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IMFSurvey Magazine: In the News

IMF Works With Vulnerable States on Food Price Policies

Wheat harvest in Amritsar, India: The impact of food price increases on the most vulnerable populations, notably the urban poor, can have significant social implications. (photo: Narinder Nanu/AFP)

HIGH COMMODITY PRICES

IMF Works With Vulnerable States on Food Price Policies

IMF Survey online

April 28, 2008

  • IMF studies impact of high food prices on budgets, balance of payments, income
  • Some African states seek extra financing to cover higher food import costs
  • Targeted social assistance, lower taxes on food are among policies under discussion

The IMF is working with vulnerable member countries to assess the fiscal, balance-of-payments, and income effects of higher food prices and of higher commodity prices more generally.

Several countries have asked for extra financial support to cover higher food import costs, and an IMF mission will shortly travel to Haiti to review the country's need for increased financial assistance.

External Relations Department Director Masood Ahmed told an April 24 news conference that the IMF is also "working with the member countries that are likely to be affected to assess the impact of the higher food prices, and of higher commodity prices more generally, on their balance of payments and fiscal situation."

The impact of food price increases on the most vulnerable populations, notably the urban poor, has significant social implications—as attested by recent food riots and strikes in several African countries. Many sub-Saharan African countries have resorted to emergency measures in response to a food price situation that is still evolving.

IMF research shows that higher prices for food pose new challenges for African policymakers, in particular, and could have especially adverse effects on the poor because food represents a larger share of what poorer consumers buy.

Follow-up action

In response, the IMF is acting on several fronts:

Additional financing. About 10 countries, mostly in Africa, have raised with the IMF the possibility of augmenting their existing arrangements under the Poverty Reduction and Growth Facility (PRGF) to provide for additional financing to cover the import costs associated with higher food prices. "We are now discussing those on a priority basis with each of the countries and our objective is that, where it makes sense to indeed augment the PRGF, that we should proceed," Ahmed said.

Help with policy response. The IMF is further working with the PRGF-eligible countries and with other economies on the appropriate policy response to higher food prices. While policies need to be determined country by country, targeted social assistance is seen as the best initial policy, with other temporary moves—such as tax and tariff cuts on food products—also available as supporting measures.

Use of IMF financing. The IMF has several financing instruments available to help members cover food-related balance of payments strains. Stand-By Arrangements are designed to help all members address short-term balance of payments problems. The Exogenous Shocks Facility was designed to cover shocks to PRGF-eligible countries with a significant negative impact on the economy, such as the ongoing food price shock, and the IMF is considering ways to modify it to enhance its usefulness.

Work with exporters. The IMF has encouraged food exporting members to avoid disruptions to global markets such as through export restrictions on food, and to preserve domestic production incentives.

Coordination with other agencies. The IMF is also coordinating closely with the World Bank, the UN system, and with other international agencies and with donors on issues that require regional and international action, including trade policies and the need for additional financing resources from donors. IMF Deputy Managing Director Murilo Portugal represented the IMF at an April 28 meeting of the UN Chief Executives Board (CEB) that discussed the impact of high food import costs. The CEB groups executive heads of UN system organizations under the chairmanship of the UN Secretary General.

The UN's World Food Program (WFP) said April 22 that high global food prices are creating "a silent tsunami", threatening to plunge more than 100 million people into hunger. The WFP estimates it needs an additional US$755 million on top of its base budget to cover the increased cost of food and fuel since June 2007—a target backed by the IMF and World Bank.

Haiti's food price shock

IMF mission chief for Haiti Andreas Bauer visited Port-au-Prince on April 22-24 for a first-hand assessment of the impact of rising food prices on the government's economic program, and to discuss how best the IMF can support the country. Haiti agreed a three-year PRGF-supported program with the IMF in November 2006.

In a statement at the end of his visit, Bauer noted that Haiti—a large net importer of food—had been particularly affected by the sharp rise in international prices, which continued to impose enormous hardship on the country's population. The food price shock had also had a significant impact on domestic inflation and caused a widening of the trade deficit.

"The IMF is deeply concerned about the social impact of higher food prices and firmly committed to support efforts to ease this burden, while safeguarding economic stability and maintaining focus on continued economic and social progress in Haiti," Bauer said. He added that the IMF supports the government's response strategy that seeks to provide immediate relief from higher food prices and to boost agricultural output.

The IMF is working closely with donors and the authorities to review Haiti's need for increased financial assistance, and will adapt the macroeconomic framework of the PRGF-supported program to reflect the external shock. An IMF mission team will travel shortly to Haiti to finalize this work and conduct the third review of the program.

New era of high food prices

An IMF conference heard April 25 that the world economy has entered a different era in which commodity prices are likely to stay high. Michael Dooley of the University of California, Santa Cruz, told the IMF's Conference on International Macrofinance in Washington that macroeconomic factors were likely to continue to propel food prices.

"The only thing really special going on right now in commodity markets is the recent and projected world growth rates. We've entered a different era. I think those commodity prices are going to stay high," Dooley said. "Outside of oil, I think this will be a relatively durable price change, so we're looking at this for the foreseeable future."

Takatoshi Ito of the University of Tokyo noted at the conference that a bubble usually starts with good fundamentals, and in the current case increased demand from emerging markets such as China and India had driven up food prices. "But once the price starts moving, and momentum traders come in and speculators come in and hedge funds come in and drive up the prices, it's a mix: There is a fundamental reason at the root and there is a bubble on top."

Poverty gains at risk

IMF Managing Director Dominique Strauss-Kahn warned April 10 that a rise in food prices of 48 percent since end-2006 is a huge increase that may undermine gains the international community has made in reducing poverty.

Strauss-Kahn told a news conference in Washington that policy responses to higher food prices have to be tailored to meet the needs of each country. He said the IMF could take four steps to help address higher food prices in the short term:

• Support countries in designing appropriate macroeconomic policies to deal with shocks

• Provide advice and technical assistance for countries where rising food prices are eroding terms of trade, through targeted income support for the poor—without jeopardizing hard-won gains on economic stabilization

• In countries where price shocks are affecting the balance of payments, provide assistance through IMF lending facilities

• Work, along with other agencies and donors, to help countries mitigate negative impacts.

An April 11 meeting of the IMF's African Consultative Group discussed the impact of high world food and fuel prices and the challenges they present for policymakers in sub-Saharan Africa (SSA) and also globally. A group statement said the meeting noted that many SSA countries have significant exposures to higher prices for fuel and other commodities, especially food. High food prices risked undermining the gains made by many countries in reducing poverty in the last 5-10 years.

Temporary, targeted subsidies

"The speed and size of the price increases have been large. We agreed that policies should aim at helping those least able to cope with high prices, while not jeopardizing hard-won gains on economic stabilization," the consultative group's statement said.

The meeting agreed that the effect of shocks could be mitigated by temporary, targeted subsidies to help protect the most vulnerable, although authorities should ensure that subsidies did not become permanent.

Delegates resolved that countries should avoid distortionary policies such as untargeted subsidies. Moreover, the meeting observed that direct price and export controls might discourage food production, be difficult to enforce, and drain scarce resources from other critical purposes.

Comments on this article should be sent to imfsurvey@imf.org


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