Washington, 1 July, 2008 - Surging food and fuel prices have pushed some countries to a "tipping point," the IMF warned Tuesday, with trade balances at risk of serious deterioration and budgets under strain.
"Some countries are at a tipping point. If food prices rise further and oil prices just stay the same, then some governments will be unable to feed people and at the same time maintain stability of their economy," International Monetary Fund Managing Director Dominique Strauss-Kahn said at a briefing on IMF research on food and fuel inflation.
In one paper, the fund said that until recently the sharp run-up in commodity prices had had only a limited effect on countries' balance of payments, but that larger impacts were now being felt and inflation was putting budgets under stress.
The IMF said oil and food prices were likely to ease only slightly as supply caught up, but admitted there was a lot of uncertainty in the outlook.
"The food and fuel price surges have greatly raised the policy challenges associated with reducing poverty, ensuring food security and maintaining macroeconomic stability," the IMF said.
The fund said countries should strive to protect the poor by expanding social programs, but that they should avoid steps that could result in economic instability.
The IMF said there was scope in some countries to loosen budgets and free-up social spending, but that others might need to limit their response or seek outside help.
The fund said central banks should tolerate so-called first-round inflation in which commodity prices push up the overall rate of inflation, but that they should seek to ensure prices of other goods and services do not trend higher.
Should inflation look as though it was settling in, countries which are net importers of food and fuel may need to allow their currency to depreciate on an inflation-adjusted basis, the IMF said.
It said global food inflation almost doubled in 2007. While food inflation in major industrial nations was relatively low -- around 3 percent -- it reached 10 percent in developing countries and would have been higher without food subsidies.
Preliminary data show that the median 12-month rate of food inflation for 120 developing countries rose to 12 percent at the end of March 2008 from 10 percent at the end of last year.
Meanwhile, median fuel price inflation is up by 2.3 percentage points, from 6.7 percent at the end of 2007 to 9 percent in March. Actual 12-month inflation in March 2008 exceeded IMF staff projections for the end of 2008 by more than one percentage point, the IMF said.
The IMF said addressing higher fuel and food prices required a coordinated response by countries, donors and international agencies.
It would likely take some time for food prices to move lower because any pick-up in production would be offset by an expected increase in biofuels output and strong growth in emerging and developing countries, the fund added.
"A lasting supply response is likely to be gradual and depend on improved policy frameworks," the IMF said.
It said a slowdown in economic growth in developed countries has had less of an impact on commodity prices than in the past, because so much of the demand was coming from the developing world.