## _091908 - Executive Summary

## Source details

**Canonical URL:** [_091908 - Executive Summary](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2008/_091908.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2008/_091908.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2008/_091908.pdf.json)

---

### Executive summary — key findings
- Food and oil prices peaked in early summer; oil prices surged to levels envisaged under the most adverse scenario presented in the June 2008 paper.
- Effects of higher prices on the balance of payments, budgets, and domestic prices intensified, with a large group of low- and middle-income countries experiencing a substantial weakening of their balance of payments and higher inflation.
- Fuel and food prices have eased from recent peaks, but remain well above levels at the onset of the price surges:
  - As of mid-September, oil prices are at some 40 percent below their mid-July peaks, but still double the levels recorded at end-2006.
  - Food prices have eased 8 percent from their June peak but are still 44 percent above end-2006 levels.
- Many fundamental forces behind the price surge remain in effect; medium-term supply constraints are likely to keep prices high absent a sharp global downturn.
- Some 50 PRGF-eligible countries and MICs are expected to remain vulnerable through 2009.

### II. Update on fuel and food price developments
- Recent softening in commodity prices reflected both supply and demand factors:
  - Oil market: OECD consumption weakened (particularly in the U.S.), sharper-than-anticipated weakening in Europe and Japan, an almost 1 million barrel a day increase in OPEC production (mostly from Saudi Arabia), and a recovering dollar contributed to price declines.
  - Food markets: bumper wheat crop, substantial reduction of rice and wheat export restrictions, and smaller-than-expected damage from June U.S. Midwest floods reduced pressure on corn and soybean prices.
  - In Euro terms, oil prices have fallen by about a third less than in dollar terms from their July peak.
- Baseline projections for food and fuel prices broadly similar to the Spring 2008 WEO:
  - Futures markets suggest annual average oil prices of U.S.$107 and U.S.$100 for 2008 and 2009, respectively, versus U.S.$113.25 and U.S.$118.75 in the September baseline projections.
  - Oil futures options prices imply greater-than-usual uncertainty and continued high price volatility.
  - Prices of major foods will stabilize or ease slightly but strong demand and high production costs will prevent a sharp retreat.

### III. Macroeconomic impact — Balance of payments (2008 developments)
- Impact has been substantial; effects continued to mount and many low- and middle-income countries saw substantial weakening of reserves.
- For net oil and food importing PRGF-eligible countries, the combined adverse impact since the beginning of 2007 rose by an additional 1½ percent of GDP on average during May-July 2008.
- Table 1 summary (BOP impacts on PRGF-eligible countries):
  - Food shock (Jan 07–Apr 08): Increase in percent of GDP 0.5; In months of imports 0.2
  - Food shock (Jan 07–Jul 08): Increase in percent of GDP 0.9; In months of imports 0.3
  - Food shock (May–July 08): Increase in percent of GDP 0.4; In months of imports 0.1
  - Fuel shock (Jan 07–Apr 08): Increase in percent of GDP 2.2; In months of imports 0.7
  - Fuel shock (Jan 07–Jul 08): Increase in percent of GDP 3.4; In months of imports 1.2
  - Fuel shock (May–July 08): Increase in percent of GDP 1.2; In months of imports 0.5
- Additional 2008 impacts versus 2007:
  - Net fuel-importing PRGF-eligible countries: rise in fuel bill equivalent to 3.2 percent of 2008 GDP relative to 2007 (U.S.$60 billion aggregate for the subset of 58 countries, or roughly 1.2 months of imports).
  - For 43 net food importers with available data: rise in food bill is 0.8 percent of 2008 GDP (U.S.$7.2 billion or 0.3 months of imports).
- Relative contribution: fuel contributed nearly four times as much as food to the balance of payments impact during January 2007 to July 2008.
- Vulnerability counts at end-2008:
  - Some 50 PRGF-eligible and middle-income countries estimated vulnerable by end-2008.
  - Compared to Spring 2008 WEO baseline, a larger number of countries (33 PRGF-eligible countries and 17 MICs) estimated to have reserves below three months of imports at end-2008.
- Table 2 (BOP impacts in 2008) key figures:
  - Low reserves cases (reserve cover below 3 months of imports):
    - PRGF-eligible: Spring 2008 WEO 29; September 2008 WEO 33
    - Middle-income: Spring 2008 WEO 18; September 2008 WEO 17
  - Large reserves declines (drop in reserves larger than 0.5 months of imports):
    - PRGF-eligible: Spring 2008 WEO 9; September 2008 WEO 10
    - Middle-income: Spring 2008 WEO 6; September 2008 WEO 5
  - Memo items: Price levels
    - Oil (in US dollars): Spring 2008 WEO 95.0; September 2008 WEO 113.3
    - Food index: Spring 2008 WEO 150.4; September 2008 WEO 167.3

