## Executive Summary

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---

### I. Introduction and scope
- Provides a first broad assessment of the impact of the surge in food and fuel prices on the balance of payments, budgets, prices, and poverty of a large sample of countries.
- Reviews countries’ macroeconomic policy responses to date and discusses Fund advice for managing the price increases.
- Policy guidance emphasizes:
  - ensuring that food and finance reaches the most affected countries as quickly as possible,
  - including targeted and scaled-up social measures,
  - avoiding high costs in terms of macroeconomic instability or loss in future agricultural production.
- Analysis is an initial assessment of a still-evolving situation; conclusions are somewhat tentative.

### II. Developments, causes, and near-term prospects
- Broad commodity boom since early 2000s; oil rose from "$30 a barrel in early 2003 to around $140 by end-June" and was "some 35 percent above the earlier record high in real terms in 1979."
- Food commodity prices started booming in 2006 and remain "generally still far below their 1970s highs."
- Major drivers:
  - Strong global growth in 2004–07, especially in emerging and developing economies, catalyzing demand for commodities.
  - Sluggish supply response in oil markets, very low spare capacity, tight market conditions; supply constrained by soaring investment costs, technological, geological, and policy constraints.
  - Financial conditions (drop in real policy interest rates, U.S. dollar depreciation) temporarily added upward pressure; purely financial factors can have short-term effects but lasting impact on oil price trends is difficult to establish.
  - Food-specific pressures: unfavorable weather, rising fuel costs, rising biofuels production, and restrictive trade policies (notably export restrictions for rice in 2008).
  - Rising corn-based ethanol production "has accounted for about ¾ of the increase in global corn consumption in 2006-7."
  - Recent export restrictions by major rice exporters—India, China, Vietnam, Cambodia, and Egypt—together supplied "around 40 percent of global rice exports in 2007" and likely contributed substantially to the rice price surge.
- Prospects:
  - Oil: futures markets suggest gradual easing over the next five years with a "wide band of uncertainty"; high prices expected to be required to induce needed capacity expansion.
  - Food: projected to ease only gradually in the short-term; "a more substantial easing is expected in the medium term" as harvests improve and supply responses materialize, but the surge may take longer than usual to unwind given biofuels expansion and continuing strong demand from emerging and developing economies.

### III. Macroeconomic impacts: balance of payments, inflation, and poverty
- General finding: surges have greatly raised challenges for poverty reduction, food security, and macroeconomic stability.
- Balance of payments:
  - Adverse balance of payments effects were limited until recently but are now larger; a prolonged period with prices around or above current levels will place serious strains on many countries' balance of payments.
- Inflation:
  - The sharp increase in food and fuel prices in 2008 will raise headline inflation and "spillovers into generalized inflation have become an increasing concern."
  - Many countries have tightened monetary policy, but exchange rates have often "not been a major shock absorber."
- Poverty:
  - Rising inflation and higher food and fuel costs hurt the poor; distributional impacts are significant.

### IV. Countries’ policy responses (overview and fiscal impact)
- Fiscal measures adopted across countries include:
  - Reductions in fuel and food taxes and tariffs.
  - Increases in universal subsidies.
  - Expansions in transfer programs.
  - Public-sector wage increases.
- Fiscal cost assessment from survey:
  - "Roughly half of the countries surveyed reported a net increase in fiscal cost stemming from these measures, with a median annualized increase in 2007-08 of 0.6 percent of GDP."
  - "For about one-fifth of the countries, the fiscal costs exceed 1 percent of GDP."
  - The largest fiscal increases were driven by expansions in universal fuel price subsidies.
- Trade and other policies:
  - Several countries resorted to export restrictions and export taxes on key food commodities (e.g., rice and cereals).
- Monetary and exchange rate policy responses:
  - Many countries allowed pass-through of first-round effects to consumers.
  - Monetary policy has been tightened in many cases to limit spillovers to generalized inflation.
  - For net importers, if shocks are deemed permanent, they "will likely call for a real exchange rate depreciation."

### V. Policy guidance and Fund role
- Broad principles of Fund advice:
  - Protect the poor without compromising macroeconomic stability and growth.
  - Enhance effectiveness of policy responses over the medium term.
  - Promote efficiency and sound fiscal policy by passing higher global commodity prices through to consumers and producers, while mitigating adverse distributional effects.
  - Caution that less than full pass-through and/or other fiscal measures typically result in fiscal costs that must be assessed carefully.
  - Consumption tax decreases and universal price subsidies are "not well targeted, result in over consumption, and may be difficult to reverse."
  - Public-sector wages should be adjusted only in line with private sector wages.
  - Strengthen targeted transfer programs as part of the social safety net.
  - Governments need to balance financing and adjustment, taking into account country-specific conditions and priorities.
- On fiscal policy:
  - Measures should reflect each country’s macroeconomic situation and capacity to create fiscal space.
  - Some countries can loosen fiscal positions; others must create fiscal space or limit size/duration of fiscal responses or seek outside assistance.
- On monetary and exchange rate policy:
  - First-round effects of higher food and fuel prices should generally be accommodated, but monetary policy must avoid spillover to generalized inflation.
  - Permanent shocks may require real exchange rate depreciation for net importers.
- On trade policy:
  - Global food markets "need to be kept open," with restrictive policies such as export taxes and bans removed.
  - Tariff reductions can reduce inefficient trade distortions and mitigate price increases.
- Fund financing and instruments:
  - Fund financing is provided through PRGF arrangements, several of which have recently been augmented.
  - The Exogenous Shocks Facility is being streamlined "to make it more useful."
- Fund commitments:
  - Stand ready to provide policy advice and balance of payments support.
  - Emphasize targeted social measures, avoiding responses that create macroeconomic instability or reduce future production.

---

### Balance of payments impacts: empirical and scenario results
- Ex post (January 2007–April 2008) estimates:
  - For the 33 PRGF-eligible net food-importing countries: adverse balance of payments impact of the increase in food prices is estimated at 0.5 percent of 2007 annual GDP (US$2.3 billion, or 0.2 months of 2008 imports of goods and services).
  - For the 59 PRGF-eligible net oil importers: impact of the increase in oil prices is estimated at 2.2 percent of GDP (US$35.8 billion, or 0.7 months of 2008 imports of goods and services).
- Spring 2008 WEO assumed increases between 2007 and 2008 of:
  - Oil: 34.3 percent
  - Food: 18.2 percent
- Under those WEO assumptions, projected between 2007 and 2008:
  - Net food import bill for the 33 net food importers would increase by 0.8 percent of their 2008 GDP (US$3.9 billion, or 0.3 months of 2009 imports).
  - For the 59 net oil importers, the increase of the net oil import bill would amount to 0.9 percent of 2007 GDP (US$18.8 billion, or 0.4 months of 2009 imports).

Scenario analysis (20 percent higher than Spring 2008 WEO baseline for 2008–2009)
- Rationale:
  - For oil this 20 percent is conservative relative to subsequent oil price projection increases.
  - For food this 20 percent is a "worse case" illustrative scenario.
- Impact measure: estimated effect on international reserves, expressed in months of imports.
- Simplifying assumptions:
  - Countries draw on reserves to cover additional import costs from rising oil and food prices.
  - No policy or behavioral responses to the price increases are assumed.
  - Zero elasticity in import volumes is assumed.
- Key comparative finding:
  - Oil price increases have larger and more widespread adverse balance of payments effects than comparable food price increases because oil imports are 2½ times larger than food imports for low-income countries and twice as large for MICs.
- Summary country counts (20 percent scenario):
  - Countries with severe negative shocks (drop in reserves larger than 0.5 months of imports):
    - Oil price shock: PRGF 48, MIC 33
    - Food price shock: PRGF 13, MIC 3
    - Combined shock: PRGF 42, MIC 30
  - Countries with positive shocks (increase in reserves):
    - Oil price shock: PRGF 11, MIC 23
    - Food price shock: PRGF 30, MIC 28
    - Combined shock: PRGF 23, MIC 23
  - Countries with less-than-adequate reserves (coverage below 3 months of next year’s imports):
    - Before the shocks: PRGF 30, MIC 18
    - After the oil price increase: PRGF 37, MIC 26
    - After the food price increase: PRGF 27, MIC 19
    - After the combined shock: PRGF 37, MIC 25
  - Total Countries considered: PRGF 74, MIC 71

Selected country-level illustrative outcomes (hypothetical 2009 reserves coverage comparisons)
- Examples (Before Shock; Oil price shock; Food price shock; Combined shock) with CA (percent of GDP) and Reserves (months of next year’s imports):
  - Grenada: Before Shock -32.4 3.2 ; Oil price shock -34.6 2.4 ; Food price shock -33.0 2.9 ; Combined shock -35.3 2.1
  - Honduras: Before Shock -9.0 3.2 ; Oil price shock -11.3 2.5 ; Food price shock -8.5 3.3 ; Combined shock -10.9 2.6
  - Kyrgyz Republic: Before Shock -7.4 3.2 ; Oil price shock -11.2 2.1 ; Food price shock -8.0 3.1 ; Combined shock -11.9 2.0
  - Niger: Before Shock -14.0 3.3 ; Oil price shock -15.1 2.7 ; Food price shock -13.7 3.4 ; Combined shock -14.8 2.8
  - Liberia: Before Shock -36.2 1.1 ; Oil price shock -41.3 0.3 ; Food price shock -40.2 0.4 ; Combined shock -45.2 -0.4
  - Ecuador (MIC): Before Shock 3.9 2.4 ; Oil price shock 7.1 4.0 ; Food price shock 5.0 3.1 ; Combined shock 8.1 4.6
  - Qatar (MIC): Before Shock 40.7 2.5 ; Oil price shock 48.5 9.4 ; Food price shock 40.5 2.3 ; Combined shock 48.3 9.3
  - Saudi Arabia (MIC): Before Shock 24.0 26.8 ; Oil price shock 32.7 32.8 ; Food price shock 23.6 26.6 ; Combined shock 32.4 32.6
  - Algeria (MIC): Before Shock 20.6 41.0 ; Oil price shock 28.5 48.2 ; Food price shock 19.8 40.5 ; Combined shock 27.8 47.6

Caveats and limitations (illustrative estimates)
- Estimates are illustrative and based on simple assumptions; not country-level projections for financing needs.
- Main caveats include:
  - Full financing through reserves is assumed; policies remain unchanged.
  - Zero elasticity in import volumes; no behavioral or policy offsets included.
  - Different food items have divergent price movements and trade compositions across countries are not distinguished.
  - No uniform definition of food or food price baseline across countries.
  - Some correlated shocks and offsetting/aggravating developments are not included.
  - Reserve-pooling and special funds (e.g., oil funds) are not fully reflected.

