Berlin-based Scope Ratings has warned on Monday, March 28, 2022, that rising food prices due to Russia’s war in Ukraine may have long-lasting economic, fiscal, and social consequences for many African countries, exacerbating structural challenges for governments still burdened with the cost of the COVID pandemic.
According to Scope, food prices have skyrocketed following the Russian invasion of Ukraine, with the war and sanctions disrupting agriculture in the two countries which are among the world’s largest exporters of wheat. Scope stated that African countries are particularly exposed as Russia and Ukraine account for around 40% of Africa’s total wheat imports, with few alternative suppliers able to substitute such quantities quickly.
“Not only is the near-term disruption of agriculture from international sanctions on Russia and any retaliation by Putin’s government a source of concern, but there is the uncertainty over how long sanctions will remain in place. As for Ukraine, the war might result in long-term damage to the country’s capacity to grow and export wheat. African countries will likely have to diversify sources of supply and reorganize trade relations, pushing up transaction costs even as grain prices rise as countries compete for more limited supplies”.Scope Ratings
Based on their share of wheat imports from Russia and Ukraine, countries such as Egypt (80% of total) and Democratic Republic of Congo (60%) are particularly at risk, whereas Ivory Coast (20%) and Angola (10%) are much less exposed to disruptions in food supply, Scope disclosed.
Countries which have accumulated stocks representing a higher share of yearly consumption are also less vulnerable. Such readjustment takes time, forcing African countries to draw down existing stocks in the short term.
Wheat carryover stocks stood around 280m tons, according to the International Grains Council, which is more than one third of yearly total production. Yet, stocks are held by a few countries, among them China (50% of total), India (10%) and the United States (6%), according to the US Agriculture Department.
“We expect most African countries reliant on Russian and Ukrainian imports to subsidize households and businesses facing higher food and energy prices, which will weigh on public finances already weakened by the Covid-19 pandemic. Higher current expenditure could come at the expense of investment spending, hampering countries’ progress on diversification towards higher value-added production”.Scope Ratings
Rising commodity prices raise social risks
Beyond the economic and fiscal costs, higher commodity prices also constitute an important social risk for African countries and will exacerbate already high levels of food insecurity and hunger, the rating agency warned. More than 50% of Africa’s people do not know when their next meal is coming from, a trend which has worsened in recent years, Scope Ratings stated.
Rapidly rising prices for essential goods, worsening hunger and the threat of widespread famine could lead to greater political and institutional instability in the region, especially in view of the more than 15 national elections scheduled across the continent in 2022, according to the Institute for Security Studies. Burkina Faso, the Democratic Republic of Congo, and South Sudan have recently faced or face famine or situations close to famine, according to the UN.
Short-term pressures due to the Ukraine war come on top of long-run challenges related to limited capacities to increase local agriculture output. In this context, food scarcity and its economic, fiscal, and social implications could become an even more important credit challenge for African countries, Scope stated.
For this reason, Scope noted that financial assistance from international financial institutions, potentially through emergency funding, may be needed to cushion the shock. The African Development Bank recently announced a USD 1bn plan to relieve consequences of higher wheat prices, while the EU has signaled its intention to reassess its African strategy. The IMF is reportedly in discussions with Egypt, the world’s largest wheat importer, on possible funding sources.