Acute food inflation and a shallow global policy leadership response

The ‘Food security’ update recently released by World Bank indicated a very difficult food inflation situation globally, whereby it pointed out: ‘Information from the latest month between March and June 2022 for which food price inflation data are available shows high inflation in almost all low-income and middle-income countries; 93.8 percent of low-income countries, 89.1 percent of lower-middle-income countries, and 89 percent of upper-middle-income countries have seen inflation levels above 5 percent, with many experiencing double-digit inflation.

The share of high-income countries with high inflation has also increased sharply, with about 78.6 percent experiencing high food price inflation. The most affected countries are in Africa, North America, Latin America, South Asia, Europe, and Central Asia.’

Pakistan falls within those countries where food inflation has been on the higher side. According to the recently released data by Pakistan Bureau of Statistics (PBS), food inflation in urban and rural areas for July increased year-on-year (YoY) by 23.6 percent, and 26.9 percent, respectively.

The severity of this level of inflation can be gauged from the fact that it is closer to the ‘Food security’ update’s upper bound of 5-30 percent; which is the second highest range band for countries globally in terms of food inflation categorization.

Moreover, as per the same update, and based on countries for which data is available, the top ten countries with most food inflation are Lebanon (332%), Zimbabwe (255%), Venezuela (155%), Turkey (94%), Iran (86%), Sri Lanka (80%), Argentine (66%), Suriname (55%), Ethiopia (38%), and Moldova (34%).

Hence, it can be seen that average (of urban and rural taken together) food inflation at 25.3% is quite close to making the list of the top ten countries, which should indicate the severity of the inflationary burden at hand, especially for the middle- and lower-income groups.

A recently published article ‘World Bank data shows where food inflation is hitting hardest’ highlighted with regard to the impact of food inflation as follows: ‘About 94% of low-income countries, 89% of lower-middle-income countries, and 89% of upper-middle-income countries have nominal food inflation levels above 5% compared with the previous year.

Eastern and southern Africa will likely see conditions worsen in the coming months. South Sudan and Sudan face the risk of famine, and the Democratic Republic of Congo and Ethiopia are also seeing food security deteriorate.’

Global south in particular is suffering from both high food inflation, and serious debt default risk possibilities. Having said that, global leadership, in terms of rich, advanced countries, and multilateral institutions continue to remain quite oblivious to the financing needs of countries, many of which are going through high imported inflation.

Proper debt restructuring, adequate provision of International Monetary Fund’s (IMF’s) special drawing rights (SDRs), and revisiting an acutely tight monetary policy stance otherwise being adopted by many developed countries, and which in turn, has increased policy rate in a quick and extensive manner in recent months, could help strengthen domestic currencies of developing countries; reducing in turn imported inflationary component in overall inflation.

The same update itself pointed out in this regard: ‘The war in Ukraine is having extreme impacts on the world’s poorest countries. The countries at highest risk of a debt crisis are experiencing the additional threat of a food crisis.

A recent World Bank blog [titled ‘For poor countries already facing debt distress, a food crisis looms’] described the dire situation that many poor countries have been facing since the start of the war, with surging food import bills resulting from high grain prices caused by the war.

According to World Bank data, import bills for wheat, rice, and maize are expected to rise by more than 1 percent for low-income countries at high risk of a debt crisis – more than double the increase from 2021 to 2022.’

Climate change is also taking a serious toll on food grain production and supply, especially wheat, due to unprecedented flooding in many parts of Pakistan and India, mainly at the back of heavy pre-monsoon rains, which in turn proceeded an extreme level of heatwave that these countries, among others, saw this year.

Having said that, there is a serious lack of global leadership in terms of adequate provision of pledged climate finance amount of $100 billion annually to developing countries, which has been far less than the committed amount.

A recent Financial Times (FT) article ‘Even more erratic monsoons take their toll in India’ pointed out: ‘Climatic extremes have characterised 2022 in India. In March and April, northern parts of the country sweltered under a heat dome – a band of high pressure stuck in one place - with meteorologists noting the hottest March since records began 121 years ago.