### Inflation impacts (selected statistics)
- Global food price inflation (weighted by GDP in purchasing power parity terms) almost doubled in 2007.
- Median 12-month rate of food price inflation for a sample of 120 non-OECD countries:
  - 10 percent at end-2007
  - 12 percent at end-March 2008
  - Almost twice the median food price inflation rate of 2006
- Median fuel price inflation:
  - 6.7 percent at end-2007
  - 9 percent at end-March 2008
  - Increase of 2.3 percentage points
- Actual 12-month inflation in March 2008 exceeded IMF staff projections for the end of 2008 by more than one percentage point.
- Countries with strong accelerations in inflation (increase in the 12-month rate of inflation since end-2007) include:
  - Ethiopia 13.9 (March)
  - Vietnam 12.6 (May)
  - Jordan 9.7 (April)
  - Ukraine 9.6 (March)
  - Pakistan 8.4 (April)
  - Egypt 7.9 (April)
  - Kyrgyz Republic 7.7 (May)
  - Sri Lanka 7.5 (May)
  - Haiti 7.0 (March)
  - Tajikistan 6.9 (April)
  - Sao Tome 6.2 (March)
  - Libya 5.8 (March)
  - Mongolia 5.5 (March)
  - Suriname 5.4 (March)
  - Paraguay 5.3 (May)
  - Venezuela 5.3 (March)
  - Tonga 5.2 (March)
  - Azerbaijan 5.1 (May)
- CPI composition (2006 average, 120 non-OECD countries):
  - Food: 37 percent of CPI
  - Fuel: about 7 percent of CPI
- Import composition (average for 120 non-OECD countries):
  - Food 16; Fuel 23; Others 62 (percent)
- Impacts on headline inflation per 1 percent increase in commodity price:
  - Food: 0.37 percent increase in overall inflation
  - Fuel: 0.07 percent increase in overall inflation
- Caveats:
  - The direct impact of fuel understates fuel’s importance because fuel is an intermediate input into many goods.
  - The weight of total food may overstate the importance of the particular food commodities experiencing rapid price increases.

### Impact on poverty and distribution
- Rising food and fuel prices adversely affect poverty; the direct poverty impact mainly relates to higher cost of food, especially for the urban poor.
- Shares of household expenditure:
  - In large emerging economies, the share spent on food typically exceeds 25 percent.
  - In developing economies, it is often above 50 percent.
  - Share spent on fuel is typically below 10 percent.
  - In advanced economies, the share of household expenditure on food is above 10 percent.
- Cumulative fuel price increases over the last three years have been significantly larger than those on food prices; indirect impacts of fuel price increases on household real incomes can be larger than direct impacts.
- Distributional highlights:
  - Urban poor most affected; rural poor may be partly self-sufficient.
  - Food-deficit farmers and urban poor worst affected by food price inflation.
  - Food-surplus farmers may not benefit due to faster pass-through of higher input costs.
  - The share of undernourished could rise rapidly above the current 40 percent of total population in developing countries.
  - Countries with high food import dependence combined with high incidence of poverty are most vulnerable (examples: Gambia, Swaziland, Mauritania, Haiti).
- Country case finding:
  - In Senegal, the indirect effect of fuel price increases on household real income was nearly 3.5 times larger than the direct effect; overall impact more than 50 percent higher for urban than for rural households.

### Fiscal responses: patterns, magnitudes, and assessment
- Survey coverage:
  - 147 countries responded to an IMF survey on tax and expenditure policy responses.
- Fuel taxes and subsidies:
  - 37 reported that they decreased some fuel tax rates; 40 reported increases in fuel tax rates.
  - Average pass-through of international prices between 2003 and end-2007:
    - 121 percent for liberalized and automatic pricing mechanisms
    - 75 percent for ad hoc pricing mechanisms
  - Fiscal cost of fuel tax decreases (19 countries): range near zero to 1.3 percent of GDP; median cost 0.3 percent (full-yearized and summed across 2007 and 2008).
  - Forty-six countries reported price subsidies for 2008, almost all untargeted.
    - Projected level of these subsidies: up to 14.6 percent of GDP (maximum reported); median cost of 1.0 percent of GDP.
    - Five countries reported universal fuel subsidies in excess of 5 percent of GDP: Turkmenistan, Yemen, Egypt, Venezuela, Ecuador.
- Food taxes, tariffs, and subsidies:
  - Eighty-four countries reported reducing food taxes.
  - Food import taxes decreased in 76 countries; VATs decreased in 22 countries.
  - Thirty-one countries reported tax decreases between 2006 and 2008; range near zero to 1.1 percent of GDP; median cost 0.1 percent.
  - Currently, 28 countries have food subsidies.
  - Six countries expected to have subsidies exceed 1 percent of GDP in 2008: Burundi, Egypt, Jordan, the Maldives, Morocco, Timor-Leste.
  - Sixteen other countries reported increasing food subsidies; increases ranged near zero to 2.7 percent of GDP; median increase 0.2 percent.
- Targeted transfers and other programs:
  - 21 countries reported outlays on targeted social safety net programs.
  - Agricultural subsidies reported in 15 countries.
  - Fifty-six countries reported targeted transfer programs with projected outlays ranging up to 4.8 percent of GDP.
  - Changes since 2006 in transfer program outlays range from -2.1 to 2.0 percent of GDP.
  - Thirty-nine countries expanded programs: increases ranged up to 2.0 percent of GDP; median increase 0.2 percent.
- Public sector wage responses:
  - Ten countries increased public sector wages; fiscal cost range near zero to 1.9 percent of GDP; median cost 0.6 percent.
- Aggregate fiscal cost:
  - Seventy-nine countries reported a net increase in fiscal cost from measures responding to higher fuel and food costs.
    - Range: near zero to 4.8 percent of GDP.
    - Median increase: 0.6 percent.
    - Ten countries reported a net increase of more than 2 percent of GDP.
    - Nineteen countries had fiscal costs greater than 1 percent of GDP.
  - Thirteen countries reported net decreases in fiscal cost; median decrease: 0.6 percent of GDP.
  - Of the 79 countries reporting fiscal costs: thirty-nine are PRGF-eligible countries; fifty are classified as vulnerable to balance of payment pressures.

Policy assessment of fiscal measures
- Reducing consumption tax rates and excise taxes to offset price increases is inefficient and badly targeted:
  - Selective tax reductions distort consumer choices and result in overconsumption of tax-preferred goods.
  - Differential VAT rates are difficult to administer and enforce; zero-rating intermediate inputs exacerbates administration problems.
  - Higher-income households receive a disproportionate share of benefits from tax rate reductions.
  - Tax rate reductions are difficult to reverse politically and administratively.
- Import tax rate reductions (tariff cuts) are more benign: tariffs distort trade patterns, so eliminating them can be positive; lost revenue can be recouped over time using more efficient revenue instruments.
- Universal price subsidies:
  - Distort price signals, result in over-consumption, benefits accrue primarily to higher income households, and can be very costly.
  - Examples of large subsidy costs: Iraq, Jordan reduced subsidies by 93 and 71 percent respectively since 2006; Saudi Arabia example where retail prices for gasoline and diesel were lowered from US$0.16/ltr to US$0.07/ltr resulting in foregone revenues of 1.2 percent of GDP per year.
- Preferred measures:
  - Develop well-targeted social safety nets.
  - Prefer targeted fiscal measures and, where possible, import tax reductions applied uniformly across sources to avoid trade distortions.
  - If full pass-through is not feasible, seek donor support or fiscal adjustment to finance stabilization measures without undermining fiscal stability.

### Monetary and exchange rate policy guidance
- First-round effects of higher food and fuel prices on inflation should generally be accommodated to allow relative prices to change without forcing a decline in nontraded goods prices.
- Monetary policy should be sufficiently tight to prevent first-round effects from spilling over to other goods and services (second-round effects) and to avoid a wage-price spiral—particularly where inflation has been rising due to overly expansionary policies.
- In countries with recent adoption of formal inflation targeting or where policy credibility is not established, a balance is required between avoiding undue output losses from tightening and risks to credibility from missing inflation objectives.
- If shocks are regarded as permanent, they call for a real effective exchange rate depreciation for net importers.
  - For countries with more open capital accounts, allowing depreciation can be consistent with tightening monetary policy because tightening improves odds that real depreciation occurs through lower inflation rather than nominal depreciation.
- Currency unions and full dollarization constrain nominal exchange rate action; in such cases fiscal adjustment needs are heightened.

### Trade policy recommendations
- Keep global food markets open; restrictive trade policies (export bans or export taxes by net food exporters) push up world prices and hurt net importers.
- Maintain free trade in commodities while fostering incentives for production and using efficient policies to protect the urban poor (e.g., targeted cash transfers).
- An ambitious Doha Round conclusion, including on agriculture, can help broaden and stabilize international food trade and foster efficient agricultural production in the medium and long term.
- Biofuel subsidies should be carefully re-examined, especially in developed countries; less ambitious and more trade-friendly biofuels policies would lower pressure on food prices by reducing competition with food for agricultural land and resources.

