Ukraine wheat food exports

Preventing developing economy debt disasters

By Rabah Arezki, Former Chief Economist and Vice President at the African Development Bank, Former Chief Economist of the World Bank’s Middle East and North Africa Region and Senior Fellow at Harvard Kennedy School & Mahmoud Mohieldin UN Special Envoy for Financing the 2030 Sustainable Development Agenda. 

The world’s breadbasket is being wrecked by war. Ukraine and Russia account for 30% of global wheat and barley exports and are leading exporters of other grains. The two countries are also the source of nearly 70% of the world’s sunflower oil exports, while Russia accounts for 13% of all crude petroleum exports. As the conflict in Ukraine rages and sanctions on Russia escalate, food and energy prices – which were rising even before Russia invaded Ukraine – are spiking in countries far away from the front lines, with devastating implications for the world’s most vulnerable communities.

The Ukraine war is having two distinct effects on food markets. First, it has caused prices to soar. Last month alone, world wheat prices surged by nearly 20%. The second effect will exacerbate this trend: likely shortages of food supplies and agricultural inputs from Russia and Ukraine.

Since the conflict began, Ukrainian farmers have lacked access to crucial resources – from fertilizer to fuel – not to mention the insecurity and violence they face. With wheat planting season fast approaching, there is good reason to expect significantly reduced crop yields. And given that Russia is a leading fertilizer exporter, other producers’ yields might suffer as well.

Even the available supply will not necessarily make it to the countries that need it. Port closures and other transport barriers have impeded Ukrainian exports, while sanctions on Russia threaten to hinder its trading activities. Severe food-supply disruptions are likely in countries that import directly from Russia and Ukraine, as it will be difficult to secure replacements from alternative suppliers quickly. Meanwhile, oil and gas prices have risen sharply.

Ultimately, it is the world’s poor – 70% of whom live in Africa – who will bear the brunt of these shocks. Refugees across Africa and the Middle East, and people in post-conflict or conflict-affected countries, are particularly vulnerable. Additionally, energy and food expenditures account for at least half of total expenditures for most households in low-income countries, meaning that the current crisis could increase global poverty.

Moreover, while rural populations are typically less vulnerable to food-import shortages than their urban counterparts, a series of droughts, including in Madagascar and the Horn of Africa, have already left people in many food-producing areas hungry. The United Nations Food and Agriculture Organization estimates that 13 million people are facing hunger in the Horn of Africa alone.

Governments are responding to this emerging crisis with a combination of policies. Countries with universal consumer subsidies or price controls are enforcing them. Others are implementing targeted subsidies, including cash transfers, in order to support their most vulnerable citizens. The effort to bolster food security at home has also led to limits on food exports. And although countries with strategic reserves of food might deploy them, many have already exhausted their stocks.

All of these schemes come at a cost. Bans on food exports threaten to drive up international prices and weaken incentives for local producers. And cash transfers can prove costly, especially if private companies have oligopoly power; in the face of inelastic demand for food, these firms might decide to raise prices beyond international market rates.

There are better options. In the medium term, many African countries can develop better-functioning food systems and transform the agricultural sector to limit food dependency on imports and bolster food security. The key will be to address long-standing issues relating to land, access to capital, and competition, including in the transport and distribution sectors.

But perhaps the single best way to protect people from poverty and food insecurity is to build a more inclusive and efficient social protection system. The problem is that most developing and emerging-market economies lack the necessary fiscal space, especially after years of strain from the COVID-19 pandemic.

Even countries that are benefiting from higher prices in one area are suffering from higher prices in another. Oil-exporting countries, such as those in the Middle East and North Africa, are heavily dependent on food imports. Likewise, major food exporters tend to depend on energy imports, leaving them with few gains from rising food prices.

But the countries in the most difficult position are those that are net importers of both energy and food. Their external deficits are now set to widen, and their already-elevated debt levels will rise further – a trend that lower GDP growth will exacerbate. The spread on sovereign borrowing has doubled for many developing and emerging-market economies. Unlike advanced economies, these countries typically cannot borrow in their own currencies.

Making matters worse, the United States Federal Reserve is expected to accelerate its interest-rate hikes, thereby tightening global financial conditions. As a result, borrowing costs for developing and emerging-market economies are set to soar, potentially triggering balance-of-payment and debt crises.

To avoid disaster, the international development community should step up financial support to vulnerable countries. At the same time, the world must urgently support much bolder debt restructuring for emerging-market and developing economies. The G20 Common Framework for debt treatment has thus far not provided the impetus for debtors and creditors alike to embark on debt restructuring.

The invocation of force majeure – which the United Nations International Law Commission defines as an unforeseen or foreseen-but-inevitable event that makes it impossible for the debtor to meet its obligations – can help here, by precluding creditor holdouts. Otherwise, most developing countries’ resources – including any international financial support they receive – could end up in the pockets of foreign bondholders.