact on the Global Economy The Russian Federation’s war with Ukraine has delivered a second major shock to the global economy in two years and caused a humanitarian catastrophe. Even prior to the war, the global recovery had already been decelerating alongside intensifying geopolitical tensions, continued COVID-19 flare-ups, diminishing macroeconomic support, and lingering supply bottlenecks (figure 1.1, panel a) (World Bank 2022a). The exceptional slowdown in growth that had been ex- pected before the war left the global economy vulnerable to adverse shocks, es- pecially in EMDEs, where recoveries were already notably weaker and more fragile compared to those in advanced economies (figure 1.1, panel b).1 Since 1. The period of recovery that follows a global recession tends to be vulnerable to adverse shocks as the growth rebound cools (Kose, Sugawara, and Terrones 2021). In the four glob- al recessions that preceded the pandemic (1975, 1982, 1991, and 2009), a second shock fol- lowed the initial crisis and exacerbated the slowdown in growth. 3 4  ●   World Bank ECA Economic Update Spring 2022 February, private sector forecasts for global growth in 2022 have already been revised down more than 0.5 percentage point and are likely to continue to fall as forecasters fully incorporate the war. Model-based estimates from the Organisa- tion for Economic Co-operation and Development suggest that global growth could be around 1 percentage point lower this year, placing it at 3 percent (OECD 2022). The deep humanitarian crisis sparked by the war has been the most pro- nounced of the initial global shockwaves and will likely be among the most en- during legacies of the conflict. The war has triggered one of the fastest growing refugee crises since World War II, with more than 4 million refugees—about half of whom are children—fleeing from Ukraine within about one month of the inva- sion (figure 1.2, panels a and b) (UNHCR 2022). An additional 6.5 million people are estimated to be internally displaced within Ukraine, with about one-third of the total population requiring emergency humanitarian assistance (UNOCHA 2022). By end-March, the war had displaced 4.5 million children—more than half of Ukraine’s estimated 7.5 million child population—likely disrupting education, setting back development goals, and eroding long-term potential growth pros- pects (UNICEF 2022a, 2022b). Scaling up programs that identify unaccompanied and separated children is critical to ensure continuation of basic protection and services, as well as to reduce the risk of trafficking and exploitation. The war in Ukraine adds to mounting global humanitarian needs from other crisis situa- tions—including in the Republic of Yemen, Afghanistan, Somalia, South Sudan, and Myanmar—which are carving into the budget for critical investment in long- term development (Modéer and Lemma 2022; UNHCR 2021). FIGURE 1.1 Global economic activity a. Global growth, pre-war forecasts b. Deviation of output from pre-pandemic trends, pre-war forecasts 8 2 0 4 −2 Percent Percent 0 −4 −4 −6 −8 −8 2010 2012 2014 2016 2018 2020 2022 2019 2020 2021 2022 2023 World Advanced economies EMDEs EMDEs excl. China Sources: Haver Analytics; Our World in Data 2020, based on multiple sources; World Bank. Note: EMDEs = emerging markets and developing economies. a. Shaded area indicates forecasts. Data for 2022 are estimates. b. Shaded area indicates forecasts. The figure shows the percent deviation between the latest projections and forecasts released in the January 2020 edition of the Global Economic Prospects report (World Bank 2020b). For 2023, the January 2020 baseline is extended using projected growth for 2022. Part 1: War in the Region ●  5 Although assessing the war’s impact on poverty at this juncture is difficult, the baseline projection assumes Ukraine’s poverty rate based on the $5.50 per day threshold will increase from 1.8 percent in 2021 to 19.8 percent in 2022. Modeled scenarios from the United Nations suggest that a more severe and protracted war could see poverty rates rise to nearly 30 percent of the population (figure 1.2, panel c) (UNDP 2022). The shockwaves of the war extend beyond Ukraine. Global pov- erty could also be impacted through second-order effects, as the war has exacer- bated the increase in global food prices.2 Previous episodes of global food price spikes have pushed a significant number of people into extreme poverty, with 2. Food price developments are discussed later in this section. FIGURE 1.2 Humanitarian impact of the war a. Refugees b. Refugee arrivals, by receiving country 10 50 3 20 8 40 15 2 Millions 6 30 Percent Millions Millions 10 4 20 1 5 2 10 0 0 0 0 Poland Romania Moldova Hungary Slovak Balkan wars Syrian war Ukraine war Republic (1991–93) (2014–20) (2022) Refugee arrivals Refugees Population (RHS) Share of host country population (RHS) c. Millions of people living in poverty ($5.50/day) d. Model-based number of people pushed into extreme poverty ($1.90/day) around food price spikes 12 200 40 8 150 30 Millions Millions Percent 4 100 20 50 10 0 2019 2020 2021 2022 2022 (war) 0 0 UNDP war scenario range 2007 2010 Current UNDP pre-war baseline World Bank forecast Number of people Change in food prices (RHS) Sources: Center for Global Development; Food and Agriculture Organization of the United Nations; United Nations Development Programme; United Nations Human Rights Council; World Bank. Note: a. and b. Current estimate of Ukrainian refugees is 4,102,876 as of March 31, 2022, based on UN data. b. The accumulated data in this figure is higher than the total number of refugees fleeing Ukraine since it also accounts for people crossing the bor- der between Romania and Moldova. Population data are for 2019. c. The range shows estimates based on four scenarios using previous armed conflict as benchmarks, as presented in UNDP (2022). The four scenari- os simulated are economic contractions of 7, 15, 20, and 60 percent. The orange diamond is the World Bank Ukraine poverty estimate as present- ed in the country page in Part II. d. Poverty impact from the food price spikes of 2007 and 2010 are as estimated by De Hoyos and Medvedev (2011) and Ivanic, Martin, and Zaman World Bank (2011). Current impact is estimated by the Center for Global Development, as presented in Mitchell, Hughes, and Huckstep (2022). 6  ●   World Bank ECA Economic Update Spring 2022 estimates suggesting that the current surge in food prices could see an additional 40 million people fall under the $1.90 per day poverty line (figure 1.2, panel d) (Mitchell, Hughes, and Huckstep 2022). These humanitarian and poverty chal- lenges will likely require sustained global support for years to come, even after the conflict stabilizes and its economic effects fade. In addition to the humanitarian crisis, the war is also delivering a sizable blow to the global economy through multiple channels, including commodity and fi- nancial markets, trade linkages, and investor and consumer confidence. The spillovers to commodity and financial markets have been immediate, through higher commodity prices and pronounced market volatility. Second-round im- pacts are also likely to be damaging to the global economy, especially in the con- text of heightened geopolitical and policy uncertainty. Weakening external de- mand and tighter global financing conditions will weigh on EMDEs, including those in ECA. Increasing expenditure shares and high import dependence have left households exposed to commodity price shocks, with higher commodity prices eroding household incomes (FAO 2021a). War-related trade disruptions and commodity/input shortages—combined with already high commodity prices—are likely to cascade through global value chains and weigh on global trade growth. These bottlenecks are adversely affecting a wide range of indus- tries, including food, automobile, construction, petrochemical, and transport. Together, higher commodity prices and additional strains on global value chains are further fueling inflationary pressures. The impact of the war on the global economy has immediately propagated through higher commodity prices, reflecting Russia’s and Ukraine’s outsized roles in global commodity markets.3 Price increases have been especially large this year for commodities in which Russia and Ukraine are key exporters, includ- ing natural gas, coal, crude oil, wheat, aluminum, iron ore, and palladium (figure 1.3, panels a and b).4 Since the beginning of the war, prices have risen sharply, at one point increasing by 70 percent for European natural gas, 65 percent for coal, 40 percent for wheat, and 30 percent for Brent crude oil. The increase in European natural gas prices has been particularly sharp because of limited spare capacity, including that of import and export terminals, and the constraint that natural gas must be transported as liquified natural gas. Oil prices have been extremely volatile, with large intraday moves. After trad- ing at around $80/barrel (bbl) at the start of the year, the price of Brent crude oil surpassed $100/bbl in late February, rising to nearly $130/bbl in March—its highest level since 2008. Oil prices were already rising prior to the war alongside a rebound in demand that accompanied the global economic recovery and after 3. Russia accounts for more than 10 percent of global crude oil exports, 25 percent of global natural gas exports, and nearly 20 percent of global coal exports. Russia is also a critical global producer of palladium and nickel, accounting for 20 percent or more of global ex- ports. Palladium is used in catalytic converters in car production, and nickel is used in steel production and construction. Together, Russia and Ukraine account for about a quarter of global wheat exports, and Ukraine is the largest exporter of seed oil, at about 40 percent of global exports. Ukraine is also an important source of global iron exports. 4. The sharp rise in commodity prices comes on the heels of earlier increases, which have been driven by rebounding demand and by weaker-than-expected energy production. Part 1: War in the Region ●  7 FIGURE 1.3 Commodities a. Russian Federation and Ukraine’s commodity b. Commodity prices exports as a share of global exports 50 300 Index, 100 = January 3, 2022 40 Percent of global 250 30 200 20 150 10 0 100 Natural gas Nickel Coal Wheat Crude oil Aluminum Seed oil Corn Wheat Palladium Fertilizers Platinum 50 n an an b eb eb ar ar r Ap Ja Fe -M -M -J -J -F -F 3- 1- 5- 14 25 16 27 10 21 Russian Federation Ukraine Crude oil Natural gas Wheat Nickel c. Wheat imports from the Russian d. Consumer Price Index basket of goods, Federation and Ukraine percent weights by component 100 60 80 Percent of imports 40 Percent 60 20 40 20 0 a ia er sn gro ia va vo s ia tia vi d ru ni en ar rb go an do so oa ba la Bu a ne lg Se 0 m n Be Ko ze ia ol Cr Al te Ar M on ia a an n va y a s bl z H Bo ru ke i ni pu gy ija en rg do ic M st ba la r ba Re Kyr eo kh m Tu Be ol Al er Ar G za M Az Housing, water, electricity, gas and other fuels Ka Russian Federation Ukraine Food and non-alcoholic beverages Sources: Bloomberg; International Monetary Fund; UN Comtrade; World Bank. Note: a. Data are for 2020. Export shares for energy commodities are in volume terms, and in value terms for non-energy commodities. b. Natural gas prices are for Europe. Dashed yellow line indicates when nickel trading was halted from March 8-15, 2022. The vertical line indicates the day of Russia’s invasion in Ukraine, February 24, 2022. The last observation is March 30, 2022. c. Data are as of 2020. d. Data are as of January 2022. supply concerns reemerged when OPEC+ production fell short of expectations amid limited spare capacity (IEA 2022). Oil prices jumped further because of the war, especially after the United States and the United Kingdom announced bans on Russian oil, prompting some large oil companies, including BP and Shell, to exit from Russian operations. Reluctance to buy Russian oil caused the price of Urals to trade at a discount of more than $20/bbl relative to Brent. By late March, the price of Brent crude oil eased somewhat, to above $100/bbl, with the price falling after the United States announced plans to release from its reserves about 1 million barrels of oil per day over a period of six months. Agricultural prices have increased this year amid concerns that global grain supplies could be further squeezed by the war since Russia and Ukraine are both 8  ●   World Bank ECA Economic Update Spring 2022 key agricultural exporters. Together, Russia and Ukraine account for a quarter of global wheat exports, with several countries—including those in ECA, the Mid- dle East and North Africa, and Sub-Saharan Africa—importing 75 percent or more of their wheat from Russia and Ukraine (figure 1.3, panel c).5 The war has pushed wheat prices higher as it disrupts Ukraine’s planting and harvest sea- sons, including for other crops such as corn, barley, and sunflowers; destroys critical fields, stores, infrastructure, and production, especially in eastern Ukraine; and halts shipping from the Black Sea, from which about 90 percent of Ukraine’s grains are exported. Although Russian ports are operating, insurance costs have soared due to the conflict and inhibited cargoes from leaving Russia. Critical inputs to agricultural production are also experiencing shortages and rising prices because of the war. Together, Russia and Belarus—both of which are under heavy international sanctions—supply nearly 38 percent of the world mar- ket in value terms for potassic fertilizers, 15 percent of nitrogenous fertilizers, and about 17 percent of compound fertilizers. Russia is the world’s largest ex- porter of fertilizer, accounting for 13 percent of global exports. In addition to di- rect exports of manufactured fertilizers, Russia is also a major supplier of natural gas, a key input to the production of nitrogenous fertilizers—higher natural gas prices have already doubled the price of fertilizer. Russia has recommended that fertilizer manufacturers halt exports of fertilizer, which will hinder food produc- tion elsewhere. The combined impact of higher prices and input shortages is al- ready being felt, with the world’s second largest fertilizer firm announcing a 50 percent production cut in Europe due to these constraints. Higher commodity prices from the war are anticipated to have second-order effects, passing through to inflation and worsening food insecurity (figure 1.3, panel d). Global food prices were already approaching record high levels leading up to the war, with prices exceeding the levels observed during the last two food price spikes in 2007 and 2010—both episodes pushed millions into extreme pov- erty (CGD 2022; FAO 2022).6 Trade restrictions on agricultural products, includ- ing tighter licensing quotas introduced by Russia prior to the war and export bans, announced in March, are expected to put further pressure on food prices. Additional export restrictions could slow trade in food and fertilizers, worsening food crises and further fueling inflation. Headwinds to global trade growth are intensifying because of the war. Al- though Russia and Ukraine account for less than 3 percent of global exports and less than 2 percent of global imports, the war and subsequent sanctions have frayed trade connectivity by disrupting transit routes, particularly for maritime container shipping and air freight traffic, while higher fuel prices and insurance premiums have pushed up shipping costs (figure 1.4, panel a). Physical and lo- gistical disruptions associated with the invasion, sanctions, and higher 5. Similarly, for corn and seed oils, Ukraine accounts for a significant share of imports of some countries. 6. The World Bank estimates that the 2007 spike may have pushed up to an additional 155 million people into extreme poverty, with separate work suggesting that the 2010 surge had the same effect on 44 million people (De Hoyos and Medvedev 2011; Ivanic, Martin, and Zaman 2011). Part 1: War in the Region ●  9 commodity prices are likely to cascade through global value chains, exacerbating the ongoing strains and adding to prolonged delivery times and high production costs for manufacturers across the world. These disruptions come at a time when global value chains are already under pressure from the pandemic and shortages of semiconductors and other industrial parts. Interruptions to trade corridors between Europe and Asia could disrupt complex supply chains, particularly for high-value goods and critical components, including for the automotive and electronics industries.7 Already the war has cut off European carmakers from the supply of key parts, including wiring systems manufactured in Ukraine, which has halted some assembly lines. The war’s implications for maritime trade in Europe could be sizable, as Rus- sia accounts for about a tenth of total annual container throughput at the Port of Rotterdam—Europe’s largest port. Shipping lines that account for nearly half of global container shipping capacity have suspended bookings with Russia, making it more difficult for Russian businesses to export. Trade through the Black Sea has already been severely disrupted, with dry bulk vessels at Ukrainian ports down 82 percent in early March relative to the month prior. Maritime calls to Russian ports have declined nearly 45 percent since the start of February (figure 1.4, panel b). Air cargo capacity, which was already tight, has been further hampered by the reciprocal ban on Russian and European air space—two Russian air carriers to- gether comprise around one-fifth of global air cargo volume and are affected by these restrictions.8 The restrictions are pushing up global transport costs as re- routing occurs through longer and more expensive routes, especially between Europe and East Asia. Rail freight and trucking between the European Union and China have also been affected by the conflict, with companies suspending travel due to concerns about border disruptions or sanction compliance. Global services trade is likely to be affected by the war, as outbound travel from Russia and Ukraine is impacted by airspace closures, travel restrictions, sanctions, and increased fuel prices. Russia and Ukraine are among the top 10 countries for total global departures and are a key source of revenue for some tourism-reliant economies in ECA, East Asia and the Pacific, the Middle East and North Africa, and South Asia. In 2021, travelers from Russia and Ukraine ac- counted for 5 percent of international air passenger arrivals in 30 countries and more than 10 percent in 18 countries. The war is likely to stall the post-pandemic recovery in international tourism, which was already anemic from ongoing COVID-19 disruptions. A further intensification of geopolitical tensions could trigger a renewed decline in international tourism, which would likely be akin to the sharp fall and subsequent weak recovery from 9/11. 7. Minerals and commodities produced in Russia and Ukraine are key inputs for a wide number of sectors and countries. For example, palladium and neon are important inputs in the production of catalytic converters in the automotive industry and microchip lithogra- phy in the semiconductor industry, where inventories are already tight. Nickel and copper are widely used in manufacturing and buildings. 8. Although only 3 percent of global cargo is transported by airplanes, air cargo accounts for over a third of global trade by value (Alderman and Gross 2022). 10  ●   World Bank ECA Economic Update Spring 2022 Even prior to the invasion in 2022, global financial conditions had been tight- ening, especially in EMDEs amid rising borrowing costs (figure 1.4, panel c). The war has eroded confidence and renewed EMDE portfolio outflows, but with most indicators suggesting limited financial contagion at this point.9 Still, global equity prices have been roiled by the war, while volatility, as measured by the 9. Direct financial exposures to Russia have steadily declined following sanctions related to the annexation of Crimea, limiting the possibility of financial contagion from Russia. If fi- nancial contagion does spread, it will likely be because losses are concentrated in a sys- temically important institution. FIGURE 1.4 Recent global economic trends a. Global manufacturing Purchasing Managers’ Index b. Maritime port calls new export orders and shipping costs 60 800 25 Index, 100 = January 2019 Index, 50+ = expansion 0 50 600 −25 Percent 40 400 −50 30 200 −75 −100 20 0 2 2 2 2 2 2 -2 -2 -2 -2 -2 -2 Ap 9 9 O 9 Ja 9 Ap 0 0 O 0 Ja 0 Ap 1 1 O 1 Ja 1 ar 2 2 ar ar ar ar ar eb 1 r-1 l-1 -1 2 r-2 l-2 -2 2 r-2 l-2 -2 M n-2 -2 M M n- n- n- -M -M -M ct ct ct -F Ju Ju Ju Ja 2- 7- 25 12 17 22 New export orders Container shipping index (RHS) Russian Federation Ukraine Western Europe c. Global financing conditions d. Consensus inflation forecasts 103 6 Index, 100 = January 1, 2021 102 4 Percent 101 2 100 99 0 1 1 1 2 1 22 21 21 l-2 -2 2019 2020 2021 2022 -2 -2 -2 n- - p- ov ar ar n Ju ay Ja Ja Se M M N M Advanced economies EMDEs May 2021 December 2021 February 2022 March 2022 Sources: Bloomberg; Citigroup; Consensus Economics; Goldman Sachs; Haver Analytics; World Bank. Note: EMDEs = emerging markets and developing economies. a. The figure shows the Purchasing Managers’ Index manufacturing new export orders index and the Freightos global container shipping index. The last observation is March 22, 2022. b. Percent change in seven-day moving average of port calls compared to February 24, 2022. The last observation is March 22, 2022. c. The index is the Goldman Sachs financial conditions index, constructed as a weighted average of short-term interest rates, long-term interest rates, trade-weighted exchange rates, an index of credit spreads, and the ratio of equity prices to the 10-year average of earnings per share. The sam- ple includes 10 advanced economies (including the euro area) and 11 EMDEs (excluding China and the Russian Federation). Aggregates are calcu- lated using 2021 gross domestic product weights at average 2010–19 prices and market exchange rates. The last observation is March 31, 2022. d. The figure shows the Consensus Economics forecasts for median headline Consumer Price Index inflation for 2021–22 using surveys for the months indicated. The sample includes 32 advanced economies and 50 EMDEs for the December 2021 and May 2021 surveys, and 21 advanced economies and 38 EMDEs for the February and March 2022 survey. Part 1: War in the Region ●  11 VIX index, spiked to its highest level in about a year. Although global financial market developments prior to the war reflected prospects for faster monetary policy tightening, especially in advanced economies where inflation has sur- prised to the upside, expectations have since diverged somewhat between the United States and Europe.10 Market expectations implied by the overnight index swap curves suggest that the pace of policy rate hikes by the Federal Reserve remains broadly unchanged from February. Although the size of the initial rate hike was smaller, at 25 basis points, than had been expected before the war, higher inflation expectations may warrant a hastier removal of monetary policy accommodation. In contrast, market participants now expect the European Cen- tral Bank (ECB) to delay rate hikes and proceed at a more gradual pace.11 The war has further complicated policy choices, as policy makers must carefully balance the need to ensure stable inflation expectations with that of preserving the eco- nomic recovery—all while indicators point to rising global consumer price infla- tion amid decelerating global growth (figure 1.4, panel d). Prior to the war, activity in the euro area, ECA’s largest economic partner, was expected to moderate in 2022, reflecting a persistent drag from supply bottle- necks and stubbornly high oil and gas prices (ECB 2022). Incoming data suggest that rising COVID-19 cases and hospitalizations since mid-March have yet to disrupt activity. The war poses a material downside risk to euro area activity— which has already prompted the ECB to lower its growth forecast by 0.5 percent- age point this year and raise its inflation projection nearly 2 percentage points. Direct financial spillovers are limited but will be felt mostly in advanced econo- mies with exposure to Russian financial assets, including some Italian, French, and Austrian banks. Still, several international banks have exposure to the Rus- sian economy through business ties and local presence. As a result, European bank stocks lost more than a fifth of their value since the onset of the war, but high capital adequacy and liquidity ratios have cushioned the impact. Although economic exposures of the euro area to Russia are small, the region is particularly dependent on energy and metal imports from Russia.12 Should Russian exports of crude oil or natural gas to Europe be curtailed, regional prices would spike further and push inflation higher, dampening activity.13,14 10. Although inflation has risen alongside recoveries in domestic demand and labor mar- kets, price pressures have also reflected prolonged strains in global supply chains and higher commodity prices. 11. However, the ECB announced it was scaling back its bond-buying stimulus program. 12. Russian exports account for more than 35 percent of the euro area’s imports of natural gas, as well as more than 20 percent of oil and 40 percent of coal, with some countries more vulnerable than others. 13. Russia is similarly dependent on the euro area, as Russia exports around 40 percent of its crude oil and natural gas to the euro area. Although Russia may be able to redirect some of its exports of natural gas and crude oil to other countries, such as China, this will be constrained by the existing pipeline infrastructure. 14. The International Energy Agency released a 10-point plan for Europe to reduce its de- pendency on Russian natural gas (IEA 2022). The European Commission released a com- munique discussing policy options to mitigate the price impact on consumers and busi- nesses, proposing the creation of a Task Force on common gas purchases to aggregate EU bargaining power, and advocating for a jointly coordinated European gas storage policy (European Commission 2022). 12  ●   World Bank ECA Economic Update Spring 2022 Europe and Central Asia: Implications of the War for the Regional Outlook The Russian invasion of Ukraine has triggered one of the fastest growing refugee crises in Europe since World War II, and is likely to have devastating impacts on regional pov- erty and food insecurity. The war is the second major shock in two years to hit ECA’s economy, with output in 2022 forecast to contract more than 4 percent in the region. The war’s impacts are cascading through the region’s strong trade, financial, and migration linkages, resulting in considerable economic damage to neighboring countries. In addi- tion to Russia and Ukraine, four other regional economies are expected to shrink this year, while the rest will grow at an anemic pace. Targeted fiscal support may be warranted to limit economic damage and provide relief to the most vulnerable, including refugees and poorer households grappling with surging prices. Downside risks to the regional economy loom large from the twin shocks of the war and the pandemic. Key risks include an inten- sification of the conflict, financial stress, protracted policy uncertainty, and trade and investment fragmentation. The scarring effects of the pandemic and war on physical and human capital will weigh on long-term growth prospects for the region. The War’s Immediate Effects on Regional Activity Russia’s invasion of Ukraine is the second major shock in two years to hit ECA’s economy. The war came at a time when the region’s recovery from the pandemic was incomplete, uneven, and quickly losing momentum amid sharp increases in policy and geopolitical uncertainty. The deceleration of economic activity before the war also reflected waning external demand and global trade growth, tighten- ing macroeconomic policy, and pandemic disruptions as regional vaccination progress continued to face roadblocks (box 1.1). The war has devastated Ukraine, and hit economic and financial activity hard in Russia, with direct spillovers to other regional economies propagating through financial market volatility, fractures in critical trade and travel routes, and the influx of refugees and migrants. The impact is likely to be large, espe- cially in the regional economies where Russia remains a key investment partner, despite financing sources becoming more diversified in recent years (figure 1.5, panel a). Similarly, remittance flows from Russia are an important source of in- come for many economies in the region. Job losses and working hour reduc- tions in Russia will reduce remittances to other ECA economies, with the most affected countries being those in Central Asia and the South Caucasus (figure 1.5, panel b). The conflict is also exerting sizable indirect spillovers, including through weaker external demand from the euro area and disruptions to value chains, especially given Russia’s importance as an exporter of commodities and intermediate goods. The war has driven up commodity prices further, which is fueling inflationary pressures, dampening domestic demand, and forcing cen- tral banks to tighten monetary policy quickly. Tighter financing conditions combined with record high debt levels will pose formidable challenges to policy makers in the region. Part 1: War in the Region ●  13 BOX 1.1 Promoting COVID-19 vaccine acceptance in Europe and Central Asia Almost a tenth of Europe and Central Asia’s (ECA’s) Recent COVID-19 trends in ECA regional population has been diagnosed with In 2020, the world moved at an unprecedented COVID-19 as of early 2022, making it the hardest pace to develop and test vaccines against COVID- hit emerging market and developing economy 19, with the World Health Organization announc- (EMDE) region in per capita terms. Cases surged ing its first emergency use validation for the Pfizer/ particularly following an outbreak of the new BioNTech vaccine in December 2020. Several vac- COVID-19 Omicron variant in late 2021, precipitat- cine authorizations followed as data from Phase 3 ing overloaded health care systems and higher mor- trials were reported, including for Moderna, Astra- tality rates, particularly in countries with vaccination Zeneca, Johnson & Johnson, Gamaleya (Sputnik V), rates below the EMDE median (figure B1.1.1, panel a). Sinovac Biotech, Sinopharm, Novavax, and Bharat Most recently, the onset of the Deltacron vari- Biotech. ant in the euro area in 2022 has raised concerns Vaccine rollout commenced during the first about vaccination progress in ECA amid an antici- quarter of 2021 for almost all ECA countries, pated surge in new cases. Prior to the invasion of with the pace of vaccination accelerating sharply Ukraine, output losses in 2022 relative to pre-pan- in mid-2021 amid the spread of the Delta variant demic trend were projected to be greater in coun- (figure B1.1.1, panel c). Throughout most of 2021, tries with lower vaccination rates as countries with ECA had the highest vaccination rate among the higher vaccination rates benefit from a relaxation six EMDE regions. Progress has since stalled, how- of pandemic-related lockdowns, lifting domestic ever, with vaccination in ECA trailing East Asia and demand and spurring improvements in services the Pacific, Latin America and the Caribbean, and and tourism (figure B1.1.1, panel b). South Asia in early 2022. Moreover, these trends Pronounced challenges to increasing vaccine are broad-based across ECA, with fully vaccinated uptake have caused vaccination rates in ECA to rates in almost 40 percent of the region’s econo- remain uneven—nearly half of all countries in the mies below the EMDE median of 41.9 percent. region may not reach 70 percent vaccination cov- Within-country variation is also quite significant, erage with at least one dose by June 2022. With with younger, socially vulnerable, and rural dwell- the rapid emergence of new variants, it is critical ers comprising large pockets of populations with that local authorities implement appropriate policy relatively low coverage. initiatives to achieve higher levels of immunization Following a surge in early 2022 in response coverage. to the Omicron variant, new cases in the region Against this backdrop, this box examines vac- have declined across all subregions (figure B1.1.1, cine coverage trends by asking the following panel d). However, the emergence of the Delta- questions: cron variant in the neighboring euro area has cre- • How has COVID-19 vaccination progressed in ated pressure to renew vaccine campaign efforts, ECA? particularly for vulnerable populations—including • What are the drivers of gaps in vaccination in refugees—that could be hard hit by the spread of ECA? new COVID-19 variants. • What are the policy recommendations for local authorities to address vaccination gaps? (Continued next page) 14  ●   World Bank ECA Economic Update Spring 2022 BOX 1.1 (continued) FIGURE B1.1.1 Current COVID-19 landscape in ECA a. COVID-19 deaths per cases, by vaccination rate b. Share of population vaccinated versus deviation relative to the median for EMDEs of 2022 pre-war output relative to pre-pandemic trend 25 75 −9 Percent of total population New deaths per new cases Percent, inverted 20 ECA 50 −6 15 25 −3 10 0 0 5 −25 3 TUR CE RUS WBK SCC CA EE 0 Above EMDE median Below EMDE median Fully vaccinated population vaccination rate vaccination rate Deviation of 2022 pre-war output (RHS) c. Vaccine rollout across ECA d. New COVID-19 cases, by subregion 75 2.0 New cases per thousand people Percent of population 1.6 50 1.2 0.8 25 0.4 0 0.0 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 ECA CA CE EE SCC WBK RUS TUR ECA CA CE EE SCC WBK RUS TUR Sources: Our World in Data (2020), based on multiple sources; World Bank. Note: CA = Central Asia; CE = Central Europe; ECA = Europe and Central Asia; EE = Eastern Europe; EMDEs = emerging markets and developing economies; RUS = Russian Federation; SCC = South Caucasus; TUR = Turkey; WBK = Western Balkans. a.-d. The last observation is April 3, 2022. a. The figure shows the average of daily data. Above (below) median vaccination groups are relative to the EMDE median of the fully vaccinated rate, 41.9 percent. The sample includes 24 ECA countries and 150 EMDEs. b. “Deviation of 2022 output” shows the percent deviation in 2022 between output projections released in the January 2022 edition of the Global Economic Prospects report (World Bank 2022a) prior to the Russian invasion of Ukraine versus forecasts released in the January 2020 edition (World Bank 2020b) prior to the onset of the COVID-19 pandemic. c. The figure shows 14-day moving averages of fully vaccinated population. The dashed black line indicates the threshold for the World Health Organization’s global vaccination target of 70 percent. d. The figure shows 14-day moving averages. Drivers of gaps in vaccination in ECA The global supply of COVID-19 vaccines reached In seeking to facilitate an improvement in vaccina- 12 billion doses at the end of 2021, which was tion rates across ECA, it is important to diagnose insufficient to cover a global population of 7.9 the drivers behind the gaps in vaccination in the billion. As a result, a fifth of the countries in ECA region. One of the main constraints to vaccination are not expected to secure enough vaccines to progress is access to vaccines given global sup- inoculate 70 percent of their populations by mid- ply chain bottlenecks, as well as ensuring efficient 2022 (figure B1.1.2, panel a). These production deployment given weaknesses in health systems. challenges reflect ongoing delivery delays and (Continued next page) Part 1: War in the Region ●  15 BOX 1.1 (continued) financial constraints, as well as in-country logisti- of inaccurate information, perceived lack of trans- cal challenges, such as insufficient vaccine storage parency, and difficulty in providing timely and and vaccination sites and difficulties distributing accurate information due to the evolving nature vaccines to rural populations. While the significant of the pandemic. The use of new technologies in bottlenecks in supply chains at the start of the pan- the development of COVID-19 vaccines has also demic have reduced, recent geopolitical turmoil precipitated additional concern among certain in ECA may spill over into additional supply con- populations. straints, exacerbating access concerns. Countries that are effectively addressing these In addition to supply bottlenecks, there exist challenges systematically monitor trends in vac- considerable demand-side gaps in vaccine cine acceptance, including in different subgroups, acceptance, with key population groups being to identify which of the 5Cs is driving poor uptake left behind. In the countries that are able to gain and thereby target these barriers directly. Using a enough vaccine supply, suboptimal vaccine accep- survey on people’s willingness to be vaccinated, it tance has yielded a plateau in vaccination rates. is clear that concerns about side effects and safety Vaccine acceptance refers to an individual’s willing- are the most pressing drivers of gaps in vaccination ness to be vaccinated based on the various barri- acceptance in ECA (figure B1.1.2, panel b). Absent ers to being vaccinated they confront as a result of safety concerns, non-vaccination in ECA has been location, socioeconomic status, health status, and driven by the belief that the COVID-19 vaccine so forth. These barriers can be considered through is unnecessary (figure B1.1.2, panel c). Although the “5Cs” framework, which describes five ante - populations in ECA rely heavily on health officials cedents that can affect an individual’s vaccination and workers for trusted information, many also rely behavior (table B1.1.1) on a variety of communication channels, including Many underlying issues can cascade into lower television and social media, which should be uti- vaccination uptake than expected or desired lized as local authorities seek to convey timely and among certain populations. These issues include accurate information to help address vaccination diminished trust in governance and institutions, concerns (figure B1.1.2, panel d). uncertainty about the safety and effectiveness Policy recommendations of vaccines, disease risk perception, and con- venience of vaccination (ECDC 2021). Reduced Increasing the production and equitable supply vaccine acceptance can also be amplified by the of vaccines remains a priority both regionally and current digital landscape, such as the circulation globally. Policies to support production through TABLE B1.1.1  5Cs framework Confidence Trust in vaccines, health systems, and policy makers Complacency Perception of the potential risks of contracting COVID-19 Constraints Physical and financial access to vaccinations Calculation Ways people search for information to inform personal risk-benefit analysis Collective responsibility Motivation or need to protect others Sources: ECDC 2021; World Bank. (Continued next page) 16  ●   World Bank ECA Economic Update Spring 2022 BOX 1.1 (continued) FIGURE B1.1.2 Drivers of gaps in vaccine acceptance in ECA a. COVID-19 vaccine doses needed to b. Survey reasons for non-vaccination reach 70 percent of population 60 Percent of respondents 40 Doses per 10,000 people 30 40 20 20 10 0 Side effects Efficacy concerns Don't like vaccines Wait and see Religious beliefs Don't need 0 Armenia Serbia Bosnia and Herzegovina Moldova Belarus Central Asia Central Europe Eastern Europe Western Balkans Turkey c. Survey reasons for respondents who d. Trusted communication channels in ECA indicated “Don’t need” COVID-19 vaccine 100 Percent of respondents 30 Percent of respondents 20 75 50 10 25 0 Already had COVID Do not see HR people Not HR person Will use precautions Not serious illness Vaccines not beneficial 0 Scientists WHO Friends/family Govt Officials Rel. leaders Media Politicians Social media Health workers TV Central Asia Central Europe Eastern Europe Western Balkans Turkey Sources: Collective Service 2021; COVID Behaviors Dashboard; IMF-WHO COVID-19 Vaccine Tracker; World Bank. Note: ECA = Europe and Central Asia. a. Data are through March 29, 2022. b. and c. The figures report results of a survey in which participants provided reasons for why they would probably, probably not, or definitely not get vaccinated. The sample includes 12 ECA economies. Data are for the survey period March 1-15, 2022, except for Poland, for which data are for February 2022. c. The figure reports reasons for why respondents answered that they “Don’t need” the COVID-19 vaccine in the survey reported in panel b. HR = high risk. d. The figure shows the percent of respondents who receive information through a communication channel they trust. Orange bars indicate minimum-maximum range. The sample includes 20 ECA economies. Data are through March 23, 2022. WHO = World Health Organization. the establishment of clearinghouses—platforms approach should be prioritized to promote vac- that bring together the private and public sec- cine equity, in which high-coverage countries con- tors—would create more partnership opportu- sider both domestic and international goals. High- nities and help to expand capacity, for instance income countries can also facilitate the sharing of by allowing COVID-19 vaccine creators to utilize information related to manufacturing capacity and firms with spare production capacity (Gill and Ruta supply schedules with COVAX, as well as vaccine 2022a). Additionally, use of the COVID-19 Vaccines access plans (WHO 2020). Global Access (COVAX) alongside a “dual-track” (Continued next page) Part 1: War in the Region ●  17 BOX 1.1 (continued) Outside equitable supply of vaccines, improv- At the beginning of the pandemic, universal ing demand-side gaps in vaccine uptake is a press- nudges through mass communication strategies ing policy issue for ECA. Survey monitoring pro- were used to promote social distancing efforts to grams have helped to increase visibility on local help stop the spread of the COVID-19 pandemic populations’ beliefs about COVID-19 and vaccina- (Sasaki, Saito, and Ohtake 2021b). However, such tion intentions, such as through the World Bank’s generic approaches are not enough to increase chatbot program (Bidani et al. 2022) and the World vaccine acceptance among certain populations Health Organization’s Regional Office of Europe’s (Chang et al. 2021). It is imperative that different survey tool (ECDC 2021). Such survey programs messaging should be tailored to specific purposes produce valuable insights into public knowledge, and targets (Sasaki, Saito, and Ohtake 2021a), risk perceptions, behaviors, and trust related to with personalized messages addressing individual COVID-19 vaccines. specific vaccine concerns shown to improve vac- Armed with these insights, local authorities can cination intent by up to 80 percent (Bidani et al. accurately diagnose which of the 5Cs is inhibiting 2022). Additionally, given that vaccine acceptance vaccine acceptance, and consequently craft policy continuously shifts with the development of new interventions based on the different issues encoun- variants and availability of new data, it is important tered by each country and population group. that strategy generation should be ongoing and Examples of interventions using the 5Cs frame- flexible to incorporate new findings. work are provided in table B1.1.2. TABLE B1.1.2  Examples of 5C interventions Antecedent Country Action Confidence Croatia, Increased public trust by having leading government officials (including North the president, prime minister, and ministers) receive their COVID-19 Macedonia, vaccines publicly. Serbia Ukraine Implemented hotlines for misinformation, resulting in almost 4 million calls, including some for vaccination. Constraints Croatia, Improved physical availability of vaccinations by increasing the number of Moldova locations, such as pharmacies and universities, that offered the vaccine, as well as giving vaccines through home visits. Calculation Georgia Changed the risk-benefit calculation, particularly among the elderly, by offering pension bonuses as incentives, leading to a fourfold jump in vaccination uptake. Ukraine Reminded young people that they are vulnerable to health risks from COVID-19, through graphic videos with sensational imagery, including coffins and oxygen support. Sources: ECDC (2021); World Bank. (Continued next page) 18  ●   World Bank ECA Economic Update Spring 2022 BOX 1.1 (continued) Outside targeted messaging to address con- while reducing long-term cooperative behaviors cerns and improve vaccine uptake, countries may (Damgaard and Gravert 2018; Nafziger 2020), also need to utilize stronger policy levers to reach thereby jeopardizing future pandemic responses the global goal of vaccinating 70 percent of the to different mutant strains or viruses. population by mid-2022. The success of using Countries that are effectively addressing vac- financial incentives to increase vaccine acceptance cine acceptance challenges systematically monitor has been mixed, resulting in improvements among trends in vaccine acceptance, including in different certain populations (Campos-Mercade et al. 2021), subgroups; identify which of the 5Cs is driving poor as well as exacerbating concerns for other groups uptake; and target these barriers directly. Paired (Chang et al. 2021), suggesting that governments with intervention strategies and policy levers, local should exercise caution when implementing them. authorities should also seek to capitalize on the Stronger levers, such as incentives, certifi- opportunity to rebuild legitimacy. The COVID-19 cates, and government mandates, should be used pandemic presents a unique opportunity to build when other types of interventions have failed to the public’s trust by ensuring the availability of reli- achieve high vaccine coverage, as they can only able information (Khemani 2020). Ongoing efforts shape behavior and do not change how people to convey credible information are important to feel about vaccination acceptance. As such, these strengthen confidence globally, especially amid levers risk improving short-term uptake of vaccines the spread of misinformation. Russia’s invasion of Ukraine has prompted several countries to impose a wide array of sanctions, with Russia now estimated to be the most sanctioned country in the world (Bown 2022; Wadhams 2022).15 As of late March, financial sanctions have encompassed about three-quarters of Russia’s banking sector by assets. Sanctions have constrained Russia’s access to global financial markets, including through the removal of seven Russian banks from the Society for Worldwide In- terbank Financial Telecommunication (SWIFT) network. Restrictions on the Cen- tral Bank of the Russian Federation (CBR) have been among the most damaging sanctions, with the freezing of Russia’s gross international reserves held overseas inhibiting Russia’s ability to meet its financing obligations. Russian external debtors, both private and public, face severe challenges to servicing external debt given capital controls and sanctions on international transactions. Russia has averted a sovereign default on bonds as of late March, but the risk of future sov- ereign and corporate defaults remains high. Russia has also announced restric- tions, including requirements for European energy imports to be invoiced in ru- bles; while this has helped to support the ruble, such a move could accelerate Europe’s plans to reduce dependence on Russia’s energy and limit Russia’s abil- ity to finance exports in the longer run. Sanctions triggered an initial sharp depreciation of the ruble against the dollar, forcing the CBR to more than double the policy interest rate, impose capital con- trols, and provide bank liquidity and broad forbearance measures. Going into the second quarter of 2022, the banking system largely stabilized, outflows 15. Castellum. AI. https://www.castellum.ai/russia-sanctions-dashboard. Part 1: War in the Region ●  19 somewhat stemmed, and the ruble nearly returned to its pre-war level against the U.S. dollar. The Russian stock market reopened in late March after being closed for about a month. Since reopening, authorities have intervened in the market to curb volatility by restricting investor activity, including through measures that limit trading to certain securities and bans on short-selling and non-resident trad- ing. For other EMDE ECA economies, losses appear contained so far as direct exposure to Russian and Ukrainian banks is low, with the exception of parts of Hungary’s banking sector. Belarus and Kazakhstan are also exceptions, as Russian bank subsidiaries account for an important share of the domestic banking sector. Financial market volatility in ECA was already pronounced prior to the war, owing to sharp increases in policy uncertainty and geopolitical tensions. Investor sentiment weakened and risk aversion increased following the invasion, FIGURE 1.5 Regional economic linkages with the Russian Federation, Ukraine, and the euro area a. Foreign direct investment, by source b. Remittances, by source 75 40 Percent of total FDI 50 30 Percent of GDP 25 20 0 10 Europe and Central Asia excluding Russian Federation and Ukraine Turkey Central Asia Central Europe South Caucasus Western Balkans 0 Kyrgyz Republic Tajikistan Uzbekistan Georgia Armenia Ukraine Moldova Other Europe and Central Asia EU 27 Russian Federation Russian Federation Other c. Goods exports to the euro area, the Russian d. Tourist arrivals from the Russian Federation, and Ukraine Federation and Ukraine 75 30 Percent of goods exports 50 20 Percent 25 10 0 0 Europe and Central Asia excluding Russian Federation and Ukraine Turkey Central Asia Central Europe South Caucasus Western Balkans Europe and Central Asia excluding Russian Federation and Ukraine Turkey Central Asia Central Europe South Caucasus Western Balkans Euro area Russian Federation Ukraine Russian Federation Ukraine Sources: Haver Analytics; UN Comtrade; United Nations World Tourism Organization; World Bank. a. The values are simple averages for the percent of the total 2019–20 average. b. The figure shows remittances in U.S. dollars as a share of nominal U.S. dollar GDP. Data are for 2018. c. Data are for 2020. d. Data come from UNWTO (2021). Data for Armenia come from the Ministry of Economy of the Republic of Armenia. Data are for 17 countries for non-resident tourists at national borders by nationality. For countries where this data series is not available, estimates use the number of non-resident visitors at national borders by nationality. 