African governments, which often face catastrophic droughts, floods and crop failures, are now confronting spiralling inflation and creeping deficits as they seek to contain popular anger over rising food prices. Surging food prices due to global supply concerns and heady world futures markets pose a particular risk to poor economies, especially in Africa, where food makes up a disproportionately large part of household spending and imports. Violent protests in Cameroon and Burkina Faso last month prompted both governments to suspend customs duties on basic food imports - a measure matched by arid Niger, where food shortages in 2005 triggered a massive international aid effort. “Across a whole range of countries where food prices basically dominate the inflation basket, inflation is suddenly getting out of hand,” said Razia Khan, regional head of research for Africa at Standard Chartered bank in London. “While a lot of people would try to make something of the longer-term potential to increase production, the fact of the matter is that the required infrastructure isn't yet in place.” There is little time for adjustment. U.S. wheat futures rose by around a third in the first two months of 2008. In Africa, prices for key staples in some countries are up by 50 percent or more in a year and political and economic pressures are growing. Targeted inflation in the continent's biggest economy, South Africa, quickened more than expected to 8.8 percent year-on-year in January - above the central bank's 3-6 percent band for the 10th month running - and driven largely by rising food prices. Neighbouring Mozambique cut diesel prices for private minibus taxis last month after six people were killed in riots over rising living costs, and Tanzania has suspended maize import duty until May. But Zimbabwe's inflation of over 100,000 percent owes more to politics than global food prices. Despite last month's suspension of import duties, Burkina Faso's unions marched at the weekend demanding further cuts in taxes and prices, as well as public sector wage increases, and threatened a general strike on April 8-9. “As rice and wheat prices rise ... there will have to be a long-term adjustment, so that is going to mean less money going into other sectors of the economy,” said David Cowan, emerging markets strategist at Citi in London. Ghana, one of West Africa's more successful and stable economies in recent years, raised its primary interest rate by 75 basis points to 14.25 percent on Monday after rising food and fuel prices helped push annual inflation to 13.2 percent in February from 12.8 percent the previous month. Raising interest rates while U.S. rates fall may help protect Ghana's cedi from weakness related to government over-spending, limiting depreciation-linked inflation. But that is not an option for many countries with euro-pegged currencies. Franc zone conundrum Burkina Faso, Cameroon and Niger are among the 14 states in West and central Africa which share the euro-pegged CFA franc, which has provided a level of currency stability and traditionally low inflation rate. The euro's steady gains against the dollar - the greenback marked a record low of 1.5904 to the euro on Monday - have shielded them further from the effects of global food inflation. But growing euro strength has already undermined competitiveness in some key industries, notably dollar-denominated cotton exports, on which millions of farmers and their families depend across the region. However, any euro reversal could spell trouble, unleashing pent-up inflationary pressure. “If we see a dollar recovery/euro weakening, that will be when food inflation really hits,” Citi's Cowan said. In addition, it is likely official inflation is understated in the franc zone, where food accounts for less than 37 percent of the consumer price basket, compared to around 50 percent in sub-Saharan Africa as a whole, Cowan said. The euro peg also means that for franc-zone countries, many of the usual anti-inflationary measures are already priced in. “A lot of the usual policy recommendations when it comes to inflation would be around what might be done to tighten up liquidity. None of those recommendations are at all effectual in this case,” said Khan at Standard Chartered. “It's very difficult to come up with any policy recommendations that might work.” Suspending customs duty may offer relief. But governments should beware of the political difficulty of re-imposing it, and ensure such moves have a fixed time-frame so as not to undermine state budgets agreed with donors - especially as many African governments rely heavily on foreign aid and import tax income. “It could have an effect on government deficits if there was no compensation elsewhere,” said Alvin Hilaire, International Monetary Fund representative to Guinea and Sierra Leone. “We would recommend that if there are measures, that they be targeted at the poorest people,” he said. In the long term, with little let-up in sight from volatility in oil and food commodity prices, countries may simply have to adjust to higher prices, Khan said. “In an economic sense the incentive obviously is to get food prices right, to encourage more domestic production, to encourage a switch in consumption to whatever is cheaper. The complicating factor is still, unfortunately, the politics.” __
