The Balance of Payments Impact of the Food and Fuel Price Shocks on Low-Income African
Countries: A Country-by-Country Assessment

Prepared by the IMF African Department
June 30, 2008

This note discusses the implications of the price shocks for the balance of payments of low-
income countries in sub-Saharan Africa. The response by bilateral donors and multilateral
institutions will, in practice, need to be country-specific. To this end, the note identifies a list
of 18 countries in the region that are especially hard-hit and that consequently face a
pressing need for additional balance of payments and budget support. The list reflects
country circumstances and underlying assumptions as of May, and is subject to change; it is
not meant to be definitive.
The current crisis has many dimensions. Food price increases, in particular, tend to hit the
poor the hardest and thus put at risk progress on poverty reduction, social cohesion, and the
broader development agenda. Fuel price increases also have a variety of damaging impacts,
including by raising the cost of agricultural production and thus, in turn, aggravating the food
crisis. The scale of the shocks, and the central importance of the commodities involved,
threaten to derail macroeconomic stability, growth, and efforts to achieve the MDGs. The
Fund stands ready to cooperate closely with development partners to help countries deal with
the crisis. This includes policy advice, technical assistance and financial support to promote
appropriate macroeconomic policy responses.
High food and fuel prices are likely to persist. Pass-through to higher domestic prices, though
not necessarily immediate, is therefore ultimately unavoidable. More broadly, monetary,
fiscal and other policies will have to adjust. In some cases, the exchange rate can play an
important role. Additional financing can play two critical roles in this context.
First, in the short term, additional external support to meet higher import bills can give
countries time to phase in the necessary adjustments, thereby easing their economic impact
and reducing social pressures. Such support may also make it feasible for some countries to
run temporarily larger fiscal deficits to cover targeted budgetary assistance to the poorest
segments of the population.
Second, looking to the longer term, additional budgetary expenditures may be called for to
promote the development of domestic agriculture and to put in place sustainable social safety
nets. While these expenditures may be met in part through higher domestic revenues or
reductions in other spending, additional concessional financing will also have a role to play.
The terms of such financing will need to take into account individual countries’ debt
situations; for most countries, it should be wholly or predominantly on grant terms.

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2
This note seeks to identify those countries that may face the most pressing near-term need for
additional concessional financing. The balance of payments impact of the food and fuel price
shocks is large on average, but their incidence is highly country-specific, depending on the
patterns of trade as well as initial conditions.
The list comprises countries for which the trade balance impact of the 2008 food and fuel
price increases exceeds one of two thresholds (Figure 1 and Table 1):
•
Either, 50 percent of initial international reserves: Eritrea, Ethiopia, Guinea,
Liberia, Madagascar, Malawi, the Democratic Republic of Congo, and
Zimbabwe.1
•
Or, 2.5 percent of GDP: this threshold is applied to countries in the WAEMU and
CEMAC currency zones (for which the reserves-based indicator is less meaningful):
Benin, Burkina Faso, Central African Republic, Guinea Bissau, Mali and Togo;
and to states with particularly weak initial institutional frameworks: Burundi,
Comoros, the Gambia, and Sierra Leone.
The list excludes Senegal, which meets the second criterion, on account of other influences
on the balance of payments.
The attached one-page country briefs provide context and background on the situation in
each of the 18 included countries.
Although there is merit in focusing attention on the hardest hit, this list is not meant to be
definitive. First, there is a degree of arbitrariness in the cutoffs used to place countries on the
list. Countries below the cutoffs in many cases have substantial and urgent needs. Second,
the list reflects price assumptions and country-specific circumstances in May 2008; as the
outlook changes, so too will the impact on individual countries.

1 For Madagascar, the cost of reconstruction due to natural disasters (cyclones) is also a factor. The estimates
for Zimbabwe are highly uncertain, owing to data problems.