### Fund role, financing modalities, and operational measures
- Fund is coordinating with the United Nations, World Bank, FAO and other partners.
  - UN Task Force prepared a Framework for Action (CFA).
  - World Bank Group announced a New Deal on Global Food with short-, medium-, and long-term actions.
- IMF activities:
  - Extensive analytical work on causes, severity, duration, and impact of price increases.
  - Advice and technical assistance on macroeconomic responses and financial assistance.
- Financing guidance:
  - Financing useful and sustainable only if shocks are temporary or as a transitory easing of adjustment.
  - For permanent shocks, adjustment is appropriate.
  - For LICs and highly indebted countries, financing should be grants or highly concessional loans to avoid unsustainable debt positions.
- Fund support modalities:
  - Augmentation of existing PRGF arrangements (several augmentations granted as of end-June 2008 for Benin, Burkina Faso, the Kyrgyz Republic, the Central African Republic, Haiti, Mali, and Niger).
  - Exogenous Shocks Facility (ESF) to provide quick concessional support; modifications under preparation to streamline access.
  - New PRGF arrangements with higher levels of access (e.g., Mali and Niger).
  - Stand-By Arrangements for middle-income countries remain available.
- Staff will revisit financing needs regularly and take into account other external support (in-kind food relief, bilateral grants, regional and multilateral development bank funds).

### Operational and methodological notes (appendices)
- Appendix I — Estimating balance of payment impacts:
  - Ex post impact estimates used annual 2007 trade data combined with world price developments; zero elasticity assumed.
  - Ex ante baseline used Spring WEO projections and questionnaire responses; missing data filled from WDI where possible.
- Appendix II — Fiscal response visuals and detailed tables track fuel tax changes, food tax changes, and fiscal impact of tax decreases and spending program changes (percent of GDP).
- Appendix III — Survey coverage and response quality:
  - Quantification of fiscal costs received from 146 countries out of 187 total (78 percent).
  - Response rates varied by area department; detailed submission counts and quantitative data coverage reported.
- Appendix IV — Policy responses catalogue:
  - Detailed advantages and disadvantages of import tariff cuts, VAT/sales tax exemptions, export taxes/quotas, fuel taxes, universal and targeted subsidies, school feeding programs, fee waivers, public works, targeted cash transfers, agricultural input subsidies, wage and pension adjustments, and other measures.
- Appendix V — Balance of payments effects and Fund relations:
  - Tables listing low-reserves and high-impact low-income countries and MICs with associated Fund programs and annotations (definitions of indicators preserved verbatim).

*Source: Executive Summary (IMF).*

### Executive Summary ......................................................................................................

### Executive Summary

### I. Introduction and scope
- Provides a first broad assessment of the impact of the surge in food and fuel prices on the balance of payments, budgets, prices, and poverty of a large sample of countries.
- Reviews countries’ macroeconomic policy responses to date and discusses Fund advice for managing the price increases.
- Policy guidance emphasizes: (i) ensuring that food and finance reaches the most affected countries as quickly as possible, (ii) including targeted and scaled-up social measures, and (iii) avoiding high costs in terms of macroeconomic instability or loss in future agricultural production.
- Analysis is an initial assessment of a still-evolving situation; conclusions are somewhat tentative.

### II. Developments, causes, and near-term prospects
- Broad commodity boom since early 2000s; oil rose from "$30 a barrel in early 2003 to around $140 by end-June" and was "some 35 percent above the earlier record high in real terms in 1979."
- Food commodity prices started booming in 2006 and remain "generally still far below their 1970s highs."
- Major drivers:
  - Strong global growth in 2004–07, especially in emerging and developing economies, has catalyzed demand for commodities.
  - Sluggish supply response in oil markets, leading to very low spare capacity and tight market conditions; supply constrained by soaring investment costs, technological, geological, and policy constraints.
  - Financial conditions (drop in real policy interest rates, U.S. dollar depreciation) have temporarily added upward pressure; purely financial factors can have short-term effects but lasting impact on oil price trends is difficult to establish.
  - Food-specific pressures: unfavorable weather, rising fuel costs, rising biofuels production, and restrictive trade policies (notably export restrictions for rice in 2008).
  - Rising corn-based ethanol production "has accounted for about ¾ of the increase in global corn consumption in 2006-7."
  - Recent export restrictions by major rice exporters—India, China, Vietnam, Cambodia, and Egypt—together supplied "around 40 percent of global rice exports in 2007" and likely contributed substantially to the rice price surge.
- Prospects:
  - Oil: futures markets suggest gradual easing over the next five years with a "wide band of uncertainty"; high prices expected to be required to induce needed capacity expansion.
  - Food: projected to ease only gradually in the short-term; "a more substantial easing is expected in the medium term" as harvests improve and supply responses materialize, but the surge may take longer than usual to unwind given biofuels expansion and continuing strong demand from emerging and developing economies.

### III. Macroeconomic impacts: balance of payments, inflation, and poverty
- General finding: surges have greatly raised challenges for poverty reduction, food security, and macroeconomic stability.
- Balance of payments:
  - Adverse balance of payments effects were limited until recently but are now larger; a prolonged period with prices around or above current levels will place serious strains on many countries' balance of payments.
- Inflation:
  - The sharp increase in food and fuel prices in 2008 will raise headline inflation and "spillovers into generalized inflation have become an increasing concern."
  - Many countries have tightened monetary policy, but exchange rates have often "not been a major shock absorber."
- Poverty:
  - Rising inflation and higher food and fuel costs hurt the poor; distributional impacts are significant (see Boxes in full report).

### IV. Countries’ policy responses (overview and fiscal impact)
- Fiscal measures adopted across countries include:
  - Reductions in fuel and food taxes and tariffs.
  - Increases in universal subsidies.
  - Expansions in transfer programs.
  - Public-sector wage increases.
- Fiscal cost assessment from survey:
  - "Roughly half of the countries surveyed reported a net increase in fiscal cost stemming from these measures, with a median annualized increase in 2007-08 of 0.6 percent of GDP."
  - "For about one-fifth of the countries, the fiscal costs exceed 1 percent of GDP."
  - The largest fiscal increases were driven by expansions in universal fuel price subsidies.
- Trade and other policies:
  - Several countries resorted to export restrictions and export taxes on key food commodities (e.g., rice and cereals).
- Monetary and exchange rate policy responses:
  - Many countries allowed pass-through of first-round effects to consumers.
  - Monetary policy has been tightened in many cases to limit spillovers to generalized inflation.
  - For net importers, if shocks are deemed permanent, they "will likely call for a real exchange rate depreciation."

### V. Policy guidance and Fund role
- Broad principles of Fund advice:
  - Protect the poor without compromising macroeconomic stability and growth.
  - Enhance effectiveness of policy responses over the medium term.
  - Promote efficiency and sound fiscal policy by passing higher global commodity prices through to consumers and producers, while mitigating adverse distributional effects.
  - Caution that less than full pass-through and/or other fiscal measures typically result in fiscal costs that must be assessed carefully.
  - Consumption tax decreases and universal price subsidies are "not well targeted, result in over consumption, and may be difficult to reverse."
  - Public-sector wages should be adjusted only in line with private sector wages.
  - Strengthen targeted transfer programs as part of the social safety net.
  - Governments need to balance financing and adjustment, taking into account country-specific conditions and priorities.
- On fiscal policy:
  - Measures should reflect each country’s macroeconomic situation and capacity to create fiscal space.
  - Some countries can loosen fiscal positions; others must create fiscal space or limit size/duration of fiscal responses or seek outside assistance.
- On monetary and exchange rate policy:
  - First-round effects of higher food and fuel prices should generally be accommodated, but monetary policy must avoid spillover to generalized inflation.
  - Permanent shocks may require real exchange rate depreciation for net importers.
- On trade policy:
  - Global food markets "need to be kept open," with restrictive policies such as export taxes and bans removed.
  - Tariff reductions can reduce inefficient trade distortions and mitigate price increases.
- Fund financing and instruments:
  - Fund financing is provided through PRGF arrangements, several of which have recently been augmented.
  - The Exogenous Shocks Facility is being streamlined "to make it more useful."
- Fund commitments:
  - Stand ready to provide policy advice and balance of payments support.
  - Emphasize targeted social measures, avoiding responses that create macroeconomic instability or reduce future production.

*Source: Executive Summary (IMF).*

### 9.      Higher food and fuel prices have serious macroeconomic effects throughout the

### 9.      Higher food and fuel prices have serious macroeconomic effects throughout the

### Overview
- Higher food and fuel prices have adverse effects on growth and inflation, large swings in the terms of trade, and important balance of payments repercussions.
- Analysis concentrates on PRGF-eligible and middle-income countries (MICs) and is based in part on the results of a questionnaire completed by country desks.

### Balance of Payments Impact: immediate observed effects
- For the 33 PRGF-eligible net food-importing countries (January 2007–April 2008):
  - Adverse balance of payments impact of the increase in food prices is estimated at 0.5 percent of 2007 annual GDP (US$2.3 billion, or 0.2 months of 2008 imports of goods and services).
- For the 59 PRGF-eligible net oil importers (January 2007–April 2008):
  - Impact of the increase in oil prices is estimated at 2.2 percent of GDP (US$35.8 billion, or 0.7 months of 2008 imports of goods and services).
- Spring 2008 WEO assumed increases between 2007 and 2008 of:
  - Oil: 34.3 percent
  - Food: 18.2 percent
- Under those WEO assumptions, projected between 2007 and 2008:
  - Net food import bill for the 33 net food importers would increase by 0.8 percent of their 2008 GDP (US$3.9 billion, or 0.3 months of 2009 imports).
  - For the 59 net oil importers, the increase of the net oil import bill would amount to 0.9 percent of 2007 GDP (US$18.8 billion, or 0.4 months of 2009 imports).

