Global food crisis demands urgent response

Russian President Vladimir Putin’s invasion of Ukraine shocked the world, forced Western countries to respond, and is driving up the cost of energy and food across the globe. 

However, the most urgent economic, social, and human crises are unfolding in poorer countries where populations face war, spillover-driven inflation, and more expensive foreign-currency debt.

Together these dynamics put populations in Asia, Africa, and some parts of Latin America and the Caribbean at risk of shortages, riots, unrest, and famine. The conflict in Ukraine is directly affecting supplies of food. News of a deal between Russia and Ukraine to allow grain exports is welcome. Russia and Ukraine together account for nearly a third of global wheat supplies, so any stoppage or constriction in trade affects access to basic foodstuffs for many.

Wheat prices are up while sunflower oil, meat, poultry, and a raft of other staples have also risen, driven by higher fuel and fertilizer costs. The United Nations' Food Price Index, which captures the effects of war and supply disruptions, recently reached an all-time high of 156, up from 103 in 2020.

The alarming economic and political crisis in Sri Lanka shows what may occur elsewhere. Long-standing poor governance and corruption in the South Asian country has combined with economic crises, price hikes, and fuel and food shortages to snap the threads of economic and societal stability. The result is unrest, riots, and a collapse of the government.

Sri Lanka is unlikely to be the last country to face economic and governmental strife. Other poorly run, indebted, and stressed states - and their populations - could be weeks or months from similar turmoil. As Kristalina Georgieva, Managing Director, International Monetary Fund, points out, food crises “can unleash social unrest, (yet) … hunger is the world’s greatest solvable problem”.

As the rich in the West grumble, governments in poorer states are reacting by placing restrictions on food exports, according to World Bank President, David Malpass. While inflation is bad for all, the poorest were already spending at least half of their income on food. They have extraordinarily little room to absorb price increases before they go hungry and their children face malnutrition.

Oxfam estimates as many as 323 million people are on the brink of starvation; the United Nations reckons 869 million are facing hunger. Unfortunately, the leaders of the world’s wealthy states are so far doing too little to avert the developing food emergency. In June the G7 group of nations, led by the United States, pledged US$4.5 billion to address the looming food shortage, but this is not enough to avoid disaster.

It’s not the first time insufficient pledges by the world’s richest economies have delivered worse outcomes for the planet. Two years ago epidemiologists estimated that vaccinating the populations of lower-income countries against Covid-19 would cost just US$2 billion. The costs of a failure to equitably distribute the vaccine are conversely massive. 

It is estimated that the negative impact for lower-income countries was US$156 billion in 2021–2022 and US$216 billion the following year. Yet rich nation donors came up with only US$700 million, while providing economic support worth US$15 trillion for their own populations.

The food crisis requires rapid action and resources of at least US$22 billion, according to the UN World Food Program. Delay will only increase the human, economic, and societal costs.

The invasion of Ukraine has hobbled the G20, whose members include Russia. The group’s recent meeting in Indonesia ended in discord. Yet the pandemic also demonstrated that when crisis strikes only state actors, acting collectively, can marshal the necessary resources, spur private and public policy action, and get fast results.

The International Monetary Fund, World Bank, and regional multilateral development banks in Asia, Latin America and Africa should be charged with managing the food and fuel crisis and equipped to step in urgently. These bodies, although consensual in nature, can direct resources and relief without a veto from Russia or its allies. This institutional room to act must be used swiftly.

We believe the response cannot wait until the World Bank and IMF hold their annual meetings in October. The leadership of these and other pillars of the global financial system must be empowered and act now.

First, they should monitor the fiscal and economic stability of countries facing increased distress from debt and rising food prices.

Second, they should redirect existing and additional multilateral and bilateral resources. Current promises, such as the US$2.3 billion committed by the World Bank, are insufficient.

Third, leaders whose countries are in or nearing a crisis should receive multilateral support, with no shaming of that necessary step from public or private creditors and credit ratings agencies.

Finally, public and private creditors should exercise restraint and be willing to take haircuts on their debt to secure stability. No one should profit from malnutrition and misery. Lenders must be part of the solution, not the problem.

National political and financial leaders still must work to avoid a food price crisis, famine, and human catastrophe. Recent history suggests politicians often lack the will to act, even though they know what is needed and that the upfront financial costs are manageable.

Can emerging markets cope with the shift in US Fed policy?

For most of last year, investors priced in a temporary rise in inflation in the United States given the unsteady economic recovery and a slow unraveling of supply bottlenecks. Now sentiment has shifted. Prices are rising at the fastest pace in almost four decades and the tight labor market has started to feed into wage increases.

