The IMF is preparing a study about the impact of high food and fuel prices. In the following interview, Mark Plant, Deputy Director of the IMF’s Policy Development and Review Department, explains the status of the various strands of work taking place within the IMF on food and fuel prices.
IMF Survey: It seems as though this crisis crept up on the world. Were the warning signs ignored?
Plant: Signs of a possible food problem have been visible for a while. The world has been consuming more food than it has been producing for a few years, prices have been creeping up, and inventories are at historic lows. And we should not forget that this time around, the food price cycle is positively correlated with the one for oil. Fertilizer and transportation costs are affected by the oil price. And the oil price rose dramatically in a very short period of time.
Also, global food markets—that is, food export markets—are often thin, especially the one for rice. In the current environment of uncertainty, financial turmoil, and the search for safe havens such as commodities, this can lead to very volatile prices, perhaps with some overshooting.
Nobody could have foreseen that the financial crisis, some flight into commodities, and an oil price hike would all happen at a time when food stocks happen to be low.
IMF Survey: How quickly will the IMF revamp its lending instruments to be able to help out more quickly in this crisis?
Plant: Very quickly. The IMF is preparing a review of the Exogenous Shocks Facility (ESF) for Board consideration in June. The modified facility will provide more rapid and effective shocks financing and be a streamlined version of the structure of financing instruments for low-income countries. But I would underscore that the ESF is available now, if any country needs immediate help.
IMF Survey: Is the PRGF [Poverty Reduction and Growth Facility] a suitable instrument for assisting crisis-hit countries?
Plant: Yes. Countries with PRGF-supported programs can request augmentations of their arrangements if they are confronting balance of payments problems. The IMF’s area departments are in active discussion with 10-15 low-income countries on possible Fund financial assistance to help address the balance of payments impact of rising food and fuel prices.
IMF Survey: How much does the IMF expect to lend to countries affected by the food price hikes? What will it do to ensure that the money goes to worst-affected people?
Plant: The IMF will consider all requests for financial assistance and decisions will be made based on country-specific needs. Augmentations in the past have been in the range of 15-20 percent of quota. On your second question, the IMF provides balance of payments assistance. In other words, the Fund can help fund import costs. At the same time, teams will very carefully assess the emergency measures put in place in their countries to make sure that they adequately target the most vulnerable.
IMF Survey: Many civil society organizations blame the present situation on the Fund’s past advice to low-income countries, such as recommending cuts in food and fuel subsidies or not allowing enough fiscal space for increases in these subsidies. What’s your response?
Plant: The IMF is well aware that food security is one of the key objectives of any government. IMF-recommended policies are intended to support this objective.
As we all know, the key element in any government’s decision making is how to allocate scarce resources. In low-income countries in particular, the overall rate of taxation is often limited and the tax base is very small. Until the recent run-up, food prices have been at historic lows for many years. Financial support for health or education systems and for infrastructure were higher on the policy priority list of most low-income country governments. These priorities may now have changed—but government resources are just as scarce.
So there will be a tendency to look to subsidies. But our advice has focused on eliminating generalized subsidies in favor of targeted transfers that benefit the poor. Most countries have immense social and economic needs and resources are scarce; it would be inappropriate to use them for supporting consumption of the rich. At the same time, the policymakers have to ensure that subsidy policies do not destroy longer-term incentives to produce. This is not an easy thing to get right and it requires a lot of expertise—not just macroeconomics. And we rely on other institutions, such as the World Bank, to advise on these issues.
IMF-supported programs are designed to provide fiscal space to meet government priority spending, while not jeopardizing long-term macroeconomic stability. With the food crisis upon us, we can help the authorities respond flexibly to spend on programs critical to keep people well-nourished.