### Scenario analysis and methodology highlights
- Alternative scenario: food and fuel prices are 20 percent higher than the Spring 2008 WEO baseline for 2008 and 2009.
  - For oil this 20 percent is conservative relative to subsequent oil price projection increases.
  - For food this 20 percent is a “worse case” illustrative scenario.
- Impact measure: estimated effect on international reserves, expressed in months of imports.
- Simplifying assumptions:
  - Countries draw on reserves to cover additional import costs from rising oil and food prices.
  - No policy or behavioral responses to the price increases are assumed.
  - Zero elasticity in import volumes is assumed for the price effect isolation.
  - Different components of the food trade balance are not distinguished.
- Definitions used for classification:
  - “High impact” if price increases lead to a reduction in coverage by more than 0.5 months of imports of goods and services.
  - “Low” reserves if coverage falls or remains below 3 months of next year’s imports of goods and services.
  - These benchmarks are rules of thumb and may be less informative for dollarized economies and currency unions.

### Key comparative finding
- Oil price increases have larger and more widespread adverse balance of payments effects than comparable food price increases because:
  - Oil imports are 2½ times larger than food imports for low-income countries and twice as large for MICs.
- Summary quantitative results (country counts from scenario where prices are 20 percent higher than the WEO baseline):
  - Countries with severe negative shocks (drop in reserves larger than 0.5 months of imports):
    - Oil price shock: PRGF 48, MIC 33
    - Food price shock: PRGF 13, MIC 3
    - Combined shock: PRGF 42, MIC 30
  - Countries with positive shocks (shock results in an increase in reserves):
    - Oil price shock: PRGF 11, MIC 23
    - Food price shock: PRGF 30, MIC 28
    - Combined shock: PRGF 23, MIC 23
  - Countries with less-than-adequate reserves (coverage below 3 months of next year’s imports):
    - Before the shocks: PRGF 30, MIC 18
    - After the oil price increase: PRGF 37, MIC 26
    - After the food price increase: PRGF 27, MIC 19
    - After the combined shock: PRGF 37, MIC 25
  - Total Countries considered: PRGF 74, MIC 71

### Oil price increase: country-level consequences
- A 20 percent oil price increase would produce a “high impact” (loss of reserves >0.5 months of imports) in 48 PRGF-eligible countries and 33 MICs.
- Thirty-eight of the 48 countries that already had reserves of less than three months of imports are net oil importers; their reserves position would deteriorate further.
- Examples noted among low-income high-impact countries with reserves coverage after the shock below three months: Tonga, Togo, Sierra Leone, Eritrea, Pakistan.
- Examples in MIC group with similar vulnerability: Jamaica, Dominican Republic, Fiji, Jordan.

### Food price increase: country-level consequences
- A 20 percent food price increase would produce a “high impact” in 13 PRGF-eligible countries and 3 MICs.
- Among countries with low reserves before the price increases, 19 PRGF-eligible and 14 MICs would suffer further from the food price increase.
- Conversely, 21 PRGF-eligible and 25 MICs would gain from higher food prices (net food exporters or beneficiaries).
- Examples of low-income high-impact countries with reserves coverage below three months after the food shock: Eritrea, Liberia, Tajikistan.
- Examples in MIC group: Bahamas, Seychelles, Namibia.

### Combined oil and food price increase: net outcomes
- The combined 20 percent increases mostly aggravate the situation, though some countries experience offsetting outcomes (gains from one shock offset losses from the other).
- Combined shock outcomes:
  - High-impact negative combined shock: PRGF 42, MIC 30.
  - Reserves below three months after combined shock: PRGF 37, MIC 25.
- Of the 48 countries with low reserves before the price increases and available data, 41 see their reserve coverage decrease further under the combined shock.
- Noted exceptions where reserves increase above three months after the combined shock include:
  - Qatar and Sudan (gain from oil price increase),
  - Cote d’Ivoire (net food exporter),
  - Ecuador (net oil and food exporter).

### Caveats and limitations emphasized in the analysis
- Estimates are illustrative and based on simple assumptions; they are not country-level projections for financing needs.
- Main caveats include:
  - Full financing through reserves is assumed; policies remain unchanged.
  - Zero elasticity in import volumes; no behavioral or policy offsets included.
  - Different food items have divergent price movements and trade compositions across countries are not distinguished.
  - No uniform definition of food or food price baseline across countries.
  - Some correlated shocks and offsetting/aggravating developments are not included.
  - Reserve-pooling and special funds (e.g., oil funds) are not fully reflected in the simple reserves measure.

*Source: _063008 - 9.      Higher food and fuel prices have serious macroeconomic effects throughout the*

### 0.5 or more

### 0.5 or more

### B. The Impact on Inflation
- Higher food and fuel prices have led to substantial increases in headline inflation, particularly in emerging markets and low-income countries.
- International food and fuel prices are for the most part denominated in U.S. dollars. Nominal exchange rate appreciations vis-à-vis the U.S. dollar in 2007 and early 2008 provided some relief in many countries.
- Global food price inflation (weighted by GDP in purchasing power parity terms) almost doubled in 2007.
- Food inflation: below 3 percent in advanced economies; almost 10 percent for developing countries (would have been higher without food subsidies).
- Low-income countries have allowed less of the higher international fuel price increases to be passed through to retail levels.

Key statistics and dynamics:
- Median 12-month rate of food price inflation for a sample of 120 non-OECD countries:
  - 10 percent at end-2007
  - 12 percent at end-March 2008
  - Almost twice the median food price inflation rate of 2006
- Median fuel price inflation:
  - 6.7 percent at end-2007
  - 9 percent at end-March 2008
  - Increase of 2.3 percentage points
- Actual 12-month inflation in March 2008 exceeded IMF staff projections for the end of 2008 by more than one percentage point.

Countries with strong accelerations in inflation (increase in the 12-month rate of inflation since end-2007):
- Ethiopia 13.9 (March)
- Vietnam 12.6 (May)
- Jordan 9.7 (April)
- Ukraine 9.6 (March)
- Pakistan 8.4 (April)
- Egypt 7.9 (April)
- Kyrgyz Republic 7.7 (May)
- Sri Lanka 7.5 (May)
- Haiti 7.0 (March)
- Tajikistan 6.9 (April)
- Sao Tome 6.2 (March)
- Libya 5.8 (March)
- Mongolia 5.5 (March)
- Suriname 5.4 (March)
- Paraguay 5.3 (May)
- Venezuela 5.3 (March)
- Tonga 5.2 (March)
- Azerbaijan 5.1 (May)

- Food price developments are more significant than fuel price changes for overall inflation, particularly in low-income countries.
- 2006 average CPI weights (120 non-OECD countries):
  - Food: 37 percent
  - Fuel: about 7 percent
- Impacts on headline inflation per 1 percent increase in commodity price:
  - Food: 0.37 percent increase in overall inflation
  - Fuel: 0.07 percent increase in overall inflation
- Caveats:
  - The direct impact of fuel understates fuel’s importance because fuel is an intermediate input into many goods.
  - The weight of total food may overstate the importance of the particular food commodities experiencing rapid price increases.

Import and CPI composition (average for 120 non-OECD countries):
- Import composition (in percent): Food 16; Fuel 23; Others 62
- Composition of the CPI basket (in percent): Food 37; Fuel 7; Others 56

### C. Impact on Poverty
- Rising food and fuel prices adversely affect poverty; the direct poverty impact mainly relates to higher cost of food, especially for the urban poor.
- Shares of household expenditure:
  - In large emerging economies, the share spent on food typically exceeds 25 percent.
  - In developing economies, it is often above 50 percent.
  - Share spent on fuel is typically below 10 percent (partly reflecting high domestic fuel subsidies in some countries).
  - In advanced economies, the share of household expenditure on food is above 10 percent.
- Cumulative fuel price increases over the last three years have been significantly larger than those on food prices; indirect impacts of fuel price increases on household real incomes can be larger than direct impacts.

Distributional and country-specific findings:
- Urban poor are most affected because rural poor are more likely to be at least partially self-sufficient in food.
- Food-deficit farmers and the urban poor are worst affected by food price inflation.
- Food-surplus farmers may not benefit because pass-through of higher input costs (fuel, fertilizer, transportation) is often faster than that of world market food prices.
- The share of undernourished could rise rapidly above the current 40 percent of total population in developing countries.
- Countries with high food import dependence combined with high incidence of poverty are most vulnerable (examples highlighted: Gambia, Swaziland, Mauritania, Haiti).

Box 1 — distributional impact of fuel and food price increases (selected findings from country examples):
- In Senegal, combining household survey data and input-output modeling found the indirect effect of fuel price increases on household real income was nearly 3.5 times larger than the direct effect.
- That analysis showed fuel price increases were progressive mainly due to the indirect impact and the overall impact was more than 50 percent higher for urban than for rural households.
- Similar impacts found in case studies for Bolivia, Ghana, Jordan, Mali, and Sri Lanka (reference to IMF Working Paper No. 06/247).
- In Senegal, price indices for cereal grains and milk increased an average of 27 percent over 12 months, while overall CPI for food increased by 9 percent.

### IV. Countries’ Policy Responses
- Countries most vulnerable to higher international food and fuel prices face constrained policy options because of limited access to foreign financing, low reserve cushions, or high external or public debt burdens.
- Where donor aid is not forthcoming, macroeconomic policy choices are limited to facilitating rapid adjustment to the terms of trade shock via:
  - Price adjustment (real depreciation and pass-through of world market prices)
  - Fiscal adjustment to offset higher fiscal costs
- Central bank credibility limitations in some countries necessitate extra caution in monetary policy.

