Policy Challenges in an Environment of Rising Commodity Prices

Transcription

1 Conference: Albania Opportunities and Challenges in the Move Towards Emerging Market Status Policy Challenges in an Environment of Rising Commodity Prices May 14, 2008 Geoffrey Oestreicher Senior Economist Southeastern Europe Division European Department International Monetary Fund The views expressed herein are those of the author and should not be attributed to the IMF, its Executive Board, or its management.

2 Food price inflation is a global phenomenon Cummulative Percentage Change in IMF Food Price Index (Since December 2005) Actual Forecast Dec-05 Sep-06 Jun-07 Mar-08 Dec-08 Sep-09 0

3 The increase is most pronounced in primary food products World Agricultural Commodity Prices (Euro indices, Dec = 100) IMF Food Index IMF Cereals Index Palm oil, Malaysia futures Rapeseed, Rotterdam FOB M M m m m m12

4 The acceleration of food prices internationally has both demand and supply origins Demand is up from emerging markets, notably China and India; Supply has been constrained by poor harvests and diversion of crops to biofuel production; Rising input costs (fertilizers, fuel) due to rising price of oil; Possible speculative bubble on top of fundamentals

5 The effects For a net food importer, a rise in food prices means a fall in real income. The effect is felt more by poorer segments of the population. Net food exporters benefit in the aggregate, but the gains are unevenly distributed. Inflationary pressure

6 The global distribution Red = largest expected trade balance losses; blue = largest gains

7 Inflation is rising worldwide World: Year-on-Year Headline Inflation, Dec 2006-Feb Feb-07 Jan-07 Dec-06 Apr-07 Mar-07 Sep-07 Aug-07 Jul-07 Jun-07 May-07 Jan-08 Dec-07 Nov-07 Oct Feb-08 World Africa Middle East Industrial Countries Noncore Europe

8 Food prices have risen throughout Europe, but the larger increases were concentrated in Central Europe and the Baltic states Annual Year-on-Year Percentage Change of Food Prices Feb-07 Jan-07 Dec-06 Dec-07 Nov-07 Oct-07 Sep-07 Aug-07 Jul-07 Jun-07 May-07 Apr-07 Mar-07 Albania Baltic states Central and South East Europe Western Europe

9 ...and where the weight of food in consumption is higher... Food Weights (As percent of total consumption basket) Baltic states Western Europe CEE Albania

10 Higher weights on food can be at least partially explained by lower income levels Weight of food in CPI (percent) Log of PPP per capita income (in U.S. dollars)

11 ...where absolute prices are lower... Euro Value of Comparable Food Consumption basket (Western Europe in 2005 = 100) Baltic states CEE Western Europe

12 Since 2002, intra-eu trade in food of the new member states more than doubled. NMSs: Measures of Agricultural Trade Integration (Exports plus imports of food) In billions of Euros (LHS) In percent of intra-eu27 trade in food (RHS)

13 Food price convergence is apparent within the new member states Noncore Europe: Coefficient of Variation of Comparative Price Indices Across Baltic States, CEE, and SEE of Food and Food Subcategories Meat Bread and cereals All Food Fruits, vegetables Oils and fats Milk, cheese and eggs

14 The prices of more processed food products seem to be converging more quickly Baltics, CEE, and SEE: Comparative Price Levels for Food Products, 2006 (EU15=100) Meat Bread and cereals Fruits and vegetables Food Fish Milk, cheese, and eggs Other Non-alcoholic beverages Oils and fats

15 As a result of the differential rate of food price increase, food prices can be seen to be converging across Europe Food price levels (EU15=100) 70 CEE5 Baltics SEE

16 Food price inflation is rising in Albania, and accounted for most of the inflationary pressure in recent months. Albania: Percentage Contribution to Year-on-Year Total Inflation, December 2006-March Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Other Food Electricity BoA target bounds

17 Albania food inflation Albania food inflation Albania: Percentage Change in Food Prices March 2007-March NEC Food Meat Fish All Food Milk, Cheese, and eggs Fruits Oils and fats Flour Bread and cerial Bread sweets and sweetener

18 Looking ahead, what can be expected? IMF commodities division expects the rapid acceleration of world prices to end soon, but for prices to remain relatively high; However, convergence of food prices in lower income European countries means that upward pressure on food inflation in the east of Europe may not end with the rise in world prices. But a considerable deceleration would be expected

19 Policy recommendations given food price increases Efforts to raise the competitiveness of the retail and distribution sectors. Monetary policy action should focus on containing second round effects of the price increase Maintain clear communication with markets Promote a supply response Avoid price controls and export restrictions should be avoided

20 Social protection General principles Maintain macroeconomic stability; If countries decide to act, a tailored solution taking into account individual country characteristics is required. As a general rule, the IMF is recommending targeted subsidies impacting only the most vulnerable groups Avoid blanket transfers or wage increases

21 END