Economic Research Forum (ERF)

Ukraine invasion: Africa is vulnerable to soaring energy and food prices

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Russia's invasion of Ukraine has accentuated the already pronounced upward trend in energy and food prices. This column assesses the vulnerability of countries in Africa to such changes in commodity markets.

In a nutshell

At the macroeconomic level, the external positions of African countries are very vulnerable to changes in commodity markets; at the microeconomic level, the distributional consequences of rising energy and food prices are severe.

Cash transfers are essential to contain the erosion of the purchasing power of households; the empty government coffers of many African countries makes international donors essential to provide lifelines to these countries.

In the medium term, the governments of African countries must reform their energy and agricultural sectors to attract more investments and thereby ensure greater energy and food security for their fellow citizens.

Energy and food prices are soaring. The barrel of Brent oil has crossed the $100 mark, a threshold it had not reached since 2014. Prices for grains, edible oils and dairy products have reached record levels close to those in 2011, a year marked by periods of popular uprising in Africa and the Middle East.

Russia’s invasion of Ukraine has accentuated the already pronounced upward trend in energy and food prices. In addition to producing natural gas and oil, the two countries together generate about 30% of global wheat production and 80% of sunflower oils.

From a macroeconomic point of view, the external positions of African countries are very vulnerable to changes in commodity markets, even if they are not all in the same situation. For example, countries dependent on edible oils and wheat imports have been much more affected than rice-importing countries such as Côte d’Ivoire, due to the price differential between these products.

The continent’s growing number of oil and natural gas exporters are benefiting from higher export prices, which have helped to mitigate the negative terms-of-trade shock from higher food prices. Countries importing both energy and food products are in a difficult situation because their external deficits are widening rapidly.

Beyond the acceleration of the rise in international prices linked to the war between Ukraine and Russia that affects all importers, North African countries such as Egypt, Tunisia and Algeria, which depend on the import of wheat directly from these countries, risk supply disruptions.

At the microeconomic level, the distributional consequences of rising energy and food prices on African populations are severe. The continent, which is home to two-thirds of the world’s poorest people, is highly vulnerable to these rising prices. Rising international prices come at a time of domestic food shortages linked to extreme weather events including drought in the Horn of Africa and Madagascar.

Living conditions, especially for economically marginalised groups, are worsening. Households on the continent have a relatively high share of food in their total expenditure. The share of spending on food in Nigeria and Cameroon averages 59% and 42% respectively, compared with 13% and 6% in France and the United States respectively.

Fragile countries are particularly vulnerable because their share of food consumption can reach well over 60% of total expenditure. If we add to the share of household expenditure on food, the share of expenditure on fuel for transport and electricity, the shock to households, especially the poorest, constitutes a perfect storm.

African countries’ responses to rising energy and food prices differ depending on the systems in place or subsidy reforms implemented in the past. Some countries already had or recently put in place new domestic price controls on energy and food products. Some of these countries are also putting in place food export restrictions to ensure the country’s food security at the expense of local food producers who wish to export these products to benefit from higher prices. Other countries allow domestic prices to fluctuate but offer cash transfers with different degree of targeting the most vulnerable segments including women in remote areas.

In a context of price controls, the state budget protects against the consequences of international prices, but to the detriment of widening deficits. In the context of liberalised markets, market structure including monopolies or oligopolies in the related services sector, including the transport and distribution of energy and food products, may lead to higher domestic prices than international prices.

Cash transfers are therefore essential to contain the erosion of the purchasing power of households. In both controlled and liberalised markets, the difficulty associated with the empty government coffers of many African countries makes international donors essential to provide lifelines to these countries.

In the medium term, the governments of African countries must reform their energy and agricultural sectors to attract more investments and thereby ensure greater energy and food security for their fellow citizens. But the pitfalls are numerous including related to the organisation of the agricultural sector including issues of cold chain and land. Fixing the governance of public or parastatal companies managing the energy sectors and operating in the agricultural sector is also at the heart of energy and food security.

Too often forgotten are competition policies, which can help to lower margins of the distribution and transport services, and reduce the gap between low farmer prices and high prices to consumers. For example, food importers are often powerful lobbies against domestic agricultural production. Declining foreign exchange earnings and difficult access to trade credit are making importers less powerful, which should be an opportunity to reform the distribution sector and encourage local agricultural production.

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