Africa

Africa faces new shock as Ukraine war raises food and fuel costs

Food security is at a risk in Sub-Saharan Africa.

Food security is at a risk in Sub-Saharan Africa. Image: Unsplash/Annie Spratt

Abebe Aemro Selassie
Director, African Department, International Monetary Fund
Peter Kovacs
Economist, IMF
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Africa

  • Africa’s economic outlook is being hit by large rises in food and fuel prices because of Russia’s invasion of Ukraine, the IMF says.
  • It expects Africa's economic growth to slow to 3.8 percent this year, down from last year’s 4.5 percent.
  • Countries need a careful policy response to address these challenges, including direct transfers to protect the most vulnerable households, according to the IMF.
  • Other options include temporary subsidies or targeted tax reductions with clear end dates.

Sub-Saharan African countries find themselves facing another severe and exogenous shock. Russia’s invasion of Ukraine has prompted a surge in food and fuel prices that threatens the region’s economic outlook. This latest setback could not have come at a worse time—as growth was starting to recover and policymakers were beginning to address the social and economic legacy of COVID-19 pandemic and other development challenges. The effects of the war will be deeply consequential, eroding standards of living and aggravating macroeconomic imbalances.

Impact of Ukraine war on countries in Africa

We now expect growth to slow to 3.8 percent this year from last year’s better-than-expected 4.5 percent, according to our latest Regional Economic Outlook. Though we project annual growth to average 4 percent over the medium term, it will be too slow to make up for ground lost to the pandemic. Inflation in the region is expected to remain elevated in 2022 and 2023 at 12.2 percent and 9.6 percent respectively—the first time since 2008 that regional average inflation will reach such high levels.

There are three main channels through which the war is impacting countries in Africa—with notable differentiation both across and within countries:

  • Prices for food, which accounts for about 40 percent of consumer spending in the Africa, are rising rapidly. Around 85 percent of the region’s wheat supplies are imported. Higher fuel and fertilizer prices also affect domestic food production. Together, these factors will disproportionately hurt the poor, especially in urban areas, and will increase food insecurity.
  • Higher oil prices will boost the import bill for the Africa’s oil importers by about $19 billion, worsening trade imbalances and raising transport and other consumer costs. Oil-importing fragile states will be hit hardest, with fiscal balances expected to deteriorate by around 0.8 percent of gross domestic product compared to the October 2021 forecast—twice that of other oil-importing countries. The Africa’s eight petroleum exporters, however, benefit from higher crude prices.
  • The shock is set to make an already delicate fiscal balancing act more difficult: increasing development spending, mobilizing more tax revenues, and containing debt pressures. Fiscal authorities generally aren’t well-positioned for additional shocks after the pandemic. Half of Africa’s low-income countries are already in or at high risk of distress. Rising oil prices also represent a direct fiscal cost for countries through fuel subsidies, while inflation will make reducing these subsidies unpopular. Spending pressures will only increase as growth slows, while rising interest rates in advanced economies may make financing more costly and harder to obtain for some governments.
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Two charts. One chart shows the prevalence of moderate or severe food insecurity, 2019. The other chart shows the top 8 wheat importer in Sub-Saharan Africa.
In 2019 prevalence of moderate or severe food insecurity in Sub-Saharan Africa was more than double than in EDME Image: IMFBlog/World Bank, Food and Agriculture Organization; COMTRADE and IMF staff calculations

Countries in Africa need a careful policy response to address these daunting challenges. Fiscal policy will need to be targeted to avoid adding to debt vulnerabilities. Policymakers should as much as possible use direct transfers to protect the most vulnerable households. Improving access to finance for farmers and small businesses would also help.

Countries that can’t provide targeted transfers can use temporary subsidies or targeted tax reductions, with clear end dates. If well-designed, they can protect households by providing time to adjust to international prices more gradually. To enhance resilience to future crises, it remains important for these countries in Africa to develop effective social safety nets. Digital technology, such as mobile money or smart cards, could be used to better target social transfers, as Togo did during the pandemic.

Net commodity-importers, such as Benin, Ethiopia and Malawi, will need to find resources to protect the vulnerable by reprioritizing spending. Net exporters, like Nigeria, are likely to benefit from rising oil prices, but a fiscal gain is only possible if the fuel subsidies they provide are contained. It is important that windfalls are largely directed to strengthen policy buffers, supported by strong fiscal institutions such as a credible medium-term fiscal framework and a strong public financial management system.

To navigate the trade-off between curbing inflation and supporting growth, central banks will need to monitor price developments carefully and raise interest rates if inflation expectations drift up. They must also guard against the financial stability risks posed by higher rates and maintain a credible policy framework underpinned by strong independence and clear communication.

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The need for international solidarity

The international community must step up to ease the food security crisis. The IMF’s recent joint statement with the World Bank, the United Nations World Food Programme and the World Trade Organization called for emergency food supplies, financial support, including grants, increased agricultural production and unhindered trade, among other measures.

Following through on the commitment by Group of Twenty countries to re-channel $100 billion of their IMF Special Drawing Rights allocation to vulnerable countries would be a major contribution to the Africa’s short-term liquidity needs and longer-term development. There are options for re-channeling SDRs, for example through the IMF’s Poverty Reduction and Growth Trust or the newly created Resilience and Sustainability Trust, which has received almost $40 billion in pledges.

Finally, for some countries, restoring debt sustainability will require debt re-profiling or an outright restructuring of their public debt. To make this a reality, the G20 Common Framework needs to better define its debt restructuring process and timeline, and the enforcement of the comparability of treatment among creditors. Importantly, debt service payments should be suspended until an agreement is reached.

A chart showing economic forecasts of Sub-Saharan Africa
Senegal, in Sub-Saharan Africa, is expected to see 9.2% real GDP growth in 2023 Image: IMFBlog/IMF World Economic Outlook Database, April 2022.
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Related topics:
AfricaAgriculture, Food and BeverageFood Security
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