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3
Sub-Saharan Africa (LICs): Impact of 2008 Food and Fuel Price Increases
(Percent of 2007 GDP)
BOP Impact1
Memo:
Food and Oil
Food
BOP Impact/
and Oil
Other
Total
Reserves
Food
Oil
Shocks Commodities
Shock
(Percent)
Selected countries
Liberia
-4.5
-11.1
-15.5
0.3
-15.3
-96.0
Guinea-Bissau
-1.1
-7.6
-8.8
0.0
-8.8
-31.5
Eritrea
-2.4
-6.1
-8.5
-0.1
-8.6
-407.7
Togo
-0.4
-5.6
-6.0
0.6
-5.5
-33.6
Comoros
-2.7
-2.9
-5.6
-0.9
-6.5
-24.7
Malawi
-0.8
-2.9
-3.7
-1.0
-4.7
-58.2
Guinea
-1.6
-3.6
-5.2
1.0
-4.2
-148.1
Gambia, The
-2.7
-2.3
-5.1
0.0
-5.1
-27.1
Sierra Leone
-0.9
-3.7
-4.6
0.1
-4.4
-36.7
Madagascar
-0.7
-3.1
-3.8
0.0
-3.7
-34.4
Burundi
-0.4
-3.9
-4.3
0.9
-3.4
-31.4
Ethiopia
-0.8
-2.6
-3.4
0.4
-3.0
-71.7
Burkina Faso
-0.3
-2.7
-3.0
0.5
-2.5
-22.1
Central African Rep.
-0.8
-1.8
-2.5
0.1
-2.4
-61.3
Benin
-0.6
-2.0
-2.5
0.3
-2.2
-11.8
Mali
-0.6
-2.9
-3.5
5.4
1.9
-22.4
Zimbabwe
-0.4
-1.7
-2.0
0.8
-1.3
-116.6
Congo, Dem. Rep.
-1.5
0.0
-1.5
0.0
-1.5
-79.4
Oil-exporting countries
Cameroon
-0.7
5.3
4.7
0.5
5.1
35.4
Nigeria
-0.7
16.1
15.5
0.0
15.5
49.0
Chad
-0.3
22.8
22.5
0.5
23.0
179.9
Gabon
-0.3
26.1
25.8
0.1
26.0
258.8
Congo, Rep.
-0.6
33.1
32.5
0.1
32.6
126.5
Angola
-0.5
37.7
37.2
0.0
37.2
188.6
Equatorial Guinea
-0.3
51.8
51.5
0.1
51.5
157.2
Other low-income countries
Ghana
-2.3
-8.1
-10.4
5.5
-4.9
-49.6
Kenya
-0.8
-3.6
-4.4
0.3
-4.2
-38.8
Tanzania
-0.9
-4.6
-5.5
1.7
-3.8
-35.1
Mozambique
-1.1
-3.1
-4.2
0.5
-3.8
-24.3
Zambia
-0.1
-2.7
-2.8
-0.1
-2.9
-28.8
Rwanda
-0.4
-2.0
-2.4
0.3
-2.2
-14.4
São Tomé & Príncipe
-0.4
-2.0
-2.4
0.3
-2.2
-8.9
Senegal
-1.5
-4.0
-5.5
0.0
-5.5
-39.4
Uganda
-0.7
-2.1
-2.7
0.8
-2.0
-12.3
Niger
-0.7
-0.8
-1.5
3.6
2.1
-12.1
Côte d'Ivoire
-1.1
2.0
0.9
2.1
3.0
9.3
Source: UN Comtrade; IMF, World Economic Outlook; and staff calculations.
1 The BOP impact is calculated as the trade balance change resulting from changes in the terms of trade
for each low-income country in SSA. It measures the effect of the expected increase in prices of exports
and imports in 2008 compared to 2007, taken as given the 2007 volumes of trade, as a share of GDP. The
oil prices used in the calculations are $71.1/barrel in 2007 and $112/barrel in 2008.

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4
SSA Reserves and BOP Impact of Food and Oil Price Shock in 2008
0
Zimbabwe
Eritrea
Congo, Dem. Rep.
Guinea
4
Central African Rep. (CFA)
Ethiopia
Malawi
GDP)
8
t
of
ZambiaMadagascar
Namibia
Kenya
ercen 12 Niger (CFA) Burkina Faso (CFA) Sierra Leone
Senegal
Burundi
rves (P
Mali (CFA)
Tanzania
16
Liberia
Rwanda
Mozambique
l
rese
Togo (CFA)
Gambia, The
20
Shock to reserves
Ghana
Benin (CFA)
ratio = 0.5
Uganda
Comoros
Internationa 24
-2.5
Cape Verde
São Tomé & Príncipe
Guinea-Bissau (CFA)
28
0
-2
-4
-6
-8
-10
-12
-14
-16
BOP impact of food and oil price shock (Percent of GDP)
Notes: Countries in the CFA Franc zone pool reserves, the group reserve holdings can be more informative than country
reserve ratios.

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5
BENIN

Macroeconomic impact: Because of rising food and fuel prices, Benin is expected to
register a 5 percent deterioration in the terms of trade in 2008—following a cumulative
8 percent decline in 2006-07. As a result, the import bill is projected to increase by
2.3 percent of GDP in 2008, and the external current account deficit is projected to widen by
about 1 percent of GDP. While domestic food availability has been broadly adequate, food
prices increased by a cumulative 8 percent in the first quarter of 2008 (they fell 3.6 percent
over the same period in 2007). Thus, year-on-year inflation is now projected to jump to
5.5 percent, from only 0.3 percent in 2007—well above the WAEMU ceiling of 3 percent.
The budgetary cost of limited tax cuts and subsidies, in response to increased oil and food
prices, is estimated at 1½ percent of GDP in 2008.

