5 May 2008

Africa: IMF Works With Vulnerable States On Food Price Policies

The IMF is working with vulnerable member countries to assess the fiscal, balance-of-payments, and income effects of higher food prices and of higher commodity prices more generally.

Several countries have asked for extra financial support to cover higher food import costs, and an IMF mission will shortly travel to Haiti to review the country's need for increased financial assistance.

External Relations Department Director Masood Ahmed recently told a news conference that the IMF is also "working with the member countries that are likely to be affected to assess the impact of the higher food prices, and of higher commodity prices more generally, on their balance of payments and fiscal situation."The impact of food price increases on the most vulnerable populations, notably the urban poor, has significant social implications-as attested by recent food riots and strikes in several African countries.

Many sub-Saharan African countries have resorted to emergency measures in response to a food price situation that is still evolving.

IMF research shows that higher prices for food pose new challenges for African policymakers, in particular, and could have especially adverse effects on the poor because food represents a larger share of what poorer consumers buy.

In response, the IMF is acting on several fronts; these include additional financing. About 10 countries, mostly in Africa , have raised with the IMF the possibility of augmenting their existing arrangements under the Poverty Reduction and Growth Facility (PRGF) to provide for additional financing to cover the import costs associated with higher food prices.

"We are now discussing those on a priority basis with each of the countries and our objective is that, where it makes sense to indeed augment the PRGF, that we should proceed," Ahmed said.

The IMF is further working with the PRGF-eligible countries and with other economies on the appropriate policy response to higher food prices.

While policies need to be determined country by country, targeted social assistance is seen as the best initial policy, with other temporary moves-such as tax and tariff cuts on food products-also available as supporting measures.

The IMF has several financing instruments available to help members cover food-related balance of payments strains. Stand-By Arrangements are designed to help all members address short-term balance of payments problems.

The Exogenous Shocks Facility was designed to cover shocks to PRGF-eligible countries with a significant negative impact on the economy, such as the ongoing food price shock, and the IMF is considering ways to modify it to enhance its usefulness.

The IMF has also encouraged food exporting members to avoid disruptions to global markets such as through export restrictions on food, and to preserve domestic production incentives.

The IMF is also coordinating closely with the World Bank, the UN system, and with other international agencies and with donors on issues that require regional and international action, including trade policies and the need for additional financing resources from donors.

IMF Deputy Managing Director Murilo Portugal represented the IMF at an April 28 meeting of the UN Chief Executives Board (CEB) that discussed the impact of high food import costs. The CEB groups executive heads of UN system organizations under the chairmanship of the UN Secretary General.

The UN's World Food Program (WFP) said April 22 that high global food prices are creating "a silent tsunami", threatening to plunge more than 100 million people into hunger.

The WFP estimates it needs an additional US$755 million on top of its base budget to cover the increased cost of food and fuel since June 2007-a target backed by the IMF and World Bank.

An IMF conference heard April 25 that the world economy has entered a different era in which commodity prices are likely to stay high.

Michael Dooley of the University of California , Santa Cruz , told the IMF's Conference on International Macrofinance in Washington that macroeconomic factors were likely to continue to propel food prices.

High food prices risked 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," the consultative group's statement said.

The meeting agreed that the effect of shocks could be mitigated by temporary, targeted subsidies to help protect the most vulnerable, although authorities should ensure that subsidies did not become permanent.

Delegates resolved that countries should avoid distortionary policies such as untargeted subsidies. Moreover, the meeting observed that direct price and export controls might discourage food production, be difficult to enforce, and drain scarce resources from other critical purposes.

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