20  ●   World Bank ECA Economic Update Spring 2022 renewing portfolio outflows and currency depreciation. Financing conditions also sharply tightened following the invasion, reflecting widening sovereign bond spreads, especially in Russia and Ukraine. Some of these pressures, how- ever, have eased in recent weeks but remain well above pre-war levels in many instances. In Russia, stabilizing conditions largely reflect tight capital controls and expectations of strong energy export revenues. However, as recent commod- ity market volatility has shown, sentiment could shift abruptly, especially given the highly uncertain environment. Although the euro area is by far ECA’s largest trading partner, accounting for about half of ECA’s goods export market, Russia and Ukraine play critical roles in regional value chains (figure 1.5, panel c). Since Russia and Ukraine are large exporters of commodity inputs that are upstream in many global value chains, shortages of their commodity exports may severely affect a wide range of indus- tries, including food, construction, petrochemicals, and transport (box 1.2). For sectors that are dependent on key commodity inputs from Russia and Ukraine, the war has already caused logistical disruptions—including from security con- cerns and lack of insurance coverage due to the surge in risk premiums—which are likely adding to existing supply chain strains. Russia is a major supplier of agricultural inputs, accounting for over 90 percent of cereal product imports in Kazakhstan, Armenia, and Georgia, as well as automotive products, stainless steel, and batteries. About half of ECA’s economies receive sizable tourist flows from Russia and Ukraine, and tourism receipts are a critical source of income (figure 1.5, panel d).16 Regional tourism has been impacted by the war through prohibitively higher fuel prices and reciprocal airspace closures, with flight routes over Russian, Ukrai- nian, Moldovan, and/or Belarusian airspace disrupted.17 The need to reroute flights has resulted in higher fuel costs, crew block hours, and travel times, in turn causing some flights to be canceled as these routes are rendered infeasible or economically unviable. Capacity on routes between Europe and East Asia— which often must fly over Russian and/or Ukrainian airspace—has been re- duced, with airlines cutting 2 to 9 percent of flights scheduled between March and June. Even prior to the war, many of the region’s central banks had already engaged in monetary policy tightening, prompted in part by a surge in commodity prices that pushed inflation above targets in nearly all the inflation-targeting economies in the region (box 1.3). Inflationary pressures have continued to rise in 2022, es- pecially in countries where commodities represent a large share of the Consumer Price Index basket. Since February, Albania, Belarus, Hungary, the Kyrgyz Re- public, Moldova, Poland, and Romania have hiked rates, with some central banks citing upside risks from mounting geopolitical tensions and market uncer- tainty. With little opportunity to substitute imported energy with domestically 16. More than half of the commercial air passengers visiting Armenia, the Kyrgyz Republic, Tajikistan, and Uzbekistan originated from Russia or Ukraine; travelers from Russia and Ukraine also accounted for at least 15 percent of commercial air passengers to Azerbaijan, Belarus, Georgia, Moldova, Montenegro, Kazakhstan, and Turkey. 17. Starting on February 28, Russia closed its airspace to airlines from 36 countries, includ- ing those within the European Union. Part 1: War in the Region ●  21 BOX 1.2 Russian Federation’s global value chain participation and its impact on Europe and Central Asia The war in Ukraine and the resulting sanctions comprise 6 percent of global exports, they represent imposed on the Russian Federation are causing trade 30 percent of Russia’s metal exports and upwards of and logistics disruptions that will propagate through 99 percent of unwrought aluminum imports (90 per- global value chains (GVCs). These disruptions will cent dependence in all Commonwealth of Indepen- feed into GVCs that are reliant on commodity inputs dent States (CIS) countries) and unwrought copper (energy, metals, chemicals) from Russia via major imports (99 percent dependence in Belarus). global production hubs for trade and will especially Russia’s exports of fertilizers are also important in affect regional economies that are highly dependent both global and regional markets. Kazakhstan is the on exports from Russia. third largest buyer of Russia’s chemical exports. Eight of the top 10 most dependent markets on Russian chemi- Russia’s role as a seller in GVCs cal imports are ECA countries. More than 40 percent Russia’s role as a major supplier of commodities places of Russia’s chemical exports consist of fertilizers, with it at the foundation of a wide array of global produc- almost all CIS countries importing at least 30 percent tion. Russia is one of the largest suppliers of energy, of fertilizer from Russia. Belarus, Mongolia, and Mol- metal, and chemical products (figure B1.1.1, panel a)— dova import over two-thirds of fertilizers from Russia, products used early on in GVCs, i.e. upstream. Rus- Honduras and the Central African Republic over half. sia stands out in global GVCs largely through its high forward GVC participation, or “upstreamness” (figure Russia’s role as a buyer in GVCs B1.2.1, panel b). The GVC production hubs of China, Russia is far less important as a “buyer” in GVCs, rely- Germany, and the United States are among Russia’s ing less on imported inputs to produce its exports and largest trade partners, both as importers of Russian showing low backward GVC participation, but more commodity inputs and as exporters of GVC goods. relevant as an importer of semi-final and final capital GVCs that are especially reliant on commodity inputs goods for domestic use. Nonetheless, exports to Rus- from Russia for their export production include trans- sia reflect an essential source of external demand for port equipment, machinery, electronics (metals), agri- neighboring countries. Export sanctions and logis- business (chemicals), transport, and business services. tics bottlenecks will make it difficult overall for Rus- The risk of disruption of Russian energy supply goes sia to import goods, while depreciation of the ruble beyond GVCs and could impact virtually every aspect and declining domestic demand in Russia will reduce of economies, both those dependent on Russian sup- import demand even if they are available. Sanctions ply and worldwide through elevated prices. will especially impact final or semi-final goods imports ECA countries constitute six of the top 10 most further downstream on which Russia relies in sectors dependent markets on imports from Russia, with such as motor vehicles, airplanes, consumer electron- Belarus reliant on Russia for more than half of its ics, and machinery. This will have an effect on the imports (figure B1.2.1, panel c). While these countries exporters of these goods to Russia, as well as trans- are predominantly reliant on intermediate goods, port and business services providers who depend on such as metals and chemicals, Russia’s exports of these activities. vehicles, electronics, and apparel play an important The top 10 exporting countries most dependent role in the ECA region and especially in the Eurasian on Russia include all EAEU countries, Georgia, Mol- Economic Union (EAEU). dova, Uzbekistan, and Tajikistan (figure B1.2.1, panel Russia serves a critical exporter of metals, with d). Dependence of these countries on exports to Rus- ECA countries comprising the top 10 most depen- sia, however, is relatively low, in particular in electron- dent markets. Over half of Russia’s metal exports over ics and transport equipment. Their largest export the period 2018–20 were iron and steel, representing shares to Russia include apparel, food and beverage over 5 percent of world exports and, notably, over 30 goods, which are exports that are likely to fall in line percent of global exports of specific semi-finished with lower consumer demand in Russia, affecting in products. While copper and aluminum collectively particular neighboring and EAEU countries’ exports. (continued next page) 22  ●   World Bank ECA Economic Update Spring 2022 BOX 1.2 (continued) FIGURE B1.2.1 Russian Federation’s imports and GVC participation a. GVC participation, sectoral decomposition b. GVC participation of the Russian Federation and comparators 40 Backward 35 30 25 Percent Forward 20 15 10 0 5 10 15 20 25 30 35 40 5 Agriculture Mining Food & beverages Coke & petroleum Chemicals Metals 0 Electronics Machinery Transport equip. Brazil China EU28 India Russia South United Trade Transport Accomod. & food services Africa States Information & comm. serv. Rest Forward Backward c. Ten most dependent markets on d. Ten most dependent countries on imports from the Russian Federation exports to the Russian Federation 25 60 14 60 Russia’s import value (US$ billion) Russia’s export value (US$ billion) 54.5% 54.5% Partner’s export share (%) Partner’s import share (%) 12 50 20 50 10 36.9% 40 40 15 29.3% 29.3% 8 28.0% 28.5% 30 30 6 23.2% 12.5% 10 19.3% 18.0% 17.1% 15.3% 20 15.7% 20 12.6% 4 11.7% 11.7% 11.1% 10.9% 9.5% 5 10 2 10 0 0 0 0 BLR KAZ ARM KGZ MNG UZB AZE SDN LTU FIN BLR ARM FRO GEO KGZ KAZ MDA PRY UZB TJK Russian export value Import share of partner Russian import value Export share of partner Sources: OECD; UN Comtrade; Winkler, Wuester, and Knight (2022a); World Bank. Note: ARM = Armenia; AZE = Azerbaijan; BLR = Belarus; FIN = Finland; FRO = Faroe Islands; GEO = Georgia; KAZ = Kazakhstan; KGZ = Kyrgyz Republic; GVC = global value chain; LTU = Lithuania; MDA = Moldova; MNG = Mongolia; PRY = Paraguay; SDN = Sudan; TJK = Tajikistan; UZB = Uzbekistan. a.-d. Data are for 2018. a.-b. The figure includes data from OECD-WTO TiVA 2021 release. b. Forward GVC participation = domestic value added embodied in third-country exports (percent of exports). Backward GVC participation = imported inputs in exports (percent of exports). c.-d. The figures reflect averages over 2018–20, drawing on data from UN Comtrade. Light blue bars indicate Eurasian Economic Union (EAEU) countries. Sources: Winkler, Wuester, and Knight (2022a) and Winkler, Wuester, and Knight (2022b). produced energy sources in the near term, higher energy prices will translate directly into a larger import bill and wider current account deficits. Sharp in- creases in energy prices have generated sizable fiscal costs in several countries, particularly those in Central Europe and Eastern Europe, as a result of energy subsidies—in some cases, these have been expanded alongside gas tax cuts. Rising food prices could lead to increased food insecurity in the region, par- ticularly for vulnerable households. Prior to the twin shocks of the pandemic and war, the prevalence of food insecurity in ECA was on par with broader Europe. The pandemic nearly doubled the prevalence rate of severe food insecurity in ECA, while rates only edged up slightly in western Europe (FAO 2021b). If high grain Part 1: War in the Region ●  23 prices persist, model-based estimates for seven ECA countries suggest they could raise poverty rates by an average of 3.3 percentage points, or an increase of nearly 1.2 million people in this sample based on national poverty lines (Artuc et al. 2022). A spike in food prices is also likely to amplify income inequality concerns as sharp increases in inflation hit poor households the hardest because of high ex- penditure shares on food and fuel (Laborde, Lakatos, and Martin. 2019). The war also comes in the midst of the COVID-19 pandemic, which has already precipi- tated widening inequality both within and between countries, particularly among lower-income groups in EMDEs due to severe job and income losses (box 1.4; World Bank 2022b). While welfare losses associated with the pandemic were more pronounced in wealthier countries in ECA, disruptions to education could set back income prospects and worsen inequality in the region over the long term, particularly for low-income groups. Regional Outlook Russia’s invasion of Ukraine is anticipated to result in considerable damage to the regional economy, with output in ECA forecast to shrink 4.1 percent in 2022— more than 7 percentage points below previous forecasts (figure 1.6, panel a; table 1.1). In addition to Russia and Ukraine, four other regional economies are ex- pected to shrink this year – Belarus, Kyrgyz Republic, Moldova and Tajikistan – while the rest will grow at an anemic pace. Growth projections have been down- graded across the board due to spillovers from the recession in Russia and Ukraine, weaker-than-expected growth in the euro area, trade disruptions, and commodity and financial market shocks (figure 1.6, panels b and c). By 2023, ECA’s gross domestic product (GDP) is expected to expand by a tepid 2.5 percent, as the regional recovery is held back by lingering weakness in war- torn Ukraine and heavily sanctioned Russia. As a result of the war, GDP is ex- pected to be around 6.5 percent below pre-war trends in 2022 and 2023 (figure 1.6, panel d). Average growth of per capita income over the next few years will be insufficient to allow progress in catching up with advanced economies. In con- flict- and sanction-affected ECA countries, progress is anticipated to reverse. The baseline forecast over 2022–23 is predicated on conflict continuing in the near term and sanctions remaining in place over the outlook period. Geopolitical and policy uncertainty is expected to remain elevated in the region, assuming the intensity of the war remains largely unchanged. The near-term outlook also as- sumes high but moderating commodity prices and a less favorable global envi- ronment owing to tighter financing conditions, softening external demand, and lingering supply chain bottlenecks. The regional outlook is subject to considerable uncertainty due to the war and its impacts on the regional economy and the euro area—ECA’s closest economic partner. Although Russia accounts for nearly 40 percent of regional GDP, regional linkages through trade and financial channels are much stronger with the euro area. A downside scenario is thus constructed, where GDP growth in the euro area is 3 percentage points lower in 2022, reflecting the impact of commodity price shocks from escalation of the war. In turn, this triggers additional sanctions and reduces Russian exports to the euro area. The downside scenario also 24  ●   World Bank ECA Economic Update Spring 2022 TABLE 1.1  Europe and Central Asia growth forecast summary (real GDP growth at market prices in percent, unless indicated otherwise) Percentage point differences from January 2022 projections 2020 2021e 2022f 2023f 2022f 2023f EMDE ECA, GDPa −1.9 6.5 −4.1 2.5 −7.1 −0.4 EMDE ECA, GDP excl. Turkey −2.9 5.2 −5.7 2.3 −9.0 −0.6 EMDE ECA, GDP excl. the Russian −1.4 7.8 2.2 3.5 −1.2 −0.1 Federation and Ukraine Central Europeb −3.5 6.1 3.5 3.8 −1.2 0.1 Western Balkansc −3.3 7.4 3.2 3.1 −0.9 −0.7 Eastern Europed −3.1 3.6 −30.7 1.9 −32.1 −1.3 South Caucasuse −5.3 6.6 2.4 3.3 −1.5 −0.3 Central Asiaf −1.3 5.1 2.0 4.3 −2.3 −0.8 Russian Federation −2.7 4.7 −11.2 0.6 −13.6 −1.2 Turkey 1.8 11.0 1.4 3.2 −0.6 0.2 Poland −2.5 5.7 3.9 3.6 −0.8 0.2 Source: World Bank. Note: World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not differ at any given moment in time. Due to lack of reliable data of adequate quality, the World Bank is currently not publishing economic output, income, or growth data for Turkmenistan, and Turkmenistan is excluded from cross-country macroeconomic aggregates. e = estimate; ECA = Europe and Central Asia; EMDE = emerging market and developing economy; f = forecast; GDP = gross domestic product. a. GDP and expenditure components are measured in average 2010-19 prices and market exchange rates. b. Includes Bulgaria, Croatia, Hungary, Poland, and Romania. c. Includes Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia, and Serbia. d. Includes Belarus, Moldova, and Ukraine. e. Includes Armenia, Azerbaijan, and Georgia. f. Includes Kazakhstan, the Kyrgyz Republic, Tajikistan, and Uzbekistan. assumes a shock to financial confidence, a 20 percent contraction in Russia’s GDP, and a 75 percent contraction in Ukraine’s GDP. The Oxford Economics’ Global Economic Model (GEM)—a large-scale, global, semi-structural projection model—is used to conduct the simulations described here (Oxford Economics 2020). In this downside scenario, ECA output would contract nearly 9 percent in 2022—nearly 5 percentage points sharper than the baseline forecast and almost 12 percentage points lower than pre-war projections (table 1.2). An output con- traction of almost 9 percent would be far steeper than the 5 percent contraction experienced during the global financial crisis in 2009 and the 2 percent recession that was induced by the pandemic in 2020. The results presented in table 1.2 are constructed using the Oxford GEM, which includes data on 120 countries, many of which are available at quarterly frequency, with behavioral equations governing domestic economic activity, monetary and fiscal policy, global trade, and commodity prices. The Oxford GEM includes complex modeling of the money and financial markets, allowing for economic shocks to transmit across countries not only through the typical real channels, but also through changes in financial volatility, credit ratings, different bond yields, and related variables. Part 1: War in the Region ●  25 FIGURE 1.6 ECA outlook a. Downgrades to 2022 growth relative b. Growth outlook for 2022 and 2023 to January 2022 forecasts 0 5 25 0 0 Percentage points Percent Percent −20 −5 −25 −40 −10 −50 2022 2023 2022 2023 2022 2023 2022 2023 Europe and Europe and Russian Ukraine −60 Central Asia Central Asia Federation (RHS) Europe and Europe and Russian Ukraine Central Asia Central Asia Federation excluding (RHS) excluding Russian Federation Russian and Ukraine Federation and Ukraine Current January 2022 c. Regional growth outlook for 2022 and 2023 d. Percent deviation in ECA output relative to pre-war baseline 5 20 0 Percent deviation from pre-war baseline 0 0 Percent Percent −4 −5 −20 −8 −10 −40 2022 2023 2022 2023 2022 2023 2022 2023 2022 2023 2022 2023 Turkey Central Central Eastern South Western Asia Europe Europe Caucasus Balkans −12 (RHS) 2021 2022 2023 Current January 2022 Baseline Downside Source: World Bank. a. The figure shows the percentage point difference between the latest projections and forecasts released in the January 2022 edition of the Global Economic Prospects report (World Bank 2022a). b. and c. Aggregates are calculated using real U.S. dollar gross domestic product weights. The values indicate forecasts. d. The figure shows the percent deviation from the pre-war baseline in Europe and Central Asia (ECA) output as a result of the Russian invasion of Ukraine. Pre-war is defined as projections published in the January 2022 edition of the Global Economic Prospects report. “Baseline” entails current projections as reflected in tables 1.1 and 1.4. “Downside” entails a scenario in which the conflict’s impact is much more severe, as outlined in table 1.2. Spillovers from the War to the Regional Economy Russia’s invasion of Ukraine has propagated through multiple channels to the ECA economy, including direct exposures from commodity markets, trade link- ages, tourist inflows, and remittances (table 1.3).18 Key spillovers emanate from the region’s reliance on energy imports and sensitivity to global food prices, which are likely to weaken external accounts and trigger higher inflation. The 18. The heatmap highlights a country’s exposure to Russia or Ukraine via trade, commod- ity, financial, tourism, and remittance flows. 26  ●   World Bank ECA Economic Update Spring 2022 BOX 1.3 Implications of rising inflation for debt in Europe and Central Asia In response to the pandemic-induced global reces- Current debt landscape in ECA sion of 2020, global debt levels surged in the wake Even prior to the war, financial markets and institu- of unprecedented emergency support measures. tions had become increasingly vulnerable to finan- Even prior to the Russian invasion of Ukraine, the cial stress amid high and rising debt. The pandemic pandemic-related rise in debt levels—combined depleted macroeconomic buffers and eroded fiscal with a sharp deceleration in growth—amplified space in ECA, with fiscal deficits widening across existing debt vulnerabilities. Above-target infla- the region and overall debt increasing (figure B1.3.1, tion in major economies is setting the stage for panel a). From the onset of the pandemic to late an abrupt tightening in global financing condi- 2021, ECA governments, households, and corpo- tions, which would increase the risks related to rations cumulatively have significantly increased public debt rollovers and currency mismatches in their borrowing. Total debt in ECA rose almost 16 Europe and Central Asia (ECA), especially given percentage points in 2020, to 119 percent of gross record-high debt in some countries. The war has domestic product (GDP), and remains elevated. The dented the ability of several economies in ECA to increase was particularly pronounced for private meet external debt obligations by cutting growth, debt, with domestic credit to the private sector renewing currency depreciation pressures, increas- soaring to 81 percent of GDP and private external ing borrowing costs, and eroding confidence. debt climbing to almost 30 percent of GDP. Simi- Moreover, the underlying balance sheet risks could larly, median government debt in ECA hovered be larger than expected: the proliferating use of around 50 percent of GDP by end-2020—close to debt-like instruments and commodity-based lend- 10 percentage points higher than 2019—as a result ing, together with the opaque financials of some of elevated expenditures and sustained weakness in state-owned enterprises, has likely obscured total revenues (figure B1.3.1, panel b; table B1.3.1). public debt levels. FIGURE B1.3.1 Fiscal deficits and government debt a. Fiscal balances, by subregion b. Increase in government debt-to-GDP ratios 2019-20, by subregion 4 14 12 2 10 Percentage points Percent of GDP 0 8 −2 6 4 −4 2 −6 0 ECA CA CE EE SCC WBK CE EE SCC WBK CA 2021 2019 EMDE average Sources: Eurostat; Kose et al. 2017; World Bank. Note: Aggregates are calculated using nominal U.S. dollar GDP weights. The sample includes 152 EMDEs and 24 ECA economies. CA = Central Asia; CE = Central Europe; ECA = Europe and Central Asia; EE = Eastern Europe; EMDEs = emerging markets and developing economies; GDP = gross domestic product; SCC = South Caucasus; WBK = Western Balkans. (Continued next page) Part 1: War in the Region ●  27 BOX 1.3 (continued) TABLE B1.3.1  Debt to GDP in 2020 Country Government Private Total Albania 77.6 28.9 106.5 Armenia 63.5 41.4 104.8 Azerbaijan 21.4 2.7 24.0 Bulgaria 24.7 27.0 51.7 Bosnia and Herzegovina 36.7 39.3 76.0 Belarus 48.0 19.1 67.2 Georgia 60.0 56.7 116.7 Croatia 87.3 55.1 142.4 Hungary 80.1 125.3 205.4 Kazakhstan 26.3 74.2 100.5 Kyrgyz Republic 68.0 49.2 117.2 Moldova 34.8 31.9 66.7 North Macedonia 51.9 30.1 82.0 Montenegro 107.2 92.6 199.7 Poland 57.4 40.6 98.0 Romania 47.4 25.9 73.3 Russian Federation 19.3 13.4 32.6 Serbia 58.4 43.3 101.7 Tajikistan 51.3 27.8 79.1 Turkmenistan 32.2 0.1 32.4 Turkey 39.8 22.7 62.5 Ukraine 60.8 33.1 93.9 Uzbekistan 36.4 19.9 56.4 Kosovo 24.1 18.2 42.3 Sources: Eurostat; Koseetal 2017; World Bank. Note: GDP = gross domestic product. Government debt is defined as general government gross debt. Private debt is defined as private external debt. Data in the table are based on estimates produced by the IMF for cross-country comparison and thus may differ from numbers reported in Part II, “Selected Country Pages.” The composition of debt in ECA has changed being particularly high in the Kyrgyz Republic (87 over the past decade, increasing vulnerabilities to percent) and Georgia (78 percent). financial market stress. External debt has risen 10 Vulnerabilities to high debt levels amid percentage points since 2010, reaching 58 per- rising inflation cent of GDP in 2020. Although foreign exchange– denominated debt has declined in ECA in recent The possibility of financial stress looms ever large years, the overall regional decline masks diver- from the war, especially as the conflict and its spill- gences at the country level, with the share of gov- overs fuel an acceleration in prices (figure B1.3.2, ernment debt denominated in foreign currency panel a). As a result of its deep global financial (Continued next page) 28  ●   World Bank ECA Economic Update Spring 2022 BOX 1.3 (continued) linkages, particularly with the euro area, ECA is premiums and widening sovereign bond spreads, vulnerable to sudden stops of capital inflows and have put upward pressure on ECA government abrupt tightening of external financing conditions. financing costs, increasing rollover risks in econo - In many of the region’s economies, external financ- mies with high short-term external debt (figure ing pressures, which were already elevated, have B1.3.2, panel b). Any further tightening in financ- increased sharply because of the war and the sub- ing conditions that makes servicing public debt sequent rise in policy uncertainty. costlier could pose fiscal sustainability challenges, Inflationary pressures and sustained currency especially given that debt is anticipated to remain depreciation, combined with increasing term elevated throughout the forecast horizon. FIGURE B1.3.2 Inflation, debt, currency depreciation, and the fiscal sustainability gap a. Current inflation versus central b. ECA countries with the highest bank inflation forecasts short-term external debt, 2020 60 35 Percent, year-on-year Percent of total external debt 30 40 25 20 20 15 10 0 5 y va ia ia an nd ia ry tia ke ar rb an ga do st oa la 0 r lg Se m kh Tu Po un ol Cr Bu Ro za M H y vo ia va s e tia an nd ru Ka ke in ar do so ist oa la la ra r lg Tu Po Current Central bank forecast Be jik Ko ol Cr Uk Bu M Ta c. Currency depreciations since the Russian d. Fiscal sustainability gaps Federation’s invasion of Ukraine 10 0 February 24, 2022 Depreciation since 5 Percent of GDP −5 0 −5 −10 −10 −15 Kyrgyz Republic Turkey Uzbekistan Hungary Kazakhstan Poland Georgia Bosnia and Herzegovina Albania −15 −20 Current Benign Stressed GFC COVID-19 Sources: Haver Analytics; Kose et al. 2017; World Bank. Note: ECA = Europe and Central Asia; GDP = gross domestic product; GFC = global financial crisis. a. “Current” indicates the most recently available monthly year-on-year inflation data. “Central bank forecast” indicates the inflation forecast for 2022 released by each country’s respective central bank. Data are through March 28, 2022. b. Short-term external debt data are defined as in Kose et al. (2017) and are on an original maturity basis. c. The last observation is March 30, 2022. d. “COVID-19” indicates 2020 data; “GFC” indicates 2009 data. Aggregates are calculated using nominal U.S. dollar GDP weights. (Continued next page) Part 1: War in the Region ●  29 BOX 1.3 (continued) The war has already triggered financial turmoil intensification of the pandemic or the war, or a and reverberated across ECA’s financial markets, sudden shift in investor sentiment—could result in with several economies experiencing sudden stops far higher fiscal adjustment needs than projected of capital inflows and at risk of currency crises, in the baseline scenario. For instance, one stan- especially countries that are dependent on short- dard deviation below median growth and above term inflows to finance elevated current account the median nominal interest rate could trigger a deficits (figure B1.3.2, panel c). In conflict-affected substantial rise in interest payments, which would countries, the war has damaged business and con- require a primary balance adjustment of 14.3 per- sumer confidence, dampened corporate profits, centage points of GDP to stabilize debt in ECA (fig- and strained the ability of many companies to stay ure B1.3.2, panel d). solvent, resulting in bankruptcies that could spill Policy recommendations over to bank balance sheets. These types of finan- cial dislocations could cause major, persistent out- In ECA, it will be critical for policy makers to shore put losses if they were to evolve into full-fledged up public finance vulnerabilities and support resil- financial crises (Laeven and Valencia 2018; World ience, especially given the war. Measures could Bank 2020c). include strengthening fiscal and public debt man- As monetary policy tightens and inflation rises, agement frameworks, supporting debt resolu- debt sustainability in ECA could be at risk. The fis- tion, and facilitating access to long-term finance. cal sustainability gap measures the sustainability of Effective frameworks to manage debt and broader medium-term debt projections using underlying fiscal risks, and to support spending and debt assumptions on growth and interest rates, as well transparency, can help prevent the emergence of as government debt and the primary balance—it unsustainable debt over the medium to long term is estimated as the difference between the primary and facilitate dealing with elevated debt (Kose et balance and the debt-stabilizing primary balance al. 2021; World Bank 2021c). Efficient debt reso - (Kose et al. 2017).a A negative (positive) statistic lution for private as well as government debt can indicates that government debt is on a rising (fall- help remove the debt overhangs that can weigh on ing) trajectory. investment and growth; such resolution requires Fiscal sustainability gap estimates are sensi- appropriate domestic and international policies. tive to sharp reassessments of growth or sudden Deep and liquid domestic financial markets, as well shifts in financial market conditions. Worse-than- as greater access to long-term debt markets, can expected growth or tighter-than-anticipated help governments and corporates contract debt financing conditions—triggered perhaps by an on more appropriate terms to match risk profiles. a. The debt-stabilizing primary balance that puts debt on a sustainable path toward a target debt ratio. The target debt ratio is defined as being equal to the historical median value in an economy’s peer group, which would be emerging markets and devel- oping economies for ECA. projected fall in the number of tourists will further weigh on the regional econ- omy—tourists from Russia and Ukraine account for more than 10 percent of ar- rivals in about half of ECA’s economies, including those reliant on tourism, such as Georgia, Montenegro, and Turkey. Still, an inflow of migrants from countries affected by the war and sanctions could help partially offset subdued tourism. Food prices are likely to continue to climb in the region and put further pres- sure on inflation. ECA imports about 40 percent of its wheat from Russia and Ukraine—this figure rises to 75 percent or more in Central Asia and the South 30  ●   World Bank ECA Economic Update Spring 2022 TABLE 1.2  Downside scenario Annual GDP impact including commodity prices shocks where Russia’s GDP contracts by 20 percent, Ukraine’s GDP contracts by 75 percent, and the euro area’s GDP growth is revised down 3 percentage points in 2022 Percentage point Percentage point differences from differences from January baseline forecasts 2022 projections 2022f 2023f 2022f 2023f 2022f 2023f EMDE ECA -8.7 2.1 -4.6 -0.4 -11.7 -0.8 EMDE ECA excl. Turkey -11.3 2.0 -5.6 -0.3 -14.6 -0.9 EMDE ECA excl. the Russian 1.5 2.9 -0.7 -0.6 -1.9 -0.7 Federation and Ukraine Sources: Oxford Economics 2020; World Bank. Note: ECA = Europe and Central Asia; EMDE = emerging market and developing economy; f = forecast; GDP = gross domestic product. Caucasus—leaving the region vulnerable to war-related disruptions to trade, es- pecially the Black Sea countries. Five ECA economies are among the top ten most dependent countries in the world on wheat imports from Russia and Ukraine, and four are among those for fertilizer imports from Russia (FAO 2022). Russia’s announced restrictions on exports of wheat and other food exports to the Eur- asian Economic Union (Armenia, Belarus, Kazakhstan, and the Kyrgyz Republic) are likely to push regional food prices higher. In turn, these price pressures might leave vulnerable households exposed to food insecurity and poverty. Moreover, inflationary pressures could and force central banks to accelerate the pace of monetary policy tightening. Outside global commodity markets and tourism, the direct impact of the war varies, with trade and financing exposures to Russia being high in the South Cau- casus and Central Asia but somewhat limited in other ECA economies. In many of these countries, Russia is a major export destination, accounting for about 10 per- cent of total exports in Central Asia and the South Caucasus. Remittances from Russia are nearly 30 percent of GDP in some Central Asian economies (the Kyrgyz Republic and Tajikistan), and Russia is an important source of foreign direct in- vestment (FDI) for many countries in Central Asia and the South Caucasus. Still, for most ECA economies—including Russia’s immediate neighbors—spillovers from the euro area are larger than those from Russia. ECA goods exports to Rus- sia are about one-tenth of those to the euro area. Similarly, 40 percent of FDI stock is sourced from the European Union versus only 7 percent from Russia. Russia’s invasion of Ukraine has destabilized the region geopolitically and triggered a refugee crisis, especially in the European Union, including ECA’s Central European economies. Within the span of three weeks, about 3 million refugees fled Ukraine, with more than 2 million arriving in Poland. The number of refugees continues to swell, with more than 4 million refugees having fled Ukraine by late March. The overall economic impact of the refugees is likely to be positive beyond the very short term, boosting domestic demand, especially pri- vate consumption, while also increasing the potential labor force owing to TABLE 1.3  Heatmap: Direct country exposures to the Russian Federation and Ukraine Displaced Natural gas Natural gas Russian Tourism, people, arrivals Wheat imports Wheat imports Remittances Nitrogenous Potassium import imports from Exportsc Importsc inbound FDI, Bankingf share of GDP as share of a b d from Russiae from Ukrainee g from Russiah fertilizeri fertilizeri dependency Russia stock impacted population Central Asia #N/A #N/A Kazakhstan #N/A #N/A Kyrgyz Republic #N/A #N/A #N/A #N/A #N/A Tajikistan #N/A #N/A #N/A #N/A #N/A #N/A Part 1: War in the Region Uzbekistan #N/A #N/A Central Europe Bulgaria #N/A #N/A Croatia #N/A #N/A #N/A Hungary #N/A Poland Romania Eastern Europe Belarus #N/A #N/A #N/A #N/A Moldova #N/A South Caucasus Armenia #N/A #N/A Azerbaijan #N/A Georgia #N/A #N/A Western Balkans Albania #N/A #N/A #N/A Bosnia and Herzegovina #N/A #N/A #N/A Kosovo #N/A #N/A #N/A #N/A #N/A North Macedonia #N/A Montenegro #N/A #N/A #N/A Serbia #N/A Turkey #N/A 3+ 75+ 75+ 20+ 20+ 15+ 75+ 10+ 3+ 3+ 10+ 60+ 60+ 2-3 50 - 75 50 - 75 10 - 20 10 - 20 5 - 15 50 - 75 5 - 10 2-3 2-3 5 - 10 40 - 60 41 - 60 1-2 25 - 50 25 - 50 5 - 10 5 - 10 2-5 25 - 50 2-5 1-2 1-2 2-5 20 - 40 21 - 40 0-1 0- 25 0- 25 0-5 0-5 0-2 0- 25 0-2 0-1 0-1 0-2 0- 20 0- 21 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Sources: Bank for International Settlements; Central Bank of Russia; Eurostat; Haver Analytics; International Food Policy Research Institute; International Monetary Fund; United Nations Comtrade; United Nations World Tourism Organization; World Bank. Note: FDI = foreign direct investment; GDP = gross domestic product. a. Energy import dependency is the share of energy needs met by imports, calculated from energy balances as net imports divided by the gross available energy. b. The share of natural gas imports from the Russian Federation in total natural gas imports. c. Exports to and imports from the Russian Federation as a percent of trading partners’ GDP. d. FDI stock from the Russian Federation as a percent of the recipient country’s total FDI. e. Wheat imports from the Russian Federation (Ukraine) as a percent of total wheat imports. f. Bank claims to the Russian Federation are a percent of consolidated positions, including risk transfers and commitments, of the creditor country’s GDP. g, The share of international tourism receipts adjusted for the share of Russian and Ukrainian tourist arrivals in total foreign tourist arrivals, as a share of GDP. h. Remittances from the Russian Federation as a percent of GDP. i. The fertilizers dependency refers to countries’ dependency on imports of nitrogenous and potassium fertilizers originating from Belarus and the Russian Federation over the period 2018-20. It is based on COMTRADE data, as reported by IFPRI. ●  31 32  ●   World Bank ECA Economic Update Spring 2022 BOX 1.4 Actual and perceived inequality in Europe and Central Asia In the run-up to the COVID-19 pandemic, income ECA income distribution, although less than in the inequality in Europe and Central Asia (ECA) was rest of the world. Considering the global income relatively low, given the region’s income levels. distribution, and abstracting for the moment from There is considerable heterogeneity within ECA in any inequalities in the welfare impact of COVID- the levels of income inequality, with the Gini index 19 within countries (within-country impacts are ranging from the mid-20s in countries such as the addressed below), those in the lower half of the Slovak Republic, Slovenia, the Czech Republic, and global income distribution, and notably those Belarus, to 40 and above in Bulgaria and Turkey. between the international $1.90/day and the At the same time, there is generally an inverse upper-middle-income country $5.50/day thresh - relationship between the national level of inequal- olds, were affected the most by the initial shock ity and gross domestic product (GDP) per capita, in 2020. Those countries also exhibited the slow- and countries in ECA have lower levels of income est recovery in 2021, in such a way that the global inequality than would be predicted, given their GDP impact of the COVID-19 pandemic is inequal- per capita. Overall, the region has the lowest values ity increasing (World Bank 2022b; Narayan et of the Gini index across the world (figure B1.4.1). al. 2022). A similar exercise but restricted to the The welfare losses associated with COVID-19 regional ECA distribution of income reveals a simi- were more pronounced in the lower part of the lar but less pronounced pattern in both emerging FIGURE B1.4.1 Gini index, by countries and regions, latest available data Europe and Central Asia Rest of the world Regional average Europe and Central Asia South Asia Middle East and North Africa East Asia and the Pacific Africa Latin America and the Carribean 20 40 60 80 Source: Adapted from Bussolo et al. 2018, updated with the latest data from Povcalnet. Note: The Gini index was calculated on income whenever possible; alternatively, consumption was used. Rest of the world = all countries, including high-income countries. Europe and Central Asia includes Western Europe. Regional averages are unweighted averages of individual countries. (Continued next page) Part 1: War in the Region ●  33 BOX 1.4 (continued) market and developing economy (EMDE) ECA and the rich and the poor to be made smaller tends non-EMDE ECA, with this last group of relatively to be higher in countries with higher observed richer ECA countries suffering more severe eco- income inequality (figure B1.4.2). nomic contractions. The recovery in 2021 in the What causes the discrepancy between rela- ECA region appears to have been quite uniform tively low inequality in outcomes in ECA and