Then late spring brought a deluge to the north-eastern state of Assam. The resulting floods lasted for weeks, killing at least 180 people and forcing more than 300,000 into relief camps, Unicef reported. The devastating toll reveals how vulnerable India is to extreme weather.’

Similarly, Pakistan’s two provinces, Sindh and Balochistan, have undergone serious flooding after a severe heatwave that hit the country in the months before. A recent Pakistan Today (PT) published article ‘Climate change behind recent flash floods: PM’ highlighted PM’s remarks on flooding and climate change as: ‘Flooding has battered Sindh and Balochistan since the onset of heavy monsoon rains a month ago, affecting a wide central belt.

More than 330 people have died in the two provinces. Since June 14, the downpours have damaged bridges, roads and about 4,000 homes in Balochistan, according to the National Disaster Management Authority (NDMA). “Our ongoing floods and torrential rains need to be seen from [climate] angle,” Sharif said in a tweet. … Pakistan has been experiencing an unprecedented heat wave and a series of extreme climate events ranging from flash floods to forest fires.’

It is therefore important that in addition to adequate provision of climate finance, global policy leadership should also take a clear stance in terms of steps needed to effectively deal with climate change, in terms of not looking to incentivize investment in fossil fuel sector to ease short-term supply pressures and oil prices, since the window of action to deal with global warming is fast closing, and needs utmost focus on promoting renewable sources of energy.

To make this transition to green sources more manageable for debt distressed, and high imported-inflation-impacted developing countries, in addition to provision of climate finance, greater allocation of SDRs, and effective debt restructuring, the serious capital flight problem affecting them also needs to be addresses.

In addition to reaching better global food production and supply through appropriate climate change crisis management, these policies will also help strengthen domestic currencies and reduce the impact of imported food inflation.

In recent months, a sharp policy rate increase, for instance, in the United States has resulted in deep and quick capital flight from developing countries, in turn, negatively impacting domestic currencies of these countries, which positively contributed to imported inflation component of overall inflation, especially through the channel of higher oil prices feeding into cost push inflation, including that of the food sector.

Highlighting the steep extent of this capital flight from developing countries, a recent FT article ‘Emerging markets hit by record streak of withdrawals by foreign investors’ pointed out in this regard: ‘Cross-border outflows by international investors in EM stocks and domestic bonds reached $10.5bn this month according to provisional data compiled by the Institute of International Finance.

That took outflows over the past five months to more than $38bn – the longest period of net outflows since records began in 2005. The outflows risk exacerbating a mounting financial crisis across developing economies. …The foreign currency bonds of at least 20 frontier and emerging markets are trading at yields of more than 10 percentage points above those of comparable US Treasury bonds, according to JPMorgan data collated by the Financial Times. Spreads at such high levels are often seen as an indicator of severe financial stress and default risk.’

A rather intellectually shallow approach has been taken by major treasuries to go overboard in terms of monetary tightening to curtail domestic inflationary pressures, given they have a significant causal imprint in the shape of supply-side determination as, for instance, was highlighted by economics Nobel laureate Joseph Stiglitz in a recent interview to Bloomberg.

He pointed out in the interview with regard to the causes of inflation in US and how it is different from the 1970s inflation there as follows: ‘…it’s mostly a supply-side inflation. And think about some of the things that are really driving it. Take the price of energy, the price of oil. It’s way up.’

Seeing this lack of proper role being played by policy leadership in advanced countries, in terms of apparently remaining quite oblivious to the impact of this over-board domestic monetary tightening on developing countries, acting State Bank of Pakistan (SBP) governor, Murtaza Syed, rightly pointed out in his recent FT published article ‘Now is not the time to neglect developing economies’ as follows: ‘…the world is not paying nearly as much attention to the problems relating to debt and capital outflows encountered by countries in Asia, Latin America and Africa as it did to similar issues faced by several European countries a decade ago. …Despite all the rhetoric of social protection and debt treatments, the tools being used to assess problems in developing countries and the policy options they are being presented by the gatekeepers of the global system remain rigid and old-fashioned.’

Copyright Business Recorder, 2022