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Food Insecurity and Debt Distress Hit The World

Food Insecurity and Debt Distress Hit The World

Since the middle of 2020, food prices have been on the rise due to global inflation, with supply chains for food being disrupted by rising commodity prices and the strong post-COVID-19 demand recovery (Chart 1).

“And it is clear that the already-existing upward pressure on food prices has been exacerbated by Russia’s invasion of Ukraine in 2022,” says the Institute of International Finance.

It says there was an abrupt surge in prices in the immediate aftermath of the invasion, given both countries’ important role in food supply chains, particularly in global cereals (wheat, corn, and coarse) and vegetable oils (sunflower oil).

“Although heightened global recession fears and the partial resumption of vital grain ex- ports from Ukrainian ports have alleviated these price pressures somewhat, global food prices remain high.

“This has fueled ongoing concerns about food security, especially in low-income countries. The latest estimates from the World Food Programme suggest that the number of people facing acute food insecurity could increase by over 15% to nearly 325 million in 2022 due to the war in Ukraine.”

Energy for food security

Today, the food industry depends to a large extent on direct (water irrigation, transpor- tation) and indirect (machinery production) use of fossil fuel energy.

Consequently, the significant amounts of energy required at different stages of food production and distribution leave countries vulnerable to abrupt swings in energy prices. The reliance on energy-intensive inputs such as fertilizer translates into higher energy bills and thus higher food prices (Chart 2). Since mid-2010, fertilizer prices have more than tripled, in tandem with surging fossil fuel prices.

Food insecurity and debt stress

Higher food prices are a major source of downside risk to growth and development across many developing countries, with adverse implications for political and social stability.

Rising food prices could cause social unrest (or exacerbate existing tensions), which in turn could prompt increased migration from countries facing severe food security challenges.

Repercussions could be even more pronounced in low-income and lower-middle income countries that have limited fiscal space to address rising food prices.

According to the latest analysis by the Food Security Information Network, 35 developing countries are currently facing a major food crisis. Of these, 21 are experiencing chronic food insecurity crises, reflecting structural challenges dating back to well before Russia’s invasion of Ukraine.

Looking at debt dynamics, 16 of the 35 countries with a major food crisis are already in or at high risk of debt distress. Most of these fragile countries have accumulated a significant amount of domestic and external debt over the past decade and are persistently running large twin deficits:

  • Total external debt of these 16 countries has more than doubled since 2010, with public and publicly guaranteed debt representing over 80% of long-term external liabilities (Table 2).
  • Over 80% of public external debt originates from official creditors, with multilaterals (including the IMF) ac- counting for 43% of the total.
  • China stands out as the largest single official external creditor, representing over 18% of outstanding public debt—up sharply from 8% in 2010.
  • Nearly 20% of external debt comes from private creditors–up from around 10% in 2010. This increase mostly reflects increased reliance on bond financing for some countries, including Cameroon, Ethiopia, Kenya, Zambia, and Zimbabwe. However, none of these fragile countries have tapped sovereign Eurobond markets since July 2021.
  • The share of commercial bank financing has increased slightly from 7% in 2010 to over 8% in 2020. While a significant portion of these loans still originates from banks in Paris Club countries, the marginal rise in the share of bank financing over the past decade largely reflects the increasing importance of bank lending from non-Paris Club countries (ex-China).

The debt trap

External public debt, 2020 Afghanistan 9.7 Burundi 16.0 Cameroon 28.0 C.A.R. 18.7 Chad 27.5 Ethiopia 30.0 Haiti 14.0 Kenya 33.3 Malawi 18.9 Mozambique 72.7 Sierra Leone 31.5 Somalia 37.9

• These 16 fragile countries are scheduled to repay over $10 billion of public external debt in 2023.

In search of a sustainable funding model: Reducing the serious downside risks from prolonged periods of higher food prices calls for electrification of the agriculture and food industries to curb these sectors’ heavy reliance on fossil fuels:

First, this requires enhanced global collaboration to mobilize public and private resources towards the energy transition.

Second, incentivizing funding alternatives and part- nerships that direct capital flows towards develop- ing countries could help to transform domestic food and agriculture industries. However, a large-scale expansion in investment flows to low-income countries depends on strengthening MDBs’ capacity to effectively engage with private investors at scale.

Third, it is increasingly important for these countries to en- hance debt and fiscal transparency to ensure access to affordable, reliable, and sustainable international capital flows. Given that many of these countries have limited or no capacity to increase debt levels, enhanced transparency on broader ESG issues has become vital for promoting non- debt creating flows (e.g. equity finance).