business activity was also dampened by the sharp appreciation of the U.S. dollar, which adversely affected manufacturing exports and profits.

# **4. What was the policy response in oil exporters and oil importers?**

The sharp oil price decline elicited widely different monetary, fiscal, and structural policy responses in oil-exporting and oil-importing economies. Monetary policy and fiscal policy were nearly universally tightened among oil-exporting EMDEs, while the policy response in oil importers was varied. Among oil-exporting EMDEs, those with flexible exchange rates or lowerthan-average reliance on oil for government revenue experienced less abrupt deterioration in fiscal balances than those with fixed exchange rates or higher-than-average reliance on oil revenues. The oil price plunge encouraged reforms in a number of oil exporters, but more efforts are required to meet diversification needs and reinforce fiscal and monetary policy frameworks. Although some oil-importing EMDEs took advantage of the period of depressed oil prices to reform energy subsidies, there has been no noticeable improvement in fiscal sustainability since 2014.

## **4.1 Policy response in oil exporters**

## **Monetary policy**

Many oil-exporting EMDEs experienced either sharp currency depreciations or rapid declines in foreign exchange reserves in 2014–16. Countries with floating exchange rate regimes were better able to stabilize reserves, but generally suffered sharper initial depreciations (Figure 8). Monetary authorities in several countries intervened in foreign exchange markets to support their currencies (e.g., Angola, Azerbaijan, Bolivia, Kazakhstan, Malaysia, Nigeria, Russia, Sudan, Turkmenistan), while many raised policy interest rates to contain inflation amid large currency depreciations (e.g., Angola, Azerbaijan, Colombia, Ghana, Kazakhstan, Nigeria, Russia, Trinidad and Tobago) or to support currency pegs (e.g., Bahrain, Kuwait, the United Arab Emirates).

The erosion of foreign exchange reserves forced some currency devaluations and encouraged a shift to more flexible exchange rate regimes in a number of countries (e.g., Azerbaijan, Nigeria, Russia). In contrast, GCC countries used their large supply of reserves to maintain currency pegs, despite intermittent exchange rate pressures (World Bank 2016c).

Central banks in oil-exporting EMDEs also took steps to mitigate tightening banking sector liquidity. In some countries, sovereign wealth and pension funds were used to reduce liquidity pressures in the banking sector (e.g., Azerbaijan, Kazakhstan; Sommer et al. 2016).

In oil-exporting advanced economies, Canada and Norway, inflation remained better anchored than in EMDEs. In light of weakened growth prospects, monetary authorities in these countries were able to pursue accommodative monetary policy—each lowered policy rates two times during 2015—as a complement to an easing fiscal stance.

## **Fiscal policy**

Many oil-exporting EMDEs undertook fiscal consolidation measures to realign spending with revenues despite rising economic slack and diminishing long-term growth prospects (e.g., Algeria, Angola, Azerbaijan, Iraq, the Islamic Republic of Iran, Kuwait, Nigeria, Russia, Saudi Arabia, the 9