Soaring prices push economies to “tipping point”

“They need good policy options and they need help from the international community,” he told a conference to discuss new IMF research on food and fuel inflation.

The problem is especially severe in some Sub-Saharan African countries and threatens to wipe out gains made over the past decade to reduce poverty and strengthen their economies. It also risks driving up the debts of poor countries as governments increase borrowing to deal with the higher prices.

The IMF has identified 18 countries in sub-Saharan Africa that have been hard-hit by higher prices that will need balance of payments and budget support.

Among these is Liberia, a West African country that has slowly emerged from years of civil war, where the impact of higher oil prices on the balance of payments is around 15% of GDP, representing nearly all of its international reserves.

Strauss-Kahn said the IMF research underscored the need for a coordinated response by countries, donors and international organizations to tackle the effects of the global price shock.

“Each country is different and exact policy prescriptions will vary considerably. But the universal challenge for all poor and middle-income countries is to find ways to feed the hungry while maintaining hard-won macroeconomic stability,” he said.

Benedicte Christensen, acting director of the IMF's African Department, said combined the price shocks have raised the overall import bill in Africa by 2% to 3% of GDP, threatening to derail economic stability and growth.

Mark Plant, deputy director of the IMF's Policy Development and Review Department, said the situation for countries worsened dramatically when food and fuel prices spiked at the end of 2007. Until then, price rises were gradual and countries were able to draw from their international reserves.

“The sharp price increases have very much driven many of these countries to the tipping point. No longer can they rely on their reserves to cushion the impact,” he said.

The fund said that until recently the sharp run-up in commodity prices had had only a limited effect on countries' balance of payments, but that larger impacts were now being felt and inflation was putting budgets under stress.

The fund said countries should strive to protect the poor by expanding targeted social programs, but should avoid steps that could result in economic instability.

The IMF said there was scope in some countries to loosen budgets and free up social spending, but others might need to limit their response or seek outside help.

It said central banks should tolerate so-called first-round inflation in which commodity prices push up the overall rate of inflation, but that they should ensure inflation does not creep into the prices of other goods and services.

Preliminary data shows that annual food price inflation for 120 poor countries and emerging market nations rose to 12% at the end of March 2008 from 10% three months earlier. Meanwhile, fuel price inflation soared to 9% from 6.7% in the same period.

Actual 12-month inflation in March 2008 exceeded IMF staff projections for the end of 2008 by more than 1 percentage point, the IMF said.

It would likely take some time for food prices to move lower because any pickup in production would be offset by an expected increase in biofuels output and strong growth in emerging and developing countries, the fund added.

The IMF said a slowdown in economic growth in developed countries has had less of an impact on commodity prices than in the past, because so much of the demand was coming from the developing world. (Reuters)