The G20 finance ministers and central bank governors, who met in Turkey, emphasized the role of fiscal policy in building confidence and supporting domestic demand. They said that it’s important for G20 leaders to account for near-term economic conditions. Member nations should be flexible in devising policies that not only support their economies and create employment, but also improve their fiscal deficits.
The recent fall in crude oil prices hurt commodity and energy-related ETFs—like the United States Oil Fund, LP (USO), the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), and the VanEck Vectors Oil Services ETF (OIH). Stocks—like ExxonMobil (XOM), Chevron (CVX), and BP Plc (BP)—were also hit.
However, it provides governments, especially those of emerging countries, an opportunity to straighten out their financial situation. These governments are expected to effect a lesser pass through of falling crude oil prices to their consumers than governments in developed markets.
Energy subsidies should reduce
Governments in emerging countries can use this opportunity to reduce energy subsidies that are a drag on government finances. This can help control government expenditure. It will be favorably for its fiscal deficit.
An example is India. In India, both gasoline and diesel prices have been deregulated. While gasoline deregulation has been in place since June 2010, the present government used the fall in crude oil prices as an opportunity to deregulate diesel—since October 18, 2014.
Governments can use the saved money to invest more—especially in infrastructure. Private enterprise is limited to small and medium infrastructure projects. In contrast, government involvement is crucial to large and long-term infrastructure projects. The fall in crude oil price gives emerging countries’ governments the option to use some of the fall in increasing investment. They can use it in public welfare schemes and infrastructure projects with limited or no additional burden on their finances.
In the next part of this series, we’ll explore structural reforms and why they’re important.