Posted by Christian Schiller
In my PFM Blog posting of June 18, 2008, I reported that the IMF was working on the impact of higher oil and food prices. Now the IMF has released two comprehensive studies and presented them to the public on July 1, 2008 in Washington D.C. The presentation was introduced by the IMF’s MD, Dominique Strauss-Kahn; five IMF senior staff members summarized the work done by the IMF staff and answered questions.
One study is a broad assessment of the impact of the surge in food and fuel prices on the balance of payments, budgets, prices and poverty in a large sample of (roughly 150) countries. The other study is a country-by-country assessment of the implications of the price shocks for the balance of payments in sub-Saharan Africa. Both studies are available at the IMF’s web site (click links above).
“The analysis shows that some countries are at the tipping point,” said the MD in his introductory remarks. “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 country. 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.”
The two papers provide a wealth of information on how individual countries have responded to higher food and oil prices. The policy responses have varied. From an efficiency standpoint, it makes sense to pass on the full price increases to consumers because this will encourage producers to increase supply and consumers to reduce demand. At the same time, the poor must be protected, because they are least able to withstand the price increases.
The best approach is to develop a well-targeted social safety net. But many low-income countries have neither the capacity nor the fiscal means to do that. Understandably, most affected countries have therefore had to adopt other policies that could be implemented quickly.
Twenty-nine of the 46 countries reporting fuel subsidies have increased these subsidies in response to the surge in oil prices.. Such subsidies have risen to dramatic levels in some countries: five countries report spending more than five percent of GDP. Apart from being very costly, universal fuel subsidies encourage over-consumption, exacerbate the upward pressure on international fuel prices, and are difficult to reverse.
Twenty-eight countries reported that they subsidize food directly, some by more than one percent of GDP. Twenty-two of these countries have increased food subsidies since 2006. General subsidies lower prices, but everybody who buys the cheaper goods benefits, including those who could afford to pay in full.
The papers urge those countries that have implemented universal rather than targeted measures (because they allow a quicker response) to assess the efficiency of the measures as soon as possible and replace untargeted programs with more cost-effective measures. The papers argue (along the lines of the guide for policymakers on equitable and efficient price-subsidy reform, written by myself and colleagues from the IMF---see my PFM Blog Posting of June 18, 2008) that in countries that do not have effective social safety nets, a package of measures building on existing programs (e.g. school feeding programs, cash transfers to the most vulnerable populations, reduction in education and health fees, and public transportation subsidies) should be identified. The coverage of these programs can be expanded and their targeting improved in the short term through the adoption of simple targeting methods focusing, for example on geographic characteristics of the poorest regions; categories of the most vulnerable populations such as the disabled and elderly living alone; and tax reductions and subsidies to products consumed mainly by the poor.
