Press Release No. 08/156

Press Release: Price Surge Driving Some Countries Close to Tipping Point, IMF Says

July 1, 2008

The impact of surging food and fuel prices is felt globally but is most acute for import-dependent poor and middle-income countries confronted by balance of payments problems, higher inflation, and worsening poverty, a new IMF study warns. Analyzing the macroeconomic policy challenges arising from the price surges, the study argues that many governments will have to adjust policies in response to the price shock while the international community will need to do its share to address this global problem.

"Some countries are at a tipping point," said IMF Managing Director Dominique Strauss-Kahn at the release of the study. "If food prices rise further and oil prices stay the same, some governments will no longer be able to feed their people and at the same time maintain stability in their economies. They need good policy options and they need help from the international community. Their challenge is ours. It is to ensure adequate food supplies while preserving the poverty-reducing benefits derived in recent years from faster growth, low inflation, and better budget and balance of payments positions."

Mr. Strauss-Kahn said the findings of the study underscored the need for a broad cooperative approach involving the countries affected, donors, and international organizations to cope with the effects of high prices. "Working closely with our member countries, the Fund has been actively involved in providing advice and financial support to address their urgent concerns and help mitigate the impact of this crisis," he said. "Every country is different and exact policy prescriptions will vary considerably. But the universal challenge for all poor and middle-income countries is to find ways to feed the hungry while maintaining hard-won macroeconomic stability."

Price Surge Impacts

Key findings of the multi-country survey—the first broad assessment of the impact of the price rises, include:

• Higher food prices have cost a group of 33 poor net food importers US$2.3 billion, or 0.5 percent of 2007 annual GDP, since January 2007. In the same period, the effect of rising oil prices on 59 low-income net oil importers was US$35.8 billion, or 2.2 percent of their GDP.

• Annual food price inflation for 120 low-income and emerging market countries rose to 12 percent at the end of March 2008 from 10 percent three months earlier, while fuel prices accelerated to 9 percent from 6.7 percent in the same period. Preliminary data indicate the problem is worsening.

• Poor countries that are highly dependent on food imports are particularly vulnerable to rising food prices. The share of household spending on food in emerging and developing economies typically exceeds 50 percent. The study found that low-income households are the most affected by food price inflation and warned that the share of undernourished in developing countries could rise rapidly above the current 40 percent of total population.

Policy Responses

Oil and food prices are expected to stay at high levels. Supply has been slow to respond to rising demand for commodities, which was largely the result of rapid economic growth in emerging and developing economies.

The Fund has been working closely with its membership on fiscal, monetary and exchange rate, trade and other policy measures to alleviate the effects of higher prices. Taking into account country-specific conditions and priorities, the Fund's involvement has focused on:

• Fiscal policy. Policy measures need to reflect each county's economic situation and capacity to create fiscal space to combat the impact of higher costs. Some countries have the scope to loosen their fiscal positions while others may need to create fiscal space through raising revenues or cutting other expenditures, or securing external grants and concessional loans. The need for support from the international community is most pressing in countries that find it difficult to accommodate higher spending.

• Monetary and exchange rate policies. While the first-round effects of higher food and fuels prices on inflation should generally be accommodated, monetary policy should seek to avoid spillover to more generalized inflation. Food and fuels prices remaining at high levels will likely call for a real exchange rate depreciation for net food and fuels importers.

• Trade polices. Global food markets need to be kept open, with restrictive policies, such as export taxes and bans, removed to maintain appropriate incentives for producers and consumers. Tariff reductions can help to reduce trade distortions and mitigate price increases.

• Fund financing. The Fund has already provided additional financial assistance to seven low-income countries through the concessional Poverty Reduction and Growth Facility and is ready to support others as needed. It is also streamlining the Exogenous Shocks Facility to make it more useful to IMF members, and stands ready to provide support for middle-income countries through Stand-By Arrangements.