### III. Macroeconomic impact — Outlook for 2009 and scenarios
- Baseline scenario: number of PRGF-eligible countries and MICs vulnerable would remain broadly constant through 2009, though vulnerabilities could be aggravated by expected slowdown in global growth.
- Two alternative shock scenarios for 2009:
  - Low-oil-price scenario (oil prices at futures-implied lower levels):
    - Five additional oil-exporting MICs would experience a severe drop in reserves in 2009 (more than ½ month of imports).
    - Net oil-importing countries would benefit.
    - Group with reserves below three months of imports by end-2009 would shrink from 50 to 47 countries.
    - Scenario assumes a downward shock of about 12 percent to the oil price compared to the September 2008 WEO projection (to U.S.$104). Food prices kept at baseline.
  - High-oil/food-price scenario (prices revert to 2008 peaks):
    - An extra eight PRGF-eligible countries would experience a severe decline in reserves during 2009.
    - Cumulative 2008–09 effect: 21 PRGF-eligible countries and 14 MICs would lose reserves equivalent to more than ½ month of imports over 2008–09.
    - Group of vulnerable countries would broaden to 58 countries.
    - For oil, this would imply an average price of U.S.$132, 12 percent above the September 2008 WEO assumption.
- Table 3 (September 2008 WEO BOP outlook) selected entries:
  - Countries with large reserve losses (vs 2007 outturns):
    - PRGF-eligible: 2008 baseline 10; 2009 baseline 13; low oil price 9; high oil price 21
    - Middle-income: 2008 baseline 5; 2009 baseline 10; low oil price 12; high oil price 14
  - Countries with low reserve cover (end of period):
    - PRGF-eligible: 2008 baseline 33; 2009 baseline 32; low oil price 26; high oil price 36
    - Middle-income: 2008 baseline 17; 2009 baseline 19; low oil price 21; high oil price 22
  - Memo items: Magnitude of shocks (net fuel importers)
    - PRGF-eligible net fuel importers: In percent of GDP ... -1.1 1.2 ; In months of imports ... -0.3 0.3
    - Middle-income net fuel importers: In percent of GDP ... -0.7 0.6 ; In months of imports ... -0.1 0.2

### III. Macroeconomic impact — Inflation
- Continued increases in food and fuel prices in Q2 2008 led to substantial further acceleration of food and fuel price inflation in low- and middle-income countries.
- Median headline inflation in low-income countries increased by almost 3 percentage points during Q2 2008, reaching 12.7 percent, and projected to reach 13.3 percent by end-2008.
- Table 4 summary (median inflation in 75 countries, year-to-year, in percent):
  - 35 PRGF-eligible countries:
    - Headline CPI: 2006 7.3; 2007 8.9; March 2008 9.8; June 2008 12.7; Projected end-2008 13.3
    - Food: 2006 7.6; 2007 10.6; March 2008 11.5; June 2008 17.0
    - Fuel: 2006 6.0; 2007 8.7; March 2008 11.3; June 2008 19.5
  - 27 Emerging market countries:
    - Headline CPI: 2006 4.5; 2007 5.9; March 2008 7.1; June 2008 7.7; Projected end-2008 7.9
    - Food: 2006 6.0; 2007 9.6; March 2008 11.4; June 2008 14.0
    - Fuel: 2006 4.9; 2007 7.3; March 2008 12.0; June 2008 15.4
  - 13 Advanced countries:
    - Headline CPI: 2006 1.9; 2007 3.4; March 2008 3.7; June 2008 4.3; Projected end-2008 3.9
    - Food: 2006 2.4; 2007 4.2; March 2008 6.3; June 2008 6.1
    - Fuel: 2006 1.4; 2007 10.7; March 2008 11.8; June 2008 15.3
- Staff country teams project further acceleration of inflation through end-2008 in low-income and emerging market countries, compared to a deceleration projected in June 2008.
  - June projection: median 12-month headline inflation for low- and middle-income countries would decelerate to 7 percent by year-end from slightly more than 8 percent in March 2008.
  - Current projection: headline inflation is now projected to exceed 10 percent by end-2008 for the same group.
- Factors keeping inflation high despite easing world prices:
  - Shipment and transportation delays of imported food items delay pass-through.
  - Increased transportation costs weigh heavier in low-income countries due to more rudimentary infrastructure.
  - Higher fuel price inflation in low-income countries—19.5 percent year-on-year in June 2008 compared to 15.4 percent in emerging market and advanced countries—suggests spillover from fuel to food inflation may have been compounded by large step adjustments in energy prices as fuel subsidy schemes became too costly.

