IMF Seminar

Food and Fuel Price Surge

Tuesday, July 1, 2008, 10:00 a.m.Washington, DC

Food and Fuel Inflation Have Doubled Since 2006

Median Inflation in 120 low- and middle-income countries, 2006-08

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2006 2007 2008:Q1

CPI Food Fuel

Year-on-year inflation (%)

Food Balance of payments deterioration from higher food prices in 33 low-income net food importers (Jan 07-Apr 08)

High impact (greater than 1% of GDP)Medium impact (up to 1% of GDP)

FuelBalance of payments deterioration from rising oil prices in 59 low-income net oil importers (Jan 07-Apr 08)

High impact (greater than 2% of GDP)Medium impact (up to 2% of GDP)

Food and Fuel Price Increases

Recent Developments, Macroeconomic Impact,and Policy Responses

Research Department,Fiscal Department, and

Policy Development and Review Department

International Monetary Fund

Oil demand growth has shifted to emerging and Oil demand growth has shifted to emerging and developing economiesdeveloping economies

0

1

2

3

4

5

6

7

8

2001 2003 2005 20070

20

40

60

80

100

120

140Emerging and DevelopingCountries (LHS)Oil Price (U.S. dollars abarrel, IMF APSP) (RHS)

Oil Demand Growth in Emerging and Developing Countries and Oil Price 1/

Oil Demand Growth in Industrial Countries and Oil

Price

1/ June 2008 Forecast.

-2

-1

0

1

2

3

4

5

2001 2003 2005 20070

20

40

60

80

100

120

140Industrial Countries(LHS)

OIL Price (U.S.dollars a barrel, IMFAPSP) (RHS)

7

Perpetuation of very low spare capacity and tight oil market Perpetuation of very low spare capacity and tight oil market conditionsconditions

World Oil Demand, Production Capacity and Spare Capacity (million barrels a day)

40

50

60

70

80

90

100

110

120

1970 1982 1994 20060

2

4

6

8

10

12

14

16Others' spare capacity (RHS)

Saudi Arabia's spare capacity(RHS)Capacity (LHS)

-50

0

50

100

150

200

250

Avg1995-2000

01 02 03 04 05 06 07 08

Other Emerging and Developing Economies

Industrial Countries 2/

Corn Used in US Ethanol Production

China

Total Production

Demand for Major Food Crops and Production(Year-on-year change, millions of metric tons)

Demand for major food crops has accelerated while production has been slow to increase 1/

1/ Includes corn, rice, soybeans, and wheat.

2/ Excludes corn used in U.S. ethanol production.

0

40

80

120

160

200

240

1970 73 76 79 82 85 88 91 94 97 00 03 06 09

Prices and Inventory Cover of Major Food Crops

Inventories of major food crops have been declining

Inventory cover

(days of global consumption)

Price index

(2005=100)

Fiscal Policy: Challenges

Challenge is to combine pass-through with measures to protect the poor Full pass-through of price increases

encourages efficient responses by consumers &facilitates sound fiscal policy

But, pass through can hurt the poor Countries have adopted a broad array of policy responses toward this end

Changes in fuel taxes

No changeIncreaseDecreaseBoth increase & decreaseNo data

Changes in food taxes

No changeIncreaseDecreaseBoth increase & decreaseNo data

Fuel tax & subsidy costs

0.0 0.3 0.6 0.9 1.2 1.5

Ireland

Dominican Republic

Congo, Republic of

Brazil

Philippines

Chile

Timor-Leste

Sierra Leone

Lao, PDR

Niger

Lebanon

Korea, Republic of

Peru

Rwanda

Burundi

Sri Lanka

Seychelles

Saudi Arabia

Guyana

Fiscal Cost of Fuel Tax Reductions

-6.0 -4.5 -3.0 -1.5 0.0 1.5 3.0 4.5

IraqJordan

Cape VerdeAngolaSudanGabon

United Arab EmiratesEgypt

RussiaMongolia

Burkina FasoFrance

São Tomé and PríncipeHonduras

SenegalMauritius

NepalBelize

BarbadosTunisia

PanamaOman

NigeriaBangladeshEl Salvador

CambodiaPeru

CameroonIndia

MexicoUkraine

MalaysiaPakistanMoroccoEcuador

Venezuela, Rep. Bol.Yemen, Republic of

TurkmenistanChange in Fuel Price Subsidies: 2006-2008

Food tax & subsidy costs

0.0 0.2 0.4 0.6 0.8 1.0 1.2

PhilippinesCôte d'Ivoire

EcuadorRussia

PeruEl SalvadorTimor-Leste

Macedonia, FYRSaudi Arabia

GuatemalaSierra Leone

MauritaniaBurkina Faso

IndiaJordan

BangladeshGuinea

IndonesiaGabon

CameroonAzerbaijan

BeninGambia

Solomon IslandsGuyana

SeychellesNiger

SenegalGrenadaMorocco

Liberia

Fiscal Cost of Food Tax Reductions

-0.7 0.0 0.7 1.4 2.1 2.8

IndonesiaIndia

Yemen, Republic ofTurkmenistan

Venezuela, Rep. Bol.Philippines

BeninSeychelles

MalaysiaLebanon

MauritaniaJamaicaEthiopia

BangladeshMorocco

AzerbaijanSwazilandMauritius

EgyptPakistan

GuatemalaSenegal

Costa RicaBurundiJordan

Timor-LesteMaldives

Change in Fuel Price Subsidies: 2006-2008

Targeted program changes

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0

IraqZimbabwe

UkrainePoland

ArgentinaLatvia

MozambiqueMacedonia, FYR

BeninMongolia

GabonCape VerdeSouth Africa

El SalvadorSt. Vincent and Grens.