per- across the income distribution, unlike the global ceptions of high inequality? Setting aside non- patterns for the same period, which saw the richer trivial issues related to the degree of awareness of percentiles of the population recover their income actual observed inequality levels,a there is a broad faster than the poorer ones. perception in the region that the distribution of At the countr y level, there is evidence of fortunes in society is not entirely fair and is get- COVID-19 having inequality-increasing impacts ting worse. In countries like Georgia, Kazakhstan, in the short term, which risk being amplified in Kosovo, and Moldova, inequality of opportunityb the longer term. While detailed evidence on the accounts for 40 percent of overall income inequal- within-country distributional impacts of COVID-19 ity, compared to 25 percent in Uzbekistan and less remains only partial, data from the High-Frequency than 10 percent in Germany. Some 45 percent of Phone Surveys collected by the World Bank show adults in ECA believe that informal connections that in the majority of countries in the sample, are very important or essential to obtain a good inclusive of the ECA region, those in the bottom government job, and 40 percent similarly think that 40 percent of the income distribution with lower connections are vital to get a good private sec- levels of education and more precarious attach- tor job. Bussolo et al. (2018), focusing on the ECA ment to the labor market have been more likely to region as a whole, present evidence of increasing suffer from work stoppages and income losses as a concentration of wealth, increasing labor mar- result of the pandemic. As such, the overall short- ket polarization characterized by a hollowing out term impact is estimated to be inequality increas- of the jobs in the middle of the income distribu- ing, with the within-country Gini coefficient being tion, and an increasing generational divide, with about 1 point higher on average due to the pan- younger age cohorts facing higher income inequal- demic’s effects. While these short-term inequality ity at every point of the life cycle relative to older impacts may be muted, the unequal patterns of generations. recovery, as well as human capital losses due to These inequalities of opportunity generate school closures, are likely to amplify the inequal- discontent. Cojocaru (2014a) finds that inequal- ity impacts in the medium to long term (Azevedo ity aversion in ECA is not intrinsic, but rather tied et al. 2020; Narayan et al. 2022; Neidhofer, Lustig, to concerns about the fairness of the institutions and Tommasi 2021). underlying the distribution of fortunes in society. The effects of COVID-19 notwithstanding, Beliefs as to whether inequality is perceived to be income inequality in ECA is relatively low. Yet, too high have been found to be linked with whether perceptions of inequality in the region are radi- those who are poor today expect to be upwardly cally different. Across the ECA region, more than mobile in the future (Cojocaru 2014b) and to the two-thirds of adults believe that inequality is too degree of inequality of opportunity that may con- high, in the sense of desiring the gap between the strain such upward mobility (Cojocaru 2019). These rich and the poor to be smaller than it is, according beliefs also reflect the deteriorating social mobility to the latest round of the Life in Transition survey in the region since the transition: estimates from data. Perceptions of higher inequality correlate, the Global Database of Intergenerational Mobility albeit weakly, with actual inequality levels, such show that the youngest cohorts in ECA, who grew that the share of adults who want the gap between up and reached adulthood in the aftermath of the (Continued next page) 34  ●   World Bank ECA Economic Update Spring 2022 BOX 1.4 (continued) FIGURE B1.4.2 Share of the population who agree that the gap between the rich and the poor should be reduced and the actual level of inequality (Gini) 95 Armenia 90 Slovenia Lithuania Latvia 85 Estonia Romania Kosovo Italy Kazakhstan Croatia Inequality perceptions, 2016 80 Hungary Slovak Republic Serbia Germany 75 Poland Tajikistan Russian Federation Georgia Kyrgyz Republic North Macedonia 70 Czech Republic 65 Moldova Ukraine 60 55 50 Belarus 45 25 27 29 31 33 35 37 39 41 Gini coefficient, 2015 Sources: Cojocaru 2021; World Bank. collapse of the Soviet Union, observe levels of government; and (ii) workers with skills that are intergenerational mobility that are lower compared waning in demand are voting more regularly for with older cohorts and more similar to the levels extremist parties, while younger generations are recorded in lower-middle-income countries. opting out of voting altogether. Winkler (2019), Perceptions of the shrinking level of equity using data from 25 European countries, including in ECA are causing fissures in the existing social a number of transition economies, for the period contract. Bussolo et al. (2018) find that (i) trust 2002–14, also finds that a 5-point increase in the in institutions is low—only 11 percent of respon- Gini index of local inequality increases the likeli- dents in the latest round of the Life in Transition hood of a voter supporting a far left or far right Survey expressed complete trust in their national party by 4 percentage points. a. Gimpelson and Treisman (2018) find, across a number of data sets and countries, that respondents predict poorly (slightly bet- ter than by chance) the level of inequality in their country, as well as the trends in inequality, or other distributional statistics such as the top 1 percent’s share of wealth, average salaries nationwide or for specific jobs, or the country’s current poverty rate. b. Defined here in the space of incomes predicted by individual circumstances at birth: gender, rural or urban place of birth, eth- nicity, mother’s and father’s level of education, and parents’ membership in the communist party (for details, see EBRD 2016). legislation that allows migrants to work. Countries have bolstered capacity, ex- panding access to social services and social benefits, as well as health care and education, but more will likely be needed and will come at the cost of rising fiscal pressures related to the provision of these services and housing. Targeted invest- ment could also support host communities to prevent social tensions and back- lash against those arriving. Part 1: War in the Region ●  35 Trends in Europe and Central Asia: Major economies and subregions Russian Federation Following Russia’s invasion of Ukraine, the Russian economy has plunged into a deep recession, with output projected to contract 11.2 percent in 2022 amid a collapse in domestic demand (table 1.4). Sanctions have impaired Russia’s siz- able macroeconomic buffers and triggered trade, financing, and confidence shocks. Domestic demand is expected to be depressed as job and income losses, increased poverty, inflation, and supply disruptions reduce consumption while investment continues to fall amid the loss of foreign investment, supply short- ages and trade disruptions, weakened economic prospects, reduced domestic lending capacity, and high interest rates. Foreign firms continue to pull out of the Russian market, with more than 400 U.S. companies withdrawing from Russia.19 Import compression due to the collapse in demand and export bans to Russia will ameliorate external financing pressures and elevated export prices. Still, the dis- ruption of imports has already interrupted some domestic sectors, including au- tomobile production and aerospace. Financial stability risks have markedly increased, despite years of strengthen- ing macroeconomic frameworks, accumulating policy buffers, and hedging CBR reserve exposure to the U.S. dollar.20 Sanctions have severed Russia’s interna- tional financial linkages, prompting the imposition of capital controls to mitigate the outflow of capital.21,22 Although it is difficult to measure the precise dollar amount, estimates using the currency decomposition of assets suggest that about half of the CBR’s assets are frozen. Ruble depreciation has increased the burden of external debt servicing costs, while shortages in foreign exchange liquidity and capital controls have further hindered Russia’s ability to meet external debt obli- gations.23 Although the CBR has injected ruble liquidity into the banking system, introduced forbearance measures, and relaxed prudential borrowing regulations, the banking sector remains vulnerable to a deeper credit crunch. Announced bans and reductions in purchases of Russian oil and gas are ex- pected to lead to a moderate fall in shipments this year. Exports of key high-tech goods to Russia are banned—including software, semiconductors, and avion- ics—which will starve Russia of critical inputs and exacerbate supply chain dis- ruptions in Russia and spill over to its trading partners. The current package of sanctions will have a lasting negative effect on Russia by curtailing oil production 19. Yale, 2022, https://som.yale.edu/story/2022/over-400-companies-have-withdrawn- russia-some-remain. 20. By January 2022, Russia had accumulated $630 billion in reserves (about 40 percent of GDP), of which $500 billion was foreign exchange reserves. 21. Financial sanctions include (i) restricting access to foreign exchange assets of the CBR and other sovereign entities, (ii) freezing assets of and blocking transactions with Russian banks, (iii) excluding selected Russian banks from the SWIFT payments messaging system, (iv) debt and equity restrictions on major Russian enterprises, and (v) financial sanctions against selected natural persons. 22. Stocks of non-resident assets in Russia are large, at about 70 percent of GDP. 23. The price of bonds with upcoming coupons due have traded at around 20 cents on the dollar, and Russia’s sovereign bond rating has been rapidly downgraded to junk status in what was the largest downgrade since the Republic of Korea in 1997. 36  ●   World Bank ECA Economic Update Spring 2022 TABLE 1.4  Europe and Central Asia country growth forecastsa (real GDP growth at market prices in percent, unless indicated otherwise) Percentage point differences from January 2022 projections 2020 2021e 2022f 2023f 2022f 2023f Albania −4.0 8.6 3.2 3.4 −0.6 −0.3 Armenia −7.4 5.7 1.2 4.6 −3.6 −0.8 Azerbaijan −4.3 5.6 2.7 2.2 −0.4 −0.5 Belarus −0.9 2.3 −6.5 1.5 −3.7 −0.8 Bosnia and Herzegovinab −3.1 6.5 2.9 3.1 −0.1 −0.1 Bulgaria −4.4 4.2 2.6 4.3 −1.2 0.7 Croatia −8.1 10.4 3.8 3.4 −1.6 −1.0 Georgia −6.8 10.4 2.5 5.5 −3.0 0.5 Hungary −4.7 6.8 4.2 4.1 −0.8 −0.2 Kazakhstan −2.5 4.0 1.8 4.0 −1.9 −0.8 Kosovo −5.3 9.1 3.9 4.3 −0.2 −0.1 Kyrgyz Republic −8.4 3.6 −5.0 3.2 −9.7 −1.1 Moldova −7.4 13.9 −0.4 2.7 −4.3 −1.7 Montenegro −15.3 12.4 3.6 4.7 −2.0 −0.1 North Macedonia −6.1 4.0 2.7 3.1 −1.0 −0.3 Poland −2.5 5.7 3.9 3.6 −0.8 0.2 Romania −3.7 5.9 1.9 4.1 −2.4 0.3 Russian Federation −2.7 4.7 −11.2 0.6 −13.6 −1.2 Serbia −0.9 7.4 3.2 2.7 −1.3 −1.3 Tajikistan 4.5 9.2 −1.8 3.2 −7.3 −1.3 Turkey 1.8 11.0 1.4 3.2 −0.6 0.2 Ukraine −3.8 3.4 −45.1 2.1 −48.3 −1.4 Uzbekistan 1.9 7.4 3.6 5.3 −2.0 −0.5 Source: World Bank. Note: World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time. Due to lack of reliable data of adequate quality, the World Bank is currently not publishing economic output, income, or growth data for Turkmenistan, and Turkmenistan is excluded from cross-country macroeconomic aggregates. e = estimate; f = forecast; GDP = gross domestic product. a. Data are based on GDP measured in average 2010-19 prices and market exchange rates, unless indicated otherwise. b. Production-approach based numbers. due to the exit of foreign oil and oil servicing companies, fall in investment, and reduced access to foreign technology. Ukraine Russia’s invasion of Ukraine has triggered a catastrophic humanitarian toll and severe economic contraction. From a population of around 44 million in Ukraine, more than 4 million have fled as refugees as of March 31, predominantly into neighboring countries, with around 6.5 million displaced internally—these num- bers are likely to swell as the war continues (UNDP 2022). Access to water, food, Part 1: War in the Region ●  37 heating, electricity, and gas has been curtailed in Ukraine due to heavy infrastruc- ture damage and security issues, leaving about a third of the population in pos- sible need of life-saving humanitarian assistance (UNOCHA 2022; UNDP 2022). The impact on poverty is also likely to be devastating, although it is hard to quantify at this stage. Based on the international poverty line of $5.50 per day, poverty is projected to increase to 19.8 percent in 2022, up from 1.8 percent in 2021, with an additional 59 percent of people being vulnerable to falling into poverty. The war has destroyed a critical amount of productive infrastructure—includ- ing rail, bridges, ports, and roads—rendering economic activity impossible in large swathes of areas. Preliminary estimates from early March suggested that the damage to infrastructure is $100 billion—or about two-thirds of 2019 GDP— but since then, the war has raged on and caused further destruction (UNDP 2022). Goods trade has come to a grinding halt, as damaged transit routes pre- vent goods by land while the loss of access to the Black Sea cuts off half of Ukraine’s exports and 90 percent of its grain trade. The planting and harvest seasons have been disrupted. Electricity consumption, which is often used as a high-frequency proxy for economic activity, decreased by more than 25 percent within two weeks of the invasion (box 1.5). Electricity data were suspended, and the war has continued—indicating that these figures are likely much higher now. The war is estimated to have caused half of Ukrainian businesses to shut down completely, while the other half has been forced to operate well below capacity (UNDP 2022). Even absent the destruction of physical infrastructure, output in Ukraine is projected to shrink by 45.1 percent in 2022. The magnitude of the contraction, however, is subject to a high degree of uncertainty related to the duration and intensity of the war. Still, the repercussions are anticipated to reverberate beyond the short-term collapse in domestic demand and exports, as output is scarred by the destruction of productive capacity, damage to arable land, and smaller labor supply—especially if refugees are slow to return or choose to remain perma- nently outside Ukraine. Learning losses from the pandemic are expected to be amplified by the war given the destruction of schools and disruption to school- ing, which are likely to have a disproportionate effect on vulnerable households. With physical capital and vital assets destroyed and degraded, combined with scarring from the war and pandemic, the recovery will be more difficult without significant reconstruction efforts and capital flows. Eastern Europe Eastern Europe is projected to contract 30.7 percent in 2022 as the subregion suf- fers from the catastrophic shock of Russia’s full-scale invasion of Ukraine. In addition to the economic fallout from the conflict, the subregion will also be im- pacted by additional sanctions that were placed on Belarus for its role in the war. Moldova is likely to be one of the most affected countries by the conflict not only because of its physical proximity, but also its inherent vulnerabilities as a small, landlocked economy, with close linkages to both Ukraine and Russia. 38  ●   World Bank ECA Economic Update Spring 2022 BOX 1.5 Assessing the economic consequences of the war in Ukraine The recent war in Ukraine has undoubtedly Within two weeks of the invasion, daily electric- affected the lives and livelihoods of millions of ity consumption dropped by more than 25 percent citizens in the country. Having an assessment of in the country—from an average of 421 gigawatt the economic consequences of the war is key to hours (GWh) during February 20 to 23, 2022, to an be able to support the country during the course average of 310 GWh during February 27 to March of the conflict and the recovery once the hostili- 6, 2022 (figure B1.5.1). After March 6, 2022, these ties cease. Typical estimates of economic activity data were suspended, but these values have likely may become unreliable as, in a conflict setting, worsened since the conflict has continued to inflict they may only be available with a delay and, even destruction. In the short run, Ukraine’s output may if available, may be a poor measure of real output have decreased by at least the same fraction if the given dramatic changes in relative prices. elasticity between electricity consumption and A way to assess the economic impact of the war gross domestic product is about one. However, this when traditional output estimates are not avail- widely used elasticity was estimated by most aca- able is by using high-frequency proxies of eco- demic work in peacetime economic settings. Thus, nomic activity. These are typically non-monetary it is not clear what would be a reasonable estimate measures that track very closely the variations in of this elasticity in a conflict setting, as patterns of output. A widely used proxy is electricity consump- consumption may have changed, but it is likely that tion, which has been shown to have a very high these estimates have substantially deteriorated correlation with economic activity and a short-run since March 6, 2022. There are confounding factors elasticity close to one (Ferguson, Wilkinson, and from the conflict because electricity consumption Hill 2000; Chen, Kuo, and Chen 2007; Arora and during night hours is reduced as households and Lieskovsky 2014). During the COVID-19 pandemic, businesses turn off their lights to prevent shelling several researchers used the variation in the daily and attacks. Further, electricity consumption may rates of electricity consumption as a proxy indica- not track well economic activity when accounting tor for the economic impact of lockdowns (Demir- for infrastructural and territorial losses. These facts guc-Kunt, Lokshin, and Torre 2021a, 2021b; Beyer, suggest that, if anything, a reduction of 26 per- Franco-Bedoya, and Galdo 2021; Vagliasindi 2021). cent in Ukraine’s economic output as result of the In other contexts, measures such as nighttime light war over these initial few weeks can be seen as a intensity (Chen and Nordhaus 2011; Henderson, lower bound estimate, with upper bound estimates Storeygard, and Weil 2012) and nitrogen dioxide implying an even larger decrease in output, espe- emissions (Morris and Zhang 2019) have been used cially given the duration of the conflict. to measure economic output. FIGURE B1.5.1 Daily electricity consumption in Ukraine, February/March 2022 500 Daily consumption (GWh) 400 300 200 100 n.a. 0 20-Feb 22-Feb 24-Feb 26-Feb 28-Feb 2-Mar 4-Mar 6-Mar Sources: Ukrenergo; Ministry of Energy of Ukraine. Note: GWh = gigawatt hours. Part 1: War in the Region ●  39 Outside Ukraine, it is anticipated that the subregion will experience direct trade consequences from the war.24 Heavy reliance on imports to meet food and energy needs has left Moldova vulnerable to disruptions in the supply of food, energy, and commodity imports from Ukraine and Russia, with Ukraine account- ing for more than 40 percent of the country’s total wheat imports. Additionally, Eastern Europe is critically reliant on natural gas for powering its energy needs— in Belarus and Moldova, natural gas comprises more than 50 percent of the total energy supply, with 100 percent of natural gas imported from Russia. While Be- larus will be shielded due to bilateral agreements with Russia, import disrup- tions are expected to increase price pressures elsewhere, in turn eroding the com- petitiveness of firms and household incomes, especially for the poor. The shock to confidence, heightened policy uncertainty, and the deteriorating outlook for the Russian economy are expected to have detrimental impacts on domestic demand in Eastern Europe. Russia is a significant source of finance for Eastern Europe, accounting for 31 and 20 percent of FDI in Belarus and Moldova, respectively, and 12 percent of portfolio flows to Belarus. Consumption will also be hard hit—nearly 50 percent of the subregion’s remittances come from Russia, with Moldova also vulnerable to disruptions in remittances from Ukraine, which accounts for 15 percent of total remittances. The influx of refugees to Moldova has been large. About 390,000 refugees, the equivalent of about 15 percent of Moldova’s population, have crossed the border since the onset of the war. Although more than three-quarters have transited to the European Union, the remaining influx of refugees will likely have additional fiscal costs, squeezing resources for long-term development priorities. The large wave of refugees could create a challenging socioeconomic environment in the medium term, especially if many migrants remain but fail to find employment opportunities. Turkey In Turkey—the region’s second largest economy after Russia—growth is ex- pected to slow sharply in 2022, to 1.4 percent—well below its pace for potential growth (World Bank 2019d). The war in Ukraine is exacerbating domestic head- winds that predated the conflict, including shrinking investment and a sharp rise in policy uncertainty after multiple policy rate cuts fueled a nearly 20-year-high inflation rate of 54.4 percent and triggered the lira to fall to new record lows against the U.S. dollar (World Bank 2022c). The war has driven commodity prices up further and is expected to generate additional inflationary pressures in Tur- key, which will further erode real incomes and dampen consumption. The Rus- sia-Ukraine war is likely to have a detrimental impact on Turkish tourism, given that visitors from these countries account for about a quarter of total tourists. The invasion, through its impact on policy uncertainty, could further dampen confi- dence and investment, accelerate portfolio outflows, and put additional pressure on the lira. Important value chain linkages in Turkey could come under further 24. Russia accounts for 20 percent of Eastern Europe’s goods exports, a number that in- creases to 43 percent for Belarus; Russia is also the source for 25 percent of Eastern Europe’s imports, with Belarus relying on Russia for 52 percent of its imports. 40  ●   World Bank ECA Economic Update Spring 2022 strain as the war severs transit routes, disrupts trade, and increases shipping prices. The war’s immediate impact on Turkey has largely been through spillovers from higher commodity prices to inflation, which has deepened Turkey’s macro- economic imbalances. Turkey is dependent on energy imports, with about 40 percent of its total natural gas and petroleum imports sourced from Russia. With little opportunity to substitute imported energy with domestically produced en- ergy sources in the near term, higher energy prices will translate directly into a larger import bill.25 This will widen the current account deficit and weigh on the value of the lira—exacerbating price pressures in an already highly inflationary environment.26 Turkey also relies heavily on Russia and Ukraine for agricultural imports—nearly 25 percent is from Russia and 10 percent is from Ukraine. To- gether, Russia and Ukraine account for more than three-quarters of Turkey’s wheat imports and sunflower seed oil imports, leaving Turkey’s economy ex- posed to supply and trade disruptions from the war and thus higher prices. Moreover, sharp increases in energy and fertilizer prices will likely add further pressure on the cost of domestic agricultural production. Additional increases in the price of food—which has a high share in Turkey’s Consumer Price Index basket and is already experiencing inflation above 50 percent—will hit poorer households particularly hard.27 Central Asia Growth in Central Asia—the weakest among the ECA subregions outside East- ern Europe—is forecast to more than halve from 5.1 percent in 2021 to 2 percent in 2022 due to tight economic linkages with the Russian economy. The severe recession in Russia is expected to dent remittances and trade flows with Central Asia, while sanctions on Russia pose challenges to financial intermediation. Al- though higher global commodity prices should help to buoy activity and fiscal balances in some Central Asian economies (Kazakhstan and Uzbekistan), weak- ness in Russia—a key trading partner—will be a drag on growth.28 The war is magnifying other vulnerabilities, including high debt distress risks in the Kyrgyz Republic and Tajikistan. Both countries are expected to experience a contraction in output this year, wider deficits, and sharp exchange rate devaluation. Remittances from Russia serve as a major source of income—accounting for over 10 percent of GDP in most countries in the subregion, and approaching 30 percent of GDP in the Kyrgyz Republic and Tajikistan. Following the annexation of Crimea in 2014, remittance outflows from Russia to Central Asia fell by more 25. Assuming a constant volume of energy imports, a $10/bbl increase in the price of Brent crude oil raises Turkey’s energy import bill by between $6.5 billion and $7.0 billion. Brent crude oil has risen about $20/bbl since January, to $100/bbl, but prices remain highly volatile. 26. The pass-through of oil prices to fuel price inflation and transportation inflation is around 25 and 9 percent, respectively (World Bank 2022c). 27. Households in the bottom decile allocate nearly 70 percent of their budget to food and housing—twice as much as the share for the highest decile and well above the 54 percent share for the median household. 28. Russia serves as a major trading partner for countries in Central Asia, comprising more than 30 percent of imports, while Central Asian exports to Russia contribute around 20 percent of GDP. Part 1: War in the Region ●  41 than 40 percent, weighing on economic activity and household incomes. Because the war dwarfs the earlier conflict in 2014–15, it is likely to trigger a significantly sharper and more enduring decline in remittances, derailing the post-pandemic recovery in Central Asia that had emerged in 2021. Indirect effects from sanctions could be significantly damaging where Russian banks play an important role, or where Russia is a critical partner in processing foreign transactions (Tajikistan and the Kyrgyz Republic). Consequently, Russia’s blockage from SWIFT, and the subsequent self-sanctioning measures adopted by the financial sector, could cas- cade into disruptions in trade, investment, and finance flows for those countries that rely on Russia to complete cross-border transactions. South Caucasus In the South Caucasus, growth is projected to weaken to 2.4 percent in 2022—al- most a third of the subregion’s growth in 2021—as the war in Ukraine disrupts trade and remittance channels.29 The spillovers will vary across the subregion, however, with Armenia facing adverse effects due to its especially tight linkages with Russia through goods trade, remittances, FDI, financial transactions, and tourism. In contrast, Azerbaijan should benefit from windfalls due to higher global energy prices. This boost may be limited, however, as Azerbaijan’s oil sec- tor is already operating close to its capacity constraints for oil production. Consumption is anticipated to be dented by the loss of remittances and infla- tionary pressures amid sharply higher agricultural prices. Goods exports will be hard hit as weak external demand from Russia is further compounded by trade disruptions from the war.30 Likewise, services exports are expected to be damp- ened by the war and subsequent travel restrictions—Russian tourists comprise over 10 percent of tourist arrivals in Georgia and 33 percent in Armenia (2018–21 average). The war has also cut off access to key imports and poses near-term supply-side risks given the South Caucasus’s reliance on Russian imports, par- ticularly wheat. Russia’s announced restrictions on grains (among other agricul- tural products) to several countries, including Armenia, could exacerbate broader price pressures. Overall, however, some of these drags could be offset by the in- flux of Russian migrants, particularly of educated and skilled workers, which could have positive effects in the near term on private consumption and in the medium to long term by expanding the labor supply. Central Europe The spillovers from Russia’s invasion of Ukraine are expected to be significant in Central Europe, with key transmission channels including an influx of refugees, higher commodity prices, lower external demand from the euro area, and a dete- rioration in confidence. Growth in Central Europe is forecast to decelerate along- side the euro area, slipping to 3.5 percent in 2022, as inflationary pressures, tighter monetary policy, and greater policy uncertainty dampen domestic demand. The 29. Russia and Ukraine together comprise just over two-thirds of remittances sent to the South Caucuses, or 60 and 7 percent, respectively. 30. Russia is a key export destination for countries in the South Caucasus, accounting for around 25 percent of Armenia’s total exports and over 10 percent of Georgia’s total exports. 42  ●   World Bank ECA Economic Update Spring 2022 large inflow of displaced people from Ukraine—particularly to Poland, where close to 60 percent of the refugees have arrived—is causing a significant increase in demand for public services and housing, with consequences for public fi- nances. Refugees could provide a boost to the Central European economy by boosting domestic demand and partly offsetting the ongoing decline in working- age populations. The economy is also expected to benefit from funding from the EU Recovery and Resilience Facility—the largest component of the Next Genera- tion EU funds.31 Indirect spillovers from the war—emanating from a slowdown in the euro area—have a more pronounced impact on Central Europe’s economy than direct shocks from Russia and Ukraine. The euro area constitutes a much larger share of Central Europe’s trade than Russia and Ukraine, which account for only 1.9 and 1.4 percent, respectively, of the subregion’s total goods exports. Slowing growth across the region’s largest trading partners in the euro area—primarily Germany, which receives an average 27 percent of the subregion’s goods ex- ports—would amount to a significant impact on growth in Central Europe. Any potential disruption in energy supplies to the euro area region could intensify price pressures, thereby eroding real incomes and business profitability.32 Addi- tionally, a slowdown in the euro area could weaken investment in Central Eu- rope, which relies on the euro area for 63 percent of its FDI, 63 percent of portfolio flows, and 87 percent of total bank claims. Direct economic linkages outside the energy sector are limited,33 but nonethe- less growth in Central Europe will be held back by higher commodity prices, including for energy; increased uncertainty; and disruptions to supplies of pre- cious metals used in the auto industry. Surging energy prices are weighing on production and household purchasing power. The increase in commodity prices— energy in particular—is expected to widen the current account deficit by more than previously expected.34 Higher commodity prices have complicated monetary policy as inflation in the subregion was already at multi-year highs and exceed- ing targets. These inflationary pressures have prompted central banks to acceler- ate the pace of monetary policy tightening (Hungary, Poland, and Romania). Western Balkans In the Western Balkans, growth is forecast to decline to 3.2 percent in 2022, as spillovers from the war impact the subregion primarily through commodity channels. Over the medium term, the subregion is expected to benefit from the European Union’s recently adopted Economic and Investment Plan for the 31. If fully implemented as planned by end-2026, these reforms and investments could help lift productivity by narrowing the digital divide and accelerating technological adoption (Hallward-Driemeier et al. 2020). 32. A hypothetical 10 percent gas rationing shock on the corporate sector could reduce euro area output by about 0.7 percent (ECB 2022). 33. Central Europe receives three-quarters of its natural gas imports from Russia—but this figure is as high as 100 percent in Hungary. 34. The deterioration in the current account deficit, however, may be partly offset by a lower deficit on the primary income balance as a result of lower profitability of foreign companies operating in Central Europe. Part 1: War in the Region ●  43 Western Balkans, which will mobilize funding to support competitiveness and inclusive growth, as well as the green and digital transitions. Although the share of economic output directly tied to Russia and Ukraine is relatively small for the Western Balkans as a whole, a few countries remain vul- nerable to shocks from Russia, including Montenegro, for 11 percent of its FDI, and Serbia, for 5 percent of its exports and 5.4 percent of its imports in 2021. However, the more acute risks for the Western Balkans stem from possible dis- ruptions in the supply of natural gas and oil. The subregion receives 67 percent of its natural gas imports from Russia, with Bosnia and Herzegovina, North Macedonia (via Bulgarian pipeline), and Serbia completely reliant on Russia for their natural gas supply. Available stock, however, varies, with limited storage capacity in smaller countries, such as Bosnia and Herzegovina, a constraining factor for supply, while in Serbia storage capacity helps mitigate the supply shock in the near term. A sustained decline in Russia’s supply of gas would prompt both a spike in prices and industrial constraints. Concerns about natural gas dis- ruptions have already spurred increases in wholesale electricity prices, which have increased significantly alongside broader European electricity prices. Much like in Central Europe, indirect spillovers from the Russia-Ukraine con- flict pose substantial risk for the Western Balkans, particularly if the conflict trig- gers a slowdown in the euro area. The Western Balkans is heavily reliant on the euro area as a destination for 63 percent of its exports, while more than half of the subregion’s FDI and nearly two-thirds of its remittances are sourced from the euro area. Risks to the Regional and Global Outlook from Russia’s Invasion of Ukraine The war could set the stage for a much sharper global growth slowdown. Risks remain heavily skewed to the downside, which are being magnified by rising inflationary pressures, tightening macroeconomic policy, and slowing trade growth. If negative risks materialize—perhaps from prolonged or intensifying conflict—the outlook could be markedly weaker than envisioned, the economic scarring more significant, and the potential for trade and investment fragmenta- tion higher. Energy embargos could materially deteriorate the outlook, especially for the euro area—ECA’s largest trading partner—and Russia, which would fur- ther damage ECA’s economy. Surging commodity prices are likely to push mil- lions into poverty and worsen food insecurity and could trigger social unrest. The outlook remains vulnerable to financial stress, which could be triggered by confidence shocks, further geopolitical turmoil, and protracted policy uncer- tainty. The pandemic also continues to pose considerable downside risks to the regional outlook given trailing vaccination rates relative to advanced economy peers in Europe. It is thus critical to renew vaccine campaign efforts, particularly for vulnerable populations—including refugees—that could be hard hit by the spread of new COVID-19 variants. The war, which has already exerted a large confidence shock, could generate a prolonged period of heightened policy uncertainty. Sustained conflict could dampen business confidence and investment—a key driver of potential 44  ●   World Bank ECA Economic Update Spring 2022 growth—as firms seek to hedge against adverse outcomes.35 The conflict could destabilize the wider region and trigger uncertainty about a potential escalation, spillovers of economic and political stresses to other countries, as well as sanc- tions or other responses. Cyberattacks could damage public infrastructure or fi- nancial systems. Ruptured supply chains and trading corridors could remain frayed if geopolitical tensions do not dissipate. The war could leave a lasting mark on the economic landscape by causing a shift from the current rules-based international economic system, fragmenting trade, investment, and financial networks. A key risk to the regional economy is the materialization of financial stress, which would worsen the fall in output and dampen the subsequent recovery. Further intensification of the conflict could trigger financial stress amid elevated inflationary pressures and high debt levels. It could also lead to additional rounds of sanctions on the Russian economy, which could cause further dysfunction in domestic financial markets or greater macroeconomic destabilization. Moreover, there are unknown risks that could materialize in the financial system, poten- tially arising from under-appreciated exposures to Russia, such as leveraged over-the-counter products that depend on underlying Russian assets. Continued pressure on corporates and banks, alongside eroded buffers, could increase the risk of bank failures and systemic crisis. In turn, this could generate losses in ECA economies, especially in those with greater exposures to Russia’s financial sys- tem, and through a rise in investor risk aversion. This could renew capital out- flows, currency depreciation pressures, and equity market losses, and increase risk premia in bond markets. Sustained disruptions from the conflict to commodity and financial markets and trade—coupled with existing supply chain bottlenecks—could put further pressure on inflation and de-anchor inflation expectations. Monetary policy au- thorities could have no choice but to respond to rising inflation expectations by tightening monetary policy at a faster-than-expected pace, exacerbating the re- pricing of risk by financial markets amid already heightened macroeconomic vulnerabilities. A further tightening in global financing conditions would put pressure on ECA economies with elevated foreign currency–denominated and external debt, especially in those economies needing to rollover debt in the near term. Record-high food prices could lead to a significantly higher number of people being pushed into extreme poverty and worsening food insecurity. For ECA, poverty increases from the pandemic will be worsened by the conflict due to the refugee crisis, severe economic contraction for the most-affected economies, and associated job losses. For context, the pandemic-induced contraction in output of about 2 percent in 2020 pushed more than 4 million people in ECA into poverty ($5.50 a day threshold); the current crisis is twice as bad in terms of the decline in output and, unlike in 2020, inflationary pressures continue to build; thus, the poverty impact could be worse as well. The war could also worsen food 35. For example, a one standard deviation increase in global policy uncertainty is associated with a 0.4 percentage point decline in global industrial production (World Bank 2017). Part 1: War in the Region ●  45 insecurity, by disrupting commodities trade, increasing shipping costs and insur- ance premiums, and pushing up input costs for agricultural production. The most exposed countries are those that rely heavily on imported grains, especially from Russia and Ukraine. Combined, Russia and Ukraine have more than 20 percent of their wheat exports and 40 percent of their maize exports in 2021/22 frozen because of the conflict, reflecting port closures, sanctions, and the suspen- sion of operations among shipping lines (WFP 2022). The spike in commodity prices and subsequently higher inflation could also contribute to social unrest in some countries, including those in ECA (Kammer et al. 2015). Vulnerable coun- tries typically have weaker governance and social safety nets, fewer job opportu- nities, less fiscal space, and elevated domestic political tensions. Long-Term Challenges and Policies Adverse events have shown yet again that crises can set back years of per capita income gains and have large negative effects on productivity through dislocating labor, tighten- ing credit, disrupting value chains, and decreasing innovation. The war in Ukraine has displaced more than half of Ukraine’s children, compounding the educational losses expe- rienced during the pandemic. The war comes at a particularly vulnerable time for ECA as its economic recovery was expected to be held back by scarring from the pandemic and lingering structural weakness. Prior to the war, the regional recovery in investment was already anticipated to trail other EMDE regions amid heightened policy uncertainty and elevated geopolitical tensions. Policies to counter the negative consequences of adverse shocks include those that strengthen stability, promote inclusion, and secure a resilient and sustainable recovery. Strengthening Stability to Bolster Economic Resilience Fortifying macroeconomic policy buffers and frameworks over the medium term will be critical to confront the geopolitical risks that have materialized and coun- ter their adverse effects on investment and trade. Although ECA countries are well integrated into global and regional economies, policies to support further linkages could help offset some of the fragmentation that could occur from a protracted war. Strengthening policies to moderate business and financial cycles remains one of the key components of a growth-enhancing policy agenda to help support a regional recovery. To be effective, such policies need to be rooted in robust and credible frameworks. Supporting continued global and regional integration. Planned infrastructure in- vestment in regional road and rail corridors, combined with continued trade lib- eralization and improved business environments, could help diversify the re- gion’s trade partners and sources of finance. Barriers to open markets remain particularly pronounced in Central Asia. Reducing these barriers would spur productivity and increase resilience to external shocks. Tariffs remain higher than the EU average in about two-thirds of ECA’s EMDEs; non-tariff barriers require streamlining; and trade facilitation can be further improved across the region. 