### IV. Countries’ policy responses
- Context: weakening balance of payments, accelerating inflation, mounting fiscal pressures, and limited use of nominal exchange rate flexibility.
- Fiscal responses:
  - Reductions in fuel taxes and increases in fuel subsidies now dominate fiscal costs.
  - Median fiscal cost of food-related policy responses appears to have leveled off, though more countries are using fiscal instruments to mitigate high food prices.
  - Some additional countries increased public sector wages and pensions.
- Exchange rate and monetary policy:
  - Many countries continued to show aversion to exchange rate flexibility despite its role as a shock absorber.
  - With rising headline inflation and wages, risks of spillover to generalized inflation are increasing and will require a robust monetary response.
- Policy prescription:
  - Most countries will need a combination of price adjustment (real depreciation and pass-through of world market prices) and fiscal adjustment to offset higher budgetary costs.
  - The scale and need for fiscal responses should reflect each country’s macroeconomic situation and capacity to create fiscal space.
  - External support, preferably grants in the case of LICs, will continue to be vital to ease adjustment burdens and limit effects on real incomes and poverty.

### V. Fund financial support and operational response
- The IMF has provided additional financial assistance to 14 affected countries to date.
- The IMF is in the process of reforming its Exogenous Shocks Facility to provide more rapid and streamlined assistance to members.
- The IMF continues to assist members through macroeconomic policy advice, technical assistance, and financial support.

### Fiscal costs — overview and detailed figures
- The costs of fiscal policy responses to increasing fuel and food prices have continued to increase.
- Countries responded primarily by reducing taxes and tariffs, increasing universal subsidies, expanding transfer programs, and increasing public sector wages.
- Recent increases in fiscal costs stem from further reductions in fuel taxes and increases in fuel subsidies, which now dominate total fiscal costs.
- Median total fiscal cost incurred since 2006 has increased from 0.6 to 0.7 percent of GDP.
- Higher fuel subsidies and lower fuel taxes account for nearly two-thirds of the total increase in fiscal cost since 2006.
  - Note: The fiscal cost of fuel tax decreases and higher fuel subsidies account, on average, for 63 percent of the total increase in fiscal cost since 2006.
- Table 5. Fiscal Cost of Policy Responses to Higher Fuel and Food Prices (as reported):
  - Fuel
    - Tax decreases — June paper: Number of countries 37; Median fiscal cost (% GDP) 0.3 — Recent update: Number of countries 43; Median fiscal cost (% GDP) 0.4
    - Subsidy increases — June paper: Number of countries 29; Median fiscal cost (% GDP) 0.7 — Recent update: Number of countries 36; Median fiscal cost (% GDP) 1.0
  - Food
    - Tax decreases — June paper: Number of countries 84; Median fiscal cost (% GDP) 0.1 — Recent update: Number of countries 92; Median fiscal cost (% GDP) 0.1
    - Subsidy increases — June paper: Number of countries 22; Median fiscal cost (% GDP) 0.2 — Recent update: Number of countries 29; Median fiscal cost (% GDP) 0.2
  - Other responses
    - Transfers — June paper: Number of countries 39; Median fiscal cost (% GDP) 0.2 — Recent update: Number of countries 43; Median fiscal cost (% GDP) 0.2
    - Public wages and pensions — June paper: Number of countries 10; Median fiscal cost (% GDP) 0.6 — Recent update: Number of countries 15; Median fiscal cost (% GDP) 0.6
  - Total fiscal cost — June paper: Number of countries 79; Median fiscal cost (% GDP) 0.6 — Recent update: Number of countries 92; Median fiscal cost (% GDP) 0.7
- Fiscal pressure from subsidies:
  - The combined fiscal cost of fuel and food subsidies in 2008 is expected to exceed 2 percent of GDP in 24 countries.
  - Fuel subsidies comprise the bulk of total food and fuel subsidies and are almost always poorly targeted; a shift—gradual, if need be—to better targeted programs could protect the poor in a more cost-effective manner.
  - In fuel importing countries, decreases in world fuel prices from recent peak levels would reduce the fiscal burden of subsidies, as long as the decreases are not passed through to consumers and the exchange rate against the dollar does not depreciate.
  - The fiscal cost of subsidies would also fall for oil exporting countries, but this effect would be offset by the loss of revenue from oil exports.

### Monetary, exchange rate, and trade policy observations
- Aversion to nominal exchange rate flexibility remains strong in many countries that can seemingly least afford it.
- A large number of countries with de jure floating exchange rates experienced an appreciation of the real effective exchange rate (REER) despite negative terms of trade shocks that would call for depreciation.
- Appreciation of the REER has been particularly pronounced in Cambodia and Sri Lanka.
- A smaller group of countries allowed modest depreciation, helping to broadly stabilize their REERs.
- Some countries that experienced large net inflows witnessed substantial appreciation of their currencies from January 2007 to June 2008 (examples: Argentina, Mongolia, Papua New Guinea, and to a certain extent Uganda).
- A few major exporters have started to relax some export restrictions; examples include Vietnam and Kazakhstan allowing export bans to expire on rice and wheat respectively, and the Ukraine increasing quotas on wheat exports.