Macroeconomic context: Supported by prudent fiscal policies and external debt relief,
Benin experienced a pickup in growth accompanied by low inflation in 2006-07. Growth is
expected to firm further to above 5 percent this year. However, structural weaknesses and
core economic vulnerabilities have not been addressed and growth has persistently fallen
below program expectations, hindering progress toward the MDGs. A strengthening of the
CFA franc is also adding to competitiveness concerns.

Policy response: On December 8, 2007, the government introduced fiscal measures to
address the rising food prices. The measures consist of elimination of customs tariffs for
pasta, tomato paste, and sweetened condensed milk; and reduction of customs fees—using
below-market reference prices for taxation purposes—for refined sugar, rice, wheat and
wheat powder, corn and maize, soybeans, and petroleum products. Traders are urged to
downwardly adjust prices to reflect tax relief granted to them.

Staff advice: Faced with such a large shock, staff believes that it is best to smooth
adjustment to higher food and fuel prices by allowing a temporary increase in the fiscal
deficit. At the same time, staff is urging that the authorities better tailor their initial measures
aimed at softening the impact on the poor by moving toward well-targeted safety net
measures and away from distortionary price restraints. Medium-term adjustment will require
full pass-through of food and fuel price increases to consumers. This will help to foster a
positive agricultural supply response.

Next steps and Fund role: To address the higher import bill, the current PRGF-supported
arrangement was augmented by 15 percent of quota on June 16, 2008. Staff intends to closely
monitor the cost of the fiscal measures and to assess any further macroeconomic adjustment
needs.

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6
BURKINA FASO
Macroeconomic impact: At current prices, the oil and food price shocks are expected to
lead to a widening of the current account deficit by, respectively 2.7 percent of GDP and
0.3 percent of GDP in 2008. Incomplete pass-through of rising petroleum prices leads to
losses of the national oil company, SONABHY, of about 1 percent of GDP. These quasi-
fiscal losses will need to be monitored carefully and resulting subsidies reflected in the
budget. The estimated loss in fiscal revenues from temporary tax and customs exemptions for
some basic products is about 0.3 percent of GDP.
Macroeconomic context: Adverse terms of trade shocks and weather conditions in 2007
slowed GDP growth. The near-term outlook is mixed. While growth should be supported by
a rebound in cotton production and the opening of several gold mines, continued high food
and oil prices dampen growth prospects. Inflation is rising (7.7 percent year-on-year in
April), partly tracking food prices (16.8 percent y-o-y). If international food and oil prices
stabilize (at a high level), inflation is expected to abate.
Policy response: The authorities (i) eliminated custom fees for some food imports (for
6 months) including for rice, pasta, salt, powder milk, condensed milk, and derivatives for
powder milk for children, and (ii) announced indicative prices for these food products in
early March, which they plan to monitor and support through a strengthened dialogue with
wholesalers and retailers. The authorities increased petroleum pump prices in January 2008.
However, pump prices remain below the price suggested by the price adjustment mechanism.
Staff advice: Staff’s policy advice has aimed at striking a balance between macro stability
considerations, ensuring incentives to consumers and producers to adjust, and supporting the
most vulnerable. In terms of macroeconomic policies, the fiscal policy stance (in terms of the
overall deficit as a share of GDP) agreed in the context of the Fund-supported program
remains appropriate. However, a further increase in food and oil prices could require some
fiscal tightening to counter inflation expectations. To minimize budgetary risks and improve
incentives to adjust, staff has advised the authorities to close the gap between pump prices
and prices mandated by the price adjustment mechanism. Due to the lack of well-developed
social programs, staff encouraged the authorities to assess the scope for indirect measures,
such as school feeding programs. Staff advised against distortionary price controls, which
would have undesirable effects on supply. For the longer term, Burkina Faso should raise
agricultural productivity, improve diversification, and strengthen social safety nets.
Next steps and Fund role: The authorities already requested an augmentation (15 percent of
quota) of the PRGF arrangement at the time of the first review in January 2008. If price
pressures increase, Fund staff could discuss the need for another augmentation during the
mission for the third review, scheduled for September. The World Bank is discussing
additional financial support for targeted measures (e.g. school feeding programs, vaccines).
Additional donor aid for targeted support would be desirable, particularly if the food situation
worsens.