46  ●   World Bank ECA Economic Update Spring 2022 The pandemic may have provided momentum for automation and digitaliza- tion that can further promote the shift to higher-productivity activities in global value chains, especially if supported by investment in transport and digital con- nectivity.36 To reap the gains from global value chain participation, countries can lower non-tariff barriers, liberalize transport and internet and communications services, strengthen customs efficiency, lower barriers to services trade, and fa- cilitate reallocation of resources across sectors (World Bank 2020d; Brenton, Fer- rantino, and Maliszewska 2022). Shoring up macroeconomic stability. Resilient monetary policy frameworks al- low policy makers more room for proactive monetary policy. Strengthening leg- islation for monetary policy and bank supervision will help raise the credibility of macroeconomic frameworks and reduce the cost of policies to reduce inflation and maintain currency stability (Gill and Ruta 2022b). Exchange rate pass- through from depreciation to inflation tends to be smaller in countries with more credible, transparent, and independent central banks; inflation-targeting mone- tary policy regimes; and better-anchored inflation expectations (Ha, Stocker, and Yilmazkuday 2019; Kose et al. 2019). Establishing and maintaining resilient mon- etary policy frameworks is especially important against the backdrop of the use of unconventional monetary policy tools—particularly asset purchases—by some ECA central banks. After a suspension of fiscal rules to confront the pandemic, it will be critical for countries to return to a fiscal rule framework to prevent fiscal slippages. Do- ing so can also help contain and manage risks from contingent liabilities, which have increased sharply from the pandemic, especially in Turkey and Central Eu- rope. Identifying inefficient government spending could improve fiscal positions and free up resources for more effective spending that yields higher growth divi- dends—in ECA, infrastructure spending has yet to approach the efficiency fron- tier (IMF 2021). Strong fiscal frameworks have also been associated with lower inflation and inflation volatility, suggesting that they tend to support the central bank in delivering its mandate (Ha, Kose, and Ohnsorge 2019). Improvements in sovereign debt management would help preserve the ability of governments to support an equitable recovery. During the pandemic, authorities in several countries eased regulatory re- quirements and exercised forbearance. To avoid the emergence of zombie firms will require efforts to continue to unwind these measures (World Bank 2021a). Stress testing different scenarios could help policy makers identify where the temporary extension of such measures may be needed to avoid liquidity prob- lems. Robust financial sector regulation and supervision remain critical to ensur- ing a sound financial system, and stronger banking systems have been associated with stronger growth over the longer term (Reinhart and Reinhart 2015). Care- fully implemented domestic financial reforms and capital account liberalization have been associated with stronger growth and faster sectoral labor reallocation 36. Increasing global value chain participation has been a critical driver of growth and job creation over the past several decades. A 1 percent increase in global value chain participa- tion has been estimated to boost per capita income by more than 1 percent—much more than the 0.2 percent income gain from standard trade (World Bank 2020d). Part 1: War in the Region ●  47 (ElFayoumi et al. 2018; Prati, Onorato, and Papageorgiou 2013). Countercyclical macroprudential policies have helped smooth asset price swings in some coun- tries (Bruno, Shim, and Shin 2017; Claessens 2015). In the near term, it is critical to assess whether domestic banks will be able to withstand a sharp tightening of global financing conditions and manage exposure risks from Russia. To this end, while most ECA countries have limited banking exposure to Russia, countries in Central Asia rely on Russia as a source of financing. Countries that are particu- larly vulnerable could establish precautionary credit lines and cash and foreign exchange buffers. Strengthening institutions. Institutional reforms should be prioritized to help build the foundation for a robust and sustained economic recovery from the pan- demic-induced global recession and to help confront the adverse shocks from the war (World Bank 2021c). Strong institutions and conducive business climates en- courage private sector investment and innovation by establishing secure and en- forceable property rights, minimizing expropriation risk, creating a stable and confidence-inspiring policy environment, lowering the costs of doing business, and encouraging participation in the formal sector where productivity tends to be higher (World Bank 2018, 2019a, 2021c). Good governance also ensures com- petitive and flexible markets with limited market concentration, effective regula- tion, and efficient and equitable provision of public services, including health care, education, and public infrastructure (Acemoglu and Johnson 2005; Dort, Méon, and Sekkat 2014; Gwartney, Holcombe, and Lawson 2006). There is considerable scope for ECA governments to stem or reverse a slow- down in productivity and potential growth by strengthening institutions, reduc- ing corruption, dismantling regulatory barriers to doing business and entrepre- neurship, and ensuring effective regulation that is conducive for the efficient working of competitive markets (Kilic Celik, Kose, and Ohnsorge 2020). Lack of exposure to international competition—including from non-tariff barriers and complex trade rules—as well as restrictive product market and services regula- tion, remain structural bottlenecks in the region, hindering the ability to attract domestic and foreign investment. Digitalization and broader use of information technologies in the public sector are among the most effective and practical ap- proaches to improving government efficiency, accountability, control of corrup- tion, and service delivery (World Bank 2021b). Promoting Inclusive Growth Robust social safety nets can underpin a productivity-driven recovery from the pandemic if they can encourage workers to move into more productive jobs and take the risks required to seize new economic opportunities. Policy makers can enhance the ability of countries to tackle and cope with crises by implementing well-designed social safety nets and effective countercyclical buffers to support the poorest and most vulnerable in society. To ensure an inclusive recovery, poli- cies are needed that reduce the number of school dropouts, promote universal access to health and education, and provide learning support to those who need it—these measures are even more critical amid the large influx of Ukrainian 48  ●   World Bank ECA Economic Update Spring 2022 refugees from the war (World Bank 2020a). Inclusive financial systems provide individuals greater access to resources to meet their financial needs, such as sav- ing for retirement, investing in education, capitalizing on business opportunities, and confronting shocks. Developed and well-functioning inclusive financial sys- tems can contribute to reduction of income inequality and promote economic growth. Such systems might be crucial for the faster integration of large numbers of Ukrainian refugees into the regional economy (World Bank 2019b). Investing in social protection. A social protection framework centered on a pub- licly funded core system, which ensures against catastrophic losses, can allow governments to reduce their reliance on distortionary policies, such as high mini- mum wages or heavy-handed labor market restrictions (Packard et al. 2019). Ac- tive labor market policies that target the re-entry of women and low-skilled workers into the labor market can nurture a more complete and inclusive recov- ery. Adaptive social protection systems and cash transfer programs have been critical to smooth consumption in the face of adverse shocks (Bowen et al. 2020). Resilience to crises can also be bolstered by stronger health and education sys- tems, particularly in areas that serve vulnerable populations and underprivi- leged students. Investing in digital infrastructure and technological diffusion is also key, as it enables better access to jobs, finance, and schooling during crises. To this end, policies need to be geared to ensuring that firms can leverage the COVID-19 digital dividend, including through the provision of training for small firms and policies that support e-commerce, fintech, and business-to-business digital technologies. Enhancing regulatory frameworks that favor innovation and competition in the telecommunications market is also important (World Bank 2021b). Protecting refugees. The wave of refugees from Ukraine to neighboring ECA countries this year is anticipated to dwarf previous crises. As a result, it will be critical for host countries to mobilize resources to ensure public service delivery and effective absorption of migrants. The main difficulty is designing policies that will allow seamless integration of the refugees in the host country economies and enable the ECA region to take advantage of the gains generated by labor mobility and address the costs (World Bank 2019c). The previous wave of Ukrai- nian migrants to Poland, for example, helped alleviate demographic pressures and bolstered Polish growth by an estimated 0.3 to 0.5 percentage point per year (Kammer et al. 2022; Strzelecki, Growiec, and Wyszyński 2021). Securing a Sustainable Future Addressing the negative consequences of climate change is one of the most ur- gent issues of our time. The shift toward a low-carbon economy, or green transi- tion, entails massive investments in technology, infrastructure, innovation in production models, and corresponding changes in the labor markets where new jobs will emerge, while others will be adjusted or replaced (ILO 2016). The war in Ukraine and the hike in conventional energy prices further demonstrate the at- tractiveness of renewables and the importance of transitioning the energy sys- tems to cheaper, cleaner, and more reliable power. Improving energy efficiency, reducing waste in energy consumption, and using technological innovations Part 1: War in the Region ●  49 could allow economies in the region to mitigate the impact of war on economic growth. The efforts to de-escalate the war in Ukraine should be integrated with strategies for the rapid reduction of carbon emissions and policies to promote the green transition. ECA governments can complement the energy transition with steps to im- prove energy security, by boosting and diversifying the energy supply, for in- stance by shifting from coal and gas-fired generation toward a diversified mix that includes renewable energy. Enhancing grid stability and managing energy demand will also be critical. This latter point includes incentivizing demand to- ward greener sources while steering it away from conventional energy. Although fossil fuel subsidies or gas tax cuts might seem attractive to reduce the burden on consumers, they generate distortions and do little to change demand for conven- tional energy. Regressivity concerns can be better addressed through targeted social protection policies that provide support to vulnerable households (OECD 2022). Moreover, dismantling fossil fuel subsidies can be a politically challenging task and can trigger social unrest, as most recently observed in Kazakhstan (Gué- nette 2020; Wheeler et al. 2020). Data Annex and Forecast Conventions The macroeconomic forecasts presented in this report are the result of an iterative process involving staff from the World Bank Prospects Group in the Equitable Growth, Finance, and Institutions Vice-Presidency; country teams; regional and country offices; and the Europe and Central Asia Chief Economist’s Office. This process incorporates data, macroeconometric models, and judgment. Data The data used to prepare the country forecasts come from a variety of sources. National income accounts, balance of payments, and fiscal data are from Haver Analytics; the World Bank’s World Development Indicators; and the Interna- tional Monetary Fund’s (IMF’s) World Economic Outlook, Balance of Payments Statistics, and International Financial Statistics. Population data and forecasts are from the United Nations’ World Population Prospects. Country and lending group classifications are from the World Bank. In-house databases include com- modity prices, data on previous forecast vintages, and country classifications. Other internal databases include high-frequency indicators—such as industrial production, Consumer Price Indexes, housing prices, exchange rates, exports, imports, and stock market indexes—based on data from Bloomberg, Haver Ana- lytics, the Organisation for Economic Co-operation and Development’s analyti- cal housing price indicators, the IMF’s Balance of Payments Statistics, and the IMF’s International Financial Statistics. Aggregate growth for the world and all subgroups of countries (such as regions and income groups) is calculated as the gross domestic product–weighted average (in average 2010–19 prices) of coun- try-specific growth rates. Income groups are defined as in the World Bank’s clas- sification of country groups. 50  ●   World Bank ECA Economic Update Spring 2022 Forecast Process The process starts with initial assumptions about advanced economy growth and commodity price forecasts. These assumptions are used as conditions for the first set of growth forecasts for emerging markets and developing economies, which are produced using macroeconometric models, accounting frameworks to ensure national accounts identities and global consistency, estimates of spillovers from major economies, and high-frequency indicators. These forecasts are then evalu- ated to ensure consistency of treatment across similar economies. This process is followed by extensive discussions with World Bank country teams, which con- duct continuous macroeconomic monitoring and dialogue with country authori- ties. Throughout the forecasting process, staff use macroeconometric models that allow the combination of judgment and consistency with model-based insights. References Acemoglu, D., and S. Johnson. 2005. “Unbundling Institutions.” Journal of Political Econ- omy 113 (5): 949–95. Alderman, L., and J. Gross. 2022. “Russian Sanctions Snarl Shipping Even as Pandemic Pressure Eases.” The New York Times, March 11. https://www.nytimes.com/2022/03/11/ business/russia-ukraine-shipping-cargo.html. Arora, V., and J. Lieskovsky. 2014. “Electricity Use as an Indicator of U.S. Economic Activ- ity.” Working Paper Series, U. S. Energy Information Administration, Washington, DC. Artuc, E., G. Falcone, G. Porto, and B. Rijkers. 2022. “War-Induced Food Price Inflation Imperils the Poor.” VoxEU.org, CEPR Policy Portal, April 1. https://voxeu.org/article/ war-induced-food-price-inflation-imperils-poor. Azevedo, J. P., A. Hasan, D. Goldemberg, S. A. Iqbal, and K. Geven. 2020. “Simulating the Potential Impacts of the COVID-19 School Closures on Schooling and Learning Out- comes: A Set of Global Estimates.” Policy Research Working Paper 9284, World Bank, Washington, DC. Beyer, R. C., S. Franco-Bedoya, and V. Galdo. 2021. “Examining the Economic Impact of COVID-19 in India through Daily Electricity Consumption and Nighttime Light Intensi- ty.” World Development 140: 105287. Bidani, B., R. Menon, S. N. Nguyen, R. Vakis, and Z. Afif. 2022. “Vaccine Hesitancy: 10 Lessons from Chatbotting about COVID-19 in 17 Countries.” World Bank Blogs, March 17, 2022, https://blogs.worldbank.org/health/vaccine-hesitancy-10-lessons-chatbotting- about-covid-19-17-countries. Bowen, T., C. del Ninno, C. Andrews, S. Coll-Black, U. Gentilini, K. Johnson, Y. Kawasoe, et al. 2020. Adaptive Social Protection: Building Resilience to Shocks. Washington, DC: World Bank. Bown, C. P. 2022. “Russia’s War on Ukraine: A Sanctions Timeline.” Peterson Institute for International Economics, Washington, DC. Brenton, P.; M. J. Ferrantino, M. Maliszewska. 2022. Reshaping Global Value Chains in Light of COVID-19: Implications for Trade and Poverty Reduction in Developing Coun- tries. Washington, DC: World Bank. Bruno, V., I. Shim, and H. S. Shin. 2017. “Comparative Assessment of Macroprudential Policies.” Journal of Financial Stability 28: 183–202. Part 1: War in the Region ●  51 Bussolo, M., M. E. Davalos, V. Peragine, and R. Sundaram. 2018. Toward a New Social Contract: Taking on Distributional Tensions in Europe and Central Asia. Europe and Central Asia Studies. Washington, DC: World Bank. Campos-Mercade, P., A. Meier, F. Schneider, S. Meier, D. Pope, and E. Wengström. 2021. “Monetary Incentives Increase COVID-19 Vaccinations, Nudges Do Not.” VoxEU.org, CEPR Policy Portal, November 19. https://voxeu.org/article/monetary-incentives- increase-covid-19-vaccinations-nudges-do-not. Chang, T., M. Jacobson, M. Shah, R. Pramanik, and S. Shah. 2021. “Financial Incentives and Other Nudges Do Not Increase COVID-19 Vaccinations among the Hesitant.” VOXEU.org, CEPR Policy Portal, December 8. https://voxeu.org/article/financial-incentives- and-other-nudges-do-not-increase-covid-19-vaccinations-among-hesitant. Chen, S., H. Kuo, and C. Chen. 2007. “The Relationship between GDP and Electricity Consumption in 10 Asian Countries.” Energy Policy 35 (4): 2611–21. Chen, X., and W. D. Nordhaus. 2011. “Using Luminosity Data as a Proxy for Economic Statistics.” Proceedings of the National Academy of Sciences 108 (21): 8589–94. Claessens, S. 2015. “An Overview of Macroprudential Policy Tools.” Annual Review of Fi- nancial Economics 7: 397–422. Cojocaru, A. 2014a. “Fairness and Inequality Tolerance: Evidence from the Life in Transi- tion Survey.” Journal of Comparative Economics 42 (3): 590–608. ———. 2014b. “Prospects of Upward Mobility and Preferences for Redistribution: Evi- dence from the Life in Transition Survey.” European Journal of Political Economy 34 (C): 300–14. ———. 2019. “Inequality of Access to Opportunities and Socioeconomic Mobility: Evi- dence from the Life in Transition Survey.” Policy Research Working Paper 8725, World Bank, Washington, DC. ———. 2021. “Inequality and Well-Being in Transition: Linking Experience and Perception to Policy Preferences.” In The Palgrave Handbook of Comparative Economics, edited by E. Douarin and O. Havrylyshyn. Palgrave Macmillan. COVID Behaviors Dashboard: S. Babalola, S. Krenn, J. G. Rosen, E. Serlemitsos, M. Shaivitz, D. Storey, S. Tsang, T. Y. Tseng, and D. Shattuck. 2022. “COVID Behaviors Dashboard.” Johns Hopkins Center for Communication Programs, Baltimore, MD (accessed March 31, 2022), https://covidbehaviors.org/. Damgaard, M., and C. Gravert. 2018. “The Hidden Costs of Nudging: Experimental Evi- dence from Reminders in Fundraising.” Journal of Public Economics 157: 15–26. De Hoyos, R., and D. Medvedev. 2011. “Poverty Effects of Higher Food Prices: A Global Perspective.” Review of Development Economics 15 (3): 387–402. Demirgüç-Kunt, A., M. Lokshin, and I. Torre. 2021a. “The Sooner, the Better: The Eco- nomic Impact of Non-Pharmaceutical Interventions during the Early Stage of the CO- VID-19 Pandemic.” Economics of Transition 29 (4). ———. 2021b. “Opening-up Trajectories and Economic Recovery: Lessons after the First Wave of the COVID-19 Pandemic.” CESifo Economic Studies 67 (3). Dort, T., P. Méon, and K. Sekkat. 2014. “Does Investment Spur Growth Everywhere? Not Where Institutions Are Weak.” Kyklos 67 (4): 482–505. EBRD (European Bank for Reconstruction and Development). 2016. “Inequality of Oppor- tunity.” In Transition Report 2016-2017: Transition for All: Equal Opportunities in an Unequal World, chapter 3. London: EBRD. ECB (European Central Bank). 2022. “Update on Economic, Financial and Monetary De- velopments.” ECB Economic Bulletin 1/2022, ECB, Frankfurt. 52  ●   World Bank ECA Economic Update Spring 2022 ECDC (European Centre for Disease Prevention and Control). 2021. “Facilitating COV- ID-19 Vaccination Acceptance and Uptake in the EU/EEA.” October 15. UCDC, Stock- holm. ElFayoumi, K., A. Ndoye, S. Nadeem, and G. Auclair. 2018. “Structural Reforms and Labor Reallocation: A Cross-Country Analysis.” IMF Working Paper 18/64, International Mon- etary Fund, Washington, DC. European Commission. 2022. “Security of Supply and Affordable Energy Prices: Options for Immediate Measures and Preparing for Next Winter.” COM (2022) 138 final, Euro- pean Commission Communication, Brussels. FAO (Food and Agriculture Organization). 2021a. Food Outlook: Biannual Report on Glob- al Food Markets. November. Rome: Food and Agriculture Organization of the United Nations. FAO (Food and Agriculture Organization). 2021b. The State of Food Security and Nutrition in the World. Rome: Food and Agriculture Organization of the United Nations. ———. 2022. “The Importance of Ukraine and the Russian Federation for Global Agricul- tural Markets and the Risks Associated with the Current Conflict.” FAO Information Note, March 25, FAO, Rome. Ferguson, R., W. Wilkinson, and R. Hill. 2000. “Electricity Use and Economic Develop- ment.” Energy Policy 28 (13): 923–34. Gill, I., and M. Ruta. 2022a. “Why Global Vaccine Equity Is the Prescription for a Full Recovery.” Brookings Institution Blog: Future Development, February 11, 2022. https:// www.brookings.edu/blog/future-development/2022/02/11/why-global-vaccine- equity-is-the-prescription-for-a-full-recovery/. ———. 2022b. “Developing Economies Face a Rough Ride as Global Interest Rates Rise.” Brookings Institution Blog: Future Development, February 28, 2022. https://www. brookings.edu/blog/future-development/2022/02/28/developing-economies-face-a- rough-ride-as-global-interest-rates-rise/. Gimpelson, V., and D. Treisman. 2018. “Misperceiving Inequality.” Economics & Politics 30 (1): 27–54. Guénette, J.-D. 2020. “Price Controls: Good Intentions, Bad Outcomes.” Policy Research Working Paper 9212, World Bank, Washington, DC. Gwartney, D., R. Holcombe, and R. Lawson. 2006. “Institutions and the Impact of Invest- ment on Growth.” Kyklos 59 (2): 255–73. Ha, J., M. A. Kose, and F. Ohnsorge, eds. 2019. Inflation in Emerging and Developing Economies: Evolution, Drivers and Policies. Washington, DC: World Bank. Ha, J., M. Stocker, and H. Yilmazkuday. 2019. “Inflation and Exchange Rate Pass-Through.” Policy Research Working Paper 8780, World Bank, Washington, DC. Hallward-Driemeier, M., G. Nayyar, W. Fengler, A. Aridi, and I. Gill. 2020. Europe 4.0: Ad- dressing the Digital Dilemma. Washington, DC: World Bank. Henderson, J. V., A. Storeygard, and D. Weil. 2012. “Measuring Economic Growth from Outer Space.” American Economic Review 102 (2): 994–1028. IEA (International Energy Agency). 2022. Oil Market Report, March. Paris: IEA. ILO (International Labour Organization). 2016. World Employment and Social Outlook: Trends 2016. Geneva: ILO. IMF (International Monetary Fund). 2021. Fiscal Monitor: Strengthening the Credibility of Public Finances. October. Washington, DC: IMF. Ivanic, M., W. Martin, and H. Zaman. 2011. “Estimating the Short-Run Poverty Impacts of the 2010–11 Surge in Food Prices.” Policy Research Working Paper 5633, World Bank, Washington, DC. Part 1: War in the Region ●  53 Kammer, A., J. Azour, A. A. Selassie, I. Goldfajn, and C. Rhee. 2022. “How War in Ukraine Is Reverberating across World’s Regions.” IMF Blog, March 15, 2021. https://blogs.imf. org/2022/03/15/how-war-in-ukraine-is-reverberating-across-worlds-regions/. Khemani, S. 2020. “An Opportunity to Build Legitimacy and Trust in Public Institutions in the Time of COVID-19.” Research & Policy Brief No. 32, World Bank, Washington, DC. Kilic Celik, S., M. A. Kose, and F. Ohnsorge. 2020. “Subdued Potential Growth: Sources and Remedies.” In Growth in a Time of Change: Global and Country Perspectives on a New Agenda, edited by H.-W. Kim and Z. Qureshi. Washington, DC: Brookings Insti- tution. Kose, M. A., S. Kurlat, F. Ohnsorge, and N. Sugawara. 2017. “A Cross-Country Database of Fiscal Space.” Policy Research Working Paper 8157, World Bank, Washington, DC. Kose, M. A., H. Matsuoka, U. Panizza, and D. Vorisek. 2019. “Inflation Expectations: Review and Evidence.” Policy Research Working Paper 8785, World Bank, Washington, DC. Kose, M. A, P. Nagle, F. Ohnsorge, and N. Sugawara. 2021. Global Waves of Debt: Causes and Consequences. Washington, DC: World Bank. Kose, M. A., N. Sugawara, and M. Terrones. 2021. What Happens during Global Reces- sions? Washington, DC: World Bank. Laborde, D., C. Lakatos, and W. Martin. 2019. “Poverty Impact of Food Price Shocks and Policies.” Policy Research Working Paper 8724, World Bank, Washington, DC. Laeven, L., and F. Valencia. 2018. “Systemic Banking Crises Revisited.” IMF Working Paper 18/206, International Monetary Fund, Washington, DC. Mitchell, I., S. Hughes, and S. Huckstep. 2022. “Price Spike Caused by Ukraine War Will Push Over 40 Million into Poverty: How Should We Respond?” Center for Global De- velopment Blog, March 18. https://www.cgdev.org/blog/price-spike-caused-ukraine- war-will-push-over-40-million-poverty-how-should-we-respond. Modéer, U., and T. Lemma. 2022. “The War in Ukraine: A Call for Investment in Global Peace and Development.” UNDP Blog, March 21, 2022. https://www.undp.org/blog/ war-ukraine-call-investment-global-peace-and-development. Morris, S., and J. Zhang. 2019. “Validating China’s Output Data Using Satellite Observa- tions.” Macroeconomic Dynamics 23: 3327–54. Nafziger, J. 2020. “Spillover Effects of Nudges.” Economics Letters 190: 109086. Narayan, A., A. Cojocaru, S. Agrawal, T. Bundervoet, M. Davalos, N. Garcia, C. Lakner, D. G. Mahler, T. Montalva Talledo, A. Ten, and N. Yonzan. 2022. “COVID-19 and Eco- nomic Inequality: Short-Term Impacts with Long-Term Consequences.” Policy Research Working Paper 9902, World Bank, Washington, DC. Neidhoefer, G., N. Lustig, and M. Tommasi. 2021. “Intergenerational Transmission of Lock- down Consequences: Prognosis of the Longer-Run Persistence of COVID-19 in Latin America.” CEQ Working Paper 99, Commitment to Equity Institute, Tulane University, New Orleans, LA. OECD (Organisation for Economic Co-operation and Development). 2022. “OECD Eco- nomic Outlook, Interim Report March 2022: Economic and Social Impacts and Policy Implications of the War in Ukraine.” OECD, Paris. Our World in Data: H. Ritchie, E. Mathieu, L. Rodés-Guirao, C. Appel, C. Giattino, E. Ortiz- Ospina, J. Hasell, B. Macdonald, D. Beltekian, and M. Roser. 2020. “Coronavirus Pan- demic (COVID-19)” (accessed March 29, 2022), https://ourworldindata.org/coronavi- rus. Oxford Economics. 2020. “Global Economic Model.” Oxford Economics, Oxford, U.K. Packard, T., U. Gentilini, M. Grosh, P. O’Keefe, R. Palacios, D. Robalino, and I. Santos. 2019. Protecting All: Risk Sharing for a Diverse and Diversifying World of Work. Washington, DC: World Bank. 54  ●   World Bank ECA Economic Update Spring 2022 Prati, A., M. G. Onorato, and C. Papageorgiou. 2013. “Which Reforms Work and under What Institutional Environment?” Review of Economics and Statistics 95 (3): 946–68. Reinhart, C. M., and V. R. Reinhart. 2015. “Financial Crises, Development, and Growth: A Long-Term Perspective.” World Bank Economic Review 29 (Supplement): S53–S76. Sasaki S., T. Saito, and F. Ohtake. 2021a. “How to Nudge COVID-19 Vaccination While Respecting Autonomous Decision Making.” VOXEU.org, CEPR Policy Portal, Decem- ber 13. https://voxeu.org/article/how-nudge-covid-19-vaccination-while-respecting- autonomous-decision-making. ———. 2021b. “Nudges for COVID-19 Voluntary Vaccination: How to Explain Peer Infor- mation?” Social Science & Medicine 292: 114561. Strzelecki, P., J. Growiec, and R. Wyszyński. 2021. “The Contribution of Immigration from Ukraine to Economic Growth in Poland.” Review of World Economics. September 20. Stubbington, T., A. Klasa, J. Cumbo, and L. Fletcher. 2022. “Investors Face Deep Losses on $170bn in Russian Assets.” Financial Times, March 4. https://www.ft.com/content/ dca77dfb-f5a8-4e99-a53f-a2778d115410. UNDP (United Nations Development Programme). 2022. “The Development Impact of the War in Ukraine: Initial Projections.” March 16. https://www.undp.org/publications/ development-impact-war-ukraine-initial-projections. UNHCR (United Nations High Commissioner for Refugees). 2021. “Global Trends—Forced Displacement in 2020.” UNHCR Global Data Service, Copenhagen, Denmark. ———. 2022. “Ukraine Situation: Flash Update #5.” UNHCR Regional Bureau for Europe. March 24. https://data2.unhcr.org/en/documents/details/91589. UNICEF (United Nations Children’s Fund). 2022a. “One Month of War Leaves More Than Half of Ukraine’s Children Displaced.” UNICEF Press Release, March 24. https://www. unicef.org/press-releases/more-half-ukraines-children-displaced-after-one-month-war. ———. 2022b. “Two Million Refugee Children Flee War in Ukraine in Search of Safety across Borders.” UNICEF Press Release, March 30. https://www.unicef.org/press- releases/two-million-refugee-children-flee-war-ukraine-search-safety-across-borders. UNOCHA (United Nations Office for the Coordination of Humanitarian Affairs). 2022. “Ukraine: Humanitarian Impact Situation Report.” March 30. https://reliefweb.int/ report/ukraine/ukraine-humanitarian-impact-situation-report-1200-pm-eet-30- march-2022. UNWTO (World Tourism Organization). 2021. Yearbook of Tourism Statistics, Data 2015– 2019, 2021 Edition. Madrid: UNWTO. Vagliasindi, M. 2021. “Measuring the Economic Impact of COVID-19 with Real-Time Elec- tricity Indicators.” Policy Research Working Paper 9806, World Bank, Washington, DC. Wadhams, N. 2022. “Russia Is Now the World’s Most-Sanctioned Nation.” Bloomberg, March 7. https://www.bloomberg.com/news/articles/2022-03-07/russia-surges-past- iran-to-become-world-s-most-sanctioned-nation. WFP (World Food Programme). 2022. “Food Security Implications of the Ukraine Conflict,” WFP, Rome. WHO (World Health Organization). 2020. “Survey Tool and Guidance: Behavioural Insights on COVID-19.” WHO, Copenhagen, Denmark. https://www.euro.who.int/en/health- topics/health-emergencies/coronavirus-covid-19/publications-and-technical-guidance/ risk-communication-and-community-engagement/who-tool-for-behavioural-insights- on-covid-19. Winkler, H. 2019. “The Effect of Income Inequality on Political Polarization: Evidence from European Regions, 2002–2014.” Economics & Politics 31 (2). Part 1: War in the Region ●  55 Winkler, D., L. Wuester, and D. Knight. 2022a. “Russia’s Global Value Chain Participation: Implications of Russia’s Invasion of Ukraine for its Trade Partners and Key Value Chains.” World Bank, Washington, DC. Winkler, D., L. Wuester, and D. Knight. 2022b. “Russia’s Global Value Chain Participation: Possible Implications of the Ukraine War for its Trade Partners and Key Value Chains.” Updates from Trade, Investment and Competitiveness, Washington, DC, World Bank. World Bank. 2017. Global Economic Prospects: A Fragile Recovery, June. Washington, DC: World Bank. ———. 2018. Global Economic Prospects: Broad-based Upturn, but for How Long? Janu- ary. Washington, DC: World Bank. ———. 2019a. Global Economic Prospects, January. Washington, DC: World Bank. ———. 2019b. “Financial Inclusion.” Europe and Central Asia Economic Update (Spring). Washington, DC: World Bank. ———. 2019c. “Migration and Brain Drain.” Europe and Central Asia Economic Update (Fall). Washington, DC: World Bank. ———. 2019d. Turkey Economic Monitor: Charting a New Course, October. Washington, DC: World Bank. ———. 2020a. “COVID-19 and Human Capital.” Europe and Central Asia Economic Up- date (Fall). Washington, DC: World Bank. ———. 2020b. Global Economic Prospects, January. Washington, DC: World Bank. ———. 2020c. Global Economic Prospects, June. Washington, DC: World Bank. ———. 2020d. World Development Report: Trading for Development in the Age of Glob- al Value Chains. Washington, DC: World Bank. ———. 2021a. “Competition and Firm Recovery Post-COVID-19.” Europe and Central Asia Economic Update (Fall). Washington, DC: World Bank. ———. 2021b. “Data, Digitalization, and Governance.” Europe and Central Asia Eco- nomic Update (Spring). Washington, DC: World Bank. ———. 2021c. Global Economic Prospects, January. Washington, DC: World Bank. ———. 2022a. Global Economic Prospects, January. Washington, DC: World Bank. ———. 2022b. “Impact of COVID-19 on Global Income Inequality.” In Global Economic Prospects, January. Washington, DC: World Bank. ———. 2022c. Turkey Economic Monitor: Sailing Against the Tide, February. Washington, DC: World Bank. PART II Selected Country Pages Part II: Selected Country Pages ●  59 stronger revenue mobilization. At the same time, despite a 3.3 percent average GDP ALBANIA Key conditions and growth rate over 2015-2019, private invest- challenges ment continues to be discouraged by low firm productivity, an unskilled labor force, limited access to finance, burdensome lo- Table 1 2021 Albania’s growth was robust in 2021. It av- gistics and poor market integration. How- Population, million 2.8 eraged 10.4 percent over the first three ever, at 28.4 percent of GDP, public rev- GDP, current US$ billion 17.2 quarters, fully offsetting the losses caused enues provide little space to increase GDP per capita, current US$ 6089.5 by the pandemic-induced recession. much-needed investment in public infra- Upper middle-income poverty rate ($5.5)a 32.4 Growth was driven by continued accom- structure and human capital. A Medium- Gini index a 36.0 modative monetary and fiscal policies, re- Term Revenue Strategy is under prepara- School enrollment, primary (% gross) b 100.2 construction investment, abundant hydro- tion, which has the potential to increase Life expectancy at birth, years b 78.6 electric production early in the year, and revenues over the medium run. Total GHG Emissions (mtCO2e) 9.2 the tourism recovery, all of which boosted private demand. Source: WDI, Macro Poverty Outlook, and official data. For 2022, prospects are uncertain with a/ Most recent value (2018), 2011 PPPs. b/ WDI for School enrollment (2020); Life expectancy many downside risks. The war in Recent developments (2019). Ukraine and continuing sanctions could push energy, food, and commodity prices Higher consumer confidence, increased even higher, shrinking households’ pur- demand for Albanian exports, and fiscal A robust recovery took place in 2021 chasing power and consumption. Addi- stimulus supported the strong growth re- thanks to policy stimulus and resurgence tional risks include new, vaccine- resis- covery in 2021. Growth in trade and con- of travel, construction, and extractive ac- tant Covid-19 variants, tighter global fi- struction—the latter connected to recon- nancial and trade conditions, and re- struction and new infrastructure pro- tivity. Private investment, consumption, newed travel restrictions. jects—contributed the most. Favorable and public spending drove growth, while Public debt increased further in 2021, reach- hydrologic conditions have boosted ex- public debt remained high. Poverty is ex- ing 78.4 percent of GDP. The government tractives and energy production and pected to have declined below pre-pan- suspended the fiscal rule of a declining tourism exports. debt-to-GDP ratio and issued a Eurobond of Jobs did not increase in 2020/2021. There demic levels, despite a sluggish labor mar- EUR650 million, benefitting from the coun- were over 16 thousand fewer employed ket. Growing inflation and the war in try’s stable B+ rating. At its current level, the people in 2021 than in 2019. Employment Ukraine threaten economic and poverty high government debt is at significant grew only in ICT, construction, transport, prospects in 2022. rollover risk. Given the current inflation and retail and wholesale, and utilities. At the expected monetary policy tightening in same time, labor force participation fell high-income economies, reducing Alba- for the second consecutive year among all nia’s public debt and strengthening its fiscal age groups. As a result, the unemploy- policy credibility are vital. ment rate was stable at 11.5 percent. The Productivity-enhancing public investment formal real wage increased by 3.7 percent is crucial to boost growth but will require in 2021, close to the 2019 increase, while FIGURE 1 Albania / Headline inflation and core inflation FIGURE 2 Albania / Actual and projected poverty rates and real GDP per capita Percent Poverty rate (%) Real GDP per capita (constant LCU) 4 45 650000 630000 40 3 610000 35 590000 2 570000 30 550000 1 25 530000 20 510000 0 490000 15 470000 -1 Inflation (CPI) Core inflation 10 450000 2016 2018 2020 2022 2024 -2 Upper middle-income pov. rate Real GDP pc Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Sources: INSTAT and World Bank. Source: World Bank. Notes: see Table 2. MPO 3 Apr 22 60  ●   World Bank ECA Economic Update Spring 2022 the minimum wage increased by 13.1 per- high infrastructure investment and subse- cent in real terms. quent demand for imports. Still, given the strong growth in GDP per Outlook In the baseline scenario, public debt is ex- capita in 2021, poverty is estimated to have pected to decline slightly to 78.1 percent dropped significantly from 31.4 percent in As of March 2022, the baseline scenario of GDP in 2022, and more significantly 2020 to 22 percent in 2021. projects economic activity to expand at its over the medium term. However, the fis- Inflation rose rapidly during the fourth pre-pandemic, pre-earthquake historical cal balance could further deteriorate in quarter, reaching 3.7 percent in December rate. However, the war in Ukraine could a worsening international context, forcing 2021. Rising food, energy, transport and further increase inflation, disrupt supply the government to cut capital spending to commodity prices risk undermining do- chains, disturb financial markets and un- prevent a hike in the debt-to-GDP ratio. mestic demand and increasing vulnerabil- dermine confidence; all of which could Given Albania’s growing reliance on ex- ity. Food prices increased by 3.9 percent dim Albania’s growth prospects. In turn, ternal financing, the exchange rate, inter- in 2021, close to double the increase of the a sluggish job market combined with di- est rate, and refinancing related risks re- overall basket. This will hurt the bottom 40 minished purchasing power could damp- main elevated. percent, whose food consumption is over en poverty reduction. Consistent with the baseline scenario in half of total consumption. The Central Government spending is expected to de- the years following, private consumption Bank kept the policy rate unchanged but cline gradually, in line with fiscal consol- is projected to return as the primary dri- recently announced an expected tighten- idation plans. However, higher spending ver of GDP growth. Private investment ing through 2022. may be needed to guarantee energy sup- could provide further support to growth Higher tax revenues and new debt al- ply through more costly energy imports if business climate reforms are imple- lowed the government to increase infra- and support to the fragile energy SOEs. mented. A key medium-term reform pri- structure spending. The government also Service exports, including tourism and ority is the need to boost revenue col- raised subsidies t o the energy State- fast-expanding business-process opera- lection and achieve fiscal consolidation, Owned Enterprises (SOEs) to ensure en- tions should return to their pre-pandemic while allowing for significant growth-en- ergy supply during the last quarter of growth trends. The current account deficit hancing spending. 2021. Contingent liabilities from SOEs is expected to reach 7.9 percent of GDP on- pose major risks for the budget. ly in 2024, as terms of trade worsen due to TABLE 2 Albania / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2019 2020 2021e 2022f 2023f 2024f Real GDP growth, at constant market prices 2.1 -4.0 8.6 3.2 3.4 3.5 Private Consumption 3.2 -2.4 3.7 2.6 2.7 2.9 Government Consumption 2.9 1.6 9.4 6.9 -1.0 2.6 Gross Fixed Capital Investment -3.7 -2.0 18.5 -0.9 1.7 3.4 Exports, Goods and Services 2.6 -25.6 29.2 4.8 8.0 6.2 Imports, Goods and Services 2.3 -19.9 18.5 1.9 3.3 4.1 Real GDP growth, at constant factor prices 2.4 -3.4 8.6 3.1 3.4 3.5 Agriculture 0.6 0.3 -0.2 0.2 0.3 0.5 Industry 0.9 -3.5 10.8 5.0 5.0 5.0 Services 3.8 -4.7 10.9 3.2 3.6 3.7 Inflation (Consumer Price Index) 1.4 2.2 2.6 5.0 4.0 3.0 Current Account Balance (% of GDP) -7.9 -8.8 -8.3 -9.6 -8.7 -7.9 Net Foreign Direct Investment (% of GDP) 7.5 6.8 6.4 6.5 6.6 6.6 Fiscal Balance (% of GDP) -1.9 -6.8 -5.8 -5.2 -2.8 -2.7 Debt (% of GDP) 67.4 77.2 78.4 78.1 76.4 75.1 Primary Balance (% of GDP) 0.1 -4.7 -3.8 -2.5 0.0 0.2 a,b Upper middle-income poverty rate ($5.5 in 2011 PPP) 28.1 31.3 22.0 19.4 16.9 14.7 GHG emissions growth (mtCO2e) -1.5 -6.5 1.6 -1.2 -1.0 -0.8 Energy related GHG emissions (% of total) 47.4 45.4 46.2 45.7 45.2 44.8 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. a/ Calculations based on ECAPOV harmonization, using 2016-SILC-C and 2018-SILC-C.Actual data: 2018. Nowcast: 2019-2021. Forecasts are from 2022 to 2024. b/ Projection using customized elasticity (2016-2018) with pass-through = 1 based on GDP per capita in constant LCU. MPO 4 Apr 22 Part II: Selected Country Pages ●  61 The fifth wave of COVID-19 infections abated in Armenia by end-February. After ARMENIA Key conditions and a slow start, the pace of vaccination picked challenges up in late 2021, after mandatory require- ments were introduced for workers to pro- duce proof of vaccination or to submit to Table 1 2021 Prudent macroeconomic policies, includ- weekly testing. Still, only 43 percent of the Population, million 3.0 ing a more-effective inflation targeting adult population was fully vaccinated as of GDP, current US$ billion 13.9 regime, a robust fiscal rule, sound financial March 13, 2022. GDP per capita, current US$ 4670.2 sector oversight, and pro-competition re- After a prolonged period of low inflation, International poverty rate ($1.9)a 0.4 forms helped Armenia weather the twin price levels picked up in late 2020 and re- Lower middle-income poverty rate ($3.2) a 6.9 crises in 2020 with a lower-than expected mained elevated in 2021. Inflation peaked Upper middle-income poverty rate ($5.5) a 44.7 increase in poverty rates. at 9.6 percent yoy in November before Gini index a 25.2 While domestic political uncertainty has moderating to 6.5 percent yoy in February School enrollment, primary (% gross) b 91.2 subsided since snap elections in mid-2021, 2022. Food inflation peaked at 17 percent b 75.1 Armenia still faces significant structural in November 2021, driving two-thirds of Life expectancy at birth, years constraints, such as weak connectivity, overall inflation. In response, the Central Total GHG Emissions (mtCO2e) 9.8 closed borders and no economic relations Bank of Armenia (CBA) increased the pol- Source: WDI, Macro Poverty Outlook, and official data. with two of its four neighbors and chal- icy rate nine times by a cumulative 500 a/ Most recent value (2020), 2011 PPPs. b/ WDI for School enrollment (2020); Life expectancy lenges related to high unemployment, skills basis points between December 2020 and (2019). mismatches and firm competitiveness. March 2022. The budget deficit declined from 5.1 per- cent of GDP in 2020 to 4.3 percent in The impact of the war in Ukraine and 2021. Revenues were up 8 percent yoy sanctions on Russia is likely to be sig- Recent developments due to higher VAT and state duties, fol- lowing the introduction of a new export nificant given Armenia’s strong eco- After contracting in 2020 by 7.4 percent duty for minerals. Expenditure was up 5 nomic links with Russia. The economy yoy, the Armenian economy started to re- percent yoy driven by current expendi- rebounded by 5.7 percent year on year cover in 2021, growing at 5.7 percent yoy. tures. Public debt to GDP declined to 63.4 (yoy) in 2021 but is forecast to grow at Growth was driven by private and public percent as at end-2021 from 67.4 percent consumption with smaller contributions a year earlier. only 1.2 percent yoy in 2022, with an from investment and net exports. The external balance improved due to a uncertain outlook subject to high down- On the production side, services rebound- quicker rebound in exports than imports, side risks. Lower growth and remit- ed from a sharp slump in 2020, and in- and a sharp increase in remittances. FDI al- tances are likely to slow poverty reduc- dustry and construction contributed mod- so rebounded, albeit from a low base. The tion and increase vulnerability. estly to growth. Agriculture contracted exchange rate stabilized following the de- for the sixth straight year, reflecting un- cline in political uncertainty in mid-2021 reformed land markets, uneven access to and reached pre-COVID levels in February irrigation and low resilience to changing 2022. However, the onset of the war in weather patterns. Ukraine brought fresh volatility. FIGURE 1 Armenia / GDP growth, fiscal and current account FIGURE 2 Armenia / Actual and projected poverty rates and balances real GDP per capita Percent Poverty rate (%) Real GDP per capita (millions constant LCU) 8 70 3 60 4 2 50 0 2 40 -4 30 1 20 -8 1 10 -12 0 0 2017 2018 2019 2020 2021e 2022f 2023f 2024f 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 Real GDP growth, % change CAB, % of GDP International poverty rate Lower middle-income pov. rate Fiscal balance, % of GDP Upper middle-income pov. rate Real GDP pc Sources: Statistical Committee of Armenia; Central Bank of Armenia; World Bank Source: World Bank. Notes: see Table 2. staff projections. MPO 5 Apr 22 62  ●   World Bank ECA Economic Update Spring 2022 The national absolute poverty rate rose to with fuel imports accounting for 9 per- an increased tourism revenues associated 27 percent in 2020 from 26.4 percent in cent of imports in 2021. with an inflow of Russian citizens follow- 2019. Existing social protection and social The growth forecast has been downgrad- ing the onset of the war. assistance mechanisms (pensions and the ed for 2022 from 5.3 percent pre-war to Higher commodity prices will keep infla- Family Benefits Program) provided a crit- 1.2 percent, with lower remittances and tionary pressures elevated in 2022, but ical buffer preventing a further increase real wages impacting consumption; CBA’s inflation targeting is expected to an- in poverty. heightened uncertainty impacting invest- chor inflation in the medium-term as exter- ment; and exports contracting due to the nal price pressures subside. projected contraction in Russia and slow- Based on the forecasted macroeconomic ing global and regional growth. On the impact, poverty (using the upper middle Outlook production side, agriculture will continue income poverty line) could reach 39.6 to be weighed down by structural chal- percent of the population in 2022, which The impact of Russia’s invasion of Ukraine lenges; industry will be impacted severely represents a 3 percentage points increase on Armenia’s economy is likely to be sig- by uncertainty; and services will slow relative to a counter-factual scenario in nificantly negative, although the magni- along with consumption. In the medium- the absence of the war. Vulnerability tude remains uncertain. term, growth is expected to pick up in may increase due to decreased remit- Armenia has strong economic links with 2023 and 2024, but at a slower pace than tances, increased utility bills and in- Russia, which accounted for 28 percent projected pre-war. creased food prices. of Armenia’s exports and 30 percent of In line with slower growth, revenue collec- The forecast is uncertain, with possible its imports on average from 2018-2021 tion is expected to decline, and spending downgrades, given the evolving global and is the source of all of Armenia’s pressures are expected to rise, particularly and regional environment. Risks include wheat and gas imports. In 2021, remit- through increased social assistance, lead- protracted conflict in Ukraine, a pro- tances from Russia amounted to 5 per- ing to a delay in fiscal consolidation. This longed and