### Fund financial support and PRGF/ESF activity
- Fund balance of payments support is being delivered through a variety of channels in collaboration with international partners.
- New PRGF arrangements approved in 2008 (amounts in millions of U.S. dollars):
  - Burundi 17.9
  - Djibouti 3.7
  - Mali 28.9
  - Niger 14.5
- Under existing PRGF arrangements (augmentations, amounts in millions of U.S. dollars):
  - Benin 14.4
  - Burkina Faso 14.0
  - Central African Republic 12.9
  - Grenada 2.3
  - Guinea 33.2
  - Haiti 25.4
  - Kyrgyz Republic 13.8
  - Madagascar 28.4
  - Malawi 16.1
  - Nicaragua 10.1
- Total reported additional financing under PRGF arrangements: 235.4 (in millions of US dollars).
- Augmentations under new and existing PRGF arrangements total over U.S.$230 million.
- Exogenous Shocks Facility (ESF): Modifications to provide quicker and streamlined concessional support are under consideration; the Executive Board is scheduled to consider proposed modifications on September.

### Comparison: June Paper “Shock” Scenario vs September WEO outlook
- June paper shock assumptions:
  - Fuel and food prices sustained for the year at about 20 percent above their Spring 2008 WEO levels (average oil price U.S.$112 vs U.S.$95).
- September WEO projections:
  - Oil prices projected to average U.S.$113, very close to the June paper shock scenario.
  - Food prices projected to remain about 11 percent above their levels in early 2008 (somewhat lower than the 20 percent potential shock considered).
- Vulnerability counts:
  - Potentially vulnerable PRGF-eligible countries in 2008: 33 (latest outlook) compared with 36 (June simulation).
  - Potentially vulnerable middle-income countries (MICs): 17 (latest outlook) compared with 22 (June simulation).
- Balance of Payments Impacts — Comparison (reserve cover below 3 months / drop in reserves > 0.5 months):
  - Low reserves cases:
    - PRGF-eligible: 36 (June paper) vs 33 (September WEO)
    - Middle-income: 22 (June paper) vs 17 (September WEO)
  - Highly impacted cases:
    - PRGF-eligible: 30 (June paper) vs 15 (September WEO)
    - Middle-income: 20 (June paper) vs 15 (September WEO)
- Memo items: 2008 prices (in US dollars)
  - June staff paper baseline: Oil 95.0, Food index 150.4
  - June staff paper shock scenario: Oil 112.0, Food index 180.5
  - September 2008 WEO outlook: Oil 113.3, Food index 167.3

*Source: Executive Summary and IMF staff analysis contained in file _091908 - Executive Summary.*

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

### _091908 - Executive Summary ......................................................................................................

### Executive summary — key findings
- Food and oil prices peaked in early summer; oil prices surged to levels envisaged under the most adverse scenario presented in the June 2008 paper.
- Effects of higher prices on the balance of payments, budgets, and domestic prices intensified, with a large group of low- and middle-income countries experiencing a substantial weakening of their balance of payments and higher inflation.
- Fuel and food prices have eased from recent peaks, but remain well above levels at the onset of the price surges:
  - As of mid-September, oil prices are at some 40 percent below their mid-July peaks, but still double the levels recorded at end-2006.
  - Food prices have eased 8 percent from their June peak but are still 44 percent above end-2006 levels.
- Many fundamental forces behind the price surge remain in effect; medium-term supply constraints are likely to keep prices high absent a sharp global downturn.
- Some 50 PRGF-eligible countries and MICs are expected to remain vulnerable through 2009.

### II. Update on fuel and food price developments
- Recent softening in commodity prices reflected both supply and demand factors:
  - Oil market: OECD consumption weakened (particularly in the U.S.), sharper-than-anticipated weakening in Europe and Japan, an almost 1 million barrel a day increase in OPEC production (mostly from Saudi Arabia), and a recovering dollar contributed to price declines.
  - Food markets: bumper wheat crop, substantial reduction of rice and wheat export restrictions, and smaller-than-expected damage from June U.S. Midwest floods reduced pressure on corn and soybean prices.
  - In Euro terms, oil prices have fallen by about a third less than in dollar terms from their July peak.
- Baseline projections for food and fuel prices broadly similar to the Spring 2008 WEO:
  - Futures markets suggest annual average oil prices of U.S.$107 and U.S.$100 for 2008 and 2009, respectively, versus U.S.$113.25 and U.S.$118.75 in the September baseline projections.
  - Oil futures options prices imply greater-than-usual uncertainty and continued high price volatility.
  - Prices of major foods will stabilize or ease slightly but strong demand and high production costs will prevent a sharp retreat.

