Food, fuel shock can 'wreck exchequer'

Africa’s cocoa makes the world’s chocolate, its fish, fruit and vegetables reach tables around the globe and its oil powers vehicles and factories from China to the United States.

Yet far from benefiting from soaring commodity prices, African states are being squeezed as hard as any by the costs of fuel and food imports.

Their desperate moves to cushion the impact for potentially restive populations threaten to wreck already stretched budgets, slashing receipts and swelling state spending.

“Net importers of oil and food are being hit very hard by this shock ... the budget impact is very negative,” Alex Segura, International Monetary Fund (IMF) resident representative for Senegal, told Reuters. “It’s not sustainable,” he added.

The rocketing cost of living is stoking social tensions, protests, strikes and violence from Morocco, Guinea and Kenya to South Africa.

Among the worst affected are poor states with big food and fuel import bills, many in West Africa, one of the least developed regions of the world’s poorest continent.

Alarmed by protests and riots, governments have rushed to suppress or cut taxes, customs duties and VAT on food imports and sales in a bid to bring down prices.

In a matter of months, they have also upped food and fuel subsidies to ease the impact of the price hikes on consumers who already spend most of their meagre income on food to feed often large, extended families.

The unplanned contingency measures, on top of global food and oil prices far above what most imagined a year ago, are wreaking havoc with governments’ finances.

“This trend is throwing the budget out of gear,” Ghana’s President John Kufuor lamented last month when he unveiled a package of actions to mitigate the price rises.

Mirroring measures taken by many other African states, Ghana removed import duties on rice, wheat, yellow corn and vegetable oil, suppressed or reduced duties and levies on a host of fuel products and raised subisdy support for electricity and farmers.

Ghana, the world’s numbert two cocoa grower and Africa’s second biggest gold producer is seen as one of the brightest economic prospects on a continent drawing increasing investor interest.

But this has not shielded it from feeling the double punch of the food and fuel price shocks.

Huge cost, small effect

Although Ghana expects to start its own crude oil production within two years, Kufuor said the oil import bill had leaped from $500-million in 2005 to $2,1-billion at the end of last year and was now moving to $2,5-billion, as prices kept rising.

The food and fuel price pressures are also rattling the macro-economic stability of North African states like Tunisia, Morocco and Algeria, whose economies are traditionally far more sturdy than those of many poorer sub-Saharan African neighbours.

All three have been forced to hike subsidies for essential food items to maintain social peace and avoid unrest.

“There is a risk such a situation would cause a debt and deficit spiral,” said Ahmed Lahlimi, the head of Morocco’s high planning commission, the leading government think tank.

The IMF’s Segura warned that many of the hurried measures taken by African governments not only risk unbalancing budgets, but may also fail to achieve their objective of lowering prices for consumers.

Except for cases where prices are government-fixed, for example for fuel products, Segura says “it’s basically almost impossible to make sure that the lower burden in taxes gets effectively translated into lower prices for consumers”.

“For a very small price effect, you are destabilising the budget to a colossal degree,” Segura said.
This was the problem in Senegal, where the estimated cost of the government measures, without correction, would be close to $400-million and the state now had a large backlog of unpaid bills to private suppliers.

Consumers in Senegal and other West African states have been complaining they have not felt any real easing of prices.

This may be in part because food importers and traders themselves say they have had their margins squeezed by the government measures and so cannot reduce prices further.

“I’d filled my stores before the decision to lift duties on the products we’d imported. So I can’t sell them at lower prices as the government demands,” said Sophiath Massou Yessoufou, a rice seller at Cotonou’s Dantokpa market in Benin.

Poorest don’t benefit

Segura argues that indiscriminate fuel and food subsidies may not in fact help the poorest Africans, but rather the more well-to-do, who drive cars and have air conditioning at home.

“The poor do not really use gasoline, they don’t even have cars. If you subsidise electricity in Senegal .... over two-thirds of the population don’t have access to electricity,” Segura said.

Alex Evans, a non-resident fellow at the Centre on International Cooperation, at New York University, believes there are other ways to tackle the food and fuel crisis “without wrecking your exchequer”.

“The better way to do this is through targeted social protection systems,” Evans told Reuters, saying these could take the form of food or cash distributions to the most needy.

He said such focused initiatives could also reduce the inflationary impact on economies. Countries across Africa, including Kenya, Ghana and Nigeria, have reported inflation swelling alarmingly under the food and fuel price pressures.

Some countries, such as Ghana, have moved to raise interest rates to try to control inflation. Others, in Burkina Faso, Guinea and Mauritania, face strike threats from unions pressing for salary increases to compensate the price hikes.

“If these salary increases are incorporated into the system, then you really have a danger of a spiralling inflation and that would require a tightening of monetary policy,” Segura said.

“That could also have an impact on growth, you would have higher interest rates, then credit would decline and there would be a negative impact on the economy,” he added.

Evans said the best solution would be an integrated combination of short-term palliative measures, such as the social protection initiatives, combined with longer-term development solutions, among them boosting farm output.

“We have to get so many parts of this puzzle right to feed everybody,” he said, noting that international bodies were starting to swing into action. “Policy-makers have picked up pretty fast ... this is the roll-up-your-sleeves moment.” - Reuters 2008.

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