A. The Nature and Cost of Fiscal Responses to Higher Food and Fuel Prices
- Policy trade-offs:
  - Passing higher world prices to consumers decreases real incomes, especially for poor households.
  - Full pass-through encourages supply increases and demand decreases, reducing current account pressures for net importers and increasing gains for net exporters.
  - Less than full pass-through results in fiscal costs that require offsetting measures or donor support and can potentially reverse fiscal and structural reforms.
- Best longer-term option: develop a well-targeted social safety net to protect vulnerable households. Designing and implementing such programs is challenging; many countries have adopted less direct measures.

Changes in Fuel Taxes and Subsidies
- Measuring tax/subsidy changes is complicated where prices are controlled or price formulas are ignored.
- Pricing regimes explain pass-through degree:
  - In 2007, average retail fuel prices in countries with liberalized and automatic pricing mechanisms were about 25 percent higher than in countries that adjusted prices on an ad hoc basis.
  - Average pass-through of international prices between 2003 and end-2007:
    - 121 percent for liberalized and automatic pricing mechanisms
    - 75 percent for ad hoc pricing mechanisms
- Oil importers are more likely to have liberalized pricing regimes than oil exporters.

Fuel taxes and tariffs:
- Consumption of petroleum fuels produces negative externalities typically addressed with specific taxes; ad valorem taxes (usually VAT) are used to raise revenue without excessive distortion.
- Most countries apply a combination of specific and ad valorem taxes to petroleum fuels.

Survey results and tax changes:
- 147 countries responded to an IMF survey:
  - 37 reported that they decreased some fuel tax rates.
  - 40 reported increases in fuel tax rates.
  - Proportion decreasing taxes did not vary much across income groups; increases occurred primarily in high-income OECD countries.
  - Proportion decreasing taxes lowest in European countries and highest in Asian countries.
  - Proportion decreasing taxes was lower in PRGF-eligible countries.
  - Oil exporters were less likely to decrease fuel taxes (possibly because taxes were already low) and also less likely to increase taxes.

Fiscal cost of fuel tax decreases:
- Nineteen countries reported that they decreased fuel tax rates with fiscal costs ranging from near zero to 1.3 percent of GDP and a median cost of 0.3 percent (full-yearized and summed across 2007 and 2008 as described in the source).
- Example: Saudi Arabia — in May 2006, retail prices for gasoline and diesel were lowered from US$0.16/ltr to US$0.07/ltr resulting in foregone revenues of 1.2 percent of GDP per year.

Policy assessment of tax reductions:
- Reducing consumption tax rates and excise taxes to offset price increases is inefficient and badly targeted:
  - Selective tax reductions distort consumer choices and result in overconsumption of tax-preferred goods.
  - Reductions in excise taxes on fossil fuels raise concerns where these taxes address negative externalities (e.g., greenhouse gas emissions).
  - Differential VAT rates are difficult to administer and enforce; zero-rating intermediate inputs exacerbates administration problems.
  - Higher-income households receive a disproportionate share of benefits from tax rate reductions.
  - Tax rate reductions are difficult to reverse politically and administratively.

- Import tax rate reductions (tariff cuts) are more benign: tariffs distort trade patterns, so eliminating them can be positive and lost revenue can be recouped over time using more efficient revenue instruments. Similar treatment should be applied to all sources of import for a given commodity to avoid trade distortions.

Fuel price subsidies:
- Forty-six countries reported price subsidies for 2008, almost all untargeted.
- Projected level of these subsidies:
  - Up to 14.6 percent of GDP (maximum reported)
  - Median cost of 1.0 percent of GDP
- Five countries reported universal fuel subsidies in excess of 5 percent of GDP:
  - Turkmenistan
  - Yemen
  - Egypt
  - Venezuela
  - Ecuador
- Another eight countries have subsidies in excess of 2 percent of GDP.
- Universal subsidies are more prevalent in MCD countries.
- Iraq and Jordan have decreased their subsidies by 93 and 71 percent, respectively, since 2006.

Policy guidance emerging from the analysis:
- Prioritize development and implementation of well-targeted social safety nets to protect vulnerable households.
- Avoid broad consumption tax or excise tax reductions as a response to commodity price shocks because they are inefficient, poorly targeted, and difficult to reverse.
- Prefer targeted fiscal measures and, where possible, import tax reductions applied uniformly across sources to avoid trade distortions.
- Where full pass-through is not feasible, seek donor support or fiscal adjustment to finance the cost of price stabilization measures without undermining fiscal stability.

*Source: IMF staff (excerpts from the provided PDF content).*

### 40.      Thirty-eight countries increased or decreased fuel price subsidies between 2006

### _063008 - 40.      Thirty-eight countries increased or decreased fuel price subsidies between 2006

### Change in Fuel Price Subsidies (2006–2008)
- Thirty-eight countries increased or decreased fuel price subsidies between 2006 and 2008.
- Increases occurred in 29 countries:
  - Range: near zero to 4.0 percent of GDP.
  - Median increase: 0.7 percent.
  - Biggest increases occurred in countries with large pre-existing subsidies.
- Decreases occurred in 9 countries:
  - Range: 0.2 to 5.3 percent of GDP.
  - Median decrease: 0.6 percent.
  - Largest decreases occurred in countries restructuring their subsidy programs.

### Policy Assessment of Universal Price Subsidies
- Universal price subsidies distort price signals, resulting in over-consumption.
- Benefits accrue primarily to higher income households.
- Universal subsidies can be costly, especially if domestic price is frozen while world price increases.

### Changes in Food Taxes and Tariffs
- A high proportion of low- and middle-income countries reported decreases in food taxes and tariffs since 2006.
- Eighty-four countries reported reducing food taxes.
- Tax rate reductions most prevalent in high-income countries (owing to a suspension in import tariffs by the European Union).
- A relatively high proportion of African countries and countries with high food-import-to-GDP ratios reported reducing food taxes.
- More countries reduced import duties than domestic value-added taxes (VATs):
  - Food import taxes decreased in 76 countries.
  - VATs decreased in 22 countries.
- More than two-thirds of tax cuts in low and middle-income countries occurred in the last five months, with 45 countries decreasing taxes in 2008.
- At least 30 countries imposed export restrictions or bans on agricultural commodities (especially rice), or introduced/increased export taxes.
  - Such measures are highly distortionary and reduce gains from higher export prices.
- Regional/union influences:
  - West African Economic and Monetary Union allows exemption of seven basic food items from VAT, limiting VAT reductions as a response.
  - CARICOM reduced or suspended the common external tariff (CET) on a range of food products.
- Fiscal cost of food tax decreases:
  - Thirty-one countries reported tax decreases between 2006 and 2008.
  - Range: near zero to 1.1 percent of GDP.
  - Median cost: 0.1 percent.

### Food Price Subsidies (2006–2008)
- Almost all current food price subsidies are universal.
- Currently, 28 countries have food subsidies.
- Six countries expected to have subsidies exceed 1 percent of GDP in 2008: Burundi, Egypt, Jordan, the Maldives, Morocco, and Timor-Leste.
  - Each of these increased their universal subsidies since 2006.
- Sixteen other countries reported increasing food subsidies:
  - Increases ranged from near zero to 2.7 percent of GDP.
  - Median increase: 0.2 percent.
- Five countries reduced price subsidies:
  - Decreases ranged from 0.1 to 0.4 percent of GDP.
  - Median decrease: 0.2 percent.

### Targeted Transfers and Other Transfer Programs
- Targeted transfer programs can reach the poor more efficiently and effectively than tax decreases and universal price subsidies.
  - Can protect the poor without distorting incentives for nonpoor households.
  - Benefits can be indexed to inflation to automatically compensate beneficiaries.
  - Require detailed planning and significant administrative capacity.
- Prevalence:
  - A total of 21 countries reported outlays on targeted social safety net programs.
  - Agricultural subsidies reported in 15 countries; concerns about fiscal, efficiency, equity, and environmental grounds.
    - Recommendation: further target on low-income farmers and include in strategy to increase agricultural productivity.
- Automatic adjustment mechanisms:
  - Many developed-country transfer programs have automatic mechanisms to adjust benefits (e.g., U.S. food stamp program increases benefits with food price inflation).
  - Some changes in transfers due to price increases were not reported, especially in developed countries.
- Reported targeted transfer program outlays for 2008:
  - Fifty-six countries reported targeted transfer programs with projected outlays ranging up to 4.8 percent of GDP.
  - Changes since 2006 in transfer program outlays range from -2.1 to 2.0 percent of GDP.
  - Seven countries reduced program size:
    - Median decrease: 0.2 percent of GDP.
  - Thirty-nine countries expanded programs:
    - Increases ranged up to 2.0 percent of GDP.
    - Median increase: 0.2 percent.

### Other Public Sector Measures
- Ten countries increased public sector wages to compensate workers and pensioners for higher prices.
  - Fiscal cost range: near zero to 1.9 percent of GDP.
  - Median cost: 0.6 percent.
  - Costs primarily reflect increases in public sector wages and pensions; in Guyana, Kyrgyz Republic, and Azerbaijan reflect increases in minimum public-sector wages and pensions.
  - Ad hoc public sector wage adjustments are poorly targeted since public servants are rarely among the poorest.

### Aggregate Fiscal Cost of Measures
- Seventy-nine countries reported a net increase in fiscal cost from measures responding to higher fuel and food costs.
  - Range: near zero to 4.8 percent of GDP.
  - Median increase: 0.6 percent.
  - Ten countries reported a net increase of more than 2 percent of GDP.
  - Nineteen countries had fiscal costs greater than 1 percent of GDP.
  - Largest fiscal cost increases driven by increases in universal fuel price subsidies.
  - As a percentage of total revenue plus grants:
    - Increases ranged from near zero to 22.9 percent.
    - Median: 1.9 percent.
- Thirteen countries reported net decreases in fiscal cost:
  - Median decrease: 0.6 percent of GDP.
  - Only Iraq’s decrease (reflecting reform of fuel price subsidies) exceeded 2 percent of GDP.
  - As a percent of total revenue plus grants, decreases ranged from near zero to 4.7 percent.
  - Median: 0.3 percent.
- Of the 79 countries reporting fiscal costs:
  - Thirty-nine are PRGF-eligible countries.
  - Fifty are classified as vulnerable to balance of payment pressures.