more significant slowdown cent of GDP, 41 percent of net FDI will push up the debt to GDP to about 67 in Russia, further disruption in global stock was associated with Russian enti- percent of GDP at the end of 2022, further commodity markets, and still unresolved ties, and Russian tourists accounted for away from statutory limits. geopolitical issues around Armenian bor- 40 percent of all tourist arrivals. In ad- The current account deficit is projected ders. On the upside, the inflow of persons dition, Armenia will also be impacted to widen due to lower exports and net from Russia, if sustained, may have a by elevated global food and fuel prices, remittances. Exports may be boosted by positive impact of the economy. TABLE 2 Armenia / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2019 2020 2021e 2022f 2023f 2024f Real GDP growth, at constant market prices 7.6 -7.4 5.7 1.2 4.6 4.9 Private Consumption 11.5 -13.8 3.4 -1.3 5.4 5.7 Government Consumption 12.9 15.2 5.0 -1.2 1.7 1.0 Gross Fixed Capital Investment 4.4 -8.6 7.7 -0.9 7.5 9.1 Exports, Goods and Services 16.0 -33.4 16.5 -8.5 6.5 7.7 Imports, Goods and Services 11.6 -31.4 10.9 -12.0 8.0 9.3 Real GDP growth, at constant factor prices 7.7 -7.1 5.4 1.2 4.6 4.9 Agriculture -5.8 -4.1 -1.4 0.2 0.8 1.0 Industry 10.5 -3.0 3.8 -1.1 2.9 3.1 Services 9.7 -9.8 7.9 2.6 6.3 6.5 Inflation (Consumer Price Index) 1.4 1.2 7.2 9.8 7.5 6.8 Current Account Balance (% of GDP) -7.4 -3.8 -3.3 -3.7 -4.9 -5.4 Net Foreign Direct Investment (% of GDP) 1.7 0.6 2.6 1.6 1.8 2.3 Fiscal Balance (% of GDP) -0.8 -5.1 -4.3 -5.8 -4.9 -3.3 Debt (% of GDP) 53.7 67.4 63.4 66.9 67.6 66.6 Primary Balance (% of GDP) 1.6 -2.4 -1.7 -3.0 -2.0 -0.4 a,b,c International poverty rate ($1.9 in 2011 PPP) 1.1 0.4 0.3 0.2 0.2 0.2 Lower middle-income poverty rate ($3.2 in 2011 PPP)a,b,c 9.8 6.9 5.7 5.4 4.8 4.0 Upper middle-income poverty rate ($5.5 in 2011 PPP)a,b,c 44.0 44.7 40.4 39.6 36.2 32.7 GHG emissions growth (mtCO2e) 6.4 -10.9 9.5 5.2 7.8 7.2 Energy related GHG emissions (% of total) 62.9 61.1 64.8 65.4 66.5 67.4 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. a/ Calculations based on ECAPOV harmonization, using 2020-ILCS.Actual data: 2020. Nowcast: 2021. Forecasts are from 2022 to 2024. b/ Projection using neutral distribution (2020) with pass-through = 0.87 based on GDP per capita in constant LCU. c/ The poverty rates for 2019 are not strictly comparable with 2018 due to revisions on the ILCS starting in 2019. MPO 6 Apr 22 Part II: Selected Country Pages ●  63 declined by 7.3 percent in 2021, with a 9.6 percent drop in non-energy sec- AZERBAIJAN Key conditions and tor investment, driven largely by lower challenges private investment. Rebounding domestic demand, rising global commodity prices, and increased Table 1 2021 Azerbaijan faces structural challenges in administrative prices pushed CPI inflation Population, million 10.2 developing a vibrant non-energy private to 6.7 percent in 2021, overshooting the GDP, current US$ billion 54.6 sector. These include a large state foot- central bank’s target range of 4±2 percent GDP per capita, current US$ 5358.1 print, institutional challenges, an undiver- and prompting a 150-basis point policy School enrollment, primary (% gross)a 95.8 sified asset mix with a low and stagnant rate increase since August 2021, pushing it Life expectancy at birth, years a 73.0 level of investmen t in human capital, the to 7.75 percent in March 2022. Total GHG Emissions (mtCO2e) 79.9 lack of a level playing field, and shallow Soaring energy prices boosted external Source: WDI, Macro Poverty Outlook, and official data. financial markets. This, in turn, has con- revenues, and the current account record- a/ WDI for School enrollment (2020); Life expectancy tributed to low private investment in the ed a surplus of 15.2 percent of GDP. This (2019). non-energy sector. was offset by financial outflows (9.2 per- Following military tension with Armenia cent of GDP). Yet the overall balance of in 2020, a tripartite statemen t on armistice payments was in surplus at 5.6 percent of Russia’s invasion of Ukraine poses was signed between the two countries and GDP in 2021. downside risks to Azerbaijan’s economic Russia in November 2020. The reconstruc- Rapid economic recovery and high State tion effort has progressed in 2021, even as Oil Fund (SOFAZ) revenues supported outlook, particularly in the non-energy the situation remains fragile, especially fiscal revenues, which jumped 38.7 per- sector. This follows a strong rebound in along the border. cent, while fiscal spending increased by 2021, as recovering domestic and exter- 2.8 percent in 2021. As a result, the fiscal nal demand supported growth in both balance recorded a surplus of 4.2 percent of GDP in 2021. energy and non-energy sectors, while rising global energy prices aided exter- Recent developments According to official data, the unemploy- ment rate fell to 6 percent in 2021, from 7.2 nal and fiscal balances. Soaring energy Azerbaijan experienced a strong econom- percent in 2020, but was still above pre-pan- prices will provide a short-term wind- ic rebound in 2021, with output recover- demic trends. The official national poverty fall, but mounting inflationary pressures ing to pre-COVID-19 levels by end-year. rate reached 6.2 percent in 2020, on a rise of The energy sector grew by 1.8 percent, 1.4 percentage points from 2019. Rural and lower remittances are expected to with production constrained by OPEC+ poverty increased disproportionately, as weigh on poverty. quotas for some parts of the year. Non- households experienced job and income energy sectors’ growth was more robust losses in the COVID-19 induced crisis peri- at 7.2 percent, led by services (especially od. The economic rebound in 2021, and in- transport, hospitality, and retail trade) creased public wages and pensions, likely and manufacturing. led to improved household income in 2021, On the demand side, consumption re- although in real terms, this was offset partly bounded strongly, while investment by higher inflation. FIGURE 1 Azerbaijan / Non-oil GDP growth and oil price FIGURE 2 Azerbaijan / Official poverty rate and unemployment rate US$/bbl Percent Percent of population Percent 120 12 10 10 10 100 8 8 8 80 6 6 6 4 60 2 4 4 40 0 -2 20 2 2 -4 0 -6 0 0 2012 2014 2016 2018 2020 2022 2024 2010 2012 2014 2016 2018 2020 Average Brent oil price (LHS) Non-oil GDP growth (RHS) Official poverty rate (LHS) Unemployment rate (RHS) Sources: State Statistical Committee of Azerbaijan, World Bank, and World Bank Source: State Statistical Committee of Azerbaijan. Note: The World Bank has not staff estimates. reviewed the official poverty rates for 2013Ð20. MPO 7 Apr 22 64  ●   World Bank ECA Economic Update Spring 2022 production stabilizes and the non-energy prices eases and global monetary condi- sectors face headwinds from low invest- tions tighten. Outlook ment levels, subdued agriculture yields The external balance is expected to record (due to still stressed water supplies) and a sizable surplus in the medium-term, sup- Economic growth is currently forecast remaining spillover effects from regional ported by high energy prices. Imports are at 2.7 percent in 2022, which represents supply chain disruptions. projected to grow in 2022, in lin e with the a 0.9 percentage point downgrade from On the demand side, consumption will continued recovery in domestic demand, the baseline forecast prior to the inva- remain the principal driver of growth in and moderate in the medium term as sion of Ukraine. 2022, as there is still some pent-up de- growth slows. A short-term increase in oil and gas pro- mand accumulated from 2020 and early The fiscal balance is estimated to be in duction would propel growth in the en- 2021. Investment is expected to remain surplus in the medium term, averaging at ergy sector in 2021, but this increase is subdued with public investment stable 4.7 percent of GDP, supported by higher expected to subside beyond 2023. After and private investment anemic amid per- oil and gas prices even as spending re- a strong rebound in 2021, growth in the sisting structural challenges. External de- mains elevated. non-oil/gas sectors is expected to moder- mand is likely to moderate, as growth The negative impact on poverty in 2022 is ate in 2022. At the same time, spillovers in major trading partners declines. Non- expected to be amplified by higher infla- from Russia’s invasion of Ukraine and as- energy exports, even though relatively tion and reduced remittances from Rus- sociated sanctions on Russia are expected small, will be hard hit as Russia was the sia. Even though these remittances ac- to adversely affect export-oriented non- destination for 32 percent of these exports counted for only about 1 percent of GDP energy sectors, especially agriculture and in 2021 (2.5 percent of GDP). in 2021, they disproportionally benefit the tourism. Other sectors, e.g., manufactur- Inflation is projected to stay elevated in poor, especially those in small towns and ing, are also expected to face difficul- 2022, above the central bank’s target, rural areas. ties in accessing critical imports such as due to higher import prices. Food prices This forecast is subject to uncertainty given wood, steel, and fertilizers. are forecast to continue rising, as dis- the evolving global and regional environ- In the medium term, assuming a stabiliza- ruptions to global commodity markets ment, with elevated downside risks tion of the geopolitical situation, growth is linger. In the medium-term, inflation is around protracted war and disruption to projected to average at 2.4 percent during projected to moderate, as consumption global commodity markets. 2022-24, close to its potential, as oil and gas growth slows, pressure from imported TABLE 2 Azerbaijan / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2019 2020 2021e 2022f 2023f 2024f Real GDP growth, at constant market prices 2.5 -4.3 5.6 2.7 2.2 2.3 Private Consumption 4.2 -5.1 7.0 4.0 4.1 4.2 Government Consumption 7.9 4.8 3.8 3.9 3.2 2.3 Gross Fixed Capital Investment -2.4 -7.1 -6.0 -3.6 -1.4 -1.0 Exports, Goods and Services 1.5 -8.1 5.6 2.7 1.7 1.8 Imports, Goods and Services 2.2 -10.5 2.5 2.6 2.7 2.7 Real GDP growth, at constant factor prices 2.5 -4.4 5.6 2.7 2.2 2.3 Agriculture 7.3 1.9 3.3 1.1 1.8 3.2 Industry 0.4 -5.2 4.1 2.6 1.1 1.1 Services 5.1 -4.4 8.6 3.2 4.0 4.0 Inflation (Consumer Price Index) 2.7 2.8 6.7 9.0 6.6 6.0 Current Account Balance (% of GDP) 9.1 -0.5 15.2 22.7 16.5 12.3 Net Foreign Direct Investment (% of GDP) -2.9 -1.5 -4.1 -1.7 -1.2 -1.2 Fiscal Balance (% of GDP) 9.0 -6.5 4.2 6.4 4.2 3.5 Debt (% of GDP) 18.8 18.4 16.2 16.1 16.2 15.8 Primary Balance (% of GDP) 9.7 -5.7 4.8 6.8 4.7 3.9 GHG emissions growth (mtCO2e) 1.6 -2.3 2.7 0.7 0.3 1.0 Energy related GHG emissions (% of total) 42.9 44.1 46.6 48.1 49.3 50.6 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. MPO 8 Apr 22 Part II: Selected Country Pages ●  65 the EU countries. In case the disruption of trade with Ukraine and restrictions on BELARUS Key conditions and potash trading are taken into account, up challenges to one-third of merchandize exports is af- fected. Although the price for natural gas imported from Russia will remain at the Table 1 2021 Population, million 9.4 In recent years, Belarus’s economy has en- 2021 level of US$128.5 per 1,000 cubic GDP, current US$ billion 68.4 countered major headwinds as its growth meters, this preference will only partial- GDP per capita, current US$ 7279.8 trajectory remains shaped by external fac- ly cushion the impact of external shocks. Upper middle-income poverty rate ($5.5) a 0.1 tors. This is due to structural rigidities, an As a result, real GDP could decline by at Gini index a 24.4 outsized and unreformed public sector, least 6.5 percent in 2022. The forecasting School enrollment, primary (% gross) b 100.5 and reliance on deepening economic and is subject to uncertainties related to the Life expectancy at birth, years b 74.2 financial integration with Russia. The external circumstances, depending on the Total GHG Emissions (mtCO2e) 60.7 economy has been left vulnerable to re- course and the outcome of the Ukraine- Source: WDI, Macro Poverty Outlook, and official data. gional and global shocks, such as the Russia war. a/ Most recent value (2020), 2011 PPPs. COVID-19 pandemic. b/ WDI for School enrollment (2018); Life expectancy (2019). Disputed 2020 elections led to sectoral economic sanctions, which had limited ef- fects. Export earnings increased, helping Recent developments to maintain a stable exchange rate and The Ukraine-Russian war has brought achieve a current account surplus in 2021. In 2021, real GDP grew 2.3 percent y/y on substantial challenges to the Belarusian Public debt pressures were alleviated the back of improved external demand and economy related to new sectoral sanc- through a combination of refinancing and higher export prices. Sectoral economic tions, the disruption of trade with spending of foreign reserves, while their sanctions imposed since mid-2021 had lim- Ukraine, and negative spillovers from the level has been boosted by the August ited effects, while the Ukrainian market (a 2021 IMF SDR allocation. Nevertheless, destination for more than 13 percent of Russian economy. While in 2022 debt to banking sector pressures persist, as with- merchandize exports) remained accessible. the major creditors could be restructured, drawal of FX deposits by households has Despite a broadly stable BYN/US$ ex- the ability to meet the 2023 Eurobond re- continued throughout 2020-2021. A bank change rate, consumer price inflation ac- payment looks questionable. Household run has been prevented by a high share celerated to 9.97 percent y/y. This is due of term deposits: about two thirds of all to an increase in administratively regulat- incomes are expected to fall and poverty household deposits, and more than 60 ed prices, imposition of VAT for selected to increase as unemployment grows and percent of FX deposits. medicines, and imported inflation, as aver- recession deepens. Fresh sectoral economic sanctions intro- age import prices went up by 21.3 percent. duced on March 2, 2022, seek to prevent Expenditure cuts of 1.5 pp of GDP amid exports of tobacco, petroleum, fuels, a tiny increase of revenues by 0.3 pp potash fertilizers, metals, iron, and rubber of GDP allowed balancing the general products to the EU. These restrictions government budget. Public debt repay- cover at least 13 percent of merchandize ment pressures have been alleviated by exports, or more than a half of exports to refinancing from Russia for US$1bn and FIGURE 1 Belarus / FX deposits and gross international FIGURE 2 Belarus / Actual and projected poverty rates and reserves, US$ bn, 2008-2022 real private consumption per capita US$ bn US$ bn Poverty rate (%) Real private consumption per capita (constant LCU) 15 10.0 18 6000 16 12 8.0 5000 14 12 4000 9 6.0 10 3000 6 4.0 8 6 2000 3 2.0 4 1000 2 0 0.0 2008 2010 2012 2014 2016 2018 2020 2022 0 0 Corporates: FX deposits, US$ bn (Jan- 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 Households: FX deposits, US$ bn Feb) Upper middle-income pov. rate Real priv. cons. pc Gross international reserves, US$ bn rhs Source: NBRB. Source: World Bank. Notes: See Table 2. MPO 9 Apr 22 66  ●   World Bank ECA Economic Update Spring 2022 issuing of FX-denominated government percent, while real pensions decreased by will likely be attempts to redirect sales out- bonds by US$1.2bn, along with spend- 3.1 percent –the first decrease in five years. side the EU market and increase exports ing of foreign reserves in Q1 2021 of However, the national poverty rate fell to Russia in a bid to fill the void caused US$0.5bn. from 4.8 percent in Q4 2020 to 3.9 percent by foreign companies discontinuing sales The consequences of the Ukraine-Russia in Q4 2021. and/or leaving the Russian market. war are yet to materialize. By mid-March, Even so, Belarus’s exports are expected to these have been limited to a 20-percent decline heavily: coupled with tighter mon- nominal exchange rate depreciation of etary and fiscal policy and lower house- BYN vis-à-vis US$, with commercial banks Outlook hold consumption, this is projected to lead imposing restrictions on FX operations, to a real GDP decline of at least 6.5 percent while the NBRB increased its policy rate by The growth outlook is clouded by extreme in 2022. 2.25 pp to 12 percent p.a. As the stock of uncertainties as economic sanctions con- Given that in 2022 more than 40 percent of FX-denominated loans exceeds 60 percent tinue to widen, and as Russia – Belarus’s repayments fall on Russia and the Russia- of the total, depreciation weakens corpo- major trade and financing partner – is fac- controlled EFSD, the debt burden will be rate balance sheets. The price of Belarus’s ing a slew of far-reaching economic and fi- eased through bilateral debt restructuring. 2023 sovereign bonds collapsed to below nancial sector restrictions. Various sectoral However, this is not an option in case of 20 percent of their nominal value. sanctions against the Belarusian economy 2023 Eurobond repayments for US$ 800 m. Business sentiment has continued to affect up to one-third of its merchandise Falling GDP will increase poverty and worsen, with IT companies relocating exports, stemming from blocking sales of household vulnerability. Broadening of abroad, and selected foreign companies a broad range of commodities. Earnings price controls could have limited effect, restrict their supplies, affecting manufac- from potash exports – estimated to be leading instead to shortages of certain turers in Belarus. equal to 3.7 percent of 2021 GDP – are to consumer goods, also due to the scarcity By the end of 2021, household disposable fall considerably as major transportation of FX in the economy and related restric- income growth decelerated from 3.9 to 2 routes are sealed. On the other hand, there tions on imports. TABLE 2 Belarus / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2019 2020 2021e 2022f 2023f 2024f Real GDP growth, at constant market prices 1.4 -0.9 2.3 -6.5 1.5 1.6 Private Consumption 5.1 -1.4 2.6 -4.8 1.5 1.8 Government Consumption 0.4 -1.1 -0.5 -0.3 -1.0 1.3 Gross Fixed Capital Investment 6.2 -6.8 -5.6 -18.7 6.2 4.3 Exports, Goods and Services 1.0 -3.2 9.5 -14.2 4.1 3.7 Imports, Goods and Services 5.2 -7.9 5.8 -18.6 5.1 4.8 Real GDP growth, at constant factor prices 1.5 -0.9 2.3 -6.5 1.5 1.6 Agriculture 3.0 4.9 -4.2 -1.8 2.8 3.3 Industry 1.4 -0.7 6.5 -9.4 3.2 5.8 Services 1.3 -2.0 0.2 -4.9 0.0 -2.1 Inflation (Consumer Price Index) 4.7 7.4 10.0 21.1 11.9 7.2 Current Account Balance (% of GDP) -1.8 -0.2 2.6 -0.8 -1.3 -1.1 Net Foreign Direct Investment (% of GDP) 2.0 2.1 1.7 0.6 0.6 0.5 Fiscal Balance (% of GDP) 2.5 -1.7 0.0 -1.1 -0.3 0.0 Debt (% of GDP) 37.5 41.1 36.0 36.4 35.5 34.9 Primary Balance (% of GDP) 4.3 0.0 1.6 0.5 1.2 1.5 a,b Upper middle-income poverty rate ($5.5 in 2011 PPP) 0.2 0.2 0.2 0.3 0.3 0.2 GHG emissions growth (mtCO2e) -3.1 -2.7 -3.5 -6.8 -1.0 -0.5 Energy related GHG emissions (% of total) 86.1 85.9 85.6 85.4 85.7 85.9 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. a/ Calculations based on ECAPOV harmonization, using 2019-HHS.Actual data: 2019. Nowcast: 2020-2021. Forecasts are from 2022 to 2024. b/ Projection using neutral distribution (2019) with pass-through = 0.87 based on private consumption per capita in constant LCU. MPO 10 Apr 22 Part II: Selected Country Pages ●  67 account deficits, financed largely by net FDI inflows. BOSNIA AND Key conditions and Steady, albeit low, economic growth has challenges not translated into more and better jobs, HERZEGOVINA with a large share of the workforce active in the informal sector and stalled poverty BiH has been a potential EU candidate reduction according to the latest official since 2016. Yet, little progress has been data from 2015. Implementation of much Table 1 2021 made in competitiveness-enhancing prod- needed structural reforms remains slug- Population, million 3.3 uct market reforms and in improving the gish due to political frictions, pressures GDP, current US$ billion 21.3 business environment. The internal market from frequent elections, corruption that GDP per capita, current US$ 6513.1 and the state institutional set-up are still pervades all levels of society, and fragmen- Life expectancy at birth, yearsa 77.4 highly fragmented, while country-wide tation of responsibilities between the two Total GHG Emissions (mtCO2e) 28.3 supervisory and regulatory institutions re- entities and Cantons. As a result of the po- main weak. litical impasse and welfare prospects, BiH Source: WDI, Macro Poverty Outlook, and official data. a/ Most recent WDI value (2019). Macroeconomic stability was maintained exhibits the highest stock of emigration over the last decade largely facilitated by across the Balkans. the currency board peg to the euro, which, together with the EU membership Real GDP growth is expected to deceler- prospects remain a critical economic an- ate to 2.9 percent in 2022 after rebound- chor. Despite real income growing roughly Recent developments ing to 6.5 percent in 2021. Meanwhile, over 3 percent per annum since 2015, per inflation surged to 7 percent in January capita GDP continues to hover around The rebound in economic growth esti- one-third of the EU27 average. A more mated at 6.5 percent in 2021 was an ex- 2022 (yoy) compared to the annual rate of pronounced convergence toward the EU27 ceptional performance, which helped real 2 percent last year. Delayed structural re- average will be difficult to achieve with GDP exceed the pre-crises level. Real forms impede EU accession and potential low investment rates and a growth model growth was driven by a surge in exports, output growth. The war in Ukraine will that relies on private consumption. and robust growth in private consump- likely aggravate price pressures resulting The pandemic has inflicted a significant tion. Meanwhile, inflation accelerated to cost on BiH’s economy, yet a full recovery 7 percent in January 2022 (yoy) and to- in an inflation rate of 4.8 percent in 2022. to the 2019 real income level has been taled 2 percent in 2021 compared to a achieved in 2021. That said, BiH is un- 1.1 percent deflation in 2020. The sharply likely to catch up with the pre-pandemic rising prices during the last quarter of growth trajectory, unless political bottle- 2021 and in January 2022 were caused necks are resolved. by stronger consumer demand, continu- BiH built fiscal buffers prior to the pan- ing supply chain problems, and a high demic by running fiscal surpluses between passthrough effect given the currency 1 and 3 percent of GDP from 2015 to 2019. board arrangement. Food and transport These surpluses helped rein in the current prices accelerated to 12 percent and 13.6 FIGURE 1 Bosnia and Herzegovina / Real GDP growth and FIGURE 2 Bosnia and Herzegovina / Labor market sectoral contributions to real GDP growth indicators, 2020-2021 Percent, percentage points Percent 8 50 44.1 2015 2016 2017 2018 45 42.1 6 40 34.3 35 31.9 4 27.7 30 25 22.6 2 18.4 20 15.2 0 15 10 Agriculture Industry -2 5 Services GDP 0 -4 Activity rate Emp. rate Unemp. rate Long-term 2019 2020 2021f 2022f 2023f 2024f unemp. Rate Sources: BiH Agency for Statistics (BHAS), World Bank staff calculations Sources: LFS 2020 - 2021 report, World Bank staff calculations. MPO 11 Apr 22 68  ●   World Bank ECA Economic Update Spring 2022 percent in January 2022 (yoy), likely dis- from IFIs. The extent of this financial sup- barring the implementation of changes to proportionally affecting the less well-off. port will depend on the de-escalation of the VAT law. Despite a renewed acceleration in political tensions, which have risen signifi- With the global energy market disrupted Covid-19 cases toward the end of 2021 and cantly over the past ten months. due to the war in Ukraine, inflationary in January-February 2022, improvements pressures are assumed to last longer than in the labor market participation and em- initially expected, leaving inflation at ployment rate continued through the end around 4.8 percent. of 2021 (Figure 2). Outlook Several risks tilt the outlook to the down- A surge in tax revenues was not fully offset side. First, protracted effects of the war in by higher spending, which resulted in a Real GDP is projected to decelerate to 2.9 Ukraine would have a negative impact on return to fiscal surpluses estimated at 0.5 percent in 2022 and stabilize below 3.5 per- aggregate demand in BiH through lower percent of GDP in 2021 , after a deficit of cent over the medium term. Growth is ex- business and consumer confidence. Sec- 1.8 percent of GDP in 2020. Higher public pected to be driven by a further pick up ond, war-related uncertainties and sanc- wages, and additional spending on goods in private consumption fueled by remit- tions will dampen the recovery in the EU, and services as well as higher social bene- tances, tightening labor market, and do- adversely impacting demand for BiH ex- fits were aimed at softening the effects of mestic lending in the short term. Invest- ports. However, price and volume effects the pandemic. ment in energy and infrastructure will add for BiH’s exports of iron and steel products The sharp rise in exports narrowed the to the growth stimulus over the medium and aluminium could in part offset the traditionally large merchandise deficit term. Higher exports are likely to be offset negative effects of a slowdown in EU and helped narrow the current account by higher imports mainly for infrastruc- growth. Third, slower growth in the EU shortfall to 3.2 percent of GDP in 2021 ture projects. As the impact of the pandem- could also limit remittances, on which the compared to 3.9 percent in 2020. External ic subsides, and the political paralysis is country is dependent (close to 8 percent of financing largely entailed net FDI in- overcome, the Socio-Economic Program , GDP). Finally, these risks would be further flows, mainly into the foreign-owned fulfilling priorities for EU accession, is ex- aggravated, if geopolitical tensions shift to banking sector, which remained stable pected to gain attention. BiH and exacerbate already significant po- during the pandemic. The fiscal deficit in 2022 is likely to be litical frictions. Without access to international markets, driven by pre-election spending activities. the authorities continue relying on support A return to surplus may occur in 2023, TABLE 2 Bosnia and Herzegovina / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2019 2020 2021e 2022f 2023f 2024f Real GDP growth, at constant market prices 2.7 -3.1 6.5 2.9 3.1 3.5 Private Consumption 2.8 -4.5 4.0 2.7 3.1 3.5 Government Consumption 2.6 0.5 6.1 2.8 3.0 3.0 Gross Fixed Capital Investment 1.9 -20.2 2.5 -2.3 4.4 3.9 Exports, Goods and Services -0.3 -8.5 28.0 9.0 7.0 8.0 Imports, Goods and Services 0.2 -13.4 17.0 6.0 6.5 7.0 Real GDP growth, at constant factor prices 2.8 -3.1 6.5 2.9 3.1 3.5 Agriculture 2.9 -1.5 3.4 3.0 2.9 2.9 Industry 1.9 -3.0 2.0 2.6 3.2 3.2 Services 3.2 -3.3 8.7 3.0 3.1 3.7 Inflation (Consumer Price Index) 1.2 2.0 2.0 4.8 0.9 0.2 Current Account Balance (% of GDP) -2.9 -3.9 -3.2 -2.4 -3.2 -4.0 Net Foreign Direct Investment (% of GDP) 3.5 2.0 3.3 3.5 3.3 3.2 Fiscal Balance (% of GDP) 1.9 -1.8 0.5 -0.8 0.3 1.1 Debt (% of GDP) 34.3 39.9 37.8 37.4 36.9 36.3 Primary Balance (% of GDP) 2.8 -0.5 1.8 0.1 1.2 1.9 GHG emissions growth (mtCO2e) -2.4 -5.6 4.8 2.3 3.1 3.9 Energy related GHG emissions (% of total) 89.0 88.7 89.1 89.2 89.4 89.7 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. MPO 12 Apr 22 Part II: Selected Country Pages ●  69 against 2011 to 6.52mn people. Significant outmigration since the start of the transi- BULGARIA Key conditions and tion period, driven by large income gaps challenges and search for better quality of life, has been the main factor behind Bulgaria’s rapid loss of population. Table 1 2021 The long-term structural challenges facing Population, million 6.9 Bulgaria include negative demographic GDP, current US$ billion 77.5 trends, coupled with institutional and gov- GDP per capita, current US$ 11276.0 ernance weaknesses. Institutional gaps Recent developments International poverty rate ($1.9)a 0.9 have been mirrored by suboptimal public Lower middle-income poverty rate ($3.2) a 2.6 service delivery, hindering private sector According to preliminary data for 2021, Upper middle-income poverty rate ($5.5) a 6.2 expansion and undermining inclusive GDP growth accelerated to 4.2% though Gini index a 40.3 growth and shared prosperity. High rates real output is yet to recover to its pre-pan- School enrollment, primary (% gross) b 85.9 of inequality of opportunity limit access to demic level. Final consumption and robust b 74.9 key public services, constraining the abili- growth of exports were the main drivers Life expectancy at birth, years ty of individuals to escape poverty and re- of the recovery. Export expansion was out- Total GHG Emissions (mtCO2e) 44.6 sult in persistently high income inequali- paced by import growth, leading to widen- Source: WDI, Macro Poverty Outlook, and official data. ty. Poverty and inequality are reinforced ing trade and current account (CA) deficits. a/ Most recent value (2019), 2011 PPPs. b/ Most recent WDI value (2019). by inadequacies in the targeting, coverage Investment, however, continued to decline and generosity of the social security sys- throughout 2021. The pandemic, combined tem, limiting its role as a redistributive with a domestic political crisis in most of Following a stronger-than-projected re- mechanism and fiscal stabilizer. 2021, increased investors’ risk aversion, The pace of convergence to average EU while the delayed approval of the national covery in 2021, growth is likely to income levels has been slower than the Recovery and Resilience Plan put addition- slow down in 2022 given higher infla- one observed in other new EU members, al drag on public investment. On the sup- tionary pressures, the war in Ukraine, and Bulgaria continues to rank last in ply side, industry, finance and IT were key and supply chain disruptions. Off the terms of GDP per capita in PPP in the sectoral drivers of growth. EU, at 55 percent of the EU average in Similar to most European countries, Bul- back of a decline in 2021, poverty is 2020. Economic growth and convergence garia saw a rapid acceleration of inflation expected to increase amidst rising food to average EU income levels across the since the summer of 2021, reaching 10.0 and energy prices. The draft 2022 NUTS-3 regions – ranging between 24 percent yoy in February 2022. Imported oil budget suggests that consolidation will percent of the EU average in Silistra to price inflation with its second-round ef- be postponed to 2023 with a continua- 120 percen t in Sofia in 2019 – has been fects was the key factor behind the infla- increasingly uneven, widening in-country tionary spike. Effective mid-December, tion of support measures. disparities. As a result, some areas are regulated prices of electricity, heating and being depopulated at a rapid pace, with water were frozen until end-March, 2022, the first results of the 2021 census show- partially cushioning the inflationary shock ing the fastest between-census decline of on households. Businesses, in turn, have the population since 1985, by 11.5 percent been receiving government subsidies for FIGURE 1 Bulgaria / Real GDP growth and contributions to FIGURE 2 Bulgaria / Actual and projected poverty rates, real GDP growth and real GDP per capita in constant LCU Percent, percentage points Poverty rate (%) Real GDP per capita (constant LCU) 15 30 18000 10 16000 25 14000 5 20 12000 0 10000 15 8000 -5 10 6000 -10 4000 5 -15 2000 2013 2015 2017 2019 2021 2023f 0 0 Imports Exports 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 Gross fixed capital formation Private consumption International poverty rate Lower middle-income pov. rate Public consumption GDP Upper middle-income pov. rate Real GDP pc Sources: World Bank, Bulgarian National Statistical Institute Source: World Bank. Notes: see Table 2. MPO 13 Apr 22 70  ●   World Bank ECA Economic Update Spring 2022 electricity costs since October 2021, which with Bulgaria’s GDP growth in 2022 re- decades. The fiscal deficit is likely to ex- has kept many firms afloat despite the en- vised by 1.2pp against our earlier forecast, ceed the government’s plan for 4.1% of ergy price spike. Electricity price subsidies to 2.6%. Risks remain titled to the down- GDP as the latter rests on a fairly opti- are expected to be fiscally neutral, as they side and further downward revisions are mistic official growth projection of 4.8%. will be financed out of profits of the state- likely to follow in case of a prolonged mil- A government-sponsored accommodation owned nuclear power plant. itary conflict, or new disruptive Covid programme for displaced Ukrainian na- Despite the boost in fiscal revenues in 2021 waves amidst low vaccination rates. More- tionals will also weigh on the expenditure (+18.1% yoy) on robust economic growth over, the delay in the approval of the na- side. More than 58 000 Ukrainian nationals and inflation, expenditure grew at a simi- tional Recovery and Resilience Plan and have remained in Bulgaria as of March 29, lar rate (+17.6%), due primarily to the con- the operational programmes for EU funds with some 40 000 of them being sheltered tinued support to businesses and individ- (2021-2027) jeopardizes the government’s at government-subsidised hotel accommo- uals. As a result, the fiscal deficit stood at plan to increase substantially public in- dation. In addition, a budget revision - that 2.9% of GDP. The banking sector remained vestment in 2022, further undermining the is likely to boost expenditure further - is solid, with after-tax profits rising by 74% growth prospects. Over the medium run, already planned for the summer. The CA to BGN 1.42bn in 2021, and non-perform- growth is expected to be fueled by EU- balance is expected to return to positive ing loans inching up modestly, by 1.4pp funded public investment and improved territory, albeit remain below 1% of GDP, y/y to 6% as of end-2021. private investor sentiment on the near- in 2022-2024. Amidst the recovery of the economy and term prospect of eurozone entry. On a positive note, the political crisis that continued, albeit more targeted, govern- The acceleration of domestic inflation since dominated the national landscape since ment support, poverty is projected to have late 2021 is likely to remain in place at least early 2021 has been overcome, after a four- slightly declined from 6.3 percent in 2020 to in H1/ 2022, as energy and food price infla- party coalition took office after the Nov 6.2 percent in 2021 using the upper middle tion is exacerbated by the ongoing war in 14, 2021 elections. There are high expecta- income poverty line of US$5.50 per day. Ukraine. This will result in a further ero- tions from the new government to under- sion of purchasing power, a likely increase take structural reforms in a number of ar- in poverty and a higher fiscal cost, if cur- eas, including the judiciary and the control rent measures in support of businesses and of corruption. Outlook individuals are extended beyond Q1. Overall, the draft 2022 budget suggests The ongoing war in Ukraine has provoked that fiscal policy will depart from the con- a revision of growth forecasts globally, servative stance adhered to in the past two TABLE 2 Bulgaria / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2019 2020 2021e 2022f 2023f 2024f Real GDP growth, at constant market prices 4.0 -4.4 4.2 2.6 4.3 3.7 Private Consumption 6.0 -0.4 8.0 3.3 4.5 3.6 Government Consumption 2.0 8.3 4.0 4.1 0.3 0.7 Gross Fixed Capital Investment 4.5 0.6 -11.0 5.4 8.5 6.6 Exports, Goods and Services 4.0 -12.1 9.9 3.4 7.1 6.3 Imports, Goods and Services 5.2 -5.4 12.2 5.1 6.9 5.9 Real GDP growth, at constant factor prices 3.7 -4.5 4.2 2.6 4.3 3.7 Agriculture 4.1 -3.3 6.1 1.2 1.8 1.1 Industry -0.1 -8.2 6.6 2.5 5.2 4.3 Services 5.2 -3.2 3.2 2.7 4.2 3.6 Inflation (Consumer Price Index) 3.1 1.7 3.3 9.3 3.4 2.0 Current Account Balance (% of GDP) 1.9 -0.3 -2.3 0.1 0.9 0.4 Net Foreign Direct Investment (% of GDP) -2.0 -3.5 -1.3 -1.7 -1.7 -1.7 Fiscal Balance (% of GDP) -1.0 -2.9 -2.9 -4.4 -3.0 -2.3 Debt (% of GDP) 20.1 24.8 25.1 28.5 28.8 27.2 Primary Balance (% of GDP) -0.4 -2.4 -2.5 -4.1 -2.6 -2.0 a,b International poverty rate ($1.9 in 2011 PPP) 0.9 1.1 0.9 0.8 0.8 0.8 Lower middle-income poverty rate ($3.2 in 2011 PPP)a,b 2.6 2.9 2.6 2.5 2.4 2.3 Upper middle-income poverty rate ($5.5 in 2011 PPP)a,b 6.2 6.3 6.2 6.2 6.1 6.0 GHG emissions growth (mtCO2e) -2.7 -3.1 -0.9 -0.9 -0.9 -0.9 Energy related GHG emissions (% of total) 82.7 86.1 85.8 85.5 85.1 84.8 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. a/ Calculations based on ECAPOV harmonization, using 2019-EU-SILC.Actual data: 2019. Nowcast: 2020-2021. Forecasts are from 2022 to 2024. b/ Projection using neutral distribution (2019) with pass-through = 0.7 based on GDP per capita in constant LCU. MPO 14 Apr 22 Part II: Selected Country Pages ●  71 the real purchasing power of households, especially the poor and vulnerable. Fur- CROATIA Key conditions and thermore, although the country’s direct challenges trade and financial linkages with Russia are limited, there could be significant indi- rect trade and investment effects via other Table 1 2021 Croatia’s economic recovery in 2021 was EU countries. In addition, while the num- Population, million 3.9 unexpectedly strong and output reached ber of new COVID-19 cases has recently GDP, current US$ billion 64.6 its pre-crisis levels by mid-2021, largely started to decline, relatively low vaccina- GDP per capita, current US$ 16619.4 due to the reopening of the economy and tion rate and the potential emergence of International poverty rate ($1.9) a 0.3 fiscal and monetary support schemes. Fur- new virus variants might impede recovery. Lower middle-income poverty rate ($3.2) a 0.6 thermore, the relatively favorable epidemi- Over the medium term, EU structural and Upper middle-income poverty rate ($5.5) a 1.8 ological situation during summer months investment funds as well as the new EU Gini index a 29.0 and the country’s proximity to its main initiatives represent an opportunity for School enrollment, primary (% gross) b 93.2 tourism originating markets resulted in a Croatia to accelerate the income conver- b 78.4 significant increase in tourist arrivals. Al- gence with the rest of the EU. Life expectancy at birth, years so, Croatia was relatively less affected by Total GHG Emissions (mtCO2e) 16.4 global supply chain bottlenecks given its Source: WDI, Macro Poverty Outlook, and official data. export structure. Together with the strong a/ Most recent value (2019), 2011 PPPs. b/ Most recent WDI value (2019). global recovery, this led to a marked rise Recent developments in exports of goods. However, underlying long-term growth remains relatively low. Following a contraction of 8.1 percent in After a pronounced economic contraction Results from the recent census suggest a 2020, real GDP in Croatia increased by 10.4 decline in the total population. This means percent in 2021. Private consumption and in 2020, the Croatian economy strongly stronger potential long-term growth will investment activity provided strong sup- rebounded in 2021, posting a double-digit hinge upon increase in productivity re- port to overall growth, underpinned by an growth rate. In addition to domestic de- quiring improvements in business envi- increase in consumer and business confi- mand, economic activity was under- ronment, public administration, education dence, favorable financing conditions and system and judiciary. inflow of EU funds. However, domestic pinned by a sharp revival of tourism and While growth is set to remain relatively demand lost some steam in the last quar- sizable exports of goods. Poverty is esti- strong over the medium term, uncertain- ter, which can be partly linked to the wors- mated to have declined to 1.6 percent in ties related to inflation developments and ening of the epidemiological situation and 2021. Over the medium term, growth is the Russian invasion of Ukraine represent buildup of inflation pressures. Contribu- expected to moderate but remain relative- a significant risk for economic activity and tion of net exports in 2021 was positive due public finances in the near- term. In early to a sharp, albeit still partial, recovery of ly strong. However, downside risks to 2022, the government adopted a mitigation tourism and increase in exports of goods growth remain significant. package worth around 1 percent of GDP by one fifth compared to 2020. On the sup- for easing rising prices but the war in ply side, growth was also broad based Ukraine might put additional pressure on with the services sector contributing the inflation with associated risks of depleting most to the rise in real gross value added. FIGURE 1 Croatia / Real GDP growth and contributions to FIGURE 2 Croatia / Actual and projected poverty rates and real GDP growth real GDP per capita Percent, percentage points Poverty rate (%) Real GDP per capita (constant LCU) 16 8 140000 14 12 7 120000 10 8 6 100000 6 4 5 80000 2 0 4 -2 60000 3 -4 -6 40000 2 -8 -10 1 20000 2015 2016 2017 2018 2019 2020e 2021e 2022f 2023f 2024f 0 0 Final consumption Gross fixed capital formation 2009 2011 2013 2015 2017 2019 2021 2023 Change in inventories Net exports International poverty rate Lower middle-income pov. rate GDP growth Upper middle-income pov. rate Real GDP pc Sources: CROSTAT, World Bank. Source: World Bank. Notes: see Table 2. MPO 15 Apr 22 72  ●   World Bank ECA Economic Update Spring 2022 Favorable economic trends were followed consumption will be partly offset by high- by an increase in employment and er inflation. Overall, inflation in 2023 and wages, and in some sectors, notably con- Outlook 2024 is projected to slow down due to the struction, worker shortages became more easing of global supply bottlenecks and pronounced and were mitigated by for- Growth is set to moderate over the medi- tightened financial conditions. However, eign labor. Inflation gradually intensified um-term but will remain above the pre- commodity price levels will remain elevat- towards the end of the year, fueled by pandemic trend. While global uncertainty ed. General government deficit is likely to food and energy prices, and it continued related to the war in Ukraine is high, the fall below 3 percent of GDP as of 2023. Al- to increase in 2022, reaching 6.3 percent Croatian economy could grow on average, so , public debt to GDP ratio is expected to in February. The general government by 3.5 percent, a year, over 2022-2024. continue declining, reaching 73.9 percent deficit is estimated to have more than However, there are significant downside of GDP at the end of 2024. halved, to around 3.5 percent of GDP and risks related to the pandemic and the war Intensifying conflicts in the region is public debt at the end of November 2021 in Ukraine. Investment activity under- putting additional pressure on food and stood at 80 percent of GDP, declining pinned by the inflow of EU funds is ex- energy prices which were already on the by 7.3 percentage points compared to the pected to pick-up strongly in 2022 and rise. While the government has promptly end of 2020. moderate thereafter. However, this pri- introduced mitigation measures to cap The strong economic and employment re- marily depends upon the implementation gas price increases, it is still expected to bound raised labor income. However, of government investment plans. Exports rise on average by 20 percent. Moreover, spikes in food prices in recent months put of goods and services are projected to sup- regional political uncertainty and glob- a burden on the most poor and vulnerable port growth, but the pace of growth is ex- al supply disruptions can have implica- as they spend nearly 50 percent of their pected to ease as to urism returns to pre- tions for the economies of host countries budget on necessities. Poverty, measured crisis levels and foreign demand moder- of Croatian migrants. This can potentially as the share of Croatian population living ates. Personal consumption growth might have adverse impacts on remittances and on less than $5.5 a day at 2011 revised PPP remain around 2.5 percent amid rising em- income of Croatians at home. Neverthe- prices, is estimated to have declined to 1.6 ployment and wages. However, positive less, poverty is expected to fall to 1.3 per- percent in 2021. effects of the increase in wages on personal cent by 2024. TABLE 2 Croatia / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2019 2020 2021e 2022f 2023f 2024f Real GDP growth, at constant market prices 3.5 -8.1 10.4 3.8 3.4 3.1 Private Consumption 4.1 -5.3 10.0 2.2 2.5 2.7 Government Consumption 3.3 4.1 3.0 2.6 2.5 2.4 Gross Fixed Capital Investment 9.8 -6.1 7.6 10.5 5.3 3.2 Exports, Goods and Services 6.8 -22.7 33.3 6.6 5.3 5.1 Imports, Goods and Services 6.5 -12.3 14.7 6.9 4.7 4.4 Real GDP growth, at constant factor prices 3.6 -6.3 8.9 3.8 3.4 3.1 Agriculture 1.8 3.6 5.5 3.6 3.6 3.6 Industry 4.8 -1.6 6.7 4.0 3.0 3.0 Services 3.3 -8.4 9.9 3.7 3.5 3.1 Inflation (Consumer Price Index) 0.8 0.2 2.6 6.1 2.2 1.9 Current Account