IMF, World Bank, finance officials: Can they tame food price hikes?

In depth
This article is part of the dossier: Africa and the economic storm

By Julian Pecquet
Posted on Tuesday, 11 October 2022 10:13

A woman sells food items at a market in Owo, Southwestern Nigeria, Tuesday, June 7, 2022. (AP Photo/Sunday Alamba)

Taming runaway food prices and their devastating impact on national economies and people’s livelihoods is a key concern as the world’s financial policymakers gather in Washington this week for the first time since the Covid-19 pandemic.

A series of calamities, including global warming, the pandemic and Russia’s invasion of Ukraine, has driven food prices up worldwide, almost 40% over the past two years, according to the UN Food and Agriculture Organisation. Africa, with its heavy reliance on imports for key staples, such as wheat, palm oil and rice, has been among the regions hardest hit, with consumer prices up 19% in the past year alone.

Related increases in the price of fuel and fertiliser have only made things worse by straining domestic food production and distribution, while the rising value of the US greenback has made imports of dollar-denominated items from refined petroleum to agrochemicals far more expensive.

Together, the interconnected shocks have left some 345 million people close to starvation in what UN food chief David Beasley described last month as a “global emergency of unprecedented magnitude”, with the Horn of Africa, the Sahel and Northern Nigeria particularly at risk.

“Hunger is the world’s greatest solvable problem, but instead of solving it, we are marching backwards,” IMF chief Kristalina Georgieva said in her opening speech at the annual meetings of the IMF and the World Bank Group on 7 October.

“The world has to unite around addressing food security,” she said.

Knock-on effects

The stakes couldn’t be higher.

In addition to the sheer scope of human suffering, the food crisis is taking a toll on African economies, harming long-term growth and forcing difficult budgetary trade-offs for cash-strapped governments.

Historically, those episodes have triggered a lot of political events

Guillaume Chabert, deputy director of strategy, policy and review department at the IMF, describes a series of spill-over effects. Rising prices for food, fuel and fertiliser have triggered worldwide rates of inflation not seen in a quarter century. This in turn has led to a tightening of monetary policy and the rapid appreciation of the US dollar, reducing liquidity in global financial markets and increasing borrowing costs across the board.

These shocks have had an outsized impact on developing countries, which typically have debts in dollars or euros and are seeing their borrowing costs rise just as their populations need more help to stay afloat. Those fiscal hardships in turn fuel political instability, much like food price hikes helped trigger the Arab Spring a decade ago.

“In terms of food price increases, we know how sensitive it is for many households, in terms of social tensions, potential social unrest,” Chabert tells The Africa Report. “Historically, those episodes have triggered a lot of political events.”

The Fund spelled out the costs for the 48 most affected countries in a report last month on the IMF’s role in tackling the global food crisis. More than half are in Africa.

The document identifies $9bn in additional import costs to the balance of payment needs for the 48 countries, another $5bn to $7bn in additional budget outlays to protect vulnerable households, and an estimated $50bn to eradicate acute food insecurity in 2022.

Outside the Nigerian capital Abuja, Rotimi Williams, a rice farmer, has witnessed the food crisis first-hand. The owner of Nigeria’s second-largest rice farm says his land under cultivation has shrunk from about 45,000 hectares to just a small fraction of that as rising insecurity – fuelled in part by the food price shocks – has kept him away from his fields over the past year.

We’re going back to the old days of subsistence farming with a growing population, that’s not sustainable.

To make matters worse, Williams says, fertiliser prices have increased almost five-fold since the start of the war in Ukraine as Russia cuts back on exports. With limited access to banking credit in rural areas, many farmers are having to go without.

“What the price increase has done is reduce the amount of fertiliser utilised, which then obviously reduces the yield per hectare,” Williams says.

The dollar’s appreciation is also taking a toll. The US currency is now worth around 434 Nigerian naira, up 4.5% in the past three months. This is having an impact on Nigerian imports, whether it’s blended fertiliser or key ingredients such as phosphorus, diesel to power tractors and water pumps, or herbicides and pesticides.

“When you look at general inflation due to the poor exchange rate and the economy in Nigeria, generally, all the components you need, all the inputs you need to produce food have gone up,” says Williams.

As a result of the price hikes and rising instability, he says, the entire agricultural value chain risks unravelling.

“You have the seed providers, you have the input providers, you have the tractor services, you have the storage people – all those business owners right now, they’re in a dilemma” when farm owners cut back on unprofitable agricultural production.

Unprecedented rainfall tied to climate change has only made things worse, he says. In addition to rice, Williams also grows spices, such as dry ginger and turmeric, whose planting season has been devastated by flooding that has inundated the fields and made the roads impassable.

“We’re going back to the old days of subsistence farming,” Williams says. “With a growing population, that’s not sustainable.”

‘We are here for you’

The international financial institutions have taken notice.

On 5 October, the IMF approved a new ‘Food Shock Window’ under its emergency financing instruments to help countries facing “urgent balance-of-payment need related to the global food crisis” for a period of one year. Days earlier, in Saudi Arabia, Georgieva said four dozen countries are particularly exposed to the food crisis, with 10 to 20 – many in Africa – likely to ask for emergency assistance. “We are here for you,” she said at the time.

Last month’s IMF report recommended four urgent actions:

  • International humanitarian assistance to support vulnerable households;
  • Maintaining open trade and the rapid phasing out of export bans by food-producing countries;
  • Increasing food production and improving distribution, notably through ensuring adequate access to fertiliser and other inputs; and
  • Investing in climate-resilient agriculture for long-term sustainability.

This week’s summit will see multiple open meetings and backroom conversations around all four axes. “The policy responses are very difficult, because the trade-offs are extremely tricky,” says Chabert.

On the one hand, he says, it is “absolutely imperative that countries preserve social spending, in particular cash transfers to the poorest”, but inflation must also be controlled, without raising interest rates so much that overheated economies crash and job growth begins to suffer.

“We’re not lecturing countries,” Chabert says. “We’re just saying it’s complicated; and technical assistance, advice, discuss[ions] between country teams from the IMF and central authorities, is definitely something we are committed to continue doing and deepen as much as possible.”

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