Rising Food and Energy Prices in Europe and Central Asia

Summary

Non-energy commodity prices rose for eight consecutive months through February, crude oil prices for seven. The World Bank food price index has matched its peak of 2008 with the energy price index still below the July 2008 peak. The increase in food prices in 2010-11 represents a generalized increase in the prices of several commodities. These commodity market developments reflect a combination of temporary and permanent factors. Rising incomes around the world, and particularly in emerging and developing countries, have increased demand for food and fuel. In addition, supply factors, related to fuel supply constraints and inventories, have affected prices both in the short and longer runs, while policies supporting bio-fuel production have affected grain prices.

Introduction

The ECA region was hit hard by the global economic crisis and countries are facing the commodity price hikes of 2010-11 from a different situation than that prevailing at the time of the 2006-2008 commodity price increases. ECA countries were in a much stronger economic situation before the global crisis with growth averaging almost 7% during 2005-08. Fiscal deficits were falling, as was public debt. Capital, available at unprecedentedly low rates, allowed many ECA countries to finance large current account deficits as they grew; remittances buffered trade deficits and provided income support for many. ECA’s strong growth was accompanied by decreasing unemployment and wage increases.

Section 1: World Commodity Markets and Prices

Non-energy commodity prices rose for eight consecutive months through February, crude oil prices for seven. Figure 1 below shows the evolution of world food and energy prices since 2005. The energy price index is still below its July 2008 peak, though the World Bank (WB) food price index had matched the peak of July 2008 by January 2011.The increase in food prices in 2010 represents a generalized increase in the prices of several commodities. In the ECA region, wheat is an important staple.

Section 2: Macroeconomic Channels

Food price inflation varies substantially among ECA countries with poorer countries tending to experience higher inflation rates. Food price inflation was over 20% in two countries in 2010- the Kyrgyz Republic and Georgia. For another nine countries, it was over 10% (Figure 3). For almost a third of ECA countries, the weight of food in the consumption basket used to estimate the CPI is around 50%.12,13 For another 20% it accounts for around 40% of the CPI. Thus, any changes in food price inflation have a significant impact on overall inflation rates. Ukraine had food price inflation of 10.6% and the food weight in the CPI was 53.5% while Armenia’s food price inflation was 15.2% and the share of food in the CPI 48%. As a group, the Caucasus experienced the highest food.

Section 3: Poverty Impacts and the Response of Social Assistance Systems

The food price increases are exacerbating the weakened conditions of many households affected by unemployment and lower wages in the global crisis. The 2010-11 food and energy price increases, if sustained, could have a stronger negative impact on poverty than did the 2006-08 price increases as they are occurring at a time when ECA countries are just beginning to recover from the global economic crisis. The first round of price increases occurred at a time when GDP growth had been strong for a while, labor markets were tight, wages were rising and remittances were high. In 2009-10, the situation has been very different.

Section 4: Vulnerability and Policy Interventions

Countries in ECA are considered most vulnerable to the food and energy price shocks if they could have large increases in poverty rates due to high inflation and if, at the same time, the impact on their macroeconomic accounts is potentially significant. In ECA, current account imbalances preceding the last crisis magnified the region’s vulnerability to external shocks. During the global crisis, current account imbalances improved in ECA countries because consumption (and therefore imports) tended to fall so sharply that they out weighed the decline in exports caused by lower external demand. As the ECA economies have recovered, so has consumption. Current account deficits have remained lower than in the pre-crisis period, but they have been rising in many.

Section 5: Agriculture in ECA

Agricultural prices in ECA are spiking upwards for the second time in three years; not only are prices rising but the variance of price levels for grains, sugar andrice has increased substantially. At the beginning of 2011, food prices were back to the 2008 peak levels. In terms of individual commodities, the world wheat price is still below its 2008 peak and the maize price has surpass edit. As in 2008, the 2011 the price peak for food is related to the evolution of energy prices. Energy and fossil fuel fertilizers are an important input in agriculture; also bio fuel production is increasing pressures on international food markets. In 2011 price increases are more wide spread across a large number of commodities than they were in 2008 and are not driven only by cereals.

Section 6: Energy in ECA

ECA countries have been facing rising oil and gas prices since global economic conditions have improved. In February 2011, international oil prices surged past US $100 per barrel for the first time since 2008 though they are still below the July 2008 peak. By January 2009, they declined to one third of their peak level. Since then, global oil prices have been increasing steadily at an average monthly rate of 1.7% over the past twelve months, to above US $100 in early February 2011. Prices for natural gas have registered a similar evolution. The average EU pipeline import price tripled between 2002 and 2008 to above US $400 per thousand cubic meters (mcm). This in turn stimulated a significant increase of gas prices in intra-CIS trade. Until 2005, countries in the CIS had been able to secure imported gas at below market prices.