Balance (% of GDP) 3.0 -0.1 3.7 2.0 2.4 2.6 Net Foreign Direct Investment (% of GDP) 6.1 1.3 2.5 2.5 2.4 2.4 Fiscal Balance (% of GDP) 0.3 -7.4 -3.6 -3.2 -2.9 -2.6 Debt (% of GDP) 71.1 87.3 80.7 78.3 76.0 74.0 Primary Balance (% of GDP) 2.5 -5.4 -2.0 -1.7 -1.5 -1.4 a,b International poverty rate ($1.9 in 2011 PPP) 0.3 0.4 0.3 0.3 0.3 0.3 Lower middle-income poverty rate ($3.2 in 2011 PPP)a,b 0.6 0.7 0.6 0.6 0.5 0.5 Upper middle-income poverty rate ($5.5 in 2011 PPP)a,b 1.8 2.4 1.6 1.5 1.5 1.3 GHG emissions growth (mtCO2e) -1.1 -12.8 4.3 1.7 0.6 1.3 Energy related GHG emissions (% of total) 86.8 85.1 84.7 84.2 83.5 82.8 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. a/ Calculations based on ECAPOV harmonization, using 2019-EU-SILC.Actual data: 2019. Nowcast: 2020-2021. Forecasts are from 2022 to 2024. b/ Projection using neutral distribution (2019) with pass-through = 0.87 based on GDP per capita in constant LCU. MPO 16 Apr 22 Part II: Selected Country Pages ●  73 2020, with output surpassing pre- COVID-19 levels by late-2021. Economic GEORGIA Key conditions and recovery also supported a reduction in challenges poverty, with projections suggesting a de- cline to pre-pandemic levels in 2021. However, the recovery was uneven, with Table 1 2021 Georgia has had a successfu l devel- output in certain sectors, such as hospi- Population, million 3.7 opment record, underpinned by pru- tality, remaining considerably below pre- GDP, current US$ billion 18.7 dent economic management, over the pandemic levels. The fifth wave of the GDP per capita, current US$ 5030.3 past decade. Growth averaged 4 per- COVID-19 pandemic abated in late Feb- International poverty rate ($1.9)a 4.2 cent per annum between 2011 and ruary, with new cases falling to 6 percent Lower middle-income poverty rate ($3.2) a 17.0 2021. The poverty rate measured by of peak levels on March 10th. Upper middle-income poverty rate ($5.5)a 46.6 the international upper-middle-income Inflation remained elevated in 2021, aver- Gini index a 34.5 line ($5.50 per capita per day, 2011 aging 9.6 percent and reflecting higher School enrollment, primary (% gross) b 99.4 PPP) declined from 59 percent in 2011 commodity prices and pass-through from b 73.8 to 42 percent in 2021. earlier depreciation. Food and fuel prices Life expectancy at birth, years Nevertheless, critical structural challenges contributed over five percentage points to Total GHG Emissions (mtCO2e) 16.3 remain, particularly weak productivity overall inflation. In response, the National Source: WDI, Macro Poverty Outlook, and official data. and the creation of high-quality jobs. Many Bank of Georgia (NBG) tightened mone- a/ Most recent value (2020), 2011 PPPs. b/ WDI for School enrollment (2020); Life expectancy Georgians remain in rural areas engaged tary policy by 250 basis points in 2021. (2019). in low productivity agriculture. Human Foreign trade increased with the deficit capital outcomes remain weak, with poor widening in 2021. Exports grew by 27 per- learning outcomes and a lack of linkages of cent yoy and imports by 25 percent yoy The Russian invasion of Ukraine will ad- education to private sector needs. as the trade deficit widened by 26 percent versely impact Georgia’s economy. The In addition, Georgia’s trade openness, yoy. Still, a gradual recovery in tourism and reliance on income from tourism, and substantia l transfers from abroad impact is felt through trade, remittances, make it vulnerable to external and global helped narrow the current account deficit. FDI, commodity prices, and logistics. shocks. High dollarization and persistent The banking sector remained healthy. The This follows a robust recovery from the reliance on external savings further am- sector’s return on assets (ROA) and return pandemic in 2021, with the economy plify risks. Still, the swift post-pandemic on equity (ROE) had improved by end-Jan- rebound has demonstrated the growing uary 2022 to 4.2 percent and 32.6 percent, growing at 10.4 percent and surpassing maturity and resilience of Georgia’s eco- respectively. Non-performing loans re- its pre-COVID output. The poverty im- nomic institutions. mained low at 2.3 percent. pact is expected to be significant and fis- The fiscal deficit narrowed in 2021 to 7.1 cal pressures from rising social assistance percent of GDP (excluding sales of non-fi- nancial assets), from 9.8 percent in 2020, are expected to increase. Recent developments and in line with the plan to return to deficit levels prescribed by the fiscal rule (around GDP increased by 10.4 percent in 2021 3 percent of GDP) by 2023. Public debt to following the 6.8 percent contraction of GDP declined to 52 percent of GDP as of FIGURE 1 Georgia / Real GDP growth and contributions to FIGURE 2 Georgia / Actual and projected poverty rates and real GDP growth real GDP per capita Percent Poverty rate (%) Real GDP per capita (constant LCU) 15 70 14000 10.4 10 60 12000 4.8 4.8 5.0 5.5 5.0 5 2.9 2.5 50 10000 0 40 8000 30 6000 -5 -6.8 20 4000 -10 10 2000 -15 2016 2017 2018 2019 2020 2021e 2022p 2023p 2024p 0 0 Gov. consumption Net Exports 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 Investments Prv. Consumption International poverty rate Lower middle-income pov. rate GDP growth Upper middle-income pov. rate Real GDP pc Sources: Geostat and staff estimates. Source: World Bank. Notes: see Table 2. MPO 17 Apr 22 74  ●   World Bank ECA Economic Update Spring 2022 end-2021, considerably below the 62 per- 20 percent of total remittances. Those are Due to higher commodity prices and re- cent registered in 2020, reflecting the at risk of declining sharply because of gional supply disruptions, inflationary strong GDP recovery and the strengthen- economic contraction in the host coun- pressures are likely to increase. This may ing of the lari. tries, depreciation of the ruble, and chal- be mitigated partly by long-term fixed- lenges in conducting payment transfers price contracts for gas supply and a shared from Russia. border with Russia that will maintain basic Lastly, elevated commodity prices will al- supply flows. On the upside, recent devel- Outlook so affect Georgia. Oi l and food prices opments provide an opportunity for Geor- have increased sharply since the begin- gia to strengthen the transit potential of the The war in Ukraine is likely to impact the ning of the war due to uncertainty and Caucasus Transport Corridor. Georgian economy adversely through sev- disrupted commodity supplies from Rus- The conflict in Ukraine will also likely eral channels. sia and Ukraine. have significant impact on poverty and The first channel is goods trade. Both Rus- These impacts will cause a slowdown in vulnerability through the tourism, remit- sia and Ukraine are among Georgia’s top growth, higher inflation, and widening ex- tances, and higher energy and food prices 10 trading partners and a key destination ternal balances. Georgia’s growth forecast (especially wheat) channels. for exports, including wine and beverages. for 2022 has been downgraded to 2.5 per- Georgia is well placed to manage the eco- There is limited potential to divert some of cent from 5.5 percent projected pre-war, nomic fallout of the war. Buffers remain the affected exports to alternative markets with considerable scope for further down- reasonable; the macro-financial frame- in the short term. In addition, Georgia is grades if the war continues for much work is credible; and the banking sector reliant on Ukraine and Russia for key im- longer. The baseline outlook envisions is entering the crisis in relatively strong ports such as cereals. growth recovery from 2023 onward, as eas- shape, albeit with the vulnerability of The second key channe l is tourism. The ing monetary policy, recovery of tourism, high dollarization. Fiscal discipline has expected dramatic drop in the arrival of and the restoration of economic links are been maintained over the past decade, Russian and Ukrainian tourists, who to- partly offset by the gradual withdrawal of although planned post-COVID consolida- gether accounted for 21 percent of vis- the fiscal stimulus. tion may decelerate due to the economic itors in 2021, will put further strain on On the external side, due to weaker ex- slowdown. Still, government deposits are a sector that is still reeling from the ports and higher import prices, the current sizeable, and debt is likely to remain be- COVID-19 pandemic. account deficit is expected to widen. Lari low the 60 percent statutory level under The third channe l is remittances, with volatility has also increased following the the fiscal rule. Russia and Ukraine accounting for over onset of the war. TABLE 2 Georgia / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2019 2020 2021e 2022f 2023f 2024f Real GDP growth, at constant market prices 5.0 -6.8 10.4 2.5 5.5 5.0 Private Consumption 7.2 8.8 8.7 3.0 3.8 4.8 Government Consumption 5.7 7.1 7.7 -4.7 6.0 2.2 Gross Fixed Capital Investment -0.1 -16.5 -7.6 -4.6 -0.5 2.2 Exports, Goods and Services 9.8 -37.6 30.5 -4.0 11.0 13.0 Imports, Goods and Services 6.6 -16.6 12.8 -5.0 5.0 9.0 Real GDP growth, at constant factor prices 5.1 -6.6 10.3 2.5 5.5 5.0 Agriculture 0.7 8.1 0.1 3.0 5.0 4.0 Industry 2.7 -6.8 5.9 2.0 5.0 4.0 Services 6.3 -8.1 12.9 2.6 5.7 5.4 Inflation (Consumer Price Index) 5.0 5.2 9.6 11.0 6.6 3.8 Current Account Balance (% of GDP) -5.5 -12.4 -10.5 -13.0 -9.6 -8.2 Net Foreign Direct Investment (% of GDP) 6.0 3.5 5.9 3.9 5.8 6.8 Fiscal Balance (% of GDP) -3.4 -9.8 -7.1 -4.7 -3.6 -3.0 Debt (% of GDP) 41.8 60.1 49.4 48.8 46.4 46.2 Primary Balance (% of GDP) -2.2 -8.2 -5.8 -3.3 -2.3 -1.8 a,b International poverty rate ($1.9 in 2011 PPP) 3.8 4.2 3.4 3.2 2.9 2.5 Lower middle-income poverty rate ($3.2 in 2011 PPP)a,b 14.8 17.0 14.1 13.9 12.1 10.5 Upper middle-income poverty rate ($5.5 in 2011 PPP)a,b 41.9 46.6 40.6 39.8 36.4 33.3 GHG emissions growth (mtCO2e) 1.6 -7.5 2.4 9.0 0.8 -2.9 Energy related GHG emissions (% of total) 52.9 49.2 49.8 53.5 53.6 51.9 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. a/ Calculations based on ECAPOV harmonization, using 2020-HIS.Actual data: 2020. Nowcast: 2021. Forecasts are from 2022 to 2024. b/ Projection using neutral distribution (2020) with pass-through = 0.87 based on GDP per capita in constant LCU. MPO 18 Apr 22 Part II: Selected Country Pages ●  75 COVID-19 containment measures during the first half of 2021, robust activity in the KAZAKHSTAN Key conditions and second half supported real GDP growth of challenges 4 percent for the year. Growth was driven by continued fiscal expansion, strong consumer credit Table 1 2021 Population, million 19.0 Since independence in 1991, Kazakhstan growth, and reduced COVID-19 restric- GDP, current US$ billion 202.9 has experienced rapid growth, fueled by tions. Due to a strong recovery in house- GDP per capita, current US$ 10693.5 investments in extractive industries. hold consumption, retail trade rose by 6.5 International poverty rate ($1.9) a 0.0 Growth, in turn, has reduced poverty and percent and retail loans, including mort- Lower middle-income poverty rate ($3.2) a 0.2 transformed the country into an upper- gages, by 40 percent in 2021. After con- Upper middle-income poverty rate ($5.5) a 4.6 middle-income economy. tracting by 3.4 percent in 2020, total cap- Gini index a 27.8 However, the achievement masks underly- ital investment rose modestly by 2.6 per- School enrollment, primary (% gross) b 100.3 ing vulnerabilities and the unevenness of cent, driven by solid growth in hous- b Life expectancy at birth, years 73.2 the country’s progress. Key challenges in- ing construction. Reopening the economy Total GHG Emissions (mtCO2e) 301.1 clude slow productivity growth, wealth in- has increased activity in face-to-face ser- Source: WDI, Macro Poverty Outlook, and official data. equality, rising living costs, limited job op- vices and manufacturing industries main- a/ Most recent value (2018), 2011 PPPs. portunities, and weak institutions. These ly aimed at the domestic market. b/ WDI for School enrollment (2020); Life expectancy (2019). challenges were amplified by the A sharp increase in global oil prices sub- COVID-19 pandemic and prompted the stantially improved Kazakhstan’s trade largest protests in the country’s history balance and reduced the current account Russia’s invasion of Ukraine is likely to earlier in the year. deficit to 3 percent of GDP in 2021 (from Reforms are needed to raise living stan- 3.8 percent in 2020). FDI inflows and high- reduce growth to 1.5 percent in 2022. dards and human capital, reduce corrup- er foreign borrowing by state enterprises This figure follows 4 percent growth in tion, reverse productivity stagnation, im- financed this deficit. 2021, driven by a rebounding economy, prove competition and private sector With heightened uncertainty during the consumption growth, and supportive fis- growth, and accelerate the low-carbon eco- January events and the recent plunge in nomic transition. Following the protests in the Ruble, the tenge has depreciated by cal policy. Higher food and energy prices January, which were marred by violence about 17 percent against the US Dollar. To have accelerated inflation. The poverty and attempts at destabilization, the gov- reduce tenge volatility, the central bank rate is expected to fall in 2022 but remain ernment has announced its intentions to scaled up FX interventions and increased above pre-pandemic levels. Inflation will tackle these constraints through wide- its policy rate by 2.25 p.p. to 13.5 percent in also remain elevated due to supply dis- reaching reforms. March 2022. FX reserves, however, remain comfortable at US$33.5 billion. ruptions arising from the war in Ukraine. Fiscal policy in 2021 remained accom- modative to the impact of COVID-19 on Recent developments the economy. Budgetary support measures continued for households and businesses Economic activity returned to pre-pan- facing hardship while public investment demic levels in 2021. Despite an increase in priorities shifted from pandemic response FIGURE 1 Kazakhstan / Movement in real GDP (Q4 FIGURE 2 Kazakhstan / Poverty rate $5.5/day PPP 2019=100) Index, 2019Q4=100 Percent 104 50 102 40 100 actual forecast 30 98 96 20 Real GDP, s.a. 94 Q4 2019 Real GDP 10 92 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 0 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2019 2020 2021 Sources: Statistical Office of Kazakhstan; World Bank staff estimates. Source: World Bank estimates, calculations based on ECAPOV harmonization, us- ing 2018-HBS. MPO 19 Apr 22 76  ●   World Bank ECA Economic Update Spring 2022 to recovery. Higher oil revenues helped re- a government package of social reforms. welfare and sustaining the business envi- duce the budget deficit to 3 percent of GDP The poverty rate is estimated to have de- ronment. Measures include increased so- from 4 percent in 2020. The public debt-to- creased to 12.4 percent in 2021 due to cial assistance, rental subsidies, and com- GDP ratio remained broadly unchanged at broader economic recovery. pensation for businesses affected by the 24.5 percent of GDP. January protests. At 8.7 percent year-on-year in February A small current account balance is project- 2022, inflation remained above the central ed in 2022, supported by higher oil prices bank target of 4-6 percent. Food and ener- Outlook and lower demand for imports. gy prices were the main drivers. The gov- The national poverty rate is projected to ernment established price caps on certain Spillovers from Russia’s economic collapse fall to 12.0 percent by end-2022, though food and fuel products and utility tariffs in will disrupt Kazakhstan’s supply chains this may change if inflation is higher and response to January’s mass protests. and dent its growth prospects. Real GDP growth slips further. As loan guarantees and forbearance mea- growth is expected to slow to 1.5-2.0 per- These projections bear significant down- sures continued to support households cent in 2022. Kazakhstan also relies on side risks: spillovers from sanctions that and businesses affected by the pandemic, Russia for 40 percent of its imports. Trade further weaken trade flows and investor the share of NPLs in the banking system disruptions, lower business confidence, confidence; more prolonged suspensions decreased to 3.3 percent in 2021 from 6.9 and increased currency volatility will also of Black Sea oil exports; risks of wage-price percent in 2020. Sanctions on banks and lower growth. spirals linked to economywide wage in- transaction restrictions thus far have not Growth will also be lower due to the clo- creases, and potential capital flight amidst stressed the local branches of Russian sure (due to storm damage) in March of heightened uncertainty and tighter global banks (15 percent of banking sector assets). Kazakhstan’s main oil pipeline (to Russia’s financial markets. However, vulnerabilities could emerge Black Sea), through which about 80 per- Events since January clearly urge faster from large financial outflows, sustained cent of Kazakhstan’s oil is exported. Based progress on reforms to achieve sustain- supply chain disruptions, and risks of sec- on current repair timeframes (up to a able growth and shared national prosper- ondary sanctions effects given Kaza- month), oil export volumes could fall by ity. In that regard, the authorities plan khstan’s significant trade, investment, and about 5-6 percent in 2022. to take a stronger stand against corrup- people linkages to Russia. Further exchange rate depreciation, rising tion and improve the rule of law, having The employment rate has reverted to pre- food prices, and wage increases will keep announced steps to increase competition pandemic levels, and real wages in- inflation high in 2022. Monetary policy is and the quality of human capital, and ad- creased by 5.7 percent annually in Q3 expected to remain tight in response. dress government inefficiency. 2021. In January 2022, the minimum wage Fiscal policy will continue accommodating was increased by 41 percent as part of public spending to improve household TABLE 2 Kazakhstan / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2019 2020 2021e 2022f 2023f 2024f Real GDP growth, at constant market prices 4.5 -2.5 4.0 1.8 4.0 3.5 Private Consumption 6.1 -3.8 7.0 2.7 4.2 3.7 Government Consumption 15.5 12.8 0.5 1.2 0.8 0.8 Gross Fixed Capital Investment 13.8 -0.3 1.2 0.8 4.0 3.0 Exports, Goods and Services 2.0 -12.1 -0.2 -0.4 6.2 4.5 Imports, Goods and Services 14.9 -10.7 5.9 1.2 4.9 3.4 Real GDP growth, at constant factor prices 4.5 -2.5 4.1 1.8 4.1 3.6 Agriculture -0.1 5.6 -2.4 2.5 2.8 2.9 Industry 4.1 -0.4 4.3 1.2 5.4 4.8 Services 5.2 -4.5 4.6 2.1 3.4 2.8 Inflation (Consumer Price Index) 5.3 6.8 8.0 10.5 7.2 5.5 Current Account Balance (% of GDP) -4.0 -3.7 -3.0 0.6 -0.1 -0.3 Net Foreign Direct Investment (% of GDP) 3.1 3.4 2.1 1.7 3.0 2.7 Fiscal Balance (% of GDP) -1.3 -3.3 -3.0 -2.7 -1.9 -0.8 Debt (% of GDP) 19.6 24.8 24.6 28.3 29.0 29.0 Primary Balance (% of GDP) -0.3 -2.2 -1.7 -1.6 -0.7 0.3 a,b International poverty rate ($1.9 in 2011 PPP) 0.0 0.0 0.0 0.0 0.0 0.0 Lower middle-income poverty rate ($3.2 in 2011 PPP)a,b 0.2 0.2 0.2 0.2 0.1 0.1 Upper middle-income poverty rate ($5.5 in 2011 PPP)a,b 4.0 14.2 12.4 12.0 10.3 9.2 GHG emissions growth (mtCO2e) 2.2 7.0 1.5 0.8 1.5 1.8 Energy related GHG emissions (% of total) 80.2 81.1 81.0 80.8 80.8 80.9 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. a/ Calculations based on ECAPOV harmonization, using 2018-HBS.Actual data: 2018. Nowcast: 2019-2021. Forecasts are from 2022 to 2024. b/ Projection using neutral distribution (2018) with pass-through = 0.87 based on GDP per capita in constant LCU. MPO 20 Apr 22 Part II: Selected Country Pages ●  77 could disrupt international travel. Mean- while, the Russian invasion of Ukraine and KOSOVO Key conditions and associated sanctions could generate further challenges inflationary pressure, especially for energy and food, undermining consumption. Ris- ing energy costs pressuring public finances Table 1 2021 Kosovo’s GDP grew by 9.1 percent in 2021, since late 2021, given the vulnerability of Population, million 1.8 following a contraction of 5.3 percent in aged power-generation infrastructure. GDP, current US$ billion 9.0 2020. From Q2 of 2021, vaccination accel- Under the changing external conditions, GDP per capita, current US$ 5057.7 erated, and travel resumed, bolstering eco- maintaining fiscal space to support the Upper middle-income poverty rate ($5.5)a 24.4 nomic activity. Consumption and diaspo- economy is crucial. Furthermore, Kosovo Gini index a 29.0 ra-driven service exports remain key needs to build on the recent export growth Life expectancy at birth, yearsb 72.5 growth drivers. momentum by further improving the reg- Source: WDI, Macro Poverty Outlook, and official data. Private investment contributes increasing- ulatory environment and by investing on a/ Most recent value (2017), 2011 PPPs. ly but consists mostly of construction, with productivity-enhancing human capital b/ Most recent WDI value (2019). limited productivity spillovers. Positively, and infrastructure. merchandise exports increased significant- ly from pre-pandemic levels and, though Kosovo’s economy experienced a strong still low, are an encouraging sign of private recovery in 2021, supported by a rebound sector growth. The trade deficit, however, Recent developments remains high. in domestic demand and record export Low labor force participation, especially Strong credit growth, remittances, and for- growth. Inflation also intensified, driven for women, remains a pressing constraint eign direct investment (FDI), combined by increases in import prices. Growth is to growth. Overall, 1 in 3 working-age with a direct 3.2 percent-of-GDP fiscal expected to decelerate to 3.9 percent in adults was employed before the recovery stimulus and the spillover from quasi- 2022. The medium-term outlook remains accelerated; women’s employment in- monetary measures in 2020, restored confi- creased by 14 percent, but still only 16 per- dence and boosted domestic demand, dri- positive, but prone to elevated risks; with cent adult women were employed by Q1 ving an exceptional 9.1 percent real output the war in Ukraine significantly increas- 2021. Positively, formal employment in- growth in 2021. Meanwhile, trade in- ing inflationary pressures. Further re- creased throughout 2021. creased substantially. On the production forms to enhance competitiveness would Kosovo, a Euroized economy, has a good side, services and industry contributed the track record of headline fiscal manage- most, while agriculture contributed nega- help sustain Kosovo’s export momentum. ment. However, without access to inter- tively to growth. national financial markets, concessional Until Q1 2021, labor force participa- financing remains a significant source to tion and employment increased only close the infrastructure gap. for women (under 25 especially) and GDP growth is expected to reach 3.9 per- slightly fell for men. However, tax- cent in 2022, but there are significant risks. registered employment rose by near- While the pandemic appears to recede, ly 10 percent throughout 2021. Pover- risks of new vaccine-resistant variants ty is estimated to have decreased by FIGURE 1 Kosovo / Index of merchandise exports in USD, FIGURE 2 Kosovo / Actual and projected poverty rates and 2019Q4=100 percent real GDP per capita Percent Poverty rate (%) Real GDP per capita (constant LCU) 250 70 5000 4500 60 4000 200 50 3500 40 3000 2500 150 30 2000 20 1500 1000 100 10 500 Pre-covid 5 year Exports Merchandise trend 0 0 Actual Exports Merchandise 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 50 Upper middle-income pov. rate Real GDP pc 2016Q1 2017Q1 2018Q1 2019Q1 2020Q1 2021Q1 Sources: Kosovo agency of statistics and World Bank staff calculations. Source: World Bank. Note: see Table 2. MPO 21 Apr 22 78  ●   World Bank ECA Economic Update Spring 2022 about 4 percentage points in 2021 to supporting the recovery through double- Headline inflation is expected to rise to under 20 percent. digit credit growth. 5.4 percent in 2022 but the negative im- Consumer price inflation jumped from 0.2 pact of the war in Ukraine on global trade percent in 2020 to 3.4 percent in 2021, and prices could increase inflation fur- reaching 7.5 percent in February 2022. Im- ther. As a net importer of food, agricul- port prices of energy, food and commodi- Outlook tural inputs, and energy, Kosovo is di- ties fueled inflation. rectly affected by global price surges of Manufacturing exports rose by almost As of March 2022, growth is projected to these goods, despite minor direct trade 70 percent year-on-year. Services’ exports reach 3.9 percent by year end, but there are links with Russia and Ukraine. Food and more than doubled as diaspora travel significant downside risks. While the post- energy inflation could affect the most vul- bounced back in 2021. Remittances also COVID recovery furthers economic activ- nerable households disproportionately, as increased by 26 percent y-o-y. However, ity, the consequences of the Russian inva- they devote large budget shares to these the recovery also increased import de- sion of Ukraine are still unfolding and items. Rising electricity costs might in- mand by almost 50 percent, resulting in could dampen economic prospects. crease fiscal pressures. On the other hand, a deterioration of the current account Private investment growth, from higher base metals’ export revenues could in- deficit (CAD). construction and export-related invest- crease from higher global demand. The fiscal deficit fell from 7.6 percent ment, is expected to support growth in Tax revenue collection is expected to re- of GDP in 2020 to 1.4 percent in 2021, 2022. Improved execution in public invest- main strong in 2022, however, expendi- thanks to a record 29 percent increase in ment should accelerate its recovery. How- ture should outpace revenues due to a re- tax revenues. Tax revenues were boosted ever, a positive contribution from invest- bound in capital expenditure and higher by the economic recovery, higher infla- ment hinges on the strength of diaspora current expenditures from energy subsi- tion, and formalization. Nominal current demand for real estate, a moderation in dies and social transfers. As a result, the expenditure grew by 7 percent, mostly construction input prices, and the ability of fiscal deficit is expected to widen to 2.2 due to the fiscal stimulus program. Nom- the Government to maintain current capi- percent of GDP and remain within the inal public capital expenditure increased tal budgeting against higher pressures for fiscal rule over the medium term. PPG but remains below its pre-pandemic share energy and social transfers. The current ac- debt is expected to reach 24.3 percent of of GDP. Public and publicly guaranteed count deficit is projected to exceed 9 per- GDP in 2022. (PPG) debt remained stable at 22.5 percent cent of GDP, as imports continue to rise of GDP. The financial sector strengthened, due to higher domestic demand. TABLE 2 Kosovo / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2019 2020 2021e 2022f 2023f 2024f Real GDP growth, at constant market prices 4.8 -5.3 9.1 3.9 4.3 4.2 Private Consumption 5.6 2.5 7.0 1.7 1.8 1.8 Government Consumption 10.1 2.1 0.7 2.3 6.8 3.1 Gross Fixed Capital Investment 2.9 -7.6 10.5 9.0 7.5 7.7 Exports, Goods and Services 7.6 -29.1 69.1 5.0 5.5 6.0 Imports, Goods and Services 4.5 -6.0 27.9 3.4 3.6 3.5 Inflation (Consumer Price Index) 2.7 0.2 3.4 5.4 1.6 2.2 Current Account Balance (% of GDP) -5.6 -7.0 -9.1 -9.7 -9.0 -8.0 Net Foreign Direct Investment (% of GDP) -2.7 -4.2 4.2 4.2 4.0 4.0 Fiscal Balance (% of GDP) -2.9 -7.6 -1.4 -2.2 -2.6 -2.5 Debt (% of GDP) 17.0 22.0 22.1 24.0 25.3 26.9 Primary Balance (% of GDP) -2.6 -7.1 -1.0 -1.7 -2.2 -2.2 a,b Upper middle-income poverty rate ($5.5 in 2011 PPP) 21.1 23.2 19.4 17.6 15.8 14.4 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. a/ Calculations based on ECAPOV harmonization, using 2017-HBS.Actual data: 2017. Nowcast: 2018-2021. Forecasts are from 2022 to 2024. b/ Projection using neutral distribution (2017) with pass-through = 0.7 based on GDP per capita in constant LCU. MPO 22 Apr 22 Part II: Selected Country Pages ●  79 activity. The gold sector grew by 1 per- cent, and fewer pandemic restrictions KYRGYZ Key conditions and spurred economic activity and remittance challenges inflows. However, in the first two months REPUBLIC of 2022, annual growth slowed to 2 per- cent on lower gold production and weak- The economy remains heavily dependent er services growth. on gold production (about 10 percent of The 2021 current account deficit was Table 1 2021 GDP and 35 percent of exports), remit- about 3.3 percent of GDP against a 4.8 Population, million 6.7 tances (30 percent of GDP), and foreign percent surplus in 2020. The main driver GDP, current US$ billion 8.5 aid. The country has witnessed significant was a sharper trade deficit of 24.8 percent GDP per capita, current US$ 1275.9 a political and governance changes over the of GDP, compared to 18.5 percent in 2020. International poverty rate ($1.9) 1.1 a past two years, accompanied by policy un- Exports (in US dollars) rose 40 percent Lower middle-income poverty rate ($3.2) 16.2 a 58.1 certainty. Overall, the economic situation while imports climbed 49 percent, reflect- Upper middle-income poverty rate ($5.5) a 29.0 was further complicated by security con- ing higher imports of machinery, chemi- Gini index School enrollment, primary (% gross) b 102.6 cerns arising from border conflicts. cals, and textiles; and increased food and Life expectancy at birth, years b 71.6 Strong and sustainable growth needs a fuel prices. Total GHG Emissions (mtCO2e) 10.3 larger private sector, more international Inflation increased to 11.2 percent in De- Source: WDI, Macro Poverty Outlook, and official data. trade, and a conducive macroeconomic en- cember 2021 from 9.7 percent a year ago a/ Most recent value (2020), 2011 PPPs. vironment. However, large infrastructure but has since fallen to 10.8 percent in Feb- b/ WDI for School enrollment (2020); Life expectancy gaps, the weak rule of law and governance, ruary 2022. This was due to higher food (2019). a poor business environment, onerous reg- and fuel prices which grew by 13.3 and ulations, and financially unsustainable en- 74.8 percent, respectively in 2021. ergy sector policies are constraining In response to higher inflation, the central Spillovers from Russia’s invasion of growth. The poor condition of the energy bank raised its policy rate four times, by Ukraine are expected to reverse the sector - the result of below-cost recovery a cumulative 350 basis points, in 2021 and progress made by the Kyrgyz economy in tariffs that have endured for years - and early 2022, to 8.5 percent. To mitigate in- recovering from the COVID pandemic in noncompliance with WTO and Eurasian flation risks and smooth exchange rate Economic Union regulatory standards are volatility, the central bank sold $689 mil- 2021 when annual GDP growth was 3.6 especially binding constraints. lion in foreign reserves in 2021. percent. The economy is now projected to Following Russia’s invasion of Ukraine, contract by 5 percent in 2022, and infla- the som depreciated by 23 percent against the US Dollar but has since re- tion is likely to exceed 15 percent, creat- ing significant further pressure on fiscal Recent developments gained about half of its lost value. In March, the central bank raised its policy and debt management as well as pushing The Kyrgyz economy was hit hard by the rate twice more by a total of 550 basis more people into poverty. pandemic in 2020 but began recovering in points to 14 percent. Credit growth in 2021 as GDP grew by 3.6 percent. Strong the economy remained robust at 10 per- industry and services growth helped off- cent in December 2021, although slightly set subdued agriculture and construction slower than in 2020. FIGURE 1 Kyrgyz Republic / Headline, food and fuel FIGURE 2 Kyrgyz Republic / GDP growth and poverty rate inflation Percent Poverty rate, percent Percent 100 35 15 80 30 10 60 25 20 5 40 20 15 0 0 10 -5 -20 5 -40 0 -10 2007 2009 2011 2013 2015 2017 2019 2021 e 2023 f Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Headline Food Fuel GDP growth, RHS $3.2/day PPP, LHS Source: Kyrgyz authorities. Sources: Kyrgyz authorities and World Bank staff. MPO 23 Apr 22 80  ●   World Bank ECA Economic Update Spring 2022 The government’s fiscal position improved outlook for the Kyrgyz economy, which alongside a recovering economy and a re- significantly in 2021. The deficit fell to 0.3 is projected to contract by 5 percent vival in exports. percent of GDP from 4.2 percent in 2020 in 2022. This is mainly due to a fall The fiscal deficit is expected to widen to on improved revenue collection and re- in private consumption and investment 5.3 percent of GDP in 2022 as the govern- strained public spending growth. Total spending from an anticipated 33 percent ment increases spending to offset domestic revenues increased to 31.3 percent of GDP decline in remittance inflows. The fiscal spillovers from the war in Ukraine. Expan- from 27.7 percent in 2020 on a surge in deficit is expected to again widen to 5 sions of social spending and public wages import tax receipts, rebounding domestic percent of GDP in 2022, and external are expected to help offset the impact of activity, and improved tax administration. trade is expected to shrink. Forecasts of the remittance shock and weaker economic Public spending increased marginally to weak agricultural output in 2022 and activity. The deficit is expected to narrow 34.3 percent of GDP from 33.7 percent in continued uncertainties around gold to 3 percent of GDP over 2023-24 as condi- 2020, with an increase in capital spending production will further constrain tions improve. offsetting sharply lower recurrent spend- growth. Growth is expected to recover Lower remittances, high food prices, few- ing. The fiscal improvement reduced pub- to 3.2 percent in 2023 and 4.0 percent er job opportunities domestically and lic debt to 60.3 percent of GDP, from 67.7 in 2024, assumin g a stabilization in the abroad, and economic contraction will percent at end-2020. conflict and continued public investment likely increase and deepen poverty in The COVID-19 pandemic increased the growth. These projections also assume 2022. The impact of sanctions on Russia poverty rate (US$3.2 a day, 2011 PPP) from domestic political stability and further may sever a vital lifeline for Kyrgyz 9.7 percent in 2019 to 16.2 percent in 2020. easing of pandemic conditions. Howev- households reliant on remittances from It is estimated to have slightly deteriorated er, risks remain high of the outlook fur- Russia. The government’s anti-crisis mea- further in 2021 due to higher food prices ther worsening. sures, such as increased pensions and and fewer job opportunities. Inflation will increase to about 18 percent wages for government officials and social by end-2022, from further food and fuel assistance, will partly soften the negative price increases, before moderating to 8 per- impact on the poor. cent by end-2023. The current account Outlook deficit in 2022 is projected to widen to 11 percent of GDP, reflecting drops in remit- The spillovers of Russia’s invasion of tances and gold exports. The deficit is ex- Ukraine have significantly worsened the pected to narrow over the medium-term TABLE 2 Kyrgyz Republic / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2019 2020 2021e 2022f 2023f 2024f Real GDP growth, at constant market prices 4.6 -8.4 3.6 -5.0 3.2 4.0 Private Consumption 0.8 -8.3 2.4 -5.2 2.7 3.2 Government Consumption 0.5 0.9 1.9 1.7 0.3 0.3 Gross Fixed Capital Investment 7.1 -16.2 17.9 4.1 10.8 11.5 Exports, Goods and Services 16.2 -27.3 -1.4 1.1 8.0 7.2 Imports, Goods and Services 6.1 -28.0 11.1 9.0 11.3 10.5 Real GDP growth, at constant factor prices 3.6 -8.4 3.6 -5.0 3.2 4.0 Agriculture 2.5 1.1 0.0 -2.2 3.5 2.6 Industry 6.6 -7.5 -2.8 0.4 1.7 8.0 Services 3.2 -16.4 10.2 -9.9 3.6 3.5 Inflation (Consumer Price Index) 1.1 6.3 11.9 15.2 8.0 6.0 Current Account Balance (% of GDP) -12.1 4.8 -3.3 -11.4 -10.1 -10.0 Net Foreign Direct Investment (% of GDP) 3.8 -7.5 0.7 1.3 2.5 2.2 Fiscal Balance (% of GDP) -0.5 -4.2 -0.3 -5.3 -4.4 -3.0 Debt (% of GDP) 51.6 67.7 60.3 65.2 61.3 57.9 Primary Balance (% of GDP) 0.5 -2.9 1.3 -3.6 -2.9 -1.7 a,b International poverty rate ($1.9 in 2011 PPP) 0.6 1.1 1.1 1.1 1.1 1.1 Lower middle-income poverty rate ($3.2 in 2011 PPP)a,b 9.7 16.2 18.3 28.7 27.7 26.7 Upper middle-income poverty rate ($5.5 in 2011 PPP)a,b 52.6 58.1 58.7 56.7 57.2 58.0 GHG emissions growth (mtCO2e) -6.7 -20.1 -7.2 -4.8 -1.2 -0.6 Energy related GHG emissions (% of total) 71.7 64.4 61.3 58.1 56.3 54.6 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. a/ Calculations based on ECAPOV harmonization, using 2017-KIHS and 2020-KIHS.Actual data: 2020. Nowcast: 2021. Forecasts are from 2022 to 2024. b/ Projection using point-to-point elasticity (2017-2020) with pass-through = 0.87 based on GDP per capita in constant LCU. MPO 24 Apr 22 Part II: Selected Country Pages ●  81 refugees, the impact on revenues and on social spending to mitigate rising infla- MOLDOVA Key conditions and tion, squeezing fiscal space. challenges Persistent inequality of opportunity lim- its the ability of low-income households to access public services, reducing their Table 1 2021 Population, million 2.6 Despite a solid economic performance resilience and cementing low intergen- GDP, current US$ billion 13.7 in the past two decades, the economic erational mobility. Due to the 2020 con- GDP per capita, current US$ 5199.9 model remains reliant on remittances-in- traction, poverty increased from 25.2 International poverty rate ($1.9) a 0.0 duced consumption, with an associated percent in 2019 to 26.8 percent in 2020 Lower middle-income poverty rate ($3.2) a 0.5 low productivity growth resulting from (based on the national poverty line), Upper middle-income poverty rate ($5.5) a 13.3 persistent structural and governance marking the second consecutive year in Gini index a 26.0 weaknesses, significant state enterprises which poverty increased. School enrollment, primary (% gross) b 106.3 footprint, low competition, uneven play- The government faces the challenge of b Life expectancy at birth, years 71.9 ing field, and tax distortions. The 2014 striking the balance between cyclical and Total GHG Emissions (mtCO2e) 12.6 bank fraud uncovered deep weaknesses structural problems, sustaining economic Source: WDI, Macro Poverty Outlook, and official data. in the financial sector. Extreme weather recovery with a stronger fiscal impulse a/ Most recent value (2019), 2011 PPPs. events and the propagation of economic while ensuring fiscal sustainability, and b/ WDI for School enrollment (2020); Life expectancy (2019). and financial crises from the main trad- implementing an ambitious structural re- ing partners have been a traditional risk forms program to improve competitive- for a small open economy like Moldova. ness and long-term growth. Growth is expected to be curtailed by The COVID-19 pandemic has recently al- so raised concerns about the health sys- the unfolding crisis in Ukraine despite tem’s stability. its swift recovery from COVID-19. Recent developments in Ukraine pose Recent developments Medium term growth hinges on the major threats to the economic prospects containment of the war and of the of Moldova through trade (32 percent Economic activity bounced back by 13.9 of imports and 14 percent of exports percent in 2021. A strong increase in COVID-19 pandemic, as well as a suc- are with Russia and Ukraine) and remit- wages, remittances and social transfers cessful management of the refugee crisis tances channels (70 percent of migrants contributed to private consumption and sustained fiscal support. Authorities and 25-30 percent of remittances are re- growth. Investments increased by 7 per- face policy trade-offs between the need lated to Russia and Ukraine). Key in- cent on the back of favorable monetary for mitigating shocks and the implemen- frastructure networks are primarily con- conditions. Strong domestic demand and nected to Ukraine despite recent efforts restocking after the lockdown led to sig- tation of a broad-based reforms program to better connect the country to the nificant drag on growth from net exports, to support long term growth. EU. The potential disruption in the sup- albeit a strong increase of exports due to ply of food, energy and commodity im- high yields. All economic sectors recov- ports is expected to further increase ered after a sharp contraction in 2020, with prices. The fiscal position is expected the agricultural sector leading (14.3 per- to be further weakened by inflows of cent) after the 2020 drought. FIGURE 1 Moldova / Projected macroeconomic indicators FIGURE 2 Moldova / Actual and projected poverty rates and real GDP per capita Percent of GDP Poverty rate (%) Real GDP per capita (constant LCU) 16 45 60000 12 40 50000 8 35 30 40000 4 25 0 30000 20 -4 15 20000 -8 10 10000 5 -12 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 0 0 Real GDP, % change 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 Current account balance, % GDP International poverty rate Lower middle-income pov. rate Fiscal deficit Upper middle-income pov. rate Real GDP pc Source: Author's calculations based on national statistics Source: World Bank. Notes: see Table 2. MPO 25 Apr 22 82  ●   World Bank ECA Economic Update Spring 2022 The accommodative monetary conditions of 2021, y/y. The Government almost dou- prices subside, the current account deficit throughout 2021 were reversed as infla- bled the minimum pension in 2021, in- is expected to improve. High inflationary tionary pressures began to pick up due to creasing disposable incomes for pension- pressures will persist throughout 2022 increasing global energy and food prices receiving households. However, rising en- with the inflation rate remaining well and strong domestic demand. Policy inter- ergy and food prices started affecting pur- above the upper bound of the central Bank est rate tightened to 10.5 percent from 2.5 chasing power of vulnerable households in target corridor of 5 percent (+/-1.5 percent). percent in 2021. In the first three quarters the last quarter of 2021. The fiscal deficit in the medium term is of 2021, the current account deficit almost expected to remain higher than in pre- doubled reaching 13 percent of GDP as im- Covid-19 years, as the economy will need ports expanded quicker than exports and to protect the disposable income of the remittances, financed primarily by cash Outlook population from increasing prices (par- and deposits in foreign currency. On the ticularly energy and food), support the back of higher GDP, external debt de- The unfolding war in Ukraine is expected refugees and increase investments as the creased by 4.5 percentage points to 66.1 to affect the economy through the trade ambitious reform program gains steam. percent of GDP. and remittances channels as well as prices As a result, public debt is expected to in- In 2021, health and social protection (35.4 and financial uncertainties. Even under an crease, while remaining relatively low by percent and 13 percent, y/y) were the main optimistic scenario of the resolution of the international standards. drivers of spending increase (+ 11.9 percent, conflict in Ukraine and reestablishment of Given the recovery in the labor market and y/y). Spending on non-financial assets in- the trade routes, subsiding pandemic risks, strong remittance receipts, poverty is ex- creased by 17.6 percent despite lower execu- a continuation of a broad-based govern- pected to have decreased from 15.7 percent tion of capital investments. Revenue collec- ment reform program, and sustained fiscal in 2020 to 10.8 percent in 2021, according tion rebounded strongly (+23.5 percent, y/ impulse, growth is expected to substantial- to US$5.50 PPP poverty line. Impacts of the y). The fiscal deficit, mainly financed ly decelerate to -0.4 percent in 2022. In an war in, including higher food and fuel in- through foreign debt, reached 2 percent of optimistic scenario of de-escalation of the flation, the potential for return migration GDP. Public and publicly guaranteed debt situation in Ukraine, growth is expected and lower remittances, as well as a weaker decreased to around 33 percent of GDP. rebound to 3.8 percent in 2023 and around labor market due to lower demand for ex- Employment recovered to its pre-pandem- 4.4 percent in 2024. As the economy gains ports, are forecasted to lead to a stagnation ic levels by Q4 of 2021 and wages grew steam and the trade routes are reestab- in poverty of 10.9 percent in 2022. by 13 percent in the first three quarters lished and higher global energy and food TABLE 2 Moldova / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2019 2020 2021e 2022f 2023f 2024f Real GDP growth, at constant market prices 3.7 -7.4 13.9 -0.4 2.7 4.2 Private Consumption 3.2 -8.3 15.5 0.8 3.8 4.4 Government Consumption 1.3 3.1 3.8 2.6 1.3 2.1 Gross Fixed Capital Investment 11.9 0.4 1.7 -1.0 3.7 4.3 Exports, Goods and Services 8.2 -9.6 17.5 0.8 4.1 4.3 Imports, Goods and Services 6.2 -5.0 19.2 2.0 4.6 3.9 