High food prices and strong US dollar are ‘double burden’ for developing countries, UNCTAD says

By United Nations Conference on Trade and Development

High food prices and strong US dollar are ‘double burden’ for developing countries, UNCTAD says

Food prices have hit record levels in 2022, creating challenges for food security worldwide, especially for people in developing countries that import most of their food. An index published by the UN Food and Agriculture Organization (FAO) tracking the prices of the most traded food commodities remained at historically high levels in November (135.7 points) after reaching an all-time high in March (159.3 points).

Although the world has suffered food crises in the past, the current one, triggered by the COVID-19 pandemic and the war in Ukraine, is different, a new UNCTAD report says, because of a stronger US dollar.

During past crises, the value of the US dollar fell as food prices climbed. Since the dollar is the main currency for international trade, its devaluation lowered the final price in the local currency that people paid for imported food. This provided some relief.

But the US dollar has gotten stronger this time, climbing 24% between May 2021 and October 2022 as the Federal Reserve increased interest rates to try to curb inflation in the United States.

The UNCTAD report says the combination of high food prices and a strong dollar is a “double burden” that many people in developing countries cannot bear, leaving them to face even harder choices to make ends meet – such as skipping meals or taking a child out of school.

“For net food-importing developing countries, the international market is a lifeline,” the report says. “As it becomes more expensive to buy US dollars, it also becomes harder for these countries to prevent millions of people from going hungry.”

Acute food insecurity has tripled in three years from 135 million before COVID-19 to almost 350 million today, according to FAO and the United Nations World Food Programme.

Wheat costs more than double

The report uses the example of wheat, the most widely cultivated crop in the world, to show how exchange rates can affect prices. It looks at six net wheat-importing countries: Egypt, Ethiopia, Mauritius, Pakistan, Peru, and Thailand.

As of October 2022, the average price of wheat was 89% higher than in 2020. During the same period, the average US dollar exchange rate against these countries’ national currencies rose between 10% and 46%.

The report shows that a stronger US dollar has an impact on the final price. When the exchange rate is included in the calculation, the estimated increase grows from 89% to between 106% and 176% depending on the country.

“This illustrates that the exchange rate effect is a significant driver of rising food import bills, contributing to inflation, loss of purchasing power, and food insecurity,” the report says.

For Egypt, the world’s largest importer of wheat in 2020 (13.2 million tons), importing the same amount in 2022 would cost an extra $3 billion.

What should be done?

The report proposes recommendations in three areas, in line with proposals by the UN Global Crisis Response Group on Food, Energy, and Finance.

1.Ease financial constraints

The report recommends targeted and sustained social protection programs to shield vulnerable households in developing countries. It also calls for supporting multilateral emergency solutions to provide liquidity and debt relief to developing countries.

“A good step forward is the new International Monetary Fund’s Food Shock Window,” the report says.

The initiative, which is based largely on FAO’s proposal for a Food Import Financing Facility, provides emergency financing for countries facing urgent challenges related to balance-of-payments and the global food crisis.

But more and faster support is urgently needed, the report says, to avoid a widespread debt crisis.

“The Global Crisis Response Group, and UNCTAD, call on international financial institutions to increase liquidity for developing countries and use existing channels to increase the accessibility of these resources to those in need. A revised and implementable G20 common framework is also necessary to provide timely debt restructuring to countries in need,” it says.

2. Ensure open trade and access to stable foods

To help ensure a stable and secure supply of food around the world, the Global Crisis Response Group has urged all countries to keep markets open, resist unjustified and unnecessary export restrictions, and make reserves available to countries at risk of hunger and famine.

It also insists that “streamlining customs procedures and trade-related regulations can help to ease the burden of compliance, reduce inefficiencies and partially offset high prices”.

3. Increase food availability nationally and internationally

The report calls for targeted financial support and technical cooperation to help net food-importing developing countries increase agricultural production and reduce their heavy reliance on imports.

It’s also crucial, the report says, to reintegrate Ukrainian and Russian food and fertilizer into global markets.

“To this end,” it says, “all parties should support the two agreements signed in Istanbul, Türkiye, last July:

The memorandum of understanding between the UN and the Russian Federation to facilitate unimpeded access for their food and fertilizer exports to global markets The Black Sea Grain Initiative signed by the UN, the Russian Federation, Türkiye, and Ukraine to resume Ukrainian grain exports via the Black Sea amid the war.