Potential Crisis of Rising Food Prices in Middle East and North Africa

Since 2020, the MENA (Middle East and North Africa) region has been hit by severe shocks, beginning with the COVID-19 pandemic, followed by Russia’s invasion of Ukraine, high inflation, and tightening economic conditions. Although, now there may be a slowdown in inflation in international markets, but domestic inflation may not follow suit in the region. Due to rising prices in commodity markets, food inflation has increased in most MENA economies, and in some cases has exceeded headline inflation. Almost half of all inflation is now caused by increases in the price of food.

International prices are not the only factor influencing domestic inflation. Domestic prices fluctuate due to two factors: fluctuations in international prices and exchange rates between the local currency and the international currency, usually the US dollar. There is less than a one-to-one passthrough of these two factors into domestic inflation. Additionally, these factors affect the overall price level. Further increasing policy rates in advanced economies would further weigh on capital inflows in developing MENA countries, which will increase pressure on exchange rates in those countries, this will further increase inflation because internationally traded goods would cost more domestically.

Export in agriculture products has coincided with an increase in food import dependency. Globally, Middle Eastern nations are among the biggest importers of food. Imported food accounts for over 50 percent of the region’s calorie consumption, which is expected to rise to over 60 percent by 2030. The heavy reliance on food imports can directly contribute to food insecurity and cause food crises in the MENA region.

In order to prevent inflation from passing through to domestic prices, tight economic policies are needed. To avoid currency depreciation altogether, policymakers can increase domestic interest rates or use currency reserves, but these methods usually come at the cost of either by pressuring domestic markets or further limiting growth. MENA countries that peg their currency to that of advanced economies must also raise interest rates at the same time as the advanced economies in order to prevent a capital outflow.

The surge in energy prices in the MENA region has also caused significant misfortune for energy importers since 2022. Egypt and Tunisia were particularly hard hit as they were still dealing with the aftermath of the Coronavirus pandemic as well as a decade of weak economic growth. As a result of the war in Ukraine, Egypt’s energy import bill exploded from $8 billion in 2021 to $14 billion in 2022; Tunisia’s energy subsidy budget also increased by over 120% percent between 2021 and 2022.

Some countries in the region still lack access to international markets and rely heavily on regional economies and sovereign banks for funding. Policymakers must simultaneously manage debt stability, navigate geopolitical challenges, and improve long-term growth prospects. A gradual policy easing can be considered when inflation is within the target range. The focus should be placed on strengthening fiscal positions and reducing vulnerabilities to economic shocks. In countries with high debt levels, proactive debt management strategies should be implemented to keep prices in control. Through new trade opportunities, barriers should be reduced, and export products should be diversified, while at the same time, trade resilience should be strengthened to shocks that may affect the food supply chain. There is no denying that there is a potential for a crisis to occur. Around half a million people fall into poverty every time the price of food products increases by 1 percent in the MENA region, according to World Bank estimates. For the region, maintaining price stability is important and a food price crisis is not an option.