Real GDP growth, at constant factor prices 4.0 -7.6 15.6 -0.8 2.5 4.2 Agriculture -2.3 -26.4 18.7 5.0 2.0 7.0 Industry 7.1 -4.3 5.6 3.5 4.3 5.4 Services 4.3 -4.8 19.3 -3.4 1.9 3.2 Inflation (Consumer Price Index) 4.7 4.1 5.1 18.1 6.2 4.6 Current Account Balance (% of GDP) -9.3 -7.7 -11.1 -10.4 -9.0 -8.8 Net Foreign Direct Investment (% of GDP) 4.2 1.3 1.6 0.8 1.5 2.7 Fiscal Balance (% of GDP) -1.4 -5.3 -1.9 -6.1 -4.1 -3.1 Debt (% of GDP) 27.4 36.4 32.4 36.6 36.0 35.2 Primary Balance (% of GDP) -0.7 -4.5 -1.1 -4.9 -2.9 -2.1 a,b International poverty rate ($1.9 in 2011 PPP) 0.0 0.0 0.0 0.0 0.0 Lower middle-income poverty rate ($3.2 in 2011 PPP)a,b 0.5 0.8 0.4 0.4 0.4 0.3 Upper middle-income poverty rate ($5.5 in 2011 PPP)a,b 13.3 15.7 10.8 10.9 10.0 8.6 GHG emissions growth (mtCO2e) -1.3 -9.6 6.0 -2.7 -0.7 -0.1 Energy related GHG emissions (% of total) 61.9 62.1 62.0 60.5 59.8 59.5 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. a/ Calculations based on ECAPOV harmonization, using 2019-HBS.Actual data: 2019. Nowcast: 2020-2021. Forecasts are from 2022 to 2024. b/ Projection using neutral distribution (2019) with pass-through = 0.7 based on GDP per capita in constant LCU. MPO 26 Apr 22 Part II: Selected Country Pages ●  83 taxation, and increases the net monthly minimum wage from €250 to €450. The pro- MONTENEGRO Key conditions and gram has the potential to reduce inequali- challenges ties and increase formal employment and growth over the medium-term, especially if complemented by additional structural Table 1 2021 Population, million 0.6 Montenegro’s small, open, and tourism- reforms, but also poses fiscal risks. The GDP, current US$ billion 5.6 dependent economy suffered the largest Parliament rejected several revenue mea- GDP per capita, current US$ 9011.0 contraction in Europe of -15.3 percent in sures, which will likely result in a wider- Upper middle-income poverty rate ($5.5) a 16.9 2020, reversing several years of poverty re- than-planned fiscal deficit in 2022 and the Gini index a 36.9 duction and exposing Montenegro’s acute following years. School enrollment, primary (% gross) b 101.7 vulnerabilities to external shocks. In February 2022, there was a vote of no Life expectancy at birth, years b 76.9 From 2015-19, growth averaged 4 percent, confidence in the government. A turbulent Total GHG Emissions (mtCO2e) 3.6 driven by large public investments and political environment is adding to already Source: WDI, Macro Poverty Outlook, and official data. strong growth in consumption. Over two- high uncertainty. Accelerating structural a/ Most recent value (2018), 2011 PPPs. thirds of Montenegro’s jobs are in services, reforms and fiscal prudence are needed to b/ WDI for School enrollment (2020); Life expectancy (2019). which account for over 70 percent of value mitigate increasing risks. added. The current account balance shows a large structural deficit and averaged 15 percent of GDP over 2015-19, financed by Montenegro’s economic recovery in 2021 net FDI and external debt. Montenegro’s Recent developments was robust, supported by tourism revival. net international investment position at The labor market also responded to eco- negative 170 percent of GDP in 2019 is Montenegro’s economy posted a strong re- nomic recovery and the fiscal position sig- amongst the largest in the world. Due to covery in 2021, estimated at 12.4 percent, nificantly improved. Montenegro adopted weaker adherence to fiscal plans and debt- driven primarily by a rebound in interna- financed highway construction, public tional tourism receipts recovering to 70 a landmark reform program “Europe debt peaked at 105 percent of GDP in 2020. percent of their 2019 level from just 13 per- Now” which carries many opportunities, Montenegro aspires to join the EU, but sig- cent in 2020. Tourism, employment but also significant fiscal risks. The out- nificant rule of law challenges have slowed growth, and household lending supported break of war in Ukraine is worsening the progress towards this goal and reflect a the strong private consumption rebound. key development constraint. Investments lingered driven by a slow- otherwise positive outlook. This together The economic rebound in 2021 was robust, down in public investments. with rising inflation risks will impact liv- supported by invigorating tourism. The fis- The labor market recovered as economic ing standards and poverty. cal macro-fiscal stability has been preserved activity picked up. LFS data show an in- as both the fiscal deficit and public debt crease in employment in the fourth quarter were significantly reduced. Montenegro by 20 percent compared to the first quarter. adopted a reform program “Europe Now”, Poverty (income below $5.5/day in which abolishes healthcare contributions, 2011PPP) is projected to decline from introduces personal income tax allowance, around 19.9 percent in 2020 to 16.2 percent progressive personal and corporate income in 2021. FIGURE 1 Montenegro / Real GDP growth and contributions FIGURE 2 Montenegro / Actual and projected poverty rates to real GDP growth and real GDP per capita Percent, percentage points Poverty rate (%) Real GDP per capita (constant LCU) 20 26 5500 15 24 10 5000 22 5 20 4500 0 18 -5 16 4000 -10 -15 14 3500 -20 12 2015 2016 2017 2018 2019 2020 2021e 2022f 10 3000 Final consumption Gross fixed capital formation 2012 2014 2016 2018 2020 2022 2024 Change in inventories Net exports Upper middle-income pov. rate Real GDP pc GDP growth Sources: MONSTAT, World Bank. Source: World Bank. Notes: see Table 2. MPO 27 Apr 22 84  ●   World Bank ECA Economic Update Spring 2022 In 2021, inflation averaged 2.4 percent, and The fiscal deficit fell to 2 percent of GDP The war decelerates household income peaked at 6.7 percent in February 2022, led in 2021 from 11 percent of GDP in 2020, growth particularly for those working in by food and oil prices, which constrains driven by a rebound in revenues, capital the tourism and hospitality sector. Rising purchasing power particularly for the budget underspending, and lower current energy and food prices will dispropor- poor. The financial sector has remained ro- spending. Public debt declined to 86 per- tionately hurt the poor. Poverty in 2022 is bust with outstanding loans and deposits cent of GDP. projected at 15.6 percent, though the out- reaching highs in 2021. The capital adequa- look is uncertain depending on the eco- cy was at 18.5 percent, while non-perform- nomic impacts of the conflict. ing loans increased to 6.8 percent of total Investments are expected to pick up as the loans from 5.9 percent in 2020. Outlook highway is being completed and other cap- In 2021, the current account deficit nar- ital spending increases, while private in- rowed to 9.2 percent of GDP, the lowest The outlook is fragile in an environment vestments in tourism and energy sectors since 2004. Growing by 95 percent, ex- of increasing uncertainties. The outbreak continue, but at a slower pace. As invest- ports of goods and services outpaced im- of the war in Ukraine and the associated ments resume, so will imports, which are port growth, narrowing the trade deficit developments have significantly wors- expected to remain at similar levels during to 19.5 percent of GDP. Strong net exports ened the outlook for Montenegro, reduc- 2022-24. The current account deficit is thus were supported by the tourism recovery, ing the GDP growth rate to 3.6 percent in expected to widen and remain at around metals and electricity exports, and lower 2022. The main direct transmission chan- 12 percent of GDP over the medium term. imports growth. Net remittances in- nel of the war to Montenegro’s economy The global inflationary pressures and, to a creased by 35 percent further reducing is tourism. The expected decline in lesser extent, domestic pressures from an the current account deficit which was en- tourism due to the war slows down ex- increase in wages will push inflation to an tirely financed by net FDI accounting for ports and private consumption, which is estimated 5 percent in 2022. Utmost fiscal 11.2 percent of GDP. In January 2022, in- expected to remain strong, however, due prudence is needed to return public debt ternational reserves covered 8 months of to the positive effects of higher disposable towards Montenegro’s fiscal rule of 60 per- merchandise imports. incomes and the employment recovery. cent of GDP. TABLE 2 Montenegro / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2019 2020 2021e 2022f 2023f 2024f Real GDP growth, at constant market prices 4.1 -15.3 12.4 3.6 4.7 3.7 Private Consumption 3.1 -4.6 4.3 3.9 3.6 2.8 Government Consumption 1.0 0.8 1.5 1.4 0.3 0.6 Gross Fixed Capital Investment -1.7 -12.0 -10.3 5.3 6.8 7.5 Exports, Goods and Services 5.8 -47.6 81.1 2.2 7.4 5.8 Imports, Goods and Services 2.7 -20.1 13.7 3.8 5.5 5.2 Real GDP growth, at constant factor prices 4.2 -14.4 12.4 3.6 4.7 3.7 Agriculture -2.2 1.1 -5.0 0.1 0.5 0.5 Industry 5.6 -12.0 1.0 4.0 6.0 4.0 Services 4.5 -16.9 19.0 3.8 4.7 4.0 Inflation (Consumer Price Index) 0.4 -0.3 2.4 5.0 2.3 1.6 Current Account Balance (% of GDP) -14.3 -26.1 -9.2 -12.6 -12.1 -12.0 Net Foreign Direct Investment (% of GDP) 6.2 11.2 11.2 8.1 8.7 8.7 Fiscal Balance (% of GDP) -2.7 -11.0 -2.0 -5.2 -3.0 -1.7 Debt (% of GDP) 76.5 105.3 84.9 77.4 75.2 73.1 Primary Balance (% of GDP) -0.5 -8.3 0.4 -3.4 -1.4 -0.2 a,b Upper middle-income poverty rate ($5.5 in 2011 PPP) 15.6 19.9 16.2 15.6 14.8 14.3 GHG emissions growth (mtCO2e) 5.3 -22.0 15.2 2.1 0.0 1.3 Energy related GHG emissions (% of total) 70.7 65.9 69.8 70.6 70.8 71.4 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. a/ Calculations based on ECAPOV harmonization, using 2012-SILC-C, 2015-SILC-C, and 2018-SILC-C.Actual data: 2018. Nowcast: 2019-2021. Forecasts are from 2022 to 2024. b/ Projection using point-to-point elasticity (2012-2015) with pass-through = 0.87 and, for 2022 onward, 0.5 based on GDP per capita in constant LCU, reflecting impacts of rising prices. MPO 28 Apr 22 Part II: Selected Country Pages ●  85 (GAP) may boost human capital devel- opment, accelerate the green transition NORTH Key conditions and and digitalization, helping to boost po- challenges tential growth. MACEDONIA With eroded fiscal space and rising public debt, the reform agenda in the near to Following a decade-long relative macro- medium term needs to focus on improved economic stability, in 2020 the economy targeting of crisis-related support, boost- Table 1 2021 plunged into a recession with the outbreak ing tax compliance, restructuring and Population, million 2.1 of the global pandemic. As the recovery reprioritizing spending towards the GAP, GDP, current US$ billion 13.9 took hold, on the back of buoyant domestic addressing long-term structural bottle- GDP per capita, current US$ 6696.8 and external demand, the energy crisis as necks and improving the efficiency of pub- Upper middle-income poverty rate ($5.5)a 17.9 well as the war in Ukraine in early 2022, lic investment management. The generous a 33.0 bring new challenges and seek continued fiscal transfers, untargeted subsidies, and Gini index b fiscal support despite elevated debt levels. broad tax exemptions, including frequent School enrollment, primary (% gross) 98.2 b Support measures introduced by the gov- changes of pension policy with sizeable fis- Life expectancy at birth, years 75.8 ernment (i.e., subsidies and social security cal implications are not sustainable and Total GHG Emissions (mtCO2e) 10.4 contributions to private firms and cash could derail the macroeconomic stability Source: WDI, Macro Poverty Outlook, and official data. benefits and vouchers for vulnerable peo- in the given context. a/ Most recent value (2018), 2011 PPPs. b/ WDI for School enrollment (2018); Life expectancy ple) helped alleviate the impact of the pan- (2019). demic on poverty in 2020. After an estimat- ed increase in 2020, poverty likely resumed decline in 2021 (using the upper middle in- Recent developments As the economy rebounded, the energy come class poverty line). The medium-term outlook remains pos- The real growth rebounded by 4 percent crisis and the war in Ukraine brought itive, but downside risks are elevated. in 2021, following a deep contraction new challenges. With rising public debt, The war in Ukraine, sanctions to Russia in 2020. The recovery was broad-based, the authorities need to replace Covid-19 and Belarus, prolonged supply chain driven by a boost in personal consump- support with targeted fiscal support to the disruptions, rising inflationary and min- tion, and a growing investment contri- most energy vulnerable households and imum wage pressures, wea k political bution. Exports and imports bounced stability and the energy crisis continue back, but the trade balance worsened. firms. Monetary policy needs to strike a to weigh on the outlook. Heightened po- On the production side, growth was dri- balance between supporting a fragile re- litical uncertainty, and delayed EU ac- ven by services, as the industry strug- covery amidst rising inflation. The medi- cession negotiations, may lead to weaker gled with supply-chain blockages and um-term outlook remains positive, but reform effort needed to boost potential reduced external orders. growth and consolidate public finances. The labor market witnessed a slow im- short-term risks are all tilted downside Further, tightening financial conditions provement despite government support. and intensified. globally may affect options and costs The unemployment rate decreased to 15.2 to meet financing needs. On the posi- percent at end-2021, in part due to a small tive side, the Growth Acceleration Plan increase in the employment rate (at 47.3 FIGURE 1 North Macedonia / Fiscal performance FIGURE 2 North Macedonia / Labor market indicators, 2020-21 Percent of GDP Percent of GDP Percent 70 1 60 55.9 55.7 Q4 2020 0 60 Q4 2021 -1 50 47.3 46.8 50 -2 -3 40 40 -4 30 30 -5 20 -6 20 -7 16.1 15.2 10 -8 10 0 -9 2014 2015 2016 2017 2018 2019 2020 2021 Domestic debt Foreign debt 0 Guarantees Fiscal deficit (rhs) Activity rate Emp. rate Unemp. rate Sources: North Macedonia State Statistics Office, Ministry of Finance and World Source: World Bank calculations based on LFS 2020 and 2021. Bank staff calculations. MPO 29 Apr 22 86  ●   World Bank ECA Economic Update Spring 2022 percent), but also due to a lower activity improvements in the execution rate. Cur- 2022 to alleviate the energy crisis through rate (at 55.7 percent in Q4 2021). rent spending declined as crisis-related indirect tax cuts, supplemental social bene- Banking sector performance remained sol- support decelerated. In November 2021, fits to pensioners and low-income groups, id in 2021, with the liquidity ratio at 22 per- the government declared an energy crisis and concessional credit lines to firms. The cent, and an increase of capital adequacy and transferred sizeable budget funds to fiscal deficit will remain elevated in 2022 ratio to 17.3 percent. Credit growth con- cover the loses of energy companies and with further rise in public debt projected tinued, led by FX-denominated mortgage took over the private heating company. to above 62 percent of GDP. However, the lending, while non-performing loans ratio Public and publicly guaranteed debt stood Ukraine war, if prolonged, would further stood at 3.5 percent. The inflation acceler- at 60.8 percent of GDP, while arrears in- reduce external demand, increase key ated in the second half of 2021, to reach 7.6 creased to 3.3 percent of GDP by yearend. commodity and energy prices, hamper percent in February 2022. The surge is fu- mobility, and result in investment delays. eled by energy and food price hikes, but This scenario would result in even lower spillovers to core inflation widened. While growth and fiscal revenues, as well as ris- wage growth was service sector-led in Outlook ing requests for fiscal support and a surge 2021, in February 2022, government in- in financing costs. creased the minimum wage by 18.5 per- Growth is projected to decelerate to 2.7 In the medium term, the country needs to cent and subsequently provided a tempo- percent in 2022 affected by the economic set public finances back on a sustainable rary compensation to firms through the consequences of the Russian invasion, war path and shift its focus to resolving struc- contribution subsidy. in Ukraine, and associated sanctions. The tural challenges, including low and declin- The fiscal deficit declined to 5.4 percent inflationary pressures (particularly food ing human capital, weak regulatory frame- in 2021. Yet, payment arrears increased by and energy prices) will increase the cost of works, poor competition policy and judi- 0.6 pp of GDP. Tax revenues increased living and hurt the poor despite sizeable cial independence declining productivity, along with capital spending, which saw government support adopted in March and out-migration. TABLE 2 North Macedonia / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2019 2020 2021e 2022f 2023f 2024f Real GDP growth, at constant market prices 3.9 -6.1 4.0 2.7 3.1 3.2 Private Consumption 3.7 -4.5 5.9 2.8 2.5 3.3 Government Consumption 2.5 6.4 4.1 1.0 0.3 0.2 Gross Fixed Capital Investment 8.7 -14.8 6.8 6.0 8.0 8.0 Exports, Goods and Services 8.9 -10.9 12.3 7.2 7.0 6.0 Imports, Goods and Services 9.5 -10.0 12.9 6.5 6.2 6.0 Real GDP growth, at constant factor prices 3.8 -5.2 2.5 2.7 3.1 3.2 Agriculture 0.1 -3.2 -1.2 2.5 2.0 1.5 Industry 3.4 -9.1 -2.4 3.4 4.9 5.3 Services 4.4 -3.9 4.7 2.5 2.6 2.6 Inflation (Consumer Price Index) 0.8 1.2 3.2 5.5 2.0 1.8 Current Account Balance (% of GDP) -3.3 -3.4 -3.5 -4.0 -3.9 -3.4 Net Foreign Direct Investment (% of GDP) 3.2 1.5 3.7 3.8 3.8 3.9 Fiscal Balance (% of GDP) -2.1 -8.3 -5.4 -5.3 -4.7 -3.7 Debt (% of GDP) 49.2 61.0 60.8 62.7 64.3 64.1 Primary Balance (% of GDP) -1.0 -7.1 -4.1 -4.0 -3.5 -2.5 a,b Upper middle-income poverty rate ($5.5 in 2011 PPP) 16.5 18.3 17.2 16.4 15.9 15.1 GHG emissions growth (mtCO2e) 4.7 -6.0 0.9 0.3 0.4 0.5 Energy related GHG emissions (% of total) 69.4 67.5 67.9 67.9 67.7 67.5 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. a/ Calculations based on ECAPOV harmonization, using 2018-SILC-C.Actual data: 2018. Nowcast: 2019-2021. Forecasts are from 2022 to 2024. b/ Projection using neutral distribution (2018) with pass-through = 0.87 based on GDP per capita in constant LCU. MPO 30 Apr 22 Part II: Selected Country Pages ●  87 Over the medium term, a key challenge is a tightening labor supply made more acute by POLAND Key conditions and the aging population. The recent large influx challenges ofdisplacedpeoplefrom Ukrainecouldhelp address the labor market tightness. Achiev- ing decarbonization commitments is anoth- Table 1 2021 The well-diversified Polish economy has er challenge. Institutional strengthening is Population, million 37.9 proven to be one of the most resilient in the needed for sustained and inclusive growth GDP, current US$ billion 658.1 EU, with employment growth in 2020 de- and for narrowing regional disparities. GDP per capita, current US$ 17365.9 spite a relatively small contraction in GDP International poverty rate ($1.9)a 0.4 of 2.5 percent, the first output contraction since 1991. Recent developments a 0.5 Lower middle-income poverty rate ($3.2) Upper middle-income poverty rate ($5.5) a 1.2 A sound macroeconomic framework, ef- Gini index a 30.3 fective absorption of EU investment funds, School enrollment, primary (% gross) b 97.2 a sound financial sector, better access to The economy rebounded strongly from the b 77.9 long-term credit and access to European COVID-19-related recession, with output Life expectancy at birth, years labor markets have supported long-term expanding by 5.7 percent in 2021. Poorer Total GHG Emissions (mtCO2e) 321.7 inclusive growth and poverty reduction. workers, who saw sharper income impacts Source: WDI, Macro Poverty Outlook, and official data. Strong domestic labor markets and in- during the early stages of the pandemic that a/ Most recent value (2018), 2011 PPPs. b/ Most recent WDI value (2019). creases in median and bottom 40 real in- fed into rising inequality, saw a rebound in comes have supported private consump- incomes. Even as the ample fiscal stimulus tion. With an improving business environ- provided in the wake of the crisis tapered off The Polish economy rebounded from the ment, Poland integrated well into regional in 2021, domestic demand expanded by 8.2 value chains (RVCs). Higher private in- percent, on account of robust household COVID-19 recession, expanding at its vestment, an improved innovation ecosys- consumption, a recovery in investment, and fastest pace since 2007. Easing of tem, and further upgrading of RVCs are rebuilding of inventories. COVID-related restrictions, robust in- needed to boost productivity and growth. A strong labor market supported wage vestment, and favorable labor market The full economic and social impact of growth, while high-capacity utilization COVID-19 remains uncertain as new vari- and strong corporate balance sheets sup- conditions supported the recovery. Infla- ants emerge amidst a vaccination rate of 66 ported investments. tion has accelerated markedly, fueled by percent of the adult population. Pent-up demand and continued income sharp increases in commodity prices and The unprecedented policy response to mit- growth fueled a 6.2 percent expansion in supply chain disruptions, feeding into igate the impacts of the COVID crisis and household consumption, translating into rising poverty. The war in Ukraine is inflationary pressures has narrowed avail- double-digit import growth. Robust export able fiscal space. demand from the EU supported the recov- impacting the economy, through com- Increased spending and tax expenditure ef- ery in the industrial sector and exports, modity prices and trade channels, confi- ficiency is needed to rebuild fiscal buffers, however the contribution of net exports to dence effects, and the large influx of dis- accommodate higher spending on health, growth was negative. placed Ukrainians. the green transition, and to prepare for the Inflation has accelerated markedly since growing fiscal burden arising from aging. mid-2021, to 8.5 percent in February 2022, FIGURE 1 Poland / Real GDP growth and contributions to FIGURE 2 Poland / Actual and projected poverty rates and real GDP growth real GDP per capita Percent, percentage points Poverty rate (%) Real GDP per capita (constant LCU) 15 10 70000 9 10 60000 8 7 50000 5 6 40000 5 0 30000 4 -5 3 20000 2 10000 -10 1 2000 2003 2006 2009 2012 2015 2018 2021 2024 0 0 Gov. cons. Exports GFCF 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 Inventories Private cons. Imports International poverty rate Lower middle-income pov. rate Statistical disc. GDP Upper middle-income pov. rate Real GDP pc Sources: GUS, World Bank staff calculations. Source: World Bank. Note: see Table 2. MPO 31 Apr 22 88  ●   World Bank ECA Economic Update Spring 2022 well above the upper bound of the targeted resulted in an improvement in the general requested €23.9 billion in grants and €12.1 range. Strong increases in energy and agri- government deficit to 3.5 percent of GDP in billion of preferential loans under the cultural commodities, as well as continued 2021 from 7.1 percent of GDP in 2020. “Next Generation EU”, which is expected disruptions in supply chains fueled infla- The financial sector is well capitalized and to be approved in March. tion. A fiscal package aimed at limiting in- has limited direct exposure to Russia, Rising food and electricity prices are ex- flation (Anti-inflation Shield) and consist- Ukraine, or Belarus. pected to weigh heavily on poorer seg- ing of temporary cuts to VAT rates on elec- ments, who devote 50 percent of their tricity, heat energy, natural gas and basic monthly spending on food and energy. food products, abolition of excise tax on Minimum wage growth of 7.5 percent in electricity sold to households, lowering of Outlook 2022 is expected to be outstripped by in- excise tax on motor fuels, and compensa- flationary pressures, leading to a decline tion for natural gas distributors, is expect- Economic growth is expected to decelerate in the real minimum wage in 2022. While ed to shave off 2.1 percentage points from to 3.9 percent in 2022, as high inflation, measures under the Anti-inflation Shield CPI in 2022 compared to a business-as- monetary policy tightening, negative con- will soften the household impacts, the usual scenario. fidence effects related to the war in share of the population at risk of poverty is High inflation triggered a faster than ex- Ukraine, and slowing demand in key trad- expected to remain elevated through 2022 pected normalization in the monetary pol- ing partners weigh on growth. and 2023. icy stance, with the central bank raising its The spillover from the war in Ukraine is ex- Higher import prices, and higher primary reference rate by 300 basis points since Oc- pected to be significant, with key transmis- income outflows are expected to result in a tober 2021. sion channels including forced displace- deterioration in the current account deficit Since the start of the war in Ukraine, more ment, commodity prices, trade, and confi- to 2.5 percent of GDP in 2022, with a mod- than 2.3 million displaced Ukrainians ar- dence effects. While direct economic link- erate improvement over 2023-2024 as rived in Poland. The government has re- ages outside the energy sector are limited, terms of trade improve. acted rapidly, granting displaced popula- higher energy and food prices, increased The fiscal deficit is expected to remain tions the right of temporary residence and uncertainty, and disruptions to supplies to above the medium-term budgetary objec- access to key public services (health, edu- the auto industry will weigh on growth. tive, as a result of the structural tax reform cation), social assistance, and housing. A large infrastructure and local public in- (Polish Deal) and the temporary impact of The current account recorded a 0.4 percent vestment program, including through the the Anti-inflation Shield. The fiscal cost of deficit in 2021, as exports of passenger ve- National Recovery and Resilience Plan these packages is estimated at 0.7 percent hicles were affected while high global in- (NRRP), higher spending on health, and a and 1.1 percent of GDP, respectively in termediate goods prices fueled imports. boost to consumption related to the large 2022. Furthermore, there will be additional The unwinding of the large 2020 fiscal stim- influx of displaced people are expected to public spending to manage the large influx ulus and the strong increase in tax revenues support growth. To fund its NRRP Poland of displaced people from Ukraine. TABLE 2 Poland / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2019 2020 2021e 2022f 2023f 2024f Real GDP growth, at constant market prices 4.7 -2.5 5.7 3.9 3.6 3.7 Private Consumption 3.9 -2.9 6.2 3.9 3.3 3.2 Government Consumption 6.5 4.9 3.6 2.4 2.5 2.7 Gross Fixed Capital Investment 6.1 -9.0 8.0 5.3 5.1 5.4 Exports, Goods and Services 5.2 0.1 6.0 5.5 4.2 4.5 Imports, Goods and Services 3.0 -1.2 7.0 5.6 4.0 4.3 Real GDP growth, at constant factor prices 4.6 -2.6 5.7 3.9 3.6 3.7 Agriculture -0.8 13.8 1.3 2.0 1.0 1.0 Industry 2.2 -5.2 7.0 4.6 3.3 3.3 Services 6.0 -1.8 5.3 3.6 3.8 3.9 Inflation (Consumer Price Index) 2.3 3.4 5.1 9.6 7.5 4.0 Current Account Balance (% of GDP) 0.5 2.9 -0.4 -2.5 -1.6 -1.3 Net Foreign Direct Investment (% of GDP) -2.0 -2.1 -1.2 -1.1 -0.9 -0.9 Fiscal Balance (% of GDP) -0.7 -7.1 -3.5 -3.5 -3.6 -2.9 Debt (% of GDP) 45.6 57.4 57.0 54.5 51.9 49.5 Primary Balance (% of GDP) 0.6 -5.8 -2.5 -2.0 -2.3 -1.8 a,b International poverty rate ($1.9 in 2011 PPP) 0.3 0.4 0.3 0.4 0.3 0.3 Lower middle-income poverty rate ($3.2 in 2011 PPP)a,b 0.5 0.5 0.5 0.6 0.6 0.5 Upper middle-income poverty rate ($5.5 in 2011 PPP)a,b 1.1 1.2 1.2 1.6 1.4 1.3 GHG emissions growth (mtCO2e) -5.4 -6.0 1.4 -0.2 -0.5 -0.6 Energy related GHG emissions (% of total) 87.4 87.7 87.3 87.0 86.9 86.9 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. a/ Calculations based on ECAPOV harmonization, using 2007-EU-SILC and 2018-EU-SILC.Actual data: 2018. Nowcast: 2019-2021. Forecasts are from 2022 to 2024. b/ Projection from 2019 to 2021 using point-to-point elasticity (2007-2018) with pass-through = 1 based on GDP per capita in constant LCU. Projection from 2022 based on estimates incorporating differential income growth among poorer households. MPO 32 Apr 22 Part II: Selected Country Pages ●  89 debt levels. Moreover, maximal and effec- tive absorption of the EU Multiannual Fi- ROMANIA Key conditions and nancial Framework and Next Generation challenges EU (NGEU) funds will be crucial for a sus- tainable recovery. Table 1 2021 Prior to the COVID-19 pandemic, Romania Population, million 19.2 enjoyed strong economic growth. Howev- GDP, current US$ billion 266.7 er, the pandemic exposed the vulnerabil- Recent developments GDP per capita, current US$ 13902.1 ities of the economy, including persistent International poverty rate ($1.9)a 2.4 poverty and disparities in economic op- The Romanian economy grew by 5.9 per- Lower middle-income poverty rate ($3.2) a 4.4 portunity across regions and between ur- cent in 2021, but growth decelerated in Q4 Upper middle-income poverty rate ($5.5) a 9.5 ban and rural areas, structural rigidities in (2.4 percent yoy) amid supply disruptions, Gini index a 35.1 the product and labor markets, weakness- significant pick-up in inflation and a new School enrollment, primary (% gross) b 87.5 es in fiscal policy and significant institu- COVID-19 wave. Private consumption re- b 75.5 tional constraints hindering the efficient covered strongly in 2021 (7 percent yoy) Life expectancy at birth, years use of resources. led by robust demand for durable and Total GHG Emissions (mtCO2e) 80.5 Disruptions in the global supply chain household goods. Higher prices of raw Source: WDI, Macro Poverty Outlook, and official data. from the pandemic coupled with the im- materials, however, tempered investment a/ Most recent value (2019), 2011 PPPs. b/ Most recent WDI value (2019). pact of the war in Ukraine have resulted growth (4 percent yoy). Trade volumes in rising food and energy prices. The were affected by global value chain dis- depleted real purchasing power and de- ruptions and cost-push inflation, while the Romania’s economy rebounded at 5.9 clining remittances impose a heavy bur- deterioration of the secondary income bal- den on the poor and marginalized pop- ance added to the current account pres- percent in 2021, despite supply disrup- ulation groups in Romania already dis- sures. On the supply side, growth was led tions, a significant pick-up in inflation proportionality affected by the prolonged by the ICT sector (13.4 percent yoy in 2021) and the effects of the pandemic. The pandemic. Despite the economic rebound, which benefited from increased remote economy is projected to modestly expand the share of the Romanian population liv- work needs. Industry growth decelerated ing on less than $5.5 a day at 2011 revised (5 percent yoy in 2021), as new industrial in 2022, although recession risks result- PPP prices is estimated to have declined orders declined in Q4. The economic re- ing from the Ukraine crisis are high. modestly to 10.1 percent in 2022 from 10.3 covery and labor supply constraints re- Despite some consolidation measures, percent in 2021. duced unemployment to 5.4 percent in De- the fiscal deficit will remain elevated in The key challenges in the short term are cember from 6 percent in January 2021. La- 2022, at around 6.6 percent of GDP. to contain the socio-economic effects of the bor shortages coupled with higher infla- conflict in the region and the COVID-19 tion led to wage increases, with nominal Poverty is anticipated to slightly decline crisis. Significant inflationary pressures net wages up by 7.2 percent yoy in De- to 10.1 percent in 2022. triggered a more hawkish stance from the cember 2021. Annual inflation accelerated National Bank of Romania (NBR). Once re- to 8.4 percent in January 2022 reflecting covery is firmly established, fiscal consoli- strong supply-side inflationary pressures, dation will be critical to limit increases in including recent spikes in energy prices. FIGURE 1 Romania / Real GDP growth and contributions to FIGURE 2 Romania / Actual and projected poverty rates real GDP growth and real GDP per capita Percent, percentage points Poverty rate (%) Real GDP per capita (constant LCU) 40 40 12000 30 35 10000 20 30 8000 10 25 20 6000 0 15 -10 4000 10 -20 2000 5 -30 0 0 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 Gov. cons. GFCF Private cons. International poverty rate Lower middle-income pov. rate Imports Exports GDP Upper middle-income pov. rate Real GDP pc Source: World Bank. Source: World Bank. Notes: see table 2. MPO 33 Apr 22 90  ●   World Bank ECA Economic Update Spring 2022 This prompted the NBR to further increase The fiscal deficit surged to 9.4 percent of 2026. However, low historical absorption the policy rate in mid-January and mid- GDP at the end of 2020 and remained rates reflect substantial headwinds to a February 2022 by 0.25 pp and 0.5 pp, re- high in 2021 at an estimated 7 percent on high absorption scenario. Significant infla- spectively, to 2.5 percent. Private credit the back of the COVID-19 related fiscal tionary pressures from the energy and sector growth remained high, up 15.1 per- stimulus. Higher revenues, up 17.7 per- food markets challenge the nascent recov- cent yoy in January 2022. cent yoy in 2021, supported by the eco- ery requiring a careful balancing act from An economic and employment rebound nomic recovery, offset the 8.8 percent yoy the NBR. meant that household income, in partic- increase in expenditure, but fiscal pres- A substantial reduction of the fiscal deficit ular labor income, also recovered. The sures remain significant. in 2022 is improbable, as the government Rapid Household Survey in December will have to support the economic recov- 2021 showed that most workers including ery process while also supporting macro- low-wage workers have returned to work, economic stabilization. Over the medium helping to bring household labor income Outlook term, the deficit will follow a downward close to the pre-crisis level. However, ris- trajectory but is likely to remain above 3 ing food and energy prices have depleted Romania’s economy is projected to grow percent of GDP. Renewed attention should households’ real purchasing power, espe- at 1.9 percent in 2022, with risks strongly be given to fiscal consolidation to avoid an cially among the poor and vulnerable, as tilted to the downside. The strength of the unsustainable increase in public debt over they spend nearly 65 percent of their bud- recovery will depend on the evolution of the medium term. get on these necessities. Moreover, the war new COVID-19 variants and the severity Poverty is projected to decline to the pre- in Ukraine and further disruption of the of the hostilities in the region. Romania’s crisis level by 2024. However, rising food global supply chain will continue to affect capacity to absorb the EU funds will be and energy prices, and declining remit- the economies of host countries for Ro- critical to a sustainable, green, and inclu- tance incomes could mean a longer recov- manian migrants, which will inevitably sive recovery process. According to Gov- ery process for vulnerable population seg- hamper income for Romanians at home. ernment estimations, in a scenario of 100 ments compared to others in the coming Thus, despite economic and employment percent absorption, the Resilience and Re- years. A protracted war in Ukraine may recovery, poverty is expected to have de- covery funds will, on average, add around however push growth into negative terri- clined modestly to 10.1 percent in 2022 yet one percentage point to Romania’s real tory and lead to an increase in poverty in remains above the pre-crisis level. GDP growth per year between 2022 and the short run. TABLE 2 Romania / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2019 2020 2021e 2022f 2023f 2024f Real GDP growth, at constant market prices 4.2 -3.7 5.9 1.9 4.1 4.3 Private Consumption 3.9 -5.1 7.0 3.8 6.1 6.3 Government Consumption 7.9 5.9 -2.8 1.2 4.6 5.2 Gross Fixed Capital Investment 12.9 4.1 4.0 4.7 8.1 8.2 Exports, Goods and Services 5.4 -9.4 11.1 5.9 7.0 7.3 Imports, Goods and Services 8.6 -5.2 13.7 7.0 8.2 8.4 Real GDP growth, at constant factor prices 4.0 -3.5 5.9 1.9 4.1 4.3 Agriculture -5.0 -14.9 13.5 2.8 3.9 3.9 Industry -1.3 -4.5 5.0 1.6 4.7 4.4 Services 7.9 -1.9 5.7 2.0 3.8 4.3 Inflation (Consumer Price Index) 3.8 2.6 5.1 9.8 5.3 3.2 Current Account Balance (% of GDP) -4.7 -5.0 -7.1 -7.2 -6.3 -5.7 Net Foreign Direct Investment (% of GDP) 2.2 0.9 2.3 1.8 2.3 2.3 Fiscal Balance (% of GDP) -4.4 -9.4 -7.0 -6.6 -5.3 -4.7 Debt (% of GDP) 35.3 47.4 49.4 52.0 53.9 54.1 Primary Balance (% of GDP) -3.2 -8.0 -5.4 -4.9 -3.7 -3.2 a,b International poverty rate ($1.9 in 2011 PPP) 2.4 2.7 2.6 2.6 2.5 2.3 Lower middle-income poverty rate ($3.2 in 2011 PPP)a,b 4.4 5.0 4.8 4.7 4.5 4.3 Upper middle-income poverty rate ($5.5 in 2011 PPP)a,b 9.5 10.8 10.3 10.1 9.7 9.2 GHG emissions growth (mtCO2e) -0.9 -8.7 3.2 -1.0 0.5 1.4 Energy related GHG emissions (% of total) 85.4 85.9 86.5 87.0 87.7 88.3 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. a/ Calculations based on ECAPOV harmonization, using 2007-EU-SILC and 2019-EU-SILC.Actual data: 2019. Nowcast: 2020-2021. Forecasts are from 2022 to 2024. b/ Projection based off elasticities calibrated on 2007-2019 growth periods and rapid assessment data, allowing for elasticities to vary between periods of contraction, recovery and expansion. MPO 34 Apr 22 Part II: Selected Country Pages ●  91 budget returned to a surplus of 0.8 per- cent of GDP. The current account surplus RUSSIAN Key conditions and expanded to US$120 billion – exceeding challenges its 2019 level – as commodity prices in- FEDERATION creased and outbound tourism remained muted. By the end of 2021, consumer Russia’s economic outlook has been rapid- price inflation had become a central con- ly overtaken by the fallout from its inva- cern, reaching 8.4 percent year-on-year Table 1 2021 sion of Ukraine. The strongest set of co- in December. The rise in inflation was Population, million a 144.1 ordinated economic sanctions, swiftly im- broad-based, reflecting a combination of GDP, current US$ billion 1775.9 posed, will severely impact Russia across robust demand for goods, increases in en- GNI per capita, Atlas method, current US$a 10690.0 multiple dimensions. The sanctions ergy and food prices, and global supply Lower middle-income poverty rate ($3.2) b 0.3 amount to coordinated shocks to trade, ex- bottlenecks. The banking sector proved b 2.9 ternal financing, financial intermediation, resilient during the COVID-19 pandemic, Upper middle-income poverty rate ($5.5) b and confidence. The withdrawal of many with economic recovery and credit Gini index 36.0 c foreign enterprises from the Russian mar- growth helping to improve balance sheets School enrollment, primary (% gross) 104.2 ket and a sharply deteriorated outlook will in 2021. Labor markets strengthened, too, Life expectancy at birth, yearsc 73.1 leave Russia bereft of investment, while in 2021; the unemployment rate fell to Sources: WDI, MPO, Rosstat. pressure on households from fast-rising 4.8 percent, close to its pre-pandemic low. a/ Most recent WDI value (2020). b/ Most recent value (2020), 2011 PPs. prices and declining incomes will push The official poverty rate of 11.0 percent c/ Most recent WDI value (2019). consumption lower. A deleterious effect on by end-2021 was below year-end rates in households will, at best, only be partly off- 2020 and 2019. set by domestic policy responses. However, developments in Russia took a Due to its invasion of Ukraine Russia Looking further ahead, Russia’s pre-exist- sharp turn for the worse beginning with ing challenge of raising medium-term Russia’s invasion of Ukraine. Sanctions faces the largest coordinated economic growth sufficiently to support improved imposed on Russia severely restrict ac- sanctions ever imposed on a country. living standards for its population is now cess to international capital markets, the Russia’s economy will be hit very hard, far more daunting. Yet, given the adverse capacity to conduct international transac- with a deep recession looming in 2022. shock it now faces, this challenge is all the tions, the imports of certain goods, and GDP is expected to contract by 11.2 per- more important. access to international and fiscal reserves. Several large Russian financial organiza- cent, with little recovery in the ensuing tions were sanctioned. Sanctions have two years. Households will be deeply im- materially increased risks to banks' asset pacted by the crisis, with a projected addi- Recent developments quality, solvency, funding and liquidity tional 2.6 million people falling below the profiles, while limiting the CBR’s capacity Before the invasion of Ukraine and the to absorb shocks. national poverty line. ensuing sanctions, Russia’s economy was The imposition of sanctions has led to a recovering well. Growth in 2021 reached precipitous drop in Russian asset prices 4.7 per cent, following a 2.7 percent de- and the ruble, with the latter depreciating cline in 2020. The general government by 30 percent against major currencies. In FIGURE 1 Russian Federation / Real GDP growth and FIGURE 2 Russian Federation / Actual and projected contributions to real GDP growth poverty rates and real private consumption per capita Percent, percentage points Poverty rate (%) Real private consumption per capita (constant LCU) 10 20 400000 18 350000 5 16 300000 0 14 12 250000 -5 10 200000 -10 8 150000 6 -15 100000 4 2 50000 -20 2019 2020 2021 2022 2023 2024 0 0 Consumption GFCF Inventories 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 Export Import Stat. error Lower middle-income pov. rate Upper middle-income pov. rate GDP growth Real priv. cons. pc Sources: Rosstat, World Bank. Source: World Bank. Notes: see Table 2. MPO 35 Apr 22 92  ●   World Bank ECA Economic Update Spring 2022 response, the Russian authorities doubled will impede cross-border transactions, Households are expected to be impacted interest rates, announced a Rub 1 trillion leading to delays and cancellations. by the crisis via four channels – limited fiscal package, imposed capital controls, Announced bans and reductions in pur- access to goods and services (either be- and introduced forbearance measures and chases of Russian oil and gas are expect- cause of inflation, shortages or even ra- special regulations for financial markets ed to lead to a substantial fall in ship- tioning), falling labor incomes, asset price aimed at stemming the capital flight and ments this year, while larger slump in falls, and migrant workers likely to be easing pressure on the financial system. non-energy export volumes is expected. especially affected via falling remittances. However, the current account balance is The percentage of the population with in- expected to strengthen as the fall in ex- comes below the official poverty line (ap- ports will be more than offset by a con- proximately US$ 14/day) is projected to Outlook traction in imports. High levels of capi- increase to 12.8 percent in 2022 from 11.0 tal outflows are expected from Russia this percent in 2021 (an increase of 2.6 mil- Uncertainty over the forecasts is un- year. In 2023 and 2024, GDP growth is ex- lion people). The poverty rate using the precedentedly high, conditional on pected to rebound only gradually, at 0.6 World Bank poverty line (US$ 5.5/day) is Russia’s military actions in Ukraine and 1.3 percent respectively. expected to increase from 2.0 in 2021 to and the global response. The severe Overall, consumer price inflation is expect- 2.8 percent in 2022 (an increase of above impacts of sanctions already in place ed to rise from 9 percent in 2021 to 22 per- one million people) and practically re- are expected to drive Russia’s GDP cent in 2022, and to stay well above the main there through 2024. down by 11.2 percent in 2022, largely central bank target in the projection pe- Risks are skewed to the downside, as ad- due to a contraction in domestic de- riod. A decline in economic activity and ditional rounds of sanctions could further mand. High uncertainty, depreciation, higher expenditure needs are expected to impact Russia’s outlook. A disruption in disruptions to trade and business clo- turn the general government surplus into oil or gas receipts, or more severe dys- sures are expected to result in a 17 a substantial deficit in 2022. The adverse function in domestic financial markets, percent slump in investment. A de- impact of the shock on the financial sector could push growth lower and poverty cline in employment and real wages, makes a major credit crunch likely, while rates up. Still-low COVID-19 vaccination elevated outmigration and rising costs continued pressure on the corporates and rates and the prospect of new variants re- of living will weigh on private con- banks, combined with eroded buffers, mains another source of risk. sumption, which is expected to fall by spells a heightened risk of bank failures 8.5 percent. SWIFT and FX restrictions and systemic crisis in the sector. TABLE 2 Russian Federation / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2019 2020 2021e 2022f 2023f 2024f Real GDP growth, at constant market prices 2.2 -2.7 4.7 -11.2 0.6 1.3 Private Consumption 3.8 -7.3 9.5 -8.5 0.5 1.3 Government Consumption 2.4 1.9 1.1 3.6 1.2 1.0 Gross Fixed Capital Investment 1.0 -4.4 7.0 -16.9 0.6 1.7 Exports, Goods and Services 0.7 -4.1 3.2 -30.9 -1.2 -0.9 Imports, Goods and Services 3.1 -12.1 16.7 -35.2 4.1 6.2 Real GDP growth, at constant factor prices 2.2 -2.5 4.6 -11.2 0.6 1.3 Agriculture 3.5 0.2 -1.3 1.0 1.0 1.0 Industry 1.5 -2.4 4.9 -8.8 0.5 0.9 Services 2.4 -2.7 4.8 -13.2 0.7 1.5 Inflation (Consumer Price Index) 4.5 3.4 6.7 22.0 13.0 8.0 Current Account Balance (% of GDP) 3.9 2.4 6.8 9.8 6.4 2.8 Net Foreign Direct Investment (% of GDP) 0.6 -0.2 -1.3 -7.5 -3.5 -2.8 a Fiscal Balance (% of GDP) 1.9 -4.0 0.8 -1.9 -1.8 -1.2 Debt (% of GDP) 14.3 20.0 17.9 19.8 20.3 20.6 a Primary Balance (% of GDP) 2.7 -3.2 1.7 -0.3 -0.1 0.5 Lower middle-income poverty rate ($3.2 in 2011 PPP)b,c 0.3 0.3 0.2 0.3 0.3 0.3 b,c Upper middle-income poverty rate ($5.5 in 2011 PPP) 3.0 2.9 2.0 2.8 2.8 2.6 GHG emissions growth (mtCO2e) 2.4 -3.6 1.1 -11.5 0.3 0.7 Energy related GHG emissions (% of total) 91.6 91.3 90.1 89.8 89.6 89.3 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. a/ Fiscal and Primary Balance refer to general government balances. b/ Calculations based on ECAPOV harmonization, using 2020-HBS.Actual data: 2020. Nowcast: 2021. Forecasts are from 2022 to 2024. c/ Projection using neutral distribution (2020) with pass-through = 0.87 based on private consumption per capita in constant LCU. MPO 36 Apr 22 Part II: Selected Country Pages ●  93 Key conditions and Recent developments SERBIA challenges The economy grew by 7.4 percent in 2021 pushed by the consumption, pushed by a Table 1 2021 The focus of the Government of Serbia large increase in private consumption (up Population, million 6.9 in 2020 and 2021 was on supporting the 7.6 percent in real terms y/y), thanks to a GDP, current US$ billion 63.0 economy to recover from the impact of strong increase of salaries and consump- GDP per capita, current US$ 9168.9 the COVID-19 pandemic. The Serbian tion loans. The economic recovery in 2021 Upper middle-income poverty rate ($5.5)a 10.1 government approved a robust fiscal was broad based, with the exception of the Gini index a 34.5 stimulus program in both years and as agriculture sector, where output declined School enrollment, primary (% gross) b 97.7 a result the economy experienced only a by 5.4 percent in real terms. Life expectancy at birth, years b 75.7 mild recession (of -0.9 percent) in 2020 Poverty (defined as income under $5.5/day Total GHG Emissions (mtCO2e) 62.5 and rebounded by 7.4 percent in 2021. in revised 2011 PPP) is estimated to have The impact of the program, however, declined slightly from 10.2 percent in 2020 Source: WDI, Macro Poverty Outlook, and official data. a/ Most recent value (2019), 2011 PPPs. came at considerable fiscal cost. The fiscal to 9.8 percent in 2021. The wage subsidy b/ WDI for School enrollment (2020); Life expectancy deficit reached 8.1 percent of GDP in 2020 and cash transfers to citizens in 2020 (2019). and public debt increased to around 58 helped to avert a spike in poverty. In 2021, percent of GDP. poverty reduction slowly resumed due to Over the medium term the Serbian econ- strong economic growth and improving la- The Serbian economy is recovering well omy is expected to return to the pre- bor market conditions, though partly from the impact of COVID-19 pandemic pandemic growth levels. However, Serbia countered by an output decline in agricul- by growing 7.4 percent in 2021 and still faces challenges that limit its poten- ture, rising inflation at the end of the year, tial growth both in the short and medium and the phasing out of government sup- poverty incidence declined to an estimat- to long terms. Most importantly, Serbia port programs. ed 9.8 percent. Growth is expected to de- needs to further remove bottlenecks for The labor market started improving celerate in 2022 and the risks to the private sector investment. These include throughout 2021. In Q4 of 2021, the un- growth outlook are clearly tilted to the a deteriorating governance environment, employment rate dropped to 9.8 percent. lack of infrastructure and an unreformed Wages continued to go up, increasing by downside. Poverty reduction is expected education sector, which creates skills mis- 9.6 percent in nominal terms in 2021. to stagnate in 2022 as income gains are matches in the labor market. With limited The consolidated fiscal deficit decreased weakened by rising inflation risks. space for future stimulus packages, struc- significantly in 2021 to reach an estimated tural reforms are needed to bring the 4.1 percent of GDP. Despite the fact that economy back to sustained growth, boost government expenditures increased by jobs and incomes and strengthen re- 10.1 percent (in nominal terms). Public silience to shocks. The second big chal- debt at end-December 2021 stood at 57.1 lenge is a large and still not entirely re- percent of GDP, thus only marginally de- formed SOE sector. creasing since end-2020. FIGURE 1 Serbia / Real GDP and potential growth and FIGURE 2 Serbia / Actual and projected poverty rates and contributions to potential GDP growth real GDP per capita Percent, percentage points Poverty rate (%) Real GDP per capita (constant LCU) 7 30 900000 6 800000 25 5 700000 4 20 600000 3 500000 15 2 400000 1 10 300000 0 200000 5 -1 100000 -2 0 0 2000 2003 2006 2009 2012 2015 2018 2021 2024 2012 2014 2016 2018 2020 2022 2024 TFP Capital Labour Potential Upper middle-income pov. rate Real GDP pc Source: World Bank staff calculations. Source: World Bank. Note: see Table 2. MPO 37 Apr 22 94  ●   World Bank ECA Economic Update Spring 2022 Starting in the summer, there was a grad- mind the significance of these flows, sound and viable. In addition, the gov- ual increase in inflation and the consumer growth for 2022 could be revised down- ernment should use the opening of new price index (CPI) reached 8.8 percent (y/ wards to 3.2 percent. Further revisions are chapters of the EU acquis to accelerate y) in February. Food inflation, higher than possible depending on the length of the reforms and align Serbian legal and in- in all EU countries in January 2022, hurt war and the scope of sanctions toward stitutional system to that of the EU. the poor. Household energy tariffs in Ser- Russia. Over the medium term, the econo- Poverty reduction is expected to stagnate bia are regulated and have been kept un- my is expected to grow steadily at around in 2022. The unfolding war in Ukraine changed so far despite rising energy costs. 