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7
BURUNDI
Macroeconomic impact: Burundi’s 2008 BOP has been affected by oil and food price
increases, with the former of a much larger magnitude (-3.9 percent of GDP and -0.4 percent
of GDP, respectively, in percent of 2007 GDP). Burundi’s terms of trade have also worsened
significantly. The 2008 budget is under increasing strain, mostly reflecting the fiscal impact
of higher food and fuel prices. The budgetary impact of higher fuel and food prices will reach
about 1.5 percent of GDP in 2008; the budget does not include spending on social safety nets
(0.8 percent of GDP) because of lack of funding.

Macroeconomic context: Burundi is a net importer of food and oil products, and its position
as a landlocked country raises import costs. Together, food and oil imports comprise one
fourth of total imports. Maize, sugar, and wheat were Burundi’s largest food imports in 2007.
Food prices have increased sharply in Burundi lately, mostly reflecting a pass-through of oil
import prices. Because of rising food prices, inflation has risen sharply since mid-2007,
reaching 27.2 percent year-on-year in April. From December 2007 to April 2008, prices of
basic staples rose on average by 23 percent.

Policy response: Tariffs on diesel imports (mostly consumed by the poor) have been reduced
from 12 percent to 9 percent. At the same time, tariffs on gasoline imports were raised from
12 percent to 16 percent to preserve overall tax collection levels. The authorities have also
sought to mitigate the impact of higher food and oil prices on the poor by enhancing social
safety nets (e.g., food security programs and school feeding programs).

Staff advice: Bank and Fund staffs have been supportive of targeted tax measures taken by
the authorities. Staff are working with the authorities to (i) improve the targeting of social
safety nets and temporary tax cuts; (ii) strengthen monetary and exchange rate policies; and
(iii) design supply side measures to increase agricultural production.

Next steps and Fund role: On May 30, a mission concluded discussions, ad referendum, on
a three-year program to be supported by a successor PRGF arrangement. The level of access
under the arrangement has not yet been finalized but will take account of the increase in food
and oil prices Given the country’s debt situation, a concerted effort to increase donors’
support would be needed to address the fiscal impact of higher food and fuel prices. It is
expected that the World Bank’s Relief Fund would be made available to Burundi. A fiscal
gap of around 0.7 percent of GDP will be financed by additional support from African
Development Bank.

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8
CENTRAL AFRICAN REPUBLIC
The macroeconomic impact: A recovery in the agricultural sector, following an
improvement in the security situation, had moderated food price pressures until recently. But
prices are now rising, prompting the media, the national assembly and trade unions to call for
government action.
Fuel price increases are estimated to have a significant negative impact on the current
account balance in 2008 (over 1½ percent of GDP). Petroleum products are subsidized, and a
sizable fiscal gap would emerge without fuel price adjustment. Prices increased on June 1
(see below) and are expected to raise end-period CPI inflation by 3 percentage points.
The macroeconomic context: Growth in 2008 is expected to increase moderately. Inflation
has picked up in early 2008, but is expected to remain under control. In a fragile socio-
economic environment, the authorities’ policy priorities are to preserve the fiscal framework
by raising domestic revenues and better controlling expenditures. In the past, acute budgetary
constraints have led to accumulation of domestic expenditure arrears and high-cost
commercial bank borrowing. Spending in priority areas is curtailed by the low availability of
domestic and external resources.
Policy response: The VAT on several key food items has been reduced. The ministry of
commerce has also set up a strengthened framework to monitor the prices of 30 basic
necessities, with the participation of consumers and the business community.
Petroleum product prices were adjusted on June 1—as part of the revenue measures under the
PRGF-supported program—by 16 percent on average. Although politically difficult, the
measure (amounting to 1/2 percent of GDP) is needed to fill the fiscal gap.
Staff advice: The staff advised the authorities to: urgently develop implementable safety net
measures to mitigate the social impact of petroleum (and possibly food) price increases; and
formulate a transparent and credible plan to clear domestic expenditure (especially wage)
arrears, to address social tensions. The staff also advised the authorities to seek greater donor
assistance to help adjust to these shocks in an already tight fiscal environment. Areas
meriting increased support are agriculture and education. Emergency support for agriculture
could alleviate the food crisis while dealing with long-term structural issues (inputs, training
for producers, extension services). CAR imports food from neighboring countries and the
weight of food in the CPI is quite high; thus boosting yields has the potential to reduce
imports quickly. Education could benefit from school feeding program using the World Food
Program’s existing mechanisms to alleviate the impact of food prices on the poor; this is
further justified by the high malnutrition rate among schoolchildren.
Next steps and Fund role: Augmentation of access under the PRGF arrangement by
15 percent of quota was approved in late June. Board consideration is scheduled for late
June.

