Press Release No. 08/84

Press Release: African Consultative Group Meeting : Joint Statement of the Chairman of the African Caucus and the Managing Director of the International Monetary Fund

April 11, 2008

Mr. Ousmane Kane, Governor of the Central Bank of Mauritania, and Mr. Dominique Strauss-Kahn, Managing Director of the International Monetary Fund (IMF), co-chairs of the African Consultative Group, issued the following statement today after the conclusion of the Group's meeting, which was held at IMF headquarters¹:

"We met to discuss the impact of high world food and fuel prices and the challenges they present for policy makers in sub-Saharan Africa and indeed globally. Many countries in the region have significant exposures to higher prices for fuel and other commodities, especially food. High food prices risk undermining the gains made by many countries in reducing poverty in the last 5-10 years.

"The speed and size of the price increases have been large. We agreed that policies should aim at helping those least able to cope with high prices, while not jeopardizing hard-won gains on economic stabilization. Temporary increases in inflation due to the direct effects of food or fuel price shocks need not call for countervailing monetary policy, particularly if monetary policy credibility is already established. However, tighter policies may be needed if sustained food price inflation fuels broader price increases.

"Monetary policy is responding appropriately in most countries in the region, allowing first round effects of food prices to pass through to inflation, but keeping overall control of inflation. In response to higher oil prices, sub-Saharan African countries have generally allowed a considerable degree of pass-through of higher fuel prices to domestic retail prices.

"The effect of shocks can be mitigated by temporary, targeted subsidies to help protect the most vulnerable, although we must ensure that subsidies do not become permanent. How these measures are paid for—through higher revenues, a higher deficit, or reductions in other expenditures—will need to be based on each country's fiscal circumstances.

"We agreed that permanent shocks require a full pass-through of prices. Depending on country circumstances, additional measures targeted at the most vulnerable may be appropriate. In this case, countries should aim to put in place an efficient social safety net. However this is not always easy, and some second best solutions may be appropriate.

"We agreed that countries that have a comparative advantage in food production should seize the opportunity—and several are—to remove impediments to domestic agricultural production, through improving infrastructure and distribution and storage systems, increasing competition, removing policy distortions that discourage food production, and removing barriers to trade.

"We agreed that countries should avoid distortionary policies such as untargeted subsidies. Moreover, direct price and export controls may discourage food production, be difficult to enforce, and drain scarce resources from other critical purposes.

"The Managing Director reiterated that the IMF stands ready to support countries design macroeconomic policies to deal with shocks, including the creation of fiscal space for safety nets. The IMF stands ready to provide balance of payment assistance through Stand By Arrangements, PRGF augmentation and Exogenous Shocks Facility (ESF) if exogenous price shocks significantly affect the balance of payments. The modalities of the ESF will be reviewed by the Fund in the near future to ensure that the facility meets the needs of the member countries.

"Finally, we support the call for bilateral and multilateral donors to substantially increase food aid, which is essential to help low-income countries mitigate the negative impact of higher food prices."

¹ This was the third meeting of the African Consultative Group, which was formed one year ago to enhance the IMF's policy dialogue with the African Caucus. The Group is comprised of members of the African Caucus and the IMF's Managing Director.