3 percent annually. poses significant downside risk for house- The current account deficit (CAD) in- The outlook also crucially depends on hold welfare in Serbia. While Serbia’s creased to an estimated 4.4 percent of GDP the domestic reform agenda and its im- economy is expected to continue to grow, for 2021, up from 4.1 percent in 2020. plementation. The ongoing crisis in the contributing to income growth for house- domestic energy sector emphasized once holds, rising inflation will limit purchas- again the importance of improved man- ing power. Particularly rising energy agement of SOEs. In addition, contin- prices, if they are passed onto household Outlook gent liabilities could affect public fi- energy tariffs, would disproportionately nances, particularly those related to the hit the poor. Poverty in 2022 is projected The Serbian economy was expected to con- deterioration in the performance of at 9.6 percent, close to its 2021 level, tinue to grow at around 4-4.5 percent an- SOEs, as demonstrated recently by though could be revised upward depend- nually. However, the war in Ukraine and Telekom Srbija and Air Serbia. As a ing on the length and severity of the sanctions on Russia will certainly have an remedy, the government should embark war’s economic impacts. The pace of la- impact on Serbia’s exports, FDI, remit- on a comprehensive and thorough re- bor market recovery remains critical for tances and tourism revenues. Having in form of SOEs to make them financially resumed poverty reduction. TABLE 2 Serbia / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2019 2020 2021e 2022f 2023f 2024f Real GDP growth, at constant market prices 4.3 -0.9 7.4 3.2 2.7 2.8 Private Consumption 3.7 -1.9 7.6 6.1 4.2 3.7 Government Consumption 2.0 2.9 2.6 1.1 0.5 -0.6 Gross Fixed Capital Investment 17.2 -1.9 12.5 -1.0 0.3 2.1 Exports, Goods and Services 7.7 -4.2 19.4 5.4 5.2 5.4 Imports, Goods and Services 10.7 -3.6 19.3 5.7 4.8 4.7 Real GDP growth, at constant factor prices 4.4 -0.8 7.3 3.0 2.6 2.9 Agriculture -1.7 2.2 -5.4 5.7 4.5 3.4 Industry 5.9 -0.6 7.8 2.4 4.5 4.5 Services 4.4 -1.2 8.7 3.0 1.5 2.0 Inflation (Consumer Price Index) 1.9 1.6 4.0 7.0 4.0 3.7 Current Account Balance (% of GDP) -6.9 -4.1 -4.4 -6.4 -5.8 -5.1 Net Foreign Direct Investment (% of GDP) 7.7 6.3 6.8 5.8 5.9 5.9 Fiscal Balance (% of GDP) -0.2 -8.0 -4.1 -4.1 -3.0 -2.2 Debt (% of GDP) 52.8 57.8 57.2 58.2 58.9 56.8 Primary Balance (% of GDP) 1.8 -6.0 -2.4 -2.3 -1.0 -0.1 a,b Upper middle-income poverty rate ($5.5 in 2011 PPP) 10.1 10.2 9.8 9.6 9.3 9.0 GHG emissions growth (mtCO2e) -2.1 0.5 1.6 -0.4 -0.6 -0.8 Energy related GHG emissions (% of total) 75.4 75.7 76.1 76.0 75.8 75.6 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. a/ Calculations based on ECAPOV harmonization, using 2013-EU-SILC, 2017-EU-SILC, and 2019-EU-SILC.Actual data: 2019. Nowcast: 2020-2021. Forecasts are from 2022 to 2024. b/ Projection using point-to-point elasticity (2013-2017) with pass-through = 0.2 and 0.3 based on GDP per capita in constant LCU, reflecting impacts of rising prices. MPO 38 Apr 22 Part II: Selected Country Pages ●  95 recovery in remittance inflows, and a pickup in private investment and con- TAJIKISTAN Key conditions and sumption supported this rebound. challenges Tajikistan's external position improved considerably from higher export prices for metals and mineral products and remit- Table 1 2021 Tajikistan remains the poorest economy in tance inflows. The current account was in Population, million 9.8 Central Asia, with a narrow export base, surplus of about 1 percent of GDP in 2021, GDP, current US$ billion 8.7 structural bottlenecks for job creation, and compared to a surplus of 4.1 percent in GDP per capita, current US$ 896.9 high dependence on external financial aid. 2020. Precious metal exports reached $897 International poverty rate ($1.9)a 4.1 Per capita income (GNI, Atlas method) was million and were about 40 percent of total Lower middle-income poverty rate ($3.2) a 17.8 about US$1,100 in 2021–slightly above the merchandise exports. Increased remit- Upper middle-income poverty rate ($5.5) a 50.5 lower-middle-income threshold. The tances and foreign direct investment (FDI) Gini index a 34.0 poverty rate fell from 17.8 percent in 2015 inflows stimulated consumer and capital School enrollment, primary (% gross) b 100.9 to about 13.9 percent in 2021. goods imports. Higher Chinese mining b 71.1 Tajikistan's economy relies heavily on pri- sector investments doubled FDI to $62.3 Life expectancy at birth, years mary commodity production and exports, million (0.7 percent of GDP) during the Total GHG Emissions (mtCO2e) 16.9 with limited economic diversification. Do- first nine months of 2021. Strong foreign Source: WDI, Macro Poverty Outlook, and official data. mestic investment and consumption de- exchange inflows, including from the is- a/ Most recent value (2015), 2011 PPPs. b/ WDI for School enrollment (2017); Life expectancy pend heavily on migrant remittances, suance of new Special Drawing Rights (2019). which are about a third of GDP, thus leav- (SDR) by the IMF, supported a stable ex- ing the economy highly vulnerable to ex- change rate and allowed international re- ternal shocks. Sanctions on the Russian serves to grow to about 8 months of import The fallout from Russia's invasion of economy have exposed this vulnerability cover by end-2021. Ukraine will lead to an economic con- since Russia is the largest employer of Tajik After a fiscal expansion in 2020, the gov- migrant workers and is among the largest ernment began to consolidate spending in traction of about 2 percent in 2022. A trading partners. 2021. The fiscal deficit narrowed to 1.5 per- projected 40 percent fall in remittances, Reforms aimed at private sector cent of GDP from 3.1 percent in 2020. The higher food and energy prices, and fi- growth, public sector efficiency, and expiration of anti-pandemic tax reliefs, a nancial services and trade disruptions greater inclusion are vital to further rebound in economic activity, and high ex- economic development. port prices increased fiscal revenues. De- will lower household incomes and in- velopment partner loans for infrastructure crease poverty. Fiscal space, already con- projects helped bridge the fiscal gap. Al- strained by structural impediments to though a stable exchange rate and a re- private sector growth, is further limited Recent developments bounding economy helped reduce public by rising debt distress risks from a and publicly guaranteed debt to 42.9 per- Real GDP growth rebounded to about cent of GDP in 2021 (from about 50 percent weakening exchange rate. 9.2 percent in 2021, after slowing to 4.5 in 2020), Tajikistan remains at high risk of percent in 2020 due to COVID-19. A debt distress given its high vulnerability to sharp increase in precious metal exports, external shocks. FIGURE 1 Tajikistan / Fiscal balance and public debt FIGURE 2 Tajikistan / Actual and projected poverty rates and real GDP per capita Percent of GDP Percent of GDP Poverty rate (%) Real GDP per capita (constant LCU) -1.5 50 80 900 -1.7 49 800 70 -1.9 700 48 60 -2.1 600 47 50 -2.3 500 -2.5 46 40 400 -2.7 45 30 300 -2.9 44 20 200 -3.1 43 10 100 -3.3 0 0 -3.5 42 2007 2009 2011 2013 2015 2017 2019 2021 2023 2019 2020 2021 2022 2023 2024 International poverty rate Lower middle-income pov. rate Fiscal Balance (LHS) Public Debt (RHS) Upper middle-income pov. rate Real GDP pc Sources: TajStat, World Bank staff estimates. Source: World Bank. Notes: see Table 2. MPO 39 Apr 22 96  ●   World Bank ECA Economic Update Spring 2022 In response to rising food and fuel price in- poverty rate fell to 13.9 percent, and few- The poverty rate is expected to increase flation, the central bank increased its pol- er households reported cutting their food to 14.3 percent in 2022 from 13.9 percent icy rate four times from 10.75 at end-2020 consumption in 2021. in 2021, with the potential for significant to 13.25 percent by the end-2021. Never- To support the most vulnerable groups, further increases in poverty should more theless, average annual inflation rose from the government provided social assistance risks materialize. 8.6 percent in 2020 to 9 percent in 2021. to 238,000 families and provided extra one- The contraction of economic activity due Amidst lower remittances and a weaken- off emergency nutrition-sensitive transfers to the war in Ukraine and a new tax ing ruble following Russia's invasion of to over 164,000 families with children. code introduced at the beginning of the Ukraine, the authorities allowed the year are expected to lower tax revenues somoni to depreciate by 13 percent against in 2022. This, along with an anticipated the US dollar in March 2022. anti-crisis spending increase, is projected Financial sector performance improved in Outlook to increase the fiscal deficit to about 3.4 2021 - primarily due to liquidation being percent in 2022. initiated for four insolvent banks (includ- Russia's invasion of Ukraine will lead These projections are subject to substantial ing two state-owned banks). The share of to a contraction of Tajikistan's economy domestic and external downside risks. En- non-performing loans in the total lending by about 2 percent in 2022. The main during sanctions on Russia could create portfolio declined by 10 percentage points driver of this contraction is a projected significant challenges for migrant workers to 13.7 percent in 2021. 40 percent fall in remittances, which is and further reduce demand for Tajik ex- In the Fall 2021 round of the World expected to lead to sharply lower pri- ports. Other risks include the re-emer- Bank's Listening to Tajikistan survey, the vate consumption and investment. Oth- gence of new pandemic waves, new border share of households with at least one er factors, including high prices, disrup- conflicts with the Kyrgyz Republic, and labor migrant abroad went up from 29 tions to trade, and the financial system, the spillover of security risks from percent to 44 percent, remittance income are also expected to contribute to the Afghanistan. In addition, institutional from 10 percent to 18 percent, and wage contraction. High global food and fuel challenges to private sector development income from 11 percent to 21 percent prices are projected to lead to double- and job creation weigh heavily on the compared with 2020. As a result, the digit inflation in 2022. country's growth prospects. TABLE 2 Tajikistan / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2019 2020 2021e 2022f 2023f 2024f Real GDP growth, at constant market prices 7.4 4.5 9.2 -1.8 3.2 3.8 Private Consumption 7.1 -4.4 4.6 -10.0 3.0 5.0 Government Consumption 3.5 0.4 7.8 -0.4 1.3 2.9 Gross Fixed Capital Investment -6.4 -6.6 4.0 -9.7 6.7 5.5 Exports, Goods and Services 3.5 9.6 18.3 0.0 3.5 3.7 Imports, Goods and Services 2.2 -2.8 11.5 -5.0 0.2 0.5 Real GDP growth, at constant factor prices 8.7 4.3 9.0 -1.3 3.4 3.9 Agriculture 7.1 8.8 6.6 4.5 3.0 3.4 Industry 13.6 9.7 22.0 5.5 3.6 4.1 Services 4.9 -4.0 -5.2 -16.0 3.5 4.0 Inflation (Consumer Price Index) 8.0 8.6 9.0 12.6 10.0 8.5 Current Account Balance (% of GDP) -2.2 4.1 1.0 -7.7 -4.4 -2.6 Net Foreign Direct Investment (% of GDP) 2.3 0.4 0.2 0.9 1.8 2.5 Fiscal Balance (% of GDP) -2.7 -3.1 -1.5 -3.4 -2.8 -2.3 Debt (% of GDP) 43.1 49.9 42.9 45.3 44.8 43.9 Primary Balance (% of GDP) -1.7 -2.2 -0.5 -2.1 -1.4 -1.0 a,b International poverty rate ($1.9 in 2011 PPP) 3.4 3.3 3.0 3.2 3.1 3.1 Lower middle-income poverty rate ($3.2 in 2011 PPP)a,b 15.0 14.8 13.9 14.4 14.2 14.0 Upper middle-income poverty rate ($5.5 in 2011 PPP)a,b 45.1 44.5 42.7 43.7 43.4 42.9 GHG emissions growth (mtCO2e) 9.9 7.8 9.6 5.2 7.1 7.5 Energy related GHG emissions (% of total) 40.9 43.1 46.3 46.7 48.2 49.8 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. a/ Calculations based on ECAPOV harmonization, using 2007-TLSS, 2019-, and 2015-HSITAFIEN.Actual data: 2015. Nowcast: 2016-2021. Forecasts are from 2022 to 2024. b/ Projection using point-to-point elasticity (2007-2019) with pass-through = 1 based on GDP per capita in constant LCU. MPO 40 Apr 22 Part II: Selected Country Pages ●  97 The Russian invasion of Ukraine is ampli- fying the headwinds facing the Turkish TURKEY Key conditions and economy. Given Turkey’s close economic challenges ties to both Russia and Ukraine, the war is expected to disrupt Turkey’s energy and agricultural trade, tourist arrivals, and Table 1 2021 Turkey enjoyed high growth rates be- overseas construction activities. Price Population, million 84.1 tween 2002-17, which propelled the coun- spikes of essential commodity imports will GDP, current US$ billion 810.0 try to the higher reaches of upper-middle- directly affect households and industry GDP per capita, current US$ 9626.1 income status. But productivity growth and adversely impact the current account Upper middle-income poverty rate ($5.5) a 10.2 slowed as reform momentum waned over balance and inflation. Low-income house- Gini index a 41.9 the past decade and efforts turned to sup- holds in Turkey are especially affected as School enrollment, primary (% gross) b 97.1 porting growth with credit booms and they spend nearly twice as much of their Life expectancy at birth, years b 77.7 demand stimulus, exacerbating internal budgets as the wealthiest on necessities Total GHG Emissions (mtCO2e) 518.0 and external vulnerabilities. High private such as food and housing. sector debt, persistent current account Source: WDI, Macro Poverty Outlook, and official data. a/ Most recent value (2019), 2011 PPPs. deficits financed by short-term portfolio flows, high inflation, and high unemploy- Recent developments b/ Most recent WDI value (2019). ment have been exacerbated by macro- financial instability since August 2018. Turkey’s economy grew 11 percent in Moreover, the economy’s high energy Turkey’s economy grew by 11 percent 2021, the fastest among G-20 countries, and carbon intensity make it vulnerable in 2021, supported by exports and ac- to global energy supply and price volatil- celerated domestic private consumption as COVID-19 related measures were ity and pose a challenge for Turkey’s ex- as COVID-19 measures were relaxed and gradually relaxed in Turkey and abroad. porters in the context of global and re- people brought forward some consump- While Turkey’s interest rate cuts from gional decarbonization policies. tion expenditures in fear of continued September supported demand, they also Turkey’s growth accelerated to the high- price rises. Turkey’s goods and services est rate among G20 countries in 2021 as exports were supported by buoyant ex- amplified macro-financial instability, COVID-19 related measures were grad- ternal demand, sharp nominal deprecia- which, combined with spillovers from ually relaxed in Turkey and abroad and tion of the Lira, and global supply chain the Ukraine-Russia war, will lower 2022 authorities loosened monetary policy. disruptions that diverted global demand growth to 1.4 percent. Rising energy However, monetary stimulus also to Turkey. caused deteriorating macro-finance con- Total employment and labor force par- and food price inflation will hurt the ditions. The Lira depreciated to record ticipation surpassed pre-pandemic levels poor the most, compromising a gradual lows and inflation rose to record highs. in 2021. However, the recovery has been employment-driven, post-pandemic External and fiscal buffers deteriorated uneven, with those with informal work poverty recovery. as the central bank supported the Lira, arrangements still lagging. On the other and the government deployed tax rate hand, the recovery was faster for reductions and fuel subsidies to dampen women than men. Between December headline inflation. 2020 and December 2021, female labor FIGURE 1 Turkey / Real GDP growth and contributions to FIGURE 2 Turkey / Actual and projected poverty rates and real GDP growth real GDP per capita Percent, percentage points Poverty rate (%) Real GDP per capita (constant LCU) 18 30 30000 16 14 12 25 25000 10 8 20 20000 6 4 2 15 15000 0 -2 10 10000 -4 -6 5 5000 -8 -10 2010 2012 2014 2016 2018 2020 2022 2024 0 0 Private cons. Gov cons. Investment 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 Exports Imports Stocks Upper middle-income pov. rate Real GDP pc GDP Sources: Turkstat and World Bank staff calculations. Source: World Bank. Notes: see Table 2. MPO 41 Apr 22 98  ●   World Bank ECA Economic Update Spring 2022 force participation (FLFP) increased by offers an exchange rate guarantee from policy stance and high global commodity 14 percent, compared to 6 percent for the state budget. prices. In 2022 lower export growth and males– although this leaves Turkey’s The fiscal balance deteriorated in 2021 de- rising import prices are expected to widen FLFP still as the lowest among OECD spite rising revenues, as the Lira depreci- the current account deficit to 6.4 percent countries. Youth employment also recov- ation raised FX-denominated debt service of GDP. The general government deficit is ered, but 20.1 percent of youth are still costs and PPP outlays, and as government projected to widen to 5.2 percent and 5.1 unemployed. Poverty is expected to re- provided capital injections to shore up percent in 2022 and 2023, respectively, dri- treat due to the employment recovery, SOE balance sheets. The FX-protected de- ven by rising public consumption, interest but will be partially offset owing to high posit scheme also created a sizable con- expenses, and current transfers. inflation, keeping the poverty rate at tingent fiscal liability. General government Both external and domestic risks are tilted 11.3 percent in 2021. debt stock is estimated to have risen to 42.4 significantly to the downside. The Russia- Despite rising domestic inflation and percent of GDP by end-2021. However, Ukraine war has raised considerable un- tightening global monetary conditions, due to strong export growth, the current certainty around the outlook. The war Turkey’s Central Bank lowered interest account deficit narrowed to 1.8 percent of could: continue to increase commodity rates five times, by a total of 500 basis GDP in 2021, from 5 percent in 2020. Gross prices and exacerbate inflation, dispropor- points, between September 2021 and the FX reserves declined from $120bn to tionately impacting the poorest house- year-end. The move rapidly worsened $111bn in 2021 amid FX interventions. holds; undermine Turkey’s nascent macro-financial conditions and dented tourism recovery; and spill over into investor confidence. The Lira depreciat- Turkey’s financial sector by raising NPLs ed by roughly 120 percent in 2021 – in affected corporate sectors. Turkey is also the worst performance among emerging Outlook vulnerable to tightening global liquidity markets. This, coupled with rising glob- conditions, given its high external financ- al commodity prices, pushed year-on- Economic growth is expected to moderate ing requirements. The banking sector re- year CPI and PPI inflation to 54.4 per- to 1.4 percent in 2022 as macro-financial mains highly capitalized and with ade- cent and 123.8 percent, respectively, in volatility intensifies and the impacts of quate FX buffers. However, removing for- February 2022 – a two-decade high for Russia-Ukraine materialize, before return- bearance measures is likely to pressure both indices. Real interest rates moved ing to 3.2 percent and 4.0 percent in 2023 banks’ balance sheets. The slowdown in deep into negative territory and dol- and 2024, respectively. Net exports are ex- the economy and job creation in 2022, and larization accelerated. In response, the pected to drive growth in 2022, offsetting persistently high inflation mean that the authorities launched several fiscal mea- the drag from contractions in investment poverty rate is projected to reach 11 per- sures to stabilize the currency and and private consumption. Inflation is pro- cent by 2024. dampen the impact of inflation, includ- jected to accelerate further to 61 percent in ing a FX-protected deposit scheme that 2022, assuming no change in the monetary TABLE 2 Turkey / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2019 2020 2021e 2022f 2023f 2024f Real GDP growth, at constant market prices 0.9 1.8 11.0 1.4 3.2 4.0 Private Consumption 1.5 3.2 15.1 -1.5 2.6 3.5 Government Consumption 4.1 2.2 2.1 3.6 3.9 2.0 Gross Fixed Capital Investment -12.4 7.2 6.4 -5.6 2.4 5.8 Exports, Goods and Services 4.6 -14.8 24.9 4.7 6.0 7.0 Imports, Goods and Services -5.4 7.6 2.0 -2.5 5.0 7.3 Real GDP growth, at constant factor prices 1.0 1.1 11.5 1.4 3.2 4.0 Agriculture 3.3 5.9 -2.2 1.0 2.0 2.0 Industry -2.9 1.0 12.5 2.0 3.5 4.8 Services 2.7 0.6 12.7 1.1 3.2 3.8 Inflation (Consumer Price Index) 15.2 12.3 19.6 61.0 27.0 20.0 Current Account Balance (% of GDP) 0.7 -4.9 -1.8 -6.4 -5.0 -3.4 Net Foreign Direct Investment (% of GDP) 0.9 0.6 1.0 1.0 1.0 1.2 Fiscal Balance (% of GDP) -3.0 -3.9 -3.1 -5.2 -5.1 -3.7 Debt (% of GDP) 32.7 39.8 42.4 44.5 43.0 40.3 Primary Balance (% of GDP) -0.5 -1.1 -0.1 -1.4 -1.2 -0.1 a,b Upper middle-income poverty rate ($5.5 in 2011 PPP) 10.2 12.2 11.3 11.3 11.2 11.0 GHG emissions growth (mtCO2e) 1.8 0.3 7.1 0.4 1.9 2.5 Energy related GHG emissions (% of total) 80.3 79.6 78.8 78.6 78.7 78.7 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. a/ Calculations based on ECAPOV harmonization, using 2011-HICES and 2019-HICES.Actual data: 2019. Nowcast: 2020-2021. Forecasts are from 2022 to 2024. b/ Projection using point-to-point elasticity (2011-2019) with pass-through = 1 based on GDP per capita in constant LCU. MPO 42 Apr 22 Part II: Selected Country Pages ●  99 Critical priorities in the near-term remain macroeconomic stability, provision of es- UKRAINE Key conditions and sential public services and humanitarian challenges relief. Over the medium-term, the damage to productive and export capacity and loss of human capital are expected to have last- Table 1 2021 Ukraine’s economy had weathered the ing economic and social repercussions. A Population, million 42.2 COVID-19 pandemic better than antic- major reconstruction effort will be neces- GDP, current US$ billion 200.1 ipated thanks to earlier reforms that sary, complemented by institutional, struc- GDP per capita, current US$ 4741,7 strengthened macro-fiscal and financial tural and financial sector reforms to sup- School enrollment, primary (% gross)a 99.0 fundamentals. Fiscal financing needs port private sector-led growth, but is con- Life expectancy at birth, years a 71.8 were managed through anchoring to the tingent on substantial external financing Total GHG Emissions (mtCO2e) 237.2 IFIs’ financing programs and access to on concessional terms (which will also aid Source: WDI, Macro Poverty Outlook, and official data. external markets. Although some re- fiscal sustainability). Absent this, the re- a/ Most recent WDI value (2019). forms, including banking and SOEs, were covery would be even more protracted and incomplete and potential growth re- likely to be characterized by continued mained low due to demographic head- hardship and migrant outflows. winds, low productivity and investment rates, the historic opening of agricultural land markets in mid-2021 held the promise of unleashing stronger growth in Recent developments The Russian invasion is taking a severe the agricultural sector that already con- economic and humanitarian toll, reflected tributed 40 percent of export earnings The economy expanded by 3.4 percent in in fiscal financing pressures, disruptions and one-fifth of GDP. 2021 as easing COVID restrictions sup- Following the Russian invasion on Febru- ported domestic demand, and a bumper to trade, the displacement of millions, and ary 24, 2022, Ukraine has suffered a mas- harvest offset d rags from higher global heavy infrastructure damage with poten- sive economic and humanitarian crisis. As energy prices and a faster fiscal consol- tially long-lasting macroeconomic and so- of March 31, 4mn people had become idation. The external position was rel- cial repercussions. A 45 percent GDP refugees, and 6.5mn displaced internally. atively robust, with gross reserves at With food insecurity increasing, the Gov- US$30.9 bn, and a small current account contraction is anticipated in 2022 and a ernment banned the export of grains and deficit of 1.1 percent of GDP. This re- weak recovery thereafter. Depending on other staples. To support the economy and covery was upended by the onset of war the war’s duration, the share of the popu- ease pressures on FX reserves and banks, it in February 2022, which has fully dis- lation living below the actual Subsistence imposed an emergency (including capital rupted maritime trade (this amounted to controls and banking sector restrictions) half of the total trade and 90 percent of Minimum may reach 70 percent in 2022. and announced tax deferrals, while fully grain trade), heavily damaged critical in- meeting domestic and external debt oblig- frastructure and triggered a massive dis- ations. These measures have helped to pre- placement of people. vent a macro-fiscal and financial collapse Access to external capital markets remains during wartime. closed, with Eurobond spreads peaking at FIGURE 1 Ukraine / EMBI bond spreads FIGURE 2 Ukraine / Number of persons displaced and in need of humanitarian assistance Percent Millions 60 14 12 12 50 10 40 8 6.5 30 6 4 20 4 10 2 0 0 Refugees Internally displaced Needing humanitarian Jan-20 May-20 Sep-20 Jan-21 May-21 Sep-21 Jan-22 aid Source: Bloomberg. Latest data point from March 30, 2022. Source: UNOCHA and UNHCR. Latest data point from March 30, 2022. MPO 1 Apr 22 100  ●   World Bank ECA Economic Update Spring 2022 over 50 percent in early March. A large fis- prices and the introduction of price caps After a significant widening, the non-pri- cal financing gap has opened amid a rapid- on essential consumer goods may restrain mary fiscal deficit is expected to narrow ly widening fiscal deficit (due to growing inflationary pressures in the short term. over the medium term as gradual fis- spending needs and declining revenues) cal consolidation and cuts to non-essen- and large debt repayments. Tax revenues tial spending offset increased public in- are expected to drop sharply due to the vestment. The CA should remain con- economic impacts of the war, as well as tax Outlook strained by sizable domestic import com- deferrals announced for key business, land pression in the near term but will widen and municipal taxes and the shift to a 2 Projections, given the ongoing conflict, in 2023 and 2024 due to reconstruction- percent turnover tax. In response, interna- are subject to great uncertainty and related investment imports (amid domes- tional partners have provided substantial large downside risks. In the baseline, as- tic supply constraints). funding through grants, loan guarantees, suming that war continues for several The poverty and social impacts of the and currency swap lines alongside major more months (albeit remains contained war will be massive. Simulations using financing packages by the IMF, EU, World to the geographical areas where it is the most recent macroeconomic projection Bank and some bilaterals. Bond spreads currently occurring), a 45 percent GDP show that the share of the population have since dropped 15 percentage points contraction is anticipated in 2022. This with incomes below the actual Subsis- to just above 30 percent. is predicated on massive declines in im- tence Minimum (the national poverty Compared to the 2014-15 crisis, the bank- ports and exports given trade disrup- line) may reach 70 percent in 2022, up ing system is more resilient but faces tions, a collapse in public and private from 18 percent in 2021. In the absence heightened operational, liquidity and sol- investments and a large drop in house- of a massive post-war support package, vency risks. In addition to capital and ex- hold spending reflecting the large dis- this indicator would still be higher than change controls, the central bank has es- placements of people, loss of incomes 60 percent by 2025. Based on the interna- tablished a new liquidity facility and in- and livelihoods. In coming years, a ma- tional upper middle-income poverty line troduced regulatory forbearance measures jor reconstruction effort is expected to (US$5.5 a day), poverty is projected to in- to support financial stability. FX reserves push growth to over 7 percent by 2025 crease to 19.8 percent in 2022, up from stood at US$27.5 bn (3.8 months of current amid a slow restoration of productive 1.8 percent in 2021, with an additional imports as of March 1). Inflation was stable and export capacity and gradual return 59 percent of people being vulnerable to at an average of 10 percent in the 8 months of refugees. Still, by 2025, GDP will be a falling into poverty. leading up to the war; regulated utilities third less than its pre-war level in 2021. TABLE 2 Ukraine / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2019 2020 2021e 2022f 2023f 2024f Real GDP growth, at constant market prices 3.2 -3.8 3.4 -45.1 2.1 5.8 Private Consumption 10.9 1.7 7.7 -50.0 2.5 2.9 Government Consumption -13.6 -0.7 1.8 -10.0 3.0 2.0 Gross Fixed Capital Investment 11.7 -21.3 7.6 -57.5 68.5 34.3 Exports, Goods and Services 7.3 -5.8 -10.4 -80.0 30.0 35.0 Imports, Goods and Services 5.7 -6.4 12.7 -70.0 42.0 24.0 Inflation (Consumer Price Index) 4.1 5.0 10.0 15.0 19.0 8.4 Current Account Balance (% of GDP) -2.7 3.4 -1.1 -6.8 -16.8 -15.3 a Fiscal Balance (% of GDP) -2.1 -5.6 -4.0 -17.5 -21.6 -14.6 Debt (% of GDP) 50.2 60.4 50.7 90.7 .. .. a Primary Balance (% of GDP) 1.0 -2.7 -0.5 -13.8 -16.6 -12.8 b,c Upper middle-income poverty rate ($5.5 in 2011 PPP) 2.5 2.5 1.8 19.8 18.5 17.1 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. Note: Projections are as of March 28, 2022. a/ Fiscal Balance and Primary Balance are non-military balances from 2022 to 2024. b/ Calculations based on ECAPOV harmonization, using 2020-HLCS. c/ Projection using neutral distribution (2020) with pass-through = 0.87 based on private consumption per capita in constant LCU. Actual data: 2020. Nowcast: 2021. Forecasts are from 2022 to 2024. MPO 2 Apr 22 Part II: Selected Country Pages ●  101 Imports grew by 20 percent in 2021 from higher consumer demand and a resump- UZBEKISTAN Key conditions and tion of capital imports after a pandemic-in- challenges duced slowdown. Exports grew by 10 per- cent but were still below pre-pandemic levels, as demand remained weak in major Table 1 2021 After a wave of trade and price liberaliza- trading partners (Russia, Kazakhstan). Re- Population, million 34.9 tion reforms, the focus of reforms is shift- mittance inflows recovered, but only par- GDP, current US$ billion 69.2 ing to deeper structural constraints such as tially offset a large fall in gold sales (by GDP per capita, current US$ 1983.2 weak factor markets and dominant public 29 percent), leading to a wider current ac- School enrollment, primary (% gross)a 100.1 enterprises. These reforms are needed to count deficit of 6.6 percent of GDP in 2021, Life expectancy at birth, years a 71.7 create a larger and more competitive pri- against 5 percent in 2020. Total GHG Emissions (mtCO2e) 259.5 vate sector, which is key to addressing the The fiscal deficit increased to 6.2 percent of Source: WDI, Macro Poverty Outlook, and official data. economy’s legacy of state-led growth with GDP in 2021 from 4.5 percent in 2020, as a/ WDI for School enrollment (2020); Life expectancy weak job creation. expanded social assistance coverage and (2019). The government recognizes the need for a higher health and education spending off- more inclusive transition. About 7.5 per- set lower policy lending and higher tax cent of citizens lived below the World revenues from a rebounding economy. The Russia’s invasion of Ukraine will slow Bank’s lower-middle-income poverty line fiscal deficit was financed almost entirely Uzbekistan’s growth to 3.6 percent in in 2021. Many more live close to this line through new external debt, though the and are at high risk of poverty. One in government remained within its annual 2022, due to a halving of remittances, six households has a member working ceiling on new debt of $5.5 billion. Despite record global oil and food prices, trade, abroad, mostly in Russia. Reforms to ex- the drop in gold sales, international re- investment, and banking disruptions, and pand social assistance started during the serves increased by $0.2 billion in 2021 to the return of migrant workers. More so- COVID-19 pandemic will serve as an effec- about 51 percent of GDP. cial protection and labor market programs tive platform to expand safety nets and la- Inflation continued falling, averaging at bor market support programs to prevent 10.8 percent in 2021 (against 12.9 percent are needed to prevent increases in pover- a sharp rise in poverty—and enable struc- in 2020). Average annual inflation ty. Higher commodity revenues and lower tural reforms to continue. reached 9.8 percent at end-February 2022, public investment spending will create the first reversion to single-digits since fiscal space and, with tighter monetary 2017. Higher domestic and global food prices and shipping costs continued to policy, support macroeconomic stability. Recent developments drive inflation. In the three weeks fol- lowing Russia’s invasion of Ukraine, and Uzbekistan’s economy grew by 7.4 percent amidst lower remittance inflows and in 2021. Strong industrial and services heightened uncertainties, the som depre- growth helped temper still weak agricultur- ciated by about 6 percent against the US al growth. Robust household income and dollar. In mid-March 2022, in response investment growth and continued anti-cri- to exchange rate pressures and an un- sis fiscal support also supported growth. certain inflation outlook, the central bank FIGURE 1 Uzbekistan / GDP growth, inflation, FIGURE 2 Uzbekistan / Poverty, GDP per capita, and small unemployment business development Percent GDP per capita, US$ Percent 20 65.3 70 17.5 2,500 62.4 56.0 55.7 54.9 60 2,000 15 13.9 14.5 1,983 50 1,917 12.9 1,784 1,750 1,500 1,597 40 10.8 9.3 30 10 9.0 9.0 1,000 10.5 9.6 20 500 7.4 10 5 11.9 11.4 11 11.5 11 5.4 5.7 4.4 0 0 1.9 2017 2018 2019 2020 2021 0 Small business, % of GDP 2017 2018 2019 2020 2021 GDP per capita, US$, lhs GDP growth CPI inflation Unemployment rate National poverty rate, % of population, rhs Source: Uzbekistan official statistics. Source: Uzbekistan official statistics. MPO 45 Apr 22 102  ●   World Bank ECA Economic Update Spring 2022 (CBU) increased its policy rate by 300 ba- Higher revenues from commodity exports sis points to 17 percent. and privatization receipts and slower A reduction in subsidized lending and Outlook public investment spending are likely to high real interest rates slowed credit offset higher social spending to support growth to 18 percent in 2021 from 31 Russia’s invasion of Ukraine will slow remittance-dependent households and percent in 2020. Portfolio growth and growth to 3.6 percent in 2022, compared prevent an anticipated sharp rise in stronger risk regulations reduced the to pre-crisis estimates of about 6 per- poverty levels from falling remittances banking sector’s total capital adequacy ra- cent. An anticipated 50 percent fall in and the return of potentially large num- tio to 17.5 percent at end-2021 from 18.4 remittances (from a weaker ruble and bers of displaced migrant workers. As a percent at end-2020. the collapse of Russia’s economy) and result, the overall fiscal deficit is expected The banking system remains resilient, but higher oil, wheat, and cooking oil prices to fall to 4 percent of GDP in 2022. An non-performing loans rose from about 1-3 will sharply lower private consumption. anticipated fiscal consolidation by 2023 is percent of total loans between 2018 and Investment growth is also expected to now likely to be delayed. The govern- 2020 to 5.2 percent at end 2021—a result slow given the heavy reliance on Russ- ment is expected to continue adhering to of the pandemic. Capital and liquidity ian capital imports and bank financing its overall debt limits, and public debt is buffers remain above regulatory mini- for public and private investment pro- expected to peak at 42 percent of GDP in mums but could be tested as further effects jects. Although Uzbekistan will benefit 2022-23 and stabilize at about 40 percent of the pandemic, the war in Ukraine, and from high global commodity prices of GDP by end-2024. strong credit growth in recent years (gold, copper, and natural gas), an es- These projections remain subject to signif- emerge. To reduce banking dollarization, timated 6 percent of GDP fall in remit- icant further downside revisions depend- the CBU increased minimum reserves for tances will widen the current account ing on the duration of sanctions on Russia, foreign currency deposits from 14 to 18 deficit to 10 percent of GDP in 2022. potential global financial spillovers from percent in August 2021. With foreign investments from Russia US interest rate changes, further The unemployment rate declined to 9.6 expected to fall, FDI inflows will be sub- COVID-19 waves, and the impact of trade percent in 2021 from 10.5 percent in 2020. dued in 2022 and take time to recover. and logistics disruptions to Uzbekistan’s Employment has not yet returned to pre- As a result, the higher current account supply chains. pandemic levels and unemployment re- deficit is expected to be financed by new mains high for women and youth. public debt and the use of reserves. TABLE 2 Uzbekistan / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2019 2020 2021e 2022f 2023f 2024f Real GDP growth, at constant market prices 5.7 1.9 7.4 3.6 5.3 5.5 Private Consumption 5.3 0.1 7.1 0.6 2.9 3.2 Government Consumption 5.7 1.4 1.1 15.8 2.5 4.5 Gross Fixed Capital Investment 38.1 -4.4 5.2 -0.4 7.1 7.2 Exports, Goods and Services 16.2 -20.0 4.8 13.1 13.8 15.1 Imports, Goods and Services 13.3 -15.0 5.8 1.0 8.9 11.1 Real GDP growth, at constant factor prices 5.7 1.9 7.4 3.6 5.3 5.5 Agriculture 3.1 2.9 4.0 3.7 3.6 3.9 Industry 8.3 2.5 8.3 3.9 6.4 6.7 Services 5.6 0.9 9.0 3.3 5.6 5.7 Inflation (Consumer Price Index) 14.5 12.9 10.8 11.9 10.6 9.0 Current Account Balance (% of GDP) -5.8 -5.0 -6.6 -10.2 -7.1 -5.7 Fiscal Balance (% of GDP) -3.9 -4.5 -6.2 -4.0 -2.9 -2.5 Debt (% of GDP) 29.7 39.0 38.1 42.0 42.1 40.3 Primary Balance (% of GDP) -3.4 -3.4 -5.0 -2.8 -1.7 -1.3 GHG emissions growth (mtCO2e) 0.4 -3.3 3.6 2.0 2.8 3.0 Energy related GHG emissions (% of total) 51.1 48.6 49.8 50.2 50.9 51.7 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. MPO 46 Apr 22