Dear Editor,
Rising energy and food prices are creating havoc with the global economy that was just beginning to return to some normalcy after two years of Covid-19 disruption. This untenable situation is further compounded by Russia’s war in Ukraine. Most countries experienced higher inflation in 2021 that has continued unchecked trending towards hyper-inflation and risked pushing millions into poverty. The current price spike was due to a combination of supply side bottlenecks after Covid, such as higher shipping costs, structural issues, and weak global resilience further aggravated by the war in Ukraine which is having a more devastating impact on Developing Countries. The FAO stated that food commodity rose 23.1% last year, while for the first quarter this year, food prices are expected to rise more than 30%. The current condition will possibly worsen with projected higher energy and fertilizer prices – two important inputs into the agriculture sector. The war in Ukraine and sanctions on Russia have affected production and shipment of two of the largest exporters of wheat that account for some thirty percent of global exports. Wheat is a staple diet for some 35% of the world’s population.
The IMF recently pointed out that the impact of the war will flow through three main channels – first higher prices for commodities, especially food and energy will push inflation higher thereby eroding the value of income and weighing on demand; further reduced business confidence and higher investor uncertainty will impact negatively on asset prices, tightening financial condition, and potentially spurring capital outflows in developing countries. Research from 143 countries over the past thirty years found that shipping costs are an important driver of inflation around the world: when freight cost double inflation picks up by about 0.7 percentage point – the effects are quite persistent, peaking after a year and lasting up to 18 months (IMF 2022). The contribution to inflation by higher shipping cost is quantitatively similar in impact by shocks to oil and food prices.
A small open economy like Guyana will immediately feel the impact of the global price spike. This situation turned for the worse with the war in Ukraine that can only get worse, unless there is a peace agreement along the line mentioned by Jeffrey Sachs in his project syndicate article (Stabroek News 03/30/22). Moreover, the Federal Reserve Bank will consider a rate hike between 50-75 basis point in May that can be counter-productive especially for developing countries. There has to be policies that will address supply side constraints. At the domestic level, the PPP government has already moved to address some of the constraints that impact local production and distribution of food. And given the fiscal space, should address the reduced income of the vulnerable population. Higher oil prices should present both an opportunity and challenge for Guyana as an importer and exporter.
Sincerely,
Rajendra Rampersaud