### III. Macroeconomic impact
#### A. Balance of payments impact — 2008 developments
- Impact has been substantial; effects continued to mount and many low- and middle-income countries saw substantial weakening of reserves.
- For net oil and food importing PRGF-eligible countries, the combined adverse impact since the beginning of 2007 rose by an additional 1½ percent of GDP on average during May-July 2008 (Table 1).
- Table 1 summary (BOP impacts of fuel and food shocks on PRGF-eligible countries):
  - Food shock (Jan 07–Apr 08): Increase in percent of GDP 0.5; In months of imports 0.2
  - Food shock (Jan 07–Jul 08): Increase in percent of GDP 0.9; In months of imports 0.3
  - Food shock (May–July 08): Increase in percent of GDP 0.4; In months of imports 0.1
  - Fuel shock (Jan 07–Apr 08): Increase in percent of GDP 2.2; In months of imports 0.7
  - Fuel shock (Jan 07–Jul 08): Increase in percent of GDP 3.4; In months of imports 1.2
  - Fuel shock (May–July 08): Increase in percent of GDP 1.2; In months of imports 0.5
- Additional 2008 impacts versus 2007:
  - Net fuel-importing PRGF-eligible countries: rise in fuel bill equivalent to 3.2 percent of 2008 GDP relative to 2007 (U.S.$60 billion aggregate for the subset of 58 countries, or roughly 1.2 months of imports).
  - For 43 net food importers with available data: rise in food bill is 0.8 percent of 2008 GDP (U.S.$7.2 billion or 0.3 months of imports).
- Relative contribution: fuel contributed nearly four times as much as food to the balance of payments impact during January 2007 to July 2008.
- Vulnerability counts at end-2008:
  - Some 50 PRGF-eligible and middle-income countries estimated vulnerable by end-2008.
  - Compared to Spring 2008 WEO baseline, a larger number of countries (33 PRGF-eligible countries and 17 MICs) estimated to have reserves below three months of imports at end-2008.
- Table 2 summary (BOP impacts of fuel and food shocks in 2008):
  - Low reserves cases (reserve cover below 3 months of imports):
    - PRGF-eligible: Spring 2008 WEO 29; September 2008 WEO 33
    - Middle-income: Spring 2008 WEO 18; September 2008 WEO 17
  - Large reserves declines (drop in reserves larger than 0.5 months of imports):
    - PRGF-eligible: Spring 2008 WEO 9; September 2008 WEO 10
    - Middle-income: Spring 2008 WEO 6; September 2008 WEO 5
  - Memo items: Price levels
    - Oil (in US dollars): Spring 2008 WEO 95.0; September 2008 WEO 113.3
    - Food index: Spring 2008 WEO 150.4; September 2008 WEO 167.3

#### A. Balance of payments impact — outlook for 2009 and scenarios
- Baseline scenario: number of PRGF-eligible countries and MICs vulnerable would remain broadly constant through 2009, though vulnerabilities could be aggravated by expected slowdown in global growth.
- High commodity price volatility increases risks; two alternative shock scenarios for 2009 considered:
  - Low-oil-price scenario (oil prices stay at lower levels implied by recent futures markets):
    - Under this scenario, five additional oil-exporting MICs would experience a severe drop in reserves in 2009 (more than ½ month of imports).
    - Net oil-importing countries would benefit.
    - Group of countries with reserves below three months of imports by end-2009 would shrink from 50 to 47 countries.
    - Note: Assumed oil price refers to level implied by futures markets as of September 11, 2008; scenario considers a downward shock of about 12 percent to the oil price compared to the September 2008 WEO projection (to U.S.$104). Food prices are kept at baseline levels.
  - High-oil/food-price scenario (prices revert to 2008 peaks):
    - Under this scenario, an extra eight PRGF-eligible countries would experience a severe decline in reserves during 2009.
    - Cumulative 2008–09 effect: 21 PRGF-eligible countries and 14 MICs would lose reserves equivalent to more than ½ month of imports over 2008–09.
    - Group of vulnerable countries would broaden to 58 countries.
    - For oil, this would imply an average price of U.S.$132, 12 percent above the September 2008 WEO assumption.
- Table 3 summary (September 2008 WEO BOP outlook):
  - Countries with large reserve losses (vs 2007 outturns):
    - PRGF-eligible: 2008 baseline 10; 2009 baseline 13; low oil price 9; high oil price 21
    - Middle-income: 2008 baseline 5; 2009 baseline 10; low oil price 12; high oil price 14
  - Countries with low reserve cover (end of period):
    - PRGF-eligible: 2008 baseline 33; 2009 baseline 32; low oil price 26; high oil price 36
    - Middle-income: 2008 baseline 17; 2009 baseline 19; low oil price 21; high oil price 22
  - Memo items: Magnitude of shocks (net fuel importers)
    - PRGF-eligible net fuel importers: In percent of GDP ... -1.1 1.2 ; In months of imports ... -0.3 0.3
    - Middle-income net fuel importers: In percent of GDP ... -0.7 0.6 ; In months of imports ... -0.1 0.2