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9
THE COMOROS
The macroeconomic impact: The oil and food price shocks are expected to worsen the
current account balance by 5.6 percent of GDP in 2008. There are no explicit subsidies on
food and fuel, but price controls (see below) have created losses in various parastatals,
notably the state hydrocarbon monopoly and the public electricity company, with knock-on
effects on tax revenues.

The macroeconomic context: By end-2007, inflation rose to 4 percent, reflecting food price
increases and disruptions to supply caused by a sustained political crisis. For end-2008, the
authorities are projecting a further rise in inflation to about 6 percent, mainly due to rising
food and fuel prices. The political crisis, combined with continuing problems in the vanilla
sector, a shortage of credit, and a decline in imports and tourism, contributed to a contraction
in real GDP growth and much lower fiscal revenues in 2007 (4.0 percent of GDP). The
economy’s very narrow export base, large import dependence and exchange rate peg make it
vulnerable to international price swings. In addition, long periods of political and economic
instability have undermined institutional capacity.

Policy response: The authorities intervened in 2007 by temporarily freezing the price of
selected food items and petroleum products prices. The Union government is considering
introducing a number of budgetary measures, including the temporary removal of customs
duties on imported ordinary rice, which would cause a revenue loss of about 0.7 percent of
GDP.

Staff advice: Staff has advised the authorities against price freezes, particularly with respect
to petroleum prices, which will be costly to the public finances, while recognizing that
temporary price caps on selected food items may be politically necessary. Relatedly, staff has
urged the authorities to resolve the triangular arrears relationship between the state
hydrocarbon monopoly, the public electricity utility, and the Ministry of Finance.

Next steps and Fund role: Following a recent visit by the Fund’s resident representative in
Madagascar, the Fund is planning a mission, to take place after the June elections, which may
initiate discussions on possible Emergency Post Conflict Assistance (EPCA). The authorities
are also considering asking the Bank for technical assistance to examine the price
transmission mechanism for petroleum products, as a basis for taking policy decisions on the
passthrough mechanism.

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10
THE DEMOCRATIC REPUBLIC OF THE CONGO
Macroeconomic impact: The rapid rise in food and oil prices has contributed to an increase
in inflation and imports. Annualized 12-month inflation rose from 10 percent at end-2007 to
24 percent in May 2007, with food and oil price inflation at 24 percent and 34 percent,
respectively. In 2008, the import bill is projected to increase by 1½ percentage points of
GDP, largely on account of higher food prices; net oil imports are negligible. However, the
DRC’s balance of payment is also likely to benefit from robust prices for copper and cobalt
exports. Buoyant fuel prices would modestly improve the fiscal position, reflecting increased
royalties from exports. But absent fiscal compensatory measures, the distributional impact of
the food price increases would be large, with disproportionate effects on the urban poor.
Macroeconomic context: The DRC economy continues to recover at a robust pace, albeit
from extremely depressed levels. In 2007, Real GDP grew by 6.3 percent. Prospects for
stronger growth in the near to medium term have also improved in view of the anticipated
large investment in mining encouraged by the commodity price boom. Macroeconomic
policies are highly constrained by very low international reserves (about 2 weeks of imports)
and a small monetary base requiring the government to essentially run a cash-balanced fiscal
policy. Some fiscal slippage late in 2007 rekindled macroeconomic pressures but corrective
measures were implemented in early 2008 under the current staff monitored program (SMP).
Policy response: The DRC government is considering reducing duties on food and related
items. Products that could be affected include cereals, meat, milk, cooking oil, fertilizers, and
agriculture equipment. The government is also considering creating a commission to regulate
food prices.
Staff advice: The strong performance in commodity exports and associated higher
government revenue should help minimize the need for macroeconomic adjustment to sustain
the balance of payments—although the very thin reserves cover means there is little room for
maneuver, and reserves accumulation to reduce vulnerability remains a paramount objective.
At the same time, the authorities have limited fiscal resources to help alleviate the impact on
the poor of higher food and fuel prices. In this context, staff is advising that any lowering of
tariffs on food imports would probably need to be temporary. It is also urging the authorities
to avoid price controls in view of their adverse effect on incentives for domestic production
and imports.
Next steps and Fund role: Fund staff is continuing to advise the authorities in the context of
ongoing discussions on a new PRGF arrangement.

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Document Outline

• Revised Note
• 18 country notes
  • 
  • ﾿
    • 
    • ﾿

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