According to a report by International Monetary Fund (IMF), the new Omicron variant has raised additional concerns of supply-side pressures on inflation. The US Fed referred to inflation developments as a key factor in its decision last month to accelerate the tapering of asset purchases.

Inflation is likely to moderate later in year 2022 as supply disruptions ease and fiscal contraction weighs on demand. The Fed’s policy guidance that it would raise borrowing costs more quickly did not cause a substantial market reassessment of the economic outlook.

The history shows that the effects on emerging markets benign if tightening is gradual, well telegraphed, and in response to a strengthening recovery. Emerging-market currencies may still depreciate, but foreign demand would offset the impact from rising financing costs.

Spillovers to emerging markets could also be less benign. Broad-based US wage inflation or sustained supply bottlenecks could boost prices more than anticipated and fuel expectations for more rapid inflation. Faster Fed rate increases in response could rattle financial markets and tighten financial conditions globally.

These developments could come with a slowing of US demand and trade, which may lead to capital outflows and currency depreciation in emerging markets.

The impact of Fed tightening in a scenario like that could be more severe for vulnerable countries. In recent months, emerging markets with high public and private debt, foreign exchange exposures, and lower current-account balances saw already larger movements of their currencies relative to the USD.

The combination of slower growth and elevated vulnerabilities could create adverse feedback loops for such economies, as the IMF highlighted in its October 2021 releases of the World Economic Outlook and Global Financial Stability Report.

Some emerging markets have already started to adjust monetary policy and are preparing to scale back fiscal support to address rising debt and inflation. In response to tighter funding conditions, emerging markets should tailor their response based on their circumstances and vulnerabilities.

Those with policy credibility on containing inflation can tighten monetary policy more gradually, while others with stronger inflation pressures or weaker institutions must act swiftly and comprehensively.

In either case, responses should include letting currencies depreciate and raising benchmark interest rates. If faced with disorderly conditions in foreign exchange markets, central banks with sufficient reserves can intervene provided this intervention does not substitute for warranted macroeconomic adjustment.

Nevertheless, such actions can pose difficult choices for emerging markets as they trade off supporting a weak domestic economy with safeguarding price and external stability. Similarly, extending support to businesses beyond existing measures may increase credit risks and weaken the longer-term health of financial institutions by delaying the recognition of losses. And rolling back those measures could further tighten financial conditions, weakening the recovery.

To manage these tradeoffs, emerging markets can take steps to strengthen policy frameworks and reduce vulnerabilities. For central banks tightening to contain inflation pressures, clear and consistent communication of policy plans can enhance the public’s understanding of the need to pursue price stability.

Countries with high levels of debt denominated in foreign currencies should look to reduce those mismatches and hedge their exposures where feasible. And to reduce rollover risks, the maturity of obligations should be extended even if it increases costs. Heavily indebted countries may also need to start fiscal adjustment sooner and faster.

Continued financial policy support for businesses should be reviewed, and plans to normalize such support should be calibrated carefully to the outlook and to preserve financial stability. For countries where corporate debt and bad loans were high even before the pandemic, some weaker banks and nonbank lenders may face solvency concerns if financing becomes difficult. Resolution regimes should be readied.

Beyond these immediate measures, fiscal policy can help build resilience to shocks. Setting a credible commitment to a medium-term fiscal strategy would help boost investor confidence and regain room for fiscal support in a downturn. Such a strategy could include announcing a comprehensive plan to gradually increase tax revenues, improve spending efficiency, or implement structural fiscal reforms such as pension and subsidy overhauls (as described in the IMF’s October Fiscal Monitor.

Finally, despite the expected economic recovery, some countries may need to rely on the global financial safety net. That may include using swap lines, regional financing arrangements, and multilateral resources. The IMF has contributed with last year’s US$650 billion allocation of Special Drawing Rights, the most ever.

While such resources boost buffers against potential economic downturns, past episodes have shown that some countries may need additional financial breathing room. That’s why the IMF has adapted its financial lending toolkit for member nations.

Countries with strong policies can tap precautionary credit lines to help prevent crises. Others can access lending tailored to their income level, though programs must be anchored by sustainable policies that restore economic stability and foster sustainable growth.

While the global recovery is projected to continue this year and next, risks to growth remain elevated by the stubbornly resurgent pandemic. Given the risk that this could coincide with faster Fed tightening, emerging economies should prepare for potential bouts of economic turbulence.