#### B. Impact on inflation
- Continued increases in food and fuel prices in Q2 2008 led to substantial further acceleration of food and fuel price inflation in low- and middle-income countries.
- Median headline inflation in low-income countries increased by almost 3 percentage points during Q2 2008, reaching 12.7 percent, and projected to reach 13.3 percent by end-2008.
- Table 4 summary (median inflation in 75 countries, year-to-year, in percent):
  - 35 PRGF-eligible countries:
    - 2006 Headline CPI 7.3; 2007 8.9; March 2008 9.8; June 2008 12.7; Projected end-2008 13.3
    - Food 2006 7.6; 2007 10.6; March 2008 11.5; June 2008 17.0
    - Fuel 2006 6.0; 2007 8.7; March 2008 11.3; June 2008 19.5
  - 27 Emerging market countries:
    - Headline CPI 2006 4.5; 2007 5.9; March 2008 7.1; June 2008 7.7; Projected end-2008 7.9
    - Food 2006 6.0; 2007 9.6; March 2008 11.4; June 2008 14.0
    - Fuel 2006 4.9; 2007 7.3; March 2008 12.0; June 2008 15.4
  - 13 Advanced countries:
    - Headline CPI 2006 1.9; 2007 3.4; March 2008 3.7; June 2008 4.3; Projected end-2008 3.9
    - Food 2006 2.4; 2007 4.2; March 2008 6.3; June 2008 6.1
    - Fuel 2006 1.4; 2007 10.7; March 2008 11.8; June 2008 15.3
- Staff country teams project further acceleration of inflation through end-2008 in low-income and emerging market countries, compared to a deceleration projected in June 2008.
  - Last June, projection was median 12-month headline inflation for low- and middle-income countries would decelerate to 7 percent by year-end from slightly more than 8 percent in March 2008.
  - Current projection: headline inflation is now projected to exceed 10 percent by end-2008 for the same group.
- Factors keeping inflation high despite easing world prices:
  - Shipment and transportation delays of imported food items delay pass-through.
  - Increased transportation costs weigh heavier in low-income countries due to more rudimentary infrastructure.
  - Higher fuel price inflation in low-income countries—19.5 percent year-on-year in June 2008 compared to 15.4 percent in emerging market and advanced countries—suggests spillover from fuel to food inflation may have been compounded by large step adjustments in energy prices as fuel subsidy schemes became too costly.

### IV. Countries’ policy responses
- Context: weakening balance of payments, accelerating inflation, mounting fiscal pressures, and limited use of nominal exchange rate flexibility.
- Fiscal responses:
  - Reductions in fuel taxes and increases in fuel subsidies now dominate fiscal costs.
  - Median fiscal cost of food-related policy responses appears to have leveled off, though more countries are using fiscal instruments to mitigate high food prices.
  - Some additional countries increased public sector wages and pensions.
- Exchange rate and monetary policy:
  - Many countries continued to show aversion to exchange rate flexibility despite its role as a shock absorber.
  - With rising headline inflation and wages, risks of spillover to generalized inflation are increasing and will require a robust monetary response.
- Policy prescription:
  - Most countries will need a combination of price adjustment (real depreciation and pass-through of world market prices) and fiscal adjustment to offset higher budgetary costs.
  - The scale and need for fiscal responses should reflect each country’s macroeconomic situation and capacity to create fiscal space.
  - External support, preferably grants in the case of LICs, will continue to be vital to ease adjustment burdens and limit effects on real incomes and poverty.

### V. Fund financial support and operational response
- The IMF has provided additional financial assistance to 14 affected countries to date.
- The IMF is in the process of reforming its Exogenous Shocks Facility to provide more rapid and streamlined assistance to members.
- The IMF continues to assist members through macroeconomic policy advice, technical assistance, and financial support.

*Source: Executive Summary (pages 2–13) of the IMF report contained in file _091908 - Executive Summary.*

### 17.      The costs of the fiscal policy responses to increasing fuel and food prices have

### 17.      The costs of the fiscal policy responses to increasing fuel and food prices have

### Fiscal costs — overview
- The costs of fiscal policy responses to increasing fuel and food prices have continued to increase.
- Countries responded primarily by reducing taxes and tariffs, increasing universal subsidies, expanding transfer programs, and increasing public sector wages.
- Recent increases in fiscal costs stem from further reductions in fuel taxes and increases in fuel subsidies, which now dominate total fiscal costs.
- The median fiscal cost of food-related measures has leveled off, although more countries are using fiscal instruments to cushion the impact of higher food prices.

### Fuel
- The number of countries reporting reductions in fuel taxes or higher fuel subsidies has risen since the June report, along with the fiscal cost of these measures.
- Most of the increase in fiscal cost is attributable to higher subsidies and stems from the reluctance of many countries to pass through price increases.