### Monetary and Exchange Rate Policy Responses
- Monetary policy responses aimed to prevent first-round effects of higher food and fuel prices from causing second-round inflation.
  - Recent tightenings in countries with elevated inflation prior to international price increases (e.g., Ghana, Egypt, Pakistan, Sri Lanka) intended to bolster monetary credibility.
  - In several cases, monetary policy should be tightened further.
- Exchange rate considerations:
  - Movements in nominal exchange rates can cushion balance of payments impacts.
  - Currency unions and fixed exchange rate regimes cannot use exchange rate as shock absorber.
  - CFA franc-zone peg to the euro helped shield those countries from increases in U.S. dollar prices of food and oil due to euro appreciation versus the U.S. dollar.
- Country groups and reserve positions (selected aggregate findings):
  - Nine countries experienced a turnaround (appreciation in 2007 then depreciation in first four months of 2008); median depreciation during first four months of 2008: -3.4 percent; median baseline reserves: 4.5 months of imports; median shocks effect: -0.8 months of imports.
  - Nine countries had ongoing depreciations; median 2007 change: -4.6 percent; median four-month 2008 change: -1.0 percent; median baseline reserves: 2.7 months of imports; median shocks effect: -0.5 months of imports.
  - Eleven mostly low-income, high-impact countries stabilized exchange rates vis-à-vis the U.S. dollar; median 2007 change: -0.5 percent; median four-month 2008 change: 0.1 percent; median baseline reserves: 2.6 months of imports; median shocks effect: -1.0 months of imports.
- Memorandum:
  - Change in US$/euro rate (percent): 11.8, 5.6, 17.4 (as presented).

### Role of the Fund and Policy Guidance
- The Fund is coordinating with national and international partners (United Nations, World Bank, FAO) to respond to fuel and food price shocks.
  - UN Task Force on the Global Food Crisis prepared a comprehensive Framework for Action (CFA).
  - The World Bank Group announced a New Deal on Global Food with short-, medium-, and long-term actions (safety nets, increased agricultural production, analysis of biofuels, trade actions).
- IMF activities:
  - Extensive analytical work on causes, severity, duration, and impact of price increases.
  - Advice and technical assistance on macroeconomic responses and financial assistance (see Box 2).
- Financing guidance:
  - Financing useful and sustainable only if shocks are temporary or as a transitory easing of adjustment.
  - For permanent shocks, adjustment is appropriate.
  - Given uncertainty about persistence, policies should be cautious and reflect asymmetric costs of adjustment.
  - For LICs and highly indebted countries, financing should be grants or highly concessional loans to avoid unsustainable debt positions.
- IMF support modalities (Box 2 summary):
  - Policy advice in surveillance (program reviews, Article IV reports) on fiscal space, monetary and exchange rates, trade policies.
  - Technical assistance on design and implementation of tax/tariff changes and transfer programs.
  - Financial support, with rapid disbursement to countries facing balance of payments gaps; grants from other partners may be more suitable for some countries; financial instruments tailored to country needs.
- Fund advice on fiscal space:
  - To promote efficiency and sound fiscal policy, commodity prices should be passed through to consumers and producers.
  - Full pass-through allows correct price signals, shields public finances from excessive costs and volatility, and mitigates volatility in world prices.
  - Full pass-through can cause significant drops in real household incomes, especially for low-income households, which need mitigating measures as appropriate.

*Italic: Source: IMF PDF content unit _063008 - 40.      Thirty-eight countries increased or decreased fuel price subsidies between 2006*

### 65.      In some countries where fuel and food prices have been kept artificially low, the

### _063008 - 65.      In some countries where fuel and food prices have been kept artificially low, the

### Social protection, subsidies, and mitigation options
- Where fuel and food prices have been kept artificially low, substantial gaps with world prices may be difficult to eliminate quickly because of social considerations; phasing out subsidies gradually and putting in place social safety nets may be necessary.
- Poverty and social impact analyses should be used, whenever possible, to identify vulnerable groups and design offsetting measures.
- If pass-through can only be partial or gradual (for socio-political reasons), adverse budget and debt impacts may need to be addressed through compensating fiscal measures.
- Primary goal on efficiency and equity grounds: protect the poor and other vulnerable groups from higher prices with minimum disruption of food and fuel markets.
- Mitigating measures discussed:
  - Targeted transfer programs, preferably as part of an integrated social safety net:
    - Can reach the poor efficiently and effectively, but implementation can be challenging.
    - Conditional cash transfer programs are expanding but “can take time and requires planning, targeting, and delivery capacity.”
    - Expanding targeted food distribution or school lunch programs can be effective.
    - Agricultural subsidy programs can help if carefully designed and focus on increasing productivity of small farmers.
  - Tariff reductions:
    - Mitigate price increases and reduce inefficient trade distortions.
    - Evidence suggests tariffs are likely to be less effective than targeted transfers at protecting the poor.
  - Consumption tax decreases and universal price subsidies:
    - Problematic: badly targeted, distort consumer choices, result in over consumption of tax-preferred goods, difficult to reverse, engender administration and enforcement problems.
    - Subsidies on products consumed mainly by the poor can increase the share of benefits going to poor households but also distort price signals.
    - Studies show fuel subsidies are a very costly way to protect the poor in developing and emerging-market economies.
  - Ad hoc general public sector wage increases:
    - Not well targeted; public servants are rarely in the lower ranges of the income distribution.
  - Export restrictions:
    - Highly distortionary, reduce gains from higher prices for exports, provide perverse incentives, and can increase world prices further.

### Replacing untargeted measures and short-term targeting
- Some countries may have implemented universal rather than targeted measures because they allow quicker response; these countries should assess efficiency and replace untargeted programs with more cost-effective measures as soon as possible.
- In countries without effective safety nets, a package building on existing programs should be identified, e.g.:
  - school feeding programs,
  - cash transfers to the most vulnerable populations,
  - reduction in education and health fees,
  - public transport subsidies.
- Short-term simple targeting methods to expand coverage and improve targeting:
  - geographic characteristics of the poorest regions;
  - categories of the most vulnerable populations (e.g., disabled and elderly living alone);
  - tax reductions and subsidies to products consumed mainly by the poor.
- Universal subsidies can be gradually withdrawn as part of a reform strategy that simultaneously develops safety-net design, targeting, and coverage, accompanied by public information campaigns to secure political support.

### Fiscal implications and Fund advice on fiscal policy
- Even the most efficient and effective policy responses to higher fuel and food prices can result in fiscal costs that governments need to assess.
- Available options to deal with fiscal costs depend on countries’ macroeconomic situation and capacity to create fiscal space; Fund advice considers specific country circumstances.
- Options by circumstance:
  - Countries without binding debt sustainability, financing, or macro-stability constraints:
    - Have scope to loosen fiscal positions to accommodate the costs of measures taken in response to higher fuel and food prices.
  - Countries with fiscal constraints:
    - Should create fiscal space to offset fiscal costs without jeopardizing sustainability or stability.
    - Fiscal space can be created by increasing revenue, reducing nonproductive spending, raising borrowing in a noninflationary and sustainable way, and securing higher external grants or concessional loans from donors.
  - Countries that find it difficult to create fiscal space:
    - Would need to limit size and duration of fiscal response and pass-through the increase in international prices to domestic consumers more rapidly.
    - Should, to the extent possible, accompany this with strengthening and expansion of cost-effective social safety nets.

### Fund advice on monetary and exchange rate policy
- First-round effects of higher food and fuel prices on inflation should generally be accommodated to allow relative prices to change without forcing a decline in nontraded goods prices.
- If inflation objectives are missed as a result, central banks should explain that achieving objectives in the face of profound supply shocks would require an overly contractionary stance and lead to unnecessary output losses.
- In countries with recent adoption of formal inflation targeting or where policy credibility is not established, a balance is required between avoiding undue output losses from tightening and risks to credibility from missing inflation objectives.
- Monetary policy should be sufficiently tight to prevent first-round effects from spilling over to other goods and services (second-round effects) and to avoid a wage-price spiral—particularly where inflation has been rising due to overly expansionary policies.
- If food and fuel shocks are regarded as permanent, they call for a real effective exchange rate depreciation for net importers.
  - For countries with more open capital accounts, allowing depreciation can be consistent with tightening monetary policy because tightening improves odds that real depreciation occurs through lower inflation rather than nominal depreciation.
- Tradeoff for countries most adversely affected by high food prices:
  - Depreciation can quickly feed into even higher domestic food prices (and hence inflation) while having limited moderating effect on the trade deficit.
  - Short-term mobilization of concessional financing may be preferable to cushion food and oil price increases in many instances.
- Membership in a currency union or full dollarization may prevent nominal exchange rate action; in such cases, fiscal adjustment needs are heightened to facilitate external adjustment and offset subsidy increases.

### Trade policy recommendations
- Keep global food markets open; restrictive trade policies (export bans or export taxes by net food exporters) push up world prices and hurt net importers.
- Priority: maintain free trade in commodities while fostering incentives for production and using efficient policies to protect the urban poor (e.g., targeted cash transfers).
- An ambitious Doha Round conclusion, including on agriculture, can help broaden and stabilize international food trade and foster efficient agricultural production in the medium and long term.
- Reduced tariffs on imported food can alleviate food price pressures and improve efficiency, but revenue losses in poor countries reliant on tariffs must be accommodated without destabilizing macroeconomic policies.
- Subsidies or price controls create trade distortions and pressures for smuggling; attempts to maintain domestic food prices below world levels through untargeted measures create incentives for evasion or smuggling.
- Biofuel subsidies should be carefully re-examined, especially in developed countries:
  - Evidence suggests first-generation biofuels promoted by these policies are not cost-effective and environment-friendly alternatives to carbon-based fuels.
  - Less ambitious and more trade-friendly biofuels policies would lower pressure on food prices by reducing competition with food for agricultural land and resources.

