Higher Wheat Prices: Need to Cushion the Effect on the Poor, A Commentary by Masood Ahmed, Director, Middle East and Central Asia Department, International Monetary Fund

October 26, 2010

A Commentary by Masood Ahmed, Director, Middle East and Central Asia Department, International Monetary Fund

Published on www.bahdja.com, October 22, 2010, and www.morrocoboard.com, October 26, 2010

From a global perspective, the recent increase in international wheat prices is not likely to leave much of a mark. Prices remain well below their 2008 levels, despite having jumped by almost 85 percent in the two months through early August. The spike was driven by weather-related supply shocks in the key wheat exporters Russia, Kazakhstan, and Ukraine, which account for 15 percent of global production. The projected decline in global wheat production resulting from these shocks is just over 5 percent in 2010—the largest drop in the past 15 years, but within the range of historical experience. Moreover, wheat production should recover quickly in 2011, assuming normal weather conditions. Indeed, markets expect no further price increases, as evidenced by prices for wheat futures. And spillovers to other food commodities are projected to be limited, considering the temporary nature of the wheat price shock, buoyant harvests in other major crops, and stable energy prices.

While this global outlook gives comfort, a few MENA countries that rely heavily on wheat imports, higher international prices will face higher import bills. Algeria and Yemen are the two countries expected to face the highest increase in their wheat import bill—of up to ½ percent of GDP during the second half of 2010. In Egypt—one of the largest wheat importers in the world—and Iraq, existing stocks will be used help to temporarily cushion the immediate impact on import costs.

The impact of higher wheat prices on the population can be significant in some MENA countries, given the importance of wheat for consumption. To the extent that international prices are passed on domestically, poor households that rely heavily on wheat and wheat-related products will undoubtedly carry the brunt of this. And the impact could be long-lasting, as international wheat prices are not projected to decline in the foreseeable future. The main policy challenge therefore is to cushion the adverse impact on low-income groups. Ideally, governments should use direct transfers to the affected people to help deal with higher food prices, but in cases where social safety nets are not well developed, temporary food subsidies or reductions in import tariffs can also help.

Algeria, Bahrain, Egypt, Iraq, Jordan, Kuwait, Morocco, Saudi Arabia, and Syria have some food- or wheat-related subsidies in place, but no change in response to the increase in international wheat prices has been announced. Morocco has temporarily suspended import tariffs for wheat. The additional fiscal burden of higher wheat prices, while manageable in most countries, may require prioritizing public spending and better revenue efforts to maintain deficits within target in countries with limited fiscal space.

Subsidies, combined with the fact that wheat makes up only a small share of the consumption basket in most countries, suggests that the impact on headline inflation should be limited, though possible spillover effects onto other components of the consumer price index should not be ruled out. However, there are a few countries where wheat is an important item in the consumption basket. For example, in Yemen and Sudan, wheat makes up around 10 percent of household expenditure and, thus, the consumer price index. Wheat is also an important element of the consumer price index in Algeria but, there, the impact may be cushioned by subsidies. Egypt, Lebanon, and Syria have administered prices for wheat or wheat-related products but, so far, none has decided to raise the administered price, so that there would not be an immediate impact on headline inflation. However, Lebanon has allowed an indirect price increase through lowering the weight of bread loafs. In the months ahead, central banks need to monitor closely that the one-off increase in wheat prices does not entail a ratcheting up of inflation.


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