### Food
- The number of countries reporting reductions in food taxes or increases in food subsidies has increased.
- The median (as well as the mean) fiscal cost for food measures has remained broadly unchanged.

### Transfers and wages
- Only a few countries reported an increase in the prevalence or size of transfer programs in response to higher fuel and food prices.
- The number of countries reporting increases in public sector wages and pensions has risen, although the increases for the additional countries, and the related fiscal costs, probably reflected a broad range of factors, and not just a response to higher fuel and food prices.

### Total fiscal costs
- Both the number of countries reporting higher fiscal costs and the magnitude of these costs have increased.
- The median total fiscal cost incurred since 2006 has increased from 0.6 to 0.7 percent of GDP.
- Higher fuel subsidies and lower fuel taxes account for nearly two-thirds of the total increase in fiscal cost since 2006.
- Note: The fiscal cost of fuel tax decreases and higher fuel subsidies account, on average, for 63 percent of the total increase in fiscal cost since 2006.

### Table 5. Fiscal Cost of Policy Responses to Higher Fuel and Food Prices (as reported)
- Fuel
  - Tax decreases — June paper: Number of countries 37; Median fiscal cost (% GDP) 0.3 — Recent update: Number of countries 43; Median fiscal cost (% GDP) 0.4
  - Subsidy increases — June paper: Number of countries 29; Median fiscal cost (% GDP) 0.7 — Recent update: Number of countries 36; Median fiscal cost (% GDP) 1.0
- Food
  - Tax decreases — June paper: Number of countries 84; Median fiscal cost (% GDP) 0.1 — Recent update: Number of countries 92; Median fiscal cost (% GDP) 0.1
  - Subsidy increases — June paper: Number of countries 22; Median fiscal cost (% GDP) 0.2 — Recent update: Number of countries 29; Median fiscal cost (% GDP) 0.2
- Other responses
  - Transfers — June paper: Number of countries 39; Median fiscal cost (% GDP) 0.2 — Recent update: Number of countries 43; Median fiscal cost (% GDP) 0.2
  - Public wages and pensions — June paper: Number of countries 10; Median fiscal cost (% GDP) 0.6 — Recent update: Number of countries 15; Median fiscal cost (% GDP) 0.6
- Total fiscal cost — June paper: Number of countries 79; Median fiscal cost (% GDP) 0.6 — Recent update: Number of countries 92; Median fiscal cost (% GDP) 0.7
- Source: Staff estimates based on data provided by country teams and authorities.

### Fiscal pressure from subsidies
- Rising fuel and food subsidies are likely to exert fiscal pressure in a number of countries.
- The combined fiscal cost of these subsidies in 2008 is expected to exceed 2 percent of GDP in 24 countries.
- Fuel subsidies present the greater fiscal challenge, as they comprise the bulk of total food and fuel subsidies.
- These subsidies are almost always poorly targeted; a shift—gradual, if need be—to better targeted programs could protect the poor in a more cost-effective manner.
- In fuel importing countries, decreases in world fuel prices from recent peak levels would reduce the fiscal burden of subsidies, as long as the decreases are not passed through to consumers and the exchange rate against the dollar does not depreciate.
- The fiscal cost of subsidies would also fall for oil exporting countries, but this effect would be offset by the loss of revenue from oil exports.

### Monetary, exchange rate, and trade policies (summary of related points)
- Aversion to nominal exchange rate flexibility continues to be strong in many countries that can seemingly least afford it.
- A large number of countries with de jure floating exchange rates has experienced an appreciation of the real effective exchange rate (REER) despite negative terms of trade shocks that would call for depreciation.
- Appreciation of the REER has been particularly pronounced in Cambodia and Sri Lanka.
- A smaller group of countries has allowed some—mostly modest—depreciation, which helped to broadly stabilize their REERs.
- Countries that use an exchange rate anchor to control inflation face trade-offs, especially if they lack an alternative framework for conducting monetary policy.
- Some countries have allowed a substantial turnaround in their currencies this year, relative to 2007; for these five countries, nominal depreciation contributed to a median real effective depreciation of close to 3 percent.
- Some low- and middle-income countries that experienced large net inflows witnessed a substantial appreciation of their currencies from January 2007 to June 2008 (examples include Argentina, Mongolia, Papua New Guinea, and to a certain extent Uganda).
- A few major exporters have started to relax some export restrictions; examples include Vietnam and Kazakhstan allowing export bans to expire on rice and wheat respectively, and the Ukraine increasing quotas on wheat exports.