### Balance of payments financing and Fund-supported instruments
- Fund financial support to help countries manage fuel and food price shocks has begun; support for low-income countries requires concerted efforts by development partners and should preferably take the form of grants to avoid risks to debt sustainability.
- At end-May, the World Bank introduced a new $1.2 billion rapid financing facility to address immediate needs, including US$200 million in grants targeted at the vulnerable in the world’s poorest countries.
- The Fund’s balance of payments support is being delivered through a variety of channels:
  - Augmentation of existing PRGF arrangements:
    - More than half of the vulnerable countries already have a PRGF arrangement in place.
    - Augmentation of access under existing arrangements provides a readily available vehicle for covering unexpected financing needs.
    - As of the end of June 2008, augmentations have been granted for Benin, Burkina Faso, the Kyrgyz Republic, the Central African Republic, Haiti, Mali, and Niger; several other requests are in the pipeline.
  - Exogenous Shocks Facility (ESF):
    - Can provide quick access to concessional support for low-income countries facing short-term, shock-related financing needs.
    - Modifications of this facility are under preparation to enable more rapid financing and streamline access requirements.
  - New PRGF arrangements:
    - Suitable for countries expected to have more prolonged balance of payments needs linked in part to the recent shocks.
    - New PRGF arrangements with higher levels of access were recently approved for Mali and Niger.
  - Stand-By Arrangements:
    - For middle-income countries, access to Stand-By arrangements remains available, including draw-downs under existing precautionary arrangements.
- The scope of Fund financing in individual cases will be guided by evolving external conditions; staff estimates of financing needs will be revisited regularly and take into account other forms of external support (in-kind food relief, bilateral grants, regional and multilateral development bank funds).

### Appendix I — Estimating balance of payment impacts (underlying assumptions)
- Ex post impact estimates (January 2007–April 2008):
  - Used annual 2007 trade data combined with world price developments to estimate impact on net oil/food imports.
  - Monthly starting value for January 2007 derived from food and oil trade value data reported for 2007 in questionnaires returned by area departments, complemented by WEO and WDI data if missing.
  - To derive an estimate for the following 16 months, applied the price index and summed estimated values; deducted a hypothetical counterfactual assuming stable prices.
  - Zero elasticity was assumed in this estimate.
- Ex ante baseline:
  - Area departments’ projections for the Spring WEO and questionnaire responses on food trade constituted the baseline.
  - For oil trade data only, major revisions since Spring WEO submission were included (example: Mauritania, Tunisia, and Vietnam forecasted to become net oil importers rather than net oil exporters in 2008).
  - Missing food trade data were estimated based on World Bank’s World Development Indicators where possible.
  - Broad assumptions where data were poor:
    - unchanged reserves accumulation or draw down of reserves in 2009 even if 2008 has been updated by country desks;
    - a fixed volume share of food items in exports and imports of goods and services for countries where projections were not available.

*Source: IMF content unit _063008 - 65.      In some countries where fuel and food prices have been kept artificially low, the*

### 84.      We estimate a hypothetical impact of a further increase in oil and food prices on

### _063008 - 84.      We estimate a hypothetical impact of a further increase in oil and food prices on

### Methodology and core assumptions
- Objective: Estimate a hypothetical impact of a further increase in oil and food prices on international reserves by comparing projected 2009 reserves coverage under the baseline with an alternative level resulting from higher prices under a transparent set of broad assumptions.
- Assumptions:
  - Each country draws on its central bank reserves to cover in full a rising oil and food import bill (abstracting from donor support, fiscal adjustment, and exchange rate depreciation).
  - Trade volumes are completely inelastic to oil and food price changes.
  - Modeled oil price increase corresponding to latest WEO revisions:
    - 2008: net oil import bill modeled to increase by 17.9% (US$ 112 per barrel after revision compared to US$95 per barrel before).
    - 2009: net oil import bill modeled to increase by 23.0% (US$ 116.25 per barrel after revision compared to US$ 94.50 before).
  - Food price increase: assume a price in 2008 and 2009 that is 20 percent higher than projected in the baseline.
    - Exercise does not differentiate between different components of the food trade balance or potential country differences in the definition of food items.
  - GDP and imports projections (denominators for indices) are adjusted to reflect the effect of the price increases.
  - Potentially offsetting or aggravating developments from correlated price increases are not included in the scenarios.

### Impact on projected 2009 external positions (reserves coverage)
- The exercise reports country-level changes in:
  - CA (current account) in percent of GDP, and
  - Reserves in months of next year's imports of goods and services,
  - For four cases: Before Shock, Oil price shock, Food price shock, Combined shock.
- Key modeling details reported in tables:
  - Severe shocks are highlighted where the drop in reserves is superior to 0.5 months of imports.
  - Note on data: For some countries, projections and data may have changed significantly since the Spring 2008 WEO submission (explicit example: Tonga).
- Illustrative country-specific results (as presented verbatim):
  - Grenada: Before Shock -32.4 3.2 ; Oil price shock -34.6 2.4 ; Food price shock -33.0 2.9 ; Combined shock -35.3 2.1
  - Honduras: Before Shock -9.0 3.2 ; Oil price shock -11.3 2.5 ; Food price shock -8.5 3.3 ; Combined shock -10.9 2.6
  - Kyrgyz Republic: Before Shock -7.4 3.2 ; Oil price shock -11.2 2.1 ; Food price shock -8.0 3.1 ; Combined shock -11.9 2.0
  - Niger: Before Shock -14.0 3.3 ; Oil price shock -15.1 2.7 ; Food price shock -13.7 3.4 ; Combined shock -14.8 2.8
  - Liberia: Before Shock -36.2 1.1 ; Oil price shock -41.3 0.3 ; Food price shock -40.2 0.4 ; Combined shock -45.2 -0.4
  - Ecuador (MICs table): Before Shock 3.9 2.4 ; Oil price shock 7.1 4.0 ; Food price shock 5.0 3.1 ; Combined shock 8.1 4.6
  - Qatar (MICs table): Before Shock 40.7 2.5 ; Oil price shock 48.5 9.4 ; Food price shock 40.5 2.3 ; Combined shock 48.3 9.3
  - Saudi Arabia (MICs table): Before Shock 24.0 26.8 ; Oil price shock 32.7 32.8 ; Food price shock 23.6 26.6 ; Combined shock 32.4 32.6
  - Algeria (MICs table): Before Shock 20.6 41.0 ; Oil price shock 28.5 48.2 ; Food price shock 19.8 40.5 ; Combined shock 27.8 47.6
- Group categorizations presented in the tables:
  - "10 Countries with low reserves after the upward revision in fuel prices" (list of low-reserve countries with their CA and Reserves values).
  - "3 Countries with low reserves after the upward revision in both fuel and food prices".
  - "30 Countries with low reserves before the upward revision in food and fuel prices".
  - "22 Countries with reserves covering more than three months of imports ... before and after shocks".
  - "11 Countries with insufficient data" (listed; some table entries show "...." meaning missing data).
  - Equivalent groupings appear in the MICs table (Table 1.b): e.g., "10 Countries with low reserves after the upward revision in fuel prices", "18 Countries with low reserves before the upward revision ...", "41 Countries with reserves covering more than three months ...", and "3 Countries with insufficient data".

### Fiscal response figures, patterns, and survey-based evidence
- Appendix II reports fiscal response visuals and tables:
  - Figures tracked: Fuel Tax Rate Changes Since 2006; Food Tax Rate Changes Since 2006; Fiscal Impact of Tax Decreases and Spending Program Changes (as a percent of GDP).
  - Table 1 (Pattern of Fuel Tax Decreases by Tax and Country Characteristics) reports counts by tax type and year across income groups, IMF department, and net oil trade balance. Excerpted counts (preserved exactly as in source):
    - All Countries 159 18 130 16 24 2637 23
    - Income group examples: High-income OECD 18 21 03 32 4 22 ; Low-income 3 4  13 06  45 8 24 (table entries appear as compacted numbers in source).
    - Note: "The count for total changes may differ from the sum of 2007 and 2008 because the same country may have tax changes in both years."
  - Table 2 (Pattern of Food Tax Decreases by Tax and Country Characteristics) reports counts by tax type and year across income groups, IMF department, net total food trade balance, net cereal trade balance. Excerpted counts (verbatim from source):
    - All Countries 159 76 22 31 49 45 84 53
    - Net total food trade balance categories: Large importer 19 10 51 14 9 12 63 ; Small importer 9 9 47 12 10 32 24 28 (table entries appear compacted in source).
    - Note definitions preserved verbatim: "Large food importer: net imports greater than 3 percent of GDP; large food exporter: net exports greater than 4 percent of GDP; large cereal importer: net imports greater than 0.2 percnt of GDP."
- Appendix III: Survey coverage and response quality (survey of tax and expenditure policy responses to higher fuel and food prices):
  - Respondents: Quantification of fiscal costs received from 146 countries.
  - Overall response: Out of total 187 countries, 146 (78 percent) provided quantitative responses to at least some fiscal questions.
  - Departmental response pattern described in prose:
    - Response rate was lowest in the European (58 percent) and Asia and Pacific (63 percent) Departments.
    - Response rates in the African, Middle East and Central Asia, and Western Hemisphere Departments were over 84 percent.
  - Table 1. Survey Responses by Area Department (preserved entries):
    - Total Number: AFR 44 ; APD 32 ; EUR 45 ; MCD 32 ; WHD 34 ; Total 187
    - Submission received: AFR 44 ; APD 24 ; EUR 24 ; MCD 23 ; WHD 31 ; Total 172
    - (percent): 100% 75% 93% 97% 91% 92%
    - Submission with BOP only: 00 10 40 14 (compact presentation in source)
    - Submission with fiscal data: 44 24 32 27 31 158
    - Qualitative information only: 1 46 0 11 2 (compact in source)
    - Quantitative information: 43 20 26 27 30 146
    - Quantitative data on food: 39 17 20 24 27 127
    - Quantitative data on fuel: 39 18 20 22 25 124
    - Quantitative data on subsidies: 24 14 8 20 17 83
    - Quantitative data on transfers: 16 9 7 12 17 61
    - Quantitative data on other spending: 21 11 12 19 14 77
  - Note preserved verbatim: "Total countries include all member countries except Federated States of Micronesia plus Aruba, Netherlands Antilles, and West Bank & Gaza."

