Food inflation darkens external and fiscal outlook and heightens social risks

Food prices have soared after Russia’s renewed invasion of Ukraine, with war and sanctions disrupting agriculture in the two countries, which are among the world’s largest wheat exporters. African countries are particularly at risk as Russia and Ukraine account for about 40% of Africa’s total wheat imports (Figure 1), with few alternative suppliers able to quickly substitute such quantities.

Not only is the short-term disruption to agriculture due to international sanctions against Russia and retaliation from Vladimir Putin’s government a cause for concern, but there is uncertainty about the duration of the sanctions. As for Ukraine, the war could harm the country’s ability to grow and export wheat in the long term. African countries will likely need to diversify their sources of supply and reorganize their trading relationships, which will increase transaction costs even if grain prices rise as countries compete for more limited supplies.

Figure 1. Sanctions against Russia, war in Ukraine: Africa will probably need other suppliers of wheat

Wheat imports from Africa by supplier country (%)

Note: 2016-2020 average for all African countries. Source: UNCTAD, Scope Ratings GmbH

Egypt, DRC particularly threatened; Ivory Coast, Angola much less exposed

Based on their share of wheat imports from Russia and Ukraine, countries such as Egypt (80% of the total) and the Democratic Republic of the Congo (60%) are particularly at risk, while Côte d’ Ivoire (20%) and Angola (10%) are much less exposed to food supply disruptions (Figure 2). Countries that have accumulated stocks representing a higher share of annual consumption are also less vulnerable.

Such a readjustment takes time, forcing African countries to draw on existing stocks in the short term. Wheat carryover stocks stood at about 280 million tonnes, according to the International Grains Council, representing more than a third of total annual production. However, stocks are held by a few countries, including China (50% of the total), India (10%) and the United States (6%), according to the United States Department of Agriculture.

We expect most African countries dependent on Russian and Ukrainian imports to subsidize households and businesses facing rising food and energy prices, straining public finances already strained by the Covid crisis. -19. Higher current expenditures could come at the expense of capital expenditures, hampering countries’ progress in diversifying towards higher value-added production.

Figure 2. Africa, wheat suppliers: unequal vulnerability to disturbances

Wheat imports from Russia and Ukraine (%); stock level relative to domestic consumption (%)

Note: average for 2016-2020 for imports from selected African countries; inventory level at the end of 2021; domestic consumption in 2021. The axes represent the median. Source: United States Department of Agriculture, United Nations, Scope Ratings GmbH

Rising commodity prices are also a significant social risk for African nations

Beyond the economic and fiscal costs, rising commodity prices also pose a significant social risk to African countries and exacerbate already high levels of food insecurity and hunger. More than 50% of Africans do not know where their next meal will come from, a trend that has worsened in recent years.

Rapidly rising prices of essential goods, worsening hunger and the threat of widespread starvation could lead to greater political and institutional instability in the region, particularly in the run-up to more than 15 national elections scheduled across the continent in 2022, according to the Institute for Security Studies. Burkina Faso, Democratic Republic of Congo and South Sudan have recently faced or are facing famine or near-famine conditions, according to the UN.

Short-term pressures from the war in Ukraine add to long-term challenges related to the limited ability to increase local agricultural production. In this context, food scarcity and its economic, fiscal and social implications could become an even bigger credit challenge for African countries.

For this reason, financial assistance from international financial institutions, possibly through emergency funding, may be needed to cushion the blow. The African Development Bank recently announced a $1 billion plan to mitigate the consequences of rising wheat prices, while the EU signaled its intention to reassess its strategy in Africa. The IMF is said to be in discussions with Egypt, the world’s largest wheat importer, on possible sources of financing.

For an overview of all of today’s economic events, check out our economic calendar.

Thomas Gillet is Associate Director of Sovereign and Public Sector Ratings at Scope Ratings GmbH. Thibault VasseSenior Analyst at Scope Ratings, contributed to this commentary.

Shirlene J. Manley