SurinameBrazil

NicaraguaJamaicaPakistan

Sri LankaCroatia

GuatemalaGuyanaSenegal

ParaguayAzerbaijanIndonesia

AfghanistanKyrgyz Republic

PhilippinesCosta RicaSingapore

PeruEcuadorMexico

TurkmenistanGrenadaGeorgia

HondurasJordan

IndiaBangladesh

BelizeMalawi

MauritaniaChange in Targeted Transfers: 2006-2008

Total fiscal costs by country

-8.0 to 0.00.0 to 1.01.0 to 2.02.0 to 5.0No data

Challenges going forward

Develop targeted transfers to protect poor from price surges as part of a broader poverty reduction strategyFind the fiscal space to implement mitigating measuresAddress the political hurdles presented by subsidy reform

Precipitous reform can engender backlash from affected groups and even social unrest

Balance of Payments Impact (1)BOP impacts of food and fuel shocks from Jan 2007-April 2008

already quite sizable

Impact in percentage of GDP

Impact in months of imports

Impact on 59 low income net oil importers

Impact on 33 low income net food importers

-2.2

-0.5

-2.5

-2

-1.5

-1

-0.5

0

-0.7

-0.2

-0.8

-0.6

-0.4

-0.2

0.0

Balance of Payments Impact (2)

Simulation of further shocks to assess which countries highly impacted.*

*Shocks simulate a 20 percent increase in food and fuel prices from levels prevailing at the time of the IMF’s Spring 2008 World Economic Outlook projections.

2

23

37

30

1

21

25

18

0 10 20 30 40 50 60

WINNERS: IR <3 monthsbefore shocks and >3 after

HIGH IMPACT: IR drop>0.5 months

HIGH IMPACT: IR <3months after shock

BEFORE the shock: IR <3months

PRGF MICs

BOP impact (3): large but wide variance among countries. Fuel greater impact

Reserves <3 months before and after shocksReserves <3 months before shocks and >3 after shocks Reserves <3 months after shocksReserve drop >0.5 monthsNo data

Inflation impact (1)

Widespread and dramatic effect: higher fuel and food prices have led to substantial increases in headline

inflation.U nweighted A verage 12-m onth Inflation in 139 C ountries (in percent)

0 .0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2006 2007 2008 Q 1 2008 Proj.

C P I Food Fuel

Inflation Impact (2)

Food prices have more impact on inflation than fuel prices: larger share of food in the CPI and imports

Import Composition (in percent)(average for 120 non-OECD countries)

Food, 16

Fuel, 23Others,

62

Composition of the CPI Basket (in percent)(average for 120 non-OECD countries)

Food, 37

Fuel, 7

Others, 56

SubSub--Saharan Africa: Food Price ShocksSaharan Africa: Food Price Shocks

SubSub--Saharan Africa: Saharan Africa: Food and Oil Price ShocksFood and Oil Price Shocks

Worst Hit sub-Saharan African Countries

Liberia

Ghana

Eritrea

Comoros

Sierra Leone

Tanzania

Gambia, The

Guinea-Bissau (CFA)

Mali (CFA)

Kenya

Togo (CFA)

Guinea

Burundi

Mozambique

MadagascarNamibia

Cape Verde

Ethiopia

Burkina Faso (CFA)Niger (CFA)

Malawi

Zambia

Uganda

Central African Rep. (CFA)

Benin (CFA)

Rwanda

São Tomé & Príncipe

Zimbabwe

Senegal

Congo, Dem. Rep.

0

4

8

12

16

20

24

28-12-10-8-6-4-20

SSA Reserves and BOP Impact of Food and Oil Price Shock in 2008

BOP impact of food and oil price shock (Percent of GDP)

Inte

rnat

iona

l res

erve

s (P

erce

nt o

f GD

P)

Shock to reservesratio = 0.5

Notes: Countries in the CFA Franc zone pool reserves, the group reserve holdings can be more informative than country reserve ratios.

-2.5

Spikes in oil and food prices are building inflationary pressures

Sub-Saharan Africa: 12-month CPI Inflation1

(Percent)

5

6

7

8

9

10

11

12

Jan-

05

Apr

-05

Jul-0

5

Oct

-05

Jan-

06

Apr

-06

Jul-0

6

Oct

-06

Jan-

07

Apr

-07

Jul-0

7

Oct

-07

Jan-

08

Apr

-08

Source: IMF, International Financial Statistics.1 The April 2008 figure includes available data for 25 countries.

10.8

Senegal Poverty Impact of Rising Food Prices

Distributional impact of price increases Rice and bread are important components of household food consumption:

Average Budget Shares for Food Items, All Households

Sources: Senegalese household survey; and staff calculations.0

2

4

6

8

10

12

Quintile1

2 3 4 Quintile5

All HHs

Powdered Milk Bread Rice

Increases in Access for sub-Saharan Africa Poverty Reduction and Growth Facility Eligible Countries

Countries In mill of SDRs In % of quota Board Date

Benin 9.29 15 6/16/08Burkina Faso 9.03 15 1/ 1/9/08Central African Republic 8.36 15 6/18/08Mali 18.66 20 2/ 5/28/08

1/ Burkina Faso's augmentation was approved by the Board last January. 2/ Mali's new arrangement increased access from 10 to 30 percent.

As of 6/30/08