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IMFSurvey Magazine: In the News

Fifty Countries Still Hurt by Food, Fuel Crisis, IMF Says

Gas cylinders in New Delhi, India: Impact of food, fuel price increases on developing countries has continued to mount, IMF says (photo: Prakash Singh/AFP)

FOOD, FUEL PRICES

Fifty Countries Still Hurt by Food, Fuel Crisis, IMF Says

IMF Survey online

September 24, 2008

  • Amid turmoil in financial markets, "other crisis" should not be obscured
  • Control of inflation will require robust monetary policy stance
  • Net fuel-importing low-income countries face $60 billion fuel bill hike

Although food and fuel prices have eased from recent peaks, some 50 low and middle-income countries have suffered a significant "shock" and will remain at risk through 2009 because of deteriorating foreign exchange reserves, rising inflation, and slowing world growth, according to an IMF study.

In the case of Africa, progress toward the Millennium Development Goals has been thrown further off course.

The study, which updates an analysis by the IMF of the macroeconomic impact of rising food and fuel costs released on July 1, shows that both energy and food prices remain well above their levels at the onset of the recent price surges.

IMF Managing Director Dominique Strauss-Kahn stressed in a September 24 statement in Washington that while the international community is currently focused on the ongoing financial crisis in advanced economies, "it is important not to lose sight of the `other crisis'—the continued debilitating impact of food and fuel hikes on some of the world's poorest countries."

Call for bolder action

"While food and fuel prices have eased from recent peaks, unfortunately they remain well above their levels at the onset of the recent price surges," Strauss-Kahn said. "What this means for a large number of countries—particularly in Africa—is a significant shock." He called for "bolder action" from the international community in terms of additional aid and action to help vulnerable countries.

The new study updates the IMF's initial report on the impact of higher food and fuel prices that was issued in July 2008. The July report warned that the price surge was most acute for import-dependent poor and middle-income countries confronted by balance of payments problems, higher inflation, and worsening poverty.

The IMF's updated assessment shows that the impact of food and fuel price increases on developing countries, far from diminishing, has continued to mount since its previous report last July. As of mid-September, oil prices are around 40 percent below their mid-July peaks, but still double the levels recorded at end-2006. Similarly, food prices have eased 8 percent from their June peak but are still above end-2006 levels.

Increase in fuel bill

As a result, the IMF projects that net fuel-importing low-income countries are facing an increase in their fuel bill equivalent to 3.2 percent of their GDP—or US$60 billion. For 43 net food-importing countries, the rise in their food bill is 0.8 percent of GDP—or US$7.2 billion.

"From a macroeconomic perspective, we see the effects in weakening balance-of-payments positions and national budgets—and acceleration of inflation," Strauss-Kahn said. The average inflation rate for low-income countries increased by almost 3 percentage points during the second quarter of 2008, and is expected to exceed 13 percent by the end of this year. "As we all know," Strauss-Kahn noted, "inflation hurts everyone, but it especially hurts the poor."

The updated study says countries face difficult choices as they seek to adjust their economies. Most will need a combination of price adjustment, involving real depreciation and pass-through of world market prices, and fiscal adjustment to offset the higher budgetary costs. The study recommends an approach involving tailored domestic responses, donor support, and multilateral cooperation.

Guard against inflation

Given the risks of further inflation and weakening external positions, monetary and exchange rate policies will have to guard against inflationary and balance of payments pressures that are likely to intensify in the short run, the study says. The need for, and scale of, fiscal policy responses will have to reflect each country's macroeconomic situation and capacity to create fiscal space.

The report adds that external support, preferably grants in the case of low-income countries, will continue to be vital to ease the burden of adjustment and to limit effects on real incomes and poverty. In early September the IMF endorsed a new action plan drawn up at an international conference in Ghana called to improve delivery of aid to developing countries.

The IMF, which has so far provided additional financial assistance to 14 affected countries and is in the process of reforming its Exogenous Shocks Facility to provide more rapid and streamlined assistance to its members, continues to assist its members through both macroeconomic policy advice, technical assistance and financial support.

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


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