### Fund financial support
- Fund balance of payments support is being delivered through a variety of channels in collaboration with international partners.
- New PRGF arrangements: Two new PRGF arrangements were recently approved for Burundi and Djibouti, raising to four the number of new arrangements approved in connection with the food and fuel price shocks.
- Augmentation of existing PRGF arrangements: More countries are making use of increased access under existing arrangements. In addition to the six countries reported in the June paper, four more countries were since granted augmentations: Grenada, Guinea, Malawi, and Nicaragua.
  - The amounts granted in the form of augmentations under new and existing PRGF arrangements total over U.S.$230 million.
- Exogenous Shocks Facility (ESF): The ESF is intended to provide quick access to concessional support for low-income countries facing short-term, shock-related financing needs. Modifications to this facility are currently under consideration, in order to enable more rapid financing and streamlined requirements for access. The Executive Board is scheduled to consider the proposed modifications to the ESF on September.

*Source: IMF staff analysis in the referenced chapter.*

### 19. Several members have expressed an interest in requesting Fund financial assistance

### 19. Several members have expressed an interest in requesting Fund financial assistance under a modified ESF.

### Additional Financing Under PRGF Arrangements (Related to Food and Fuel Price Shocks)
- Under new PRGF arrangements (2008)
  - Burundi 17.9
  - Djibouti 3.7
  - Mali 28.9
  - Niger 14.5
- Under existing PRGF arrangements
  - Benin 14.4
  - Burkina Faso 14.0
  - Central African Republic 12.9
  - Grenada 2.3
  - Guinea 33.2
  - Haiti 25.4
  - Kyrgyz Republic 13.8
  - Madagascar 28.4
  - Malawi 16.1
  - Nicaragua 10.1
- Total 235.4 (in millions of US dollars)

### Comparison of June Paper “Shock” Scenario and Latest WEO Outlook
- June paper shock assumptions (staff simulation):
  - Fuel and food prices sustained for the year at about 20 percent above their Spring 2008 WEO levels (an average price of U.S.$112 for oil instead of U.S.$95).
- September WEO projections:
  - Oil prices projected to average U.S.$113, very close to the June paper shock scenario.
  - Food prices projected to remain about 11 percent above their levels in early 2008 (somewhat lower than the 20 percent potential shock considered).
- Vulnerability counts (based on reserve cover dropping below 3 months of imports):
  - Number of potentially vulnerable PRGF-eligible countries in 2008: 33 (latest outlook) compared with 36 (June simulation).
  - Number of potentially vulnerable middle-income countries (MICs): 17 (latest outlook) compared with 22 (June simulation).
- Highly impacted cases (drop in reserves larger than 0.5 months of imports):
  - The number of countries now expected to have a drop in reserves larger than ½ month of imports is smaller than in the June shock scenario.
  - This partly reflects country policy responses and adjustments, including increased net inflows from remittances, foreign direct investment, and external borrowing.

### Balance of Payments Impacts — Summary Comparison (June shock scenario vs September 2008 WEO)
- Number of countries impacted (reserve cover below 3 months / drop in reserves > 0.5 months)
  - Low reserves cases:
    - PRGF-eligible: 36 (June paper) vs 33 (September WEO)
    - Middle-income: 22 (June paper) vs 17 (September WEO)
  - Highly impacted cases:
    - PRGF-eligible: 30 (June paper) vs 15 (September WEO)
    - Middle-income: 20 (June paper) vs 15 (September WEO)
- Memo items: 2008 prices (in US dollars)
  - June staff paper baseline: Oil 95.0, Food index 150.4
  - June staff paper shock scenario: Oil 112.0, Food index 180.5
  - September 2008 WEO outlook: Oil 113.3, Food index 167.3

### Additional Observations from Annex Tables and Simulations
- Staff note: Simulations in SM/08/112 focused only on food and fuel price impacts and by construction excluded other BOP developments, to highlight severity in the absence of volume, policy, or other adjustments and offsets.
- Table summaries (selected):
  - Table 1 (Impact of Combined Fuel and Food Price Increases in 2008) identifies countries classified as highly impacted (reserves loss above 0.5 months) and low reserves (below 3 months) under the June Staff Paper and Latest WEO outlook; totals indicated as "30 ... 15 ... 36 ... 33 ...".
  - Table 2 and Table 3 present simulated 2009 fuel price shock impacts for PRGF-eligible and middle-income countries respectively, showing:
    - Lists of countries with large reserve losses and with low reserve levels under different 2009 simulated oil price shocks (lower oil price shock using a year average price of $104; high oil price shock using the highest monthly peak oil price actually observed in 2008).
    - Current account (CA) listed as percent of GDP and reserves listed as months of next year's imports of goods and services for each country.
  - Appendix tables show exchange rate and REER changes and the projected level and change of reserves (months of imports), with country-level entries for turnarounds, ongoing appreciations, ongoing depreciations, and stable exchange rates in high-impact countries.

*Source: World Economic Outlook and IMF staff calculations as presented in the document.*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2008/_091908.pdf_