Impact of Soaring Food Prices on Kyrgyzstan Joint Government/WB/IMF Workshop “COPING WITH SHORT TERM RISKS AND VULNERABILITIES & ACCELERATING LONG TERM GROWTH” Bishkek, June 25-26, 2008 WORLD BANK

2 GLOBAL COMMODITY PRICE DEVELOPMENTS  Many commodities reached record prices in nominal terms in  Global prices for food commodities accelerated in 2007 – food inflation reached 80 percent since end-2006  In real terms commodity prices, incl. food, are still below their highs in the early 70s

3 REASONS BEHIND Economic growth in developing and emerging countries as their growth is more commodity intensive - Population is approaching to 9 bln. people - India and China have been growing rapidly over the last decade Gradual reduction of world grains stocks twinned with weather- related production shortfalls - Global stock levels have declined by 3.4 percent per year since Production of cereals in major exporting countries declined (i.e. Canada and Australia) Rising biofuels production in advanced economies - Concerns over oil prices encouraged production and use of bio-fuels - Demand for bio-fuel raw materials (i.e. wheat, soy, maize and palm oil) and competition for cropland increased Depreciation of the US dollar twined with falling short-term real interest rates and rising credit risk - Prices for the most of food commodities are quoted in USD - Storable commodities became attractive as alternative assets

4 GLOBAL OUTLOOKS Food crop prices are expected to remain high in 2008 and 2009 and then begin to decline as supply and demand respond to high prices However, further patterns of food prices will highly depend on the following factors: (i) further population and income growth in developing and emerging countries (East and South Asia, Latin America and CIS); (ii) the price of crude oil, i.e. whether it continues to increase and whether policies supporting the biofuels are maintained; and (iii) ability to increase agricultural supply given land/technology constraints and climate change impacts.

5 Source: “Impact of Food and Fuel Price Increases” IMF, June 2008 IMPACT: BALANCE OF PAYMENTS Impact of Oil and Food Price on the Projected 2009 External Position

6 IMPACT: INFLATION  Higher food and fuel prices have led to substantial increases in headline inflation  Inflation in low and middle income countries was affected the most  It is explained by the higher weight of food items in their overall CPI - on average food contributes percent into CPI basket

7 High inflation, food in particular, have an adverse affect on real incomes It can more than offset the benefits of recent economic growth, reducing the purchasing power of the poorest people. It is likely to affect the urban poor more, because they are less likely to produce a significant share of their own food and they are more likely to consume staple foods derived from tradable commodities. But some people (e.g. business farmers) likely benefit IMPACT: POVERTY

8 KYRGYZ CONTEXT Relative price adjustment process in Kyrgyzstan has been slower than in the other CIS countries before 2007…  Price level increased at moderate level until 2006  Kyrgyz producers faced lower input costs, i.e. cheap energy and low relative wages  Kyrgyz consumers enjoyed cheap Kazakh wheat

9 KYRGYZ CONTEXT But situation changed in 2007 when inflation reached 20.1 percent …  The biggest contribution to the dramatic increase of Kyrgyz CPI in 2007 came from the global food prices pressure  Fuel prices increase provided negative impact too and it has been accelerated in 2008 … at the same time  Upward pressures on real incomes/wages magnified inflationary pressures from fuel and food prices Considerable FDI in selected labor intensive sectors Large re-exports activities Large labor migration As a result headline inflation speeded up in , bringing second round effects of food and fuel prices increase at the urgent policy agenda

10 IMPACT OF FOOD PRICES ON KYRGYZSTAN  Foodstuffs* saw the highest surge among all ECA countries in approximately 14 percent (out of 20.1) of CPI can be directly attributed to the food items  The highest increase was provided by bread and bakery products -bread prices increased by 62.6 percent in world wheat prices increased by 63.6 percent  Even excluding bread food inflation was high - 26 percent in 2007 while it averaged 5.5 percent over other foodstuffs which saw considerable price increase in 2007 were diary percent, vegetable oils percent and fruits percent * Food items contribute 46.6 percent to the Kyrgyz CPI basket

11 KYRGYZ IMPORTS OF WHEAT

12 Main messages Global food and fuel prices increase exerted inflationary pressures in Kyrgyzstan and speeded up the process of relative price adjustment It is likely that selected groups of Kyrgyz poor (i.e. urban poor and rural net food consumers) have been aversively affected by the food price increase Kyrgyz farmers face good opportunities offered by favorable prices for agricultural commodities Policy responses have to address the above issues:  Protect the most affected poor by strengthening existing social safety nets  Help farmers to benefit from commodity price boom  Tighten monetary and fiscal policies to fight second round effects of the food and energy prices increase  to keep at least headline inflation under control; and  to prevent price expectations from being adjusted upwards.  Use non-monetary measures to fight core inflation - reduce policy induced transaction costs: - to help producers to be more productive; and - to prevent further increase in prices