Posted by: APO | 13 May 2008

Global Food Crisis / IMF Closely Involved in Drive to Relieve Global Food Crisis


Multilateral initiative

IMF Closely Involved in Drive to Relieve Global Food Crisis

By IMF Survey online

May 13, 2008

 

Mark Plant, Deputy Director of the IMF’s Policy Development and Review Department, talks about the work going on in the Fund to help relieve the impact of the global food crisis, particularly on the world’s poorest, and discusses the IMF’s policy suggestions.

 

 

The IMF is concerned about the impact of price increases for food and fuel, especially on the poor, and is monitoring closely the current commodity price boom.

The inflationary impact of recent food price increases is a particular concern in emerging and developing economies, where spending on those goods is high. Indeed, food price increases accounted for almost 70 percent of headline inflation in 2007 in emerging economies.

Mark Plant, Deputy Director of the IMF’s Policy Development and Review Department, explains the status of the various strands of work taking place within the IMF on food and fuel prices and their policy implications, and outlines how the IMF is collaborating with the United Nations and other agencies to help relieve the impact.

 

 

IMF Survey online: It seems as though this crisis crept up on the world. Were the warning signs ignored?

 

Plant: Signs of a possible food problem have been visible for a while. The world has been consuming more food than it has been producing for a few years, prices have been creeping up, and inventories are at historical lows. And we should not forget that this time around, the food price cycle is positively correlated with the one for oil. Fertilizer and transportation costs are affected by the oil price. And the oil price rose dramatically in a very short period of time.

 

Also, global food markets, that is, food export markets are often thin, especially the one for rice. In the current environment of uncertainty, financial turmoil, and the search for safe havens such as commodities, this can lead to very volatile prices, perhaps with some overshooting.

 

Nobody could have foreseen that the financial crisis, some flight into commodities, and an oil price hike would all happen at a time when food stocks happen to be low.

 

IMF Survey online: In the face of hardships, many countries are taking immediate palliative actions, including subsidies on rice in Haiti and a ban on food exports in Guinea. What is the Fund’s stance in these cases?

 

Plant: First of all, most countries should be commended for taking the right policy measures—by right we mean ones that preserve the long-term production incentives while meeting the nutritional needs of their population.

Second, policymakers are being confronted with very difficult policy questions with macroeconomic implications: how quickly to pass on higher food prices, how to prevent these price increases from leading to permanently higher inflation expectations, and how to deal with any resulting balance of payments (and fiscal) financing gaps.

 

So far, we have generally recommended that policy responses follow some general principles, such as:

  1. coordination at the regional level;
  2. measures that are targeted and minimize disincentives for long-run supply responses; and
  3. actions that are focused on the poor.

 

For example, subsidizing certain varieties of rice consumed by the poor can satisfy these principals, while subsidizing petroleum products may not. Also eliminating tariffs on key food items could work, as could temporary fertilizer subsidies or expanding school feeding programs. Of course, countries would need to create fiscal space in their budgets to cover the costs of these policy actions.

Having said this, we are also telling country authorities that some policies can be distortionary and inefficient, such as generalized subsidies and across-the-board wage increases. If wage increases are necessary, they should be targeted at low-income workers, and be financed in a non-inflationary manner, to avoid a wage-price spiral.

 

Moreover, direct price and export controls can undermine long-run supply responses, discourage food production, be difficult to enforce, and drain scarce resources from other critical purposes.

 

IMF Survey online: How quickly will the IMF revamp its lending instruments to be able to help out more quickly in this crisis?

 

Plant: Very quickly. The IMF is preparing a review of the Exogenous Shocks Facility (ESF) for Board consideration in June. The modified facility will provide more rapid and effective shocks financing and be a streamlined version of the structure of financing instruments for low-income countries. But I would underscore that the ESF is available now, if any country needs immediate help.

 

IMF Survey online: Is the PRGF [Poverty Reduction and Growth Facility] a suitable instrument for assisting crisis-hit countries?

 

Plant: Yes. Countries with PRGF-supported programs can request augmentations of their arrangements if they are confronting balance of payments problems. The IMF’s area departments are in active discussion with 10–15 low-income countries on possible Fund financial assistance to help address the balance of payments impact of rising food and fuel prices.

IMF Survey online: How much does the IMF expect to lend to countries affected by the food price hikes? What will it do to ensure that the money goes to worst-affected people?

 

Plant: The IMF will consider all requests for financial assistance and decisions will be made based on country-specific needs. Augmentations in the past have been in the range of 15–20 percent of quota.

 

On your second question, the IMF provides balance of payments assistance. In other words, the Fund can help fund import costs. At the same time, teams will very carefully assess the emergency measures put in place in their countries to make sure that they adequately target the most vulnerable.

 

IMF Survey online: Many civil society organizations criticize the Fund’s past advice to low-income countries, such as recommending cuts in food and fuel subsidies and for not providing the fiscal space that would allow countries to increase food and fuel subsidies? What’s your response?

 

Plant: The IMF is well aware that food security is one of the key objectives of any government. IMF-recommended policies are intended to support this objective.

 

As we all know, the key element in any government’s decision making is how to allocate scarce resources. In low-income countries in particular, the overall rate of taxation is often limited and the tax base is very small. Until the recent run-up, food prices have been at historical lows for many years. Financial support for health or education systems and for infrastructure were higher on the policy priority list of most low-income country governments. These priorities may now have changed—but government resources are just as scarce.

 

So there will be a tendency to look to subsidies. But our advice has focused on eliminating generalized subsidies in favor of targeted transfers that benefit the poor. Most countries have immense social and economic needs and resources are scarce; it would be inappropriate to use them for supporting consumption of the rich. At the same time, the policymakers have to ensure that subsidy policies do not destroy longer-term incentives to produce. This is not an easy thing to get right and it requires a lot of expertise—not just macroeconomics. And we rely on other institutions, such as the World Bank, to advise on these issues.

 

IMF-supported programs are designed to provide fiscal space to meet government priority spending, while not jeopardizing long-term macroeconomic stability. With the food crisis upon us, we can help the authorities respond flexibly to spend on programs critical to keep people well-nourished. Clearly aid will be needed from the international community to meet these needs, but countries must do so with an eye towards the long-term sustainability of their policies.

 

IMF Survey online: How is the IMF collaborating with other international institutions?

 

Plant: The Managing Director has stressed that the food crisis is a problem that requires an multilateral effortno one agency or government has the expertise or resources to tackle the entire short- or long-term food problems faced by the world.

 

The IMF is very much a part of the burgeoning international effort. The Managing Director serves on the United Nations Task Force on the Global Food Crisis, chaired by UN Secretary General Ban-Ki Moon. The staff of the IMF is involved in the support work for that task force.

 

We are coordinating our efforts with the World Bank and are in contact with the World Food Program, the UN’s Food and Agriculture Organization, and other international organizations and bilateral donors. These organizations have expressed interest in working closely with the Fund on food price issues, as they would rely on the IMF to estimate the balance of payment and fiscal impact of the shocks.

 


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