IMF Survey: Coping With Food Price Increases in Sub-Saharan Africa

IMF News, March 20, 2008

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Publication: IMF Survey by John Wakeman-Lynn and Paulo Drummond, IMF African Department.
Date: March 20, 2008
Core finding: Rising food and fuel prices have increased inflationary pressures in Sub-Saharan Africa, but "rising food and fuel prices will not translate into higher sustained inflation if the policy response is correct."

Mix of temporary and longer-term factors driving up prices.
Longer-term structural factors:
- "Rising biofuels production in the United States and European Union accounts for almost half of the increase in consumption of major food crops in the past year."
- Growth in per capita income in emerging economies has increased demand.
- Higher energy and fertilizer costs have contributed to higher prices for all agricultural commodities.
- "Most of these factors are likely to be permanent."
Temporary supply factors:
- Droughts, especially in countries south of the equator, reduced wheat production in 2007.
- Post-election violence in Kenya led to shortages and price hikes in neighboring countries as well as Kenya.

Fuel and food-price shocks have a significant impact on low-income countries.
Because food represents a larger share of poorer consumers' spending, global food-price increases have a bigger impact on inflation in poorer countries.
Net effect on terms of trade varies across countries; positive in about half the countries of Sub-Saharan Africa—particularly commodity exporters.
Within countries:
- Farmers producing export crops may gain.
- Urban consumers of imported food and oil have been hurt.

Rising food prices can have severe social consequences.
Recent incidents cited:
- Food price–related riots in several countries.
- Demonstrations in two cities in Burkina Faso.
- Political unrest in Cameroon spilled over into protests over food and fuel prices.
- Niger has suffered food-price-related riots.

"In sub-Saharan Africa on average, food inflation is currently 2.8 percentage points higher than headline inflation."
Note: "the latest increases in food prices are not yet reflected in CPI data."
Overall: Monetary policy is responding appropriately in most countries in the region, and overall inflation "remains contained by historical standards."

Policy responses should be custom-tailored to each country's situation and to whether shocks are temporary or permanent.
Guiding principles:
- If the country can, it should seize the opportunity to encourage expansion of domestic agricultural production through:
- Improving infrastructure and distribution and storage systems.
- Increasing competition.
- Removing policy distortions that discourage food production.
- Removing barriers to trade.
- Avoiding distortionary policies such as untargeted subsidies.
- Temporary increases in food prices need not call for countervailing monetary policy, particularly if monetary policy is already accepted as credible.
- There may be a need for tighter policies if sustained high food price inflation starts to have significant second-round effects.
- The effect of temporary shocks could be mitigated by:
- Temporary and targeted subsidies.
- Temporary tax measures.
- Increased reliance on international aid.
- These measures can help protect the most vulnerable.

Source: IMF Survey: Coping With Food Price Increases in Sub-Saharan Africa (IMF African Department), March 20, 2008.