*Source: World Economic Outlook and Staff's calculations; content extracted from the provided IMF chapter/section.*

### Appendix IV

### Appendix IV

### Policy responses to food and petroleum price increases — Food Taxes and Tariffs
- Import Tariffs on Food
  - Advantages: "Countries that have import tariffs on food can reduce or eliminate these to decrease domestic food prices. Import tariffs distort trade patterns and lost revenue can be recouped using more efficient revenue raising instruments as part of a broader reform of the fiscal system. Similar treatment should be applied to all sources of import for a given food in order to avoid distorting trade patterns."
  - Disadvantages: "Poor domestic producers can be adversely affected. Higher urban income groups typically receive a relatively large share of the benefit since they consume a relatively large share of total food consumption. Revenue losses need to be recouped elsewhere in fiscal system. Lowering tariffs may be problematic for countries that are part of customs unions."
- VAT and Sales Taxes on Food
  - Advantages: "Countries with existing VAT or sales taxes on food consumption can reduce or eliminate these taxes to decrease domestic prices of food. VAT exemptions are preferable to zero rating on administrative and enforcement grounds."
  - Disadvantages: "Revenue losses may need to be recouped using other taxes that could be more distortionary. Higher income urban groups typically receive a relatively large share of the benefit. Difficult to undo since so many households benefit. May lead for request for preferential tax rates for other sectors and is inconsistent with Fund advice to broaden the tax base by eliminating sectoral exemptions and preferential rates. Price and revenue implications of VAT exemptions are difficult to identify when intermediate inputs are subject to VAT."
- Export taxes or quotas
  - Advantages: "Possible if country is an exporter of important food items."
  - Disadvantages: "Such taxes and quotas are highly distortionary and reduce the gains from higher prices for exports. Lower prices provide perverse incentives to producers who should be encouraged to increase food production. Exacerbate problem by increasing world prices further."

### Policy responses to food and petroleum price increases — Fuel Taxes and Tariffs
- Fuel Taxes (VAT, excises, import taxes)
  - Advantages: "Most countries (especially fuel importing countries) generate substantial indirect tax revenues through fuel taxes, especially on gasoline and diesel. Reducing these taxes can lead to domestic fuel prices increasing by less than world prices. Governments often directly control prices and so can enforce domestic price changes quickly. Governments can adjust the mix of ad-valorem and specific taxes to mitigate the impact of increasing world prices."
  - Disadvantages: "Fuel taxes are typically seen as an efficient way to raise revenues and reducing them may mean that these revenues have to be financed through more inefficient tax instruments, by cutting back growth-enhancing public expenditures or pro-poor social expenditures, or through inflationary financing that has adverse growth consequences. Higher fuel prices would provide the correct incentives for more efficient use of fuel, encourage lower consumption, and thus mitigate the impact of higher prices on the balance of payments. For fuel exporters, lower prices redirect fuel to domestic consumption and reduce the economic gains from exporting fuel when world prices are high. Higher income households receive the bulk of the benefits of lower fuel taxes since they account for the bulk of fuel consumption."

### Policy responses to food and petroleum price increases — Food and Fuel Subsidies
- Universal Food Subsidies (Including price controls)
  - Advantages: "May be possible if there are marketing boards, a few large domestic producers/importers, or if all consumption is imported. If government has sufficient capacity to enforce passthrough of the subsidy, it will lead to an immediate decrease in the domestic price."
  - Disadvantages: "Higher income groups typically receive a relatively large share of the subsidy. Can involve a very large fiscal cost, necessitating offsetting fiscal measures, possibly including taxes."
- Import Subsidy on Food
  - Advantages: "May be possible where importers are already regulated or imports are controlled by a few large suppliers. May lead to an immediate decrease in food price."
  - Disadvantages: "Import subsidies can be highly distortionary and higher food demand exacerbates adverse terms of trade effect of higher import prices. Financing subsidy bill may involve increasing other distortionary taxes. Higher income groups typically receive a relatively large share of the subsidy. Domestic producers lose at time when increased investment in agriculture should be encouraged."
- Targeted Food Subsidies
  - Advantages: "Some countries may have access to existing food subsidy programs that are targeted to low-income groups (e.g. ration programs or geographically targeted programs). Increased budgetary pressures may focus attention on need to improve targeting. If well targeted, a high proportion of the subsidy benefit will go to low income groups."
  - Disadvantages: "Can be costly if government is involved in procuring and distributing foods. Require adequate capacity to design and implement well-targeted programs. Alleviate current poverty, but unlikely to have any impact on future poverty through enhancing income earning opportunities."
- Fuel Subsidies
  - Advantages: "Some countries sell fuel domestically at prices below import cost or the export price. This is especially true for kerosene in importing developing countries but also often true for other products in exporting countries."
  - Disadvantages: "Subsidies distort domestic fuel consumption patterns and do not provide sufficient incentives to become more energy efficient. For example, low kerosene or diesel prices result in substantial substitution from diesel to kerosene or from gasoline to diesel. For fuel importers, subsidies increase domestic fuel consumption and exacerbates the adverse impact of higher import prices on the balance of payments. For fuel exporters, subsidies similarly reduce the gains from exporting at higher world prices. Fuel subsidies crowd out higher priority public capital expenditures and pro-poor social expenditures. The bulk of fuel subsidies accrue to higher income households that consume the bulk of total fuel consumption. Low kerosene prices can result in the redirection of kerosene to the transport sector with resulting shortages, especially in poor remote rural areas."

### Policy responses to food and petroleum price increases — Transfer Programs
- School Feeding Programs
  - Advantages: "Countries with existing programs can increase subsidy and expand coverage. Can be well targeted if focused on public schools and primary school children. Provide incentives for enrolling children in schools and can improve student participation in learning process."
  - Disadvantages: "Does not cover poor households without children attending schools participating in the program. Can be costly if government involved in procuring and distributing foods."
- Fee Waivers
  - Advantages: "Countries with school registration and attendance fees or health clinic fees can reduce or eliminate these fees. Eligibility can be restricted to those attending public facilities and even geographically to poorest areas. Can provide incentives to attend schools and health clinics."
  - Disadvantages: "May result in large undercoverage of poor if these do not access education and health service facilities. Poor without children do not benefit from lower school fees."
- Public Works Programs
  - Advantages: "Countries with existing public works programs can increase coverage and nominal wages paid."
  - Disadvantages: "Requires capacity to design and implement such programs and expand within short time scale. A substantial amount of budget can be absorbed by administrative, managerial and input costs. Typically these programs are concentrated in poorer localities and thus do not cover poor in other localities. When payment is in food this can increase administrative cost of the program. Not effective at targeting the working poor, disabled, or women with very young children."
- Targeted Cash Transfers
  - Advantages: "Some countries may be able to expand existing targeted safety net programs with broad coverage of poor. The level of transfer and/or the coverage of poor households could be quickly expanded (or indexed). If transfers are in cash then these may be less administratively costly to deliver and do not distort prices. Transfers can be conditioned on household investments in human capital (e.g. attendance at school, training, health clinics, agricultural extension programs)."
  - Disadvantages: "These require an administrative capacity to design and implement well targeted programs. Often not easy to scale up coverage of these programs in very short term. Takes time and resources to design and implement or to expand coverage."

### Policy responses to food and petroleum price increases — Other Policies
- Agricultural Input Subsidies
  - Advantages: "Countries can subsidize the import of agricultural inputs such as fertilizer and pesticides. These are intended to stimulate domestic production of foods and reduce reliance on imports."
  - Disadvantages: "Typically the larger farm holders gain most from these programs and price subsidies can be fiscally costly without addressing the underlying objective of increasing agricultural productivity."
- Wage and pension adjustments
  - Advantages: "Countries often increase minimum wages, civil service wages or state pensions where these are not automatically inflation indexed. Where they are indexed, additional adjustments are not required."
  - Disadvantages: "These policies do not typically benefit the poorest households since they typically work in the informal sector."

### Balance of Payments Effects and Fund Relations (Appendix V content included)
- Table 1. "Low-Reserves and High Impact Low-Income Countries and Fund Relations (as of June 26, 2008)"
  - Includes a listing of low-reserves countries and high-impact indicators for food and fuel price shocks, associated Fund programs (e.g., PRGF, ENDA, PSI, SMP, EPCA, SBA) and annotations:
    - "1/ Reserves coverage of less than 3 months after the oil and food price shock."
    - "2/ Change in reserves coverage by more than 0.5 months of imports as a result of either shock."
    - "Two "√√" indicates high impact for both the food and fuel price shock."
    - "3/ Includes new arrangements with higher access than planned initially."
- Table 2. "Low-Reserves and High Impact MICs and Fund Relations (as of June 11, 2008)"
  - Includes a listing of middle-income countries with low reserves and high impact indicators and associated Fund programs, with the same footnote definitions as Table 1:
    - "1/ Reserves coverage of less than 3 months after the oil and food price shock."
    - "2/ Change in reserves coverage by more than 0.5 months of imports as a result of either shock."
    - "Two "√√" indicates high impact for both the food and fuel price shock."

*Appendix IV (content extracted from the source PDF).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2008/_063008.pdf_