## IMF Survey: High Food, Fuel Prices a Threat Where Protection Limited _IMF News, October 21, 2008_ ## Source details **Canonical URL:** [IMF Survey: High Food, Fuel Prices a Threat Where Protection Limited](https://www.imf.org/en/news/articles/2015/09/28/04/53/socar102108b) ## Other formats - [Markdown version](/en/news/articles/2015/09/28/04/53/socar102108b/index.md) - [Structured JSON version](/en/news/articles/2015/09/28/04/53/socar102108b/index.json) - [Bundle manifest](/en/news/articles/2015/09/28/04/53/socar102108b/bundle-manifest.json) ## Bibliographic details - Authors: Patrizia Tumbarello IMF Asia, Pacific Department October - Published: October 21, 2008 --- ### Overview and context - Publication: IMF Survey by Patrizia Tumbarello, IMF Asia and Pacific Department, October 21, 2008. - Core observation: Inflation has been rising in the Pacific Islands driven by strong increases in commodity prices (food and fuel), with limited social protection systems increasing vulnerability. - Commodity price trend: Although commodity prices have declined from recent peaks, food and fuel prices remain above historical levels and continue to be a concern. ### Inflation dynamics and domestic transmission - Headline inflation: - Headline inflation in the islands has picked up since end-2007 beyond most central banks' comfort zone. - Fuel pass-through: - As of September 2008, the pass-through of international gasoline prices to domestic retail prices has been complete for Fiji, Palau, Papua New Guinea, Samoa, the Solomon Islands, and Timor-Leste. - Local fuel prices have increased steadily since December 2007. - Food price transmission: - Food price inflation has increased substantially. - The large share of food in consumer price index baskets has magnified the impact. - The food basket in many countries includes unprocessed or low value-added products, causing relatively high pass-through of imported food price increases due to low elasticity of demand. - Household impact: - Food-related expenditure is a large share of household spending. - The food share in total household spending is on average 50 percent for these islands—about twice as much as in the emerging markets. - Second-round and core inflation: - Core inflation has started to trend up. - Second-round effects are emerging in Papua New Guinea, the Solomon Islands, Timor-Leste, and Tonga, indicating inflation becoming more entrenched. - Higher input costs (animal feed, fertilizer, energy) have created upstream pressures; wage pressures are mounting notably in Papua New Guinea and the Solomon Islands. ### Demand pressures and macro conditions - Domestic demand signals: - Credit growth remains high and excess liquidity pervasive in Papua New Guinea and the Solomon Islands. - Fiscal policies appear to have turned expansionary in the Solomon Islands, Timor-Leste, and Vanuatu. - Exchange rate and monetary policy constraints: - Most islands are either dollarized or have a pegged exchange rate regime, reducing the exchange rate’s role in curbing imported inflation. - The weakening of the Australian and New Zealand dollars has generated terms of trade losses for countries pegged to these currencies. - In Papua New Guinea (more flexible exchange rate), the central bank increased the policy rate three times since June, but the real interest rate remains negative. ### External balances and fiscal impacts - Trade and energy dependence: - Most islands rely heavily on imports—mostly food and fuel—while export bases remain narrow; external balances are vulnerable to commodity price spikes. - Pacific island countries rely almost exclusively on oil-based fuel for energy, limiting substitution options. - Country-specific impacts: - Net food and oil importers (Fiji, Kiribati, Samoa, Tonga) have been hit hardest and face wider current account deficits. - The Marshall Islands received an emergency foreign loan to support the domestic energy company; the government also contributed to payment for fuel shipments, which are secured through end-October. - Commodity producers (Papua New Guinea, Timor-Leste) benefited from a positive terms of trade shock that strengthened external and fiscal positions but remain vulnerable to volatility. - Revenue linkages: - In Papua New Guinea and Timor-Leste, the oil sector is largely foreign owned with limited local inputs; linkages to the domestic economy are mainly via income tax and other budget revenues or the petroleum fund. ### Policy responses implemented - Price and tax measures: - Import duties and sales tax on rice were eliminated in the Solomon Islands. - Import duties on fuel products were recently reduced in Fiji. - In Timor-Leste, a reduction in sales taxes and import duties was introduced; the government ensured availability of agricultural inputs (seeds, fertilizer, diesel) to farmers. - In the Marshall Islands, electricity tariffs were raised and tighter controls introduced on government use of electricity and fuel; import duties exemptions were granted on basic staples including rice and flour. - Some price controls used in Fiji, including delaying scheduled electricity tariff increases. - Monetary policy actions: - Papua New Guinea central bank increased the policy rate three times since June (real interest rate remains negative). ### Outlook - Near-term: - The recent decline in commodity prices from record highs in mid-July may provide some respite to inflation. - Inflation is likely to decline only gradually as high transportation costs continue to feed through with a lag. - Medium-term: - Commodity exporters have an opportunity to increase medium-term growth prospects; benefits from high oil prices depend critically on how revenue windfalls are utilized. ### Policy implications and recommendations - Targeting protection: - Authorities should balance protecting the poor from price increases (especially food) with supporting demand to enhance growth. - Ideally, targeted transfer programs as part of an integrated social safety net could reach the poor efficiently. - In the absence of effective safety nets, a package could build on existing programs such as school feeding programs, cash transfers to the most vulnerable populations, reduced education and health fees, and public transport subsidies. - Ad hoc general increases in public sector wages would not be well targeted. - Demand and supply measures: - A more effective approach includes targeted demand and supply responses, combined with donor support. - Continue allowing full pass-through of higher food and fuel prices to domestic prices while allowing time to adjust. - Long-term measures in agriculture, rural transport, and other support services can increase domestic supply and reduce price pressure. - External and fiscal measures: - Donor support—preferably grants—would help limit harm to real incomes. - A more flexible exchange rate regime would help cushion inflationary pressures in commodity exporting countries. - In fully dollarized or pegged regimes, fiscal restraint is needed to facilitate external adjustment and to offset any increase in fuel and food subsidies. *IMF Survey by Patrizia Tumbarello, IMF Asia and Pacific Department, October 21, 2008.* --- ## References - [https://www.imf.org/en/News/country-focus](https://www.imf.org/en/News/country-focus) - [PRESS CENTER](http://presscenter.imf.org/) - [IMF Country Focus](https://www.imf.org/en/news/country-focus) - [IMF and food, fuel policies](https://www.imf.org/external/pubs/ft/survey/so/2008/POL070108A.htm) - [Fiji and the IMF](https://www.imf.org/external/country/FJI/index.htm) - [Palau and the IMF](https://www.imf.org/external/country/PLW/index.htm) - [Papua New Guinea and IMF](https://www.imf.org/external/country/PNG/index.htm) - [Samoa and the IMF](https://www.imf.org/external/country/WSM/index.htm) - [Solomon Islands and IMF](https://www.imf.org/external/country/SLB/index.htm) - [Timor-Leste and IMF](https://www.imf.org/external/country/TLS/index.htm) - [https://www.imf.org/en/home](https://www.imf.org/en/home) _Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/socar102108b_