Food and energy price shocks on the back of the Russia-Ukraine conflict could increase income inequality and pose risks to existing socio-political dynamics in some Middle East and North African countries, according to S&P Global economists.

Five Mena countries — Egypt, Jordan, Lebanon, Morocco, and Tunisia — will be among the hardest hit by economic spillovers from the conflict because their economies depend significantly on imports of food or energy (or both), and they source a large part of their cereal supply from Russia and Ukraine, a panel of economists led by S&P Global Economist Valerijs Rezvijs said in a report.

The report, “Food price shock reverberates through Mena economies,” said the Russia-Ukraine conflict will likely continue to pressure food and energy markets given Russia’s pivotal role in energy supply and both countries’ significant contribution to global agricultural exports. Russia and Ukraine together account for over 25 per cent of global wheat exports, and almost 15 per cent of corn. Russia and Belarus are also important producers of fertilizers.

“Our analysis has found that Egypt, Jordan, Lebanon, Morocco, and Tunisia will be among the hardest hit by economic spillovers from the conflict because their net food and energy imports account for between 4.0 per cent and 17 per cent of their GDP and they source a large part of their cereal supply from Russia and Ukraine,” said S&P Global Economist Valerijs Rezvijs.

“We believe rising food and energy prices and supply insecurities, alongside high youth unemployment in these countries, could lead to higher income inequality and pose risks to existing socio-political dynamics,” said Rezvijs.

Temporary fiscal measures to soften the blow to consumers and producers and prevent social discontent will put pressure on post-pandemic fiscal consolidation.

“A protracted Russia-Ukraine conflict that kept food prices elevated over the medium term bears a risk of worsening the fiscal dynamics of Mena commodity importers,” said Rezvijs.

The International Monetary Fund has urged governments worldwide to subsidise the cost of food and energy, “in a much-targeted manner, preferably by providing subsidies directly to people,” as global recession fears loom. Reiterating that the poor strata of the society have been struggling due to inflation and the high cost of living, the IMF head Kristalina Georgieva said while many governments have been providing some kind of help via schemes and other provisions, that may not be enough. Georgieva voiced concern that without the correct government support the protests seen in Sri Lanka could be repeated in other countries.

Tatiana Lysenko, lead economist, Emea Emerging Markets, said given social pressures, governments will mount fiscal programmes aiming to cushion the impact and prevent social discontent, either through subsidies or other forms of support.

“The conflict has triggered steep increases in commodity prices because both countries are major exporters of many key commodities. Energy markets are hard hit, given Russia’s pivotal role in the global energy supply, with Brent oil price up by 50 per cent this year. Food markets are also among the most affected, as Russia and Ukraine together account for almost 60 per cent of global exports of sunflower oil, over 25 per cent of wheat, and almost 15 per cent of corn. Russia and Belarus are also important producers of fertilizers. Consequently, prices for cereals have surged following the start of the conflict. We are also seeing other countries imposing controls on food exports to protect domestic consumers, such as the Indian government’s recent decision to restrict exports of wheat following a drought. Such developments are adding to food price pressures,” said Lysenko.

“Future developments remain uncertain, but we believe that commodity prices are likely to stay elevated for some time. We now believe the conflict is likely to last longer than we previously expected, and irrespective of the duration of military hostilities, sanctions and related political risks are likely to remain in place for some time,” said Lysenko.

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