How exposed are MENA households to global food price increases?

SUBMITTED BY ELENA IANCHOVICHINA 

There is widespread belief that consumers across Middle East and North Africa (MENA) are largely insulated from global food price increases due to government food consumption subsidies and other policies. This, perhaps, explains why prior to its April edition, the World Bank’s Food Price Watchand many papers written on the topic did not report changes in domestic food prices in any MENA country. Limited access to microeconomic data has been another reason for focusing mainly on the macroeconomic implications of food price shocks in the region.

Still the absence of systematic monitoring of domestic food price movements and analysis of their implications for households in MENA are surprising. Food security has featured prominently in public policy discussions and higher food prices are thought by some to have been a contributing factor in the region’s recent unrest. The MENA region is the largest wheat importer in the world, and wheat prices have doubled since the end of 2005.  Malnutrition rates are high, and a large number of people live close to the poverty line. Domestic food prices are influenced not only by world prices, but by a number of country-specific factors, including domestic supply chain efficiency, infrastructure and exchange rates, to name a few. With substantial and sustained increases in international prices of a broad range of foods, coupled with a fast-growing domestic food demand, some MENA countries are facing growing fiscal and inflationary pressures.

Nearly all the countries in the region have experienced an increase in their domestic food prices, with the country average increasing by almost 40 percent since January 2007. Importantly, the fiscal pressures vary by country, with some spending as much as 3.5% of GDP on food subsidies.  Since the 1980s most MENA countries have attempted to reform their consumption food subsidy systems, but some governments have been more successful than others in doing so. Measures such as self-targeting, increasing prices by stealth, subsidy rationing and replacing subsidies with cash transfers succeeded in reducing the government subsidy burden, but many others fell short and in some cases, following public pressure, reforms were reversed. The result has been partial reforms, with all MENA countries still offering at least some consumer price subsidies. Meanwhile, social assistance schemes do not adequately channel resources to the needy.

Our recent Economic Developments and Prospects (EDP) report finds that MENA households are indeed highly vulnerable to international food price increases as well as inefficiencies in domestic markets. International food price shocks have been transmitted to various degrees into domestic food prices in nearly all MENA countries.  The strongest pass-through effects (above 0.4) have been observed in West Bank and Gaza (WBG), Iraq, Djibouti, Egypt, and the United Arab Emirates (UAE). The pass-through is smaller but still sizable – varying between 0.2 and 0.4 – throughout the rest of the MENA countries. The exceptions are Algeria and Tunisia where government policies, including subsidies, effectively safeguard against price transmission. Importantly, in all countries, a decline in global food prices barely translates into a reduction in domestic food prices.

The EDP report shows that rising world food prices have been a major factor behind increases in domestic food prices in MENA, explaining some 20 to 30 percent of the variation in these prices. International prices have been a particularly strong driver of food inflation in Iraq and West Bank and Gaza, where they accounted for over 50 percent of food inflation, followed by Egypt, Djibouti and the United Arab Emirates, where they contributed 40 percent to food inflation. Domestic factors such as inflexible procurement methods, poor logistics, inadequate stockpiling practices and insufficient use of financial instruments and planning techniques, have also played a major role in explaining domestic food inflation in nearly all MENA countries.

What these numbers show us is that countries could reduce food price pressures considerably by tackling domestic issues and the fiscal burden by improving the targeting of subsidies and other food consumption policies. But any efforts regarding the latter must of course be sensitive to political-economic realities: refining subsidy targeting to the poor will, by necessity, make price increase transmission to the not-so-poor much stronger. Today’s authorities are especially challenged to make transmission pressures to those who can afford to pay more palatable. The findings also underscore the importance of regular monitoring and reporting of domestic food price developments in the Middle East and North Africa.