The Global Inflation Crisis: How Developing Countries Are Impacted
Inflation Waves Emerge across the World
Russia’s invasion of Ukraine which began in February this year combined with the enduring COVID-19 has slowed economic growth and caused inflation to be stubbornly entrenched in countries around the world.
According to the Global Economic Prospects published by World Bank Group in June 2022, global growth is revised from 4.1 percent that was anticipated in January to 2.9 percent in 2022 and will hover around this pace during 2023-24 due to COVID-19, Russia - Ukraine war, and the decrease in investment and trade.
Among developing countries, the growth is expected to be 3.4 percent in 2022 - lower than the annual average of 4.8 percent between 2011 and 2019. The slower growth will be particularly in the Latin America and the Caribbean area and Europe and Central Asia area, compared with 2021, the growth of developing countries in 2022 is expected to decrease by more than 4 percent.
Meanwhile, considering the inflation, prices had increased during COVID-19 even before the Russia-Ukraine war, which has further pushed another leap in the global food and energy market. According to the International Monetary Fund (IMF)’s report in April this year, consumer prices in emerging market and developing economies are projected to be 8.7 percent in 2022, which is higher than advanced economies (5.7%), especially in Sub-Saharan Africa (12.2%), Middle East and Central Asia (12.8%), and emerging and developing Europe (27.1%). It proves that the developing world tends to be more vulnerable to global inflation. Inflation has become a central concern in many developing countries.
An employee at a grocery store restocks shelves with baked beans at a groceries store in Harare
Photo by Jekesai NJIKIZANA / AFP; Source: gettyimages
What Caused Inflation in Developing Countries
This high inflation in developing countries can be explained by COVID-19-induced supply-demand imbalances, war-induced increases in commodity prices, and undeveloped financial infrastructure. First, the COVID-19 pandemic has caused supply-chain disruptions around the world, widening the gap between supply and demand in the goods market. According to the Oxford COVID-19 government response stringency index, although there is an indisputable reduction in the most serious consequences of COVID-19, Asian countries still adopt relatively strict COVID restrictions, which constrains activity and adds to inflation. The labor shortage is also contributing to inflation. The drop in labor force participation due to COVID-19 was enormous. And it’s unlikely that all the employees will return to the workforce at this point, which leads to difficulties in hiring and increasing output. In addition, increased shipping costs and port delays also impede the recovery of supply chains. Due to globalization, the disruptions in supply chains and the increase in global inflation are undoubtedly associated with the surging inflation in developing countries, especially countries with a large number of commodity importers and countries that are vulnerable to the increase in global inflation and investor risk aversion.
Second, developing countries that are highly exposed to global food prices such as countries in the Middle East, North Africa, and Central Asia have been influenced by the war in Ukraine. Russia and Ukraine are significant producers and exporters of wheat, corn, sunflower oil, and fertilizer. However, many developing countries heavily rely on the import of these agricultural products from Ukraine and Russia. For example, more than 80 percent of wheat in Lebanon is bought from Ukraine. Brazil, Argentina, and other nations are reliant on Russian fertilizer with an import dependency level from 20 to more than 70 percent. War in Ukraine is affecting food supply in developing countries and causing an increase in food prices.
Third, in order to reduce inflation, some major economies raise policy rates and tighten monetary policy, while low-income countries with undeveloped financial infrastructure have limited ability to control inflation, especially soaring inflation resulting from external factors - rising global oil and food prices. Limited monetary sovereignty is one of the reasons for the higher inflation rate in low-income countries compared to developed countries that can stimulate supply-side economics and maintain enough foreign reserves.
Regional Situations under Global Inflation
In developing countries, global inflation can be acute based on different regional conditions. In East Asia and the Pacific, the growth rate is projected to decrease to 4.4 percent in 2022. China chose a strict lockdown policy to react to the recurring COVID-19 outbreaks, which contributed to a lower economic growth rate as well as a potential source of inflation for logistics. In India, the country has suffered from substantial inflation in commodities. A bag of mixed vegetables can be 80% compared to a few weeks ago. For other countries, the impact can be mixed. Tourism-reliant countries such as Thailand are opening up to restart their economies. On the contrary, Sri Lanka has been trapped in a debt crisis and halted external debt repayments.
The growth rate in Latin America and the Caribbean is projected to drop to 2.5 percent in 2022 and 1.9 percent in 2023. In this region, food and energy prices are the main factors of inflation. In LAX, the shares of food and energy take up around 40 percent of the consumption basket, which puts substantial pressure on households. Food insecurity is growing in Caribbean Island countries such as Jamaica and Haiti since they are heavily relying on imported goods. Additionally, LAC came across a dilemma: keeping the gas price low can reduce consumers’ pressure, but it also contradicts the region’s long-term effort of greener transformation in energy and environment.
In the Middle East and North Africa (MENA) region, the growth rate is forecasted to be at 5.3 percent in 2022 and will slow down in the upcoming years. The Russia-Ukraine influenced the global oil market and caused a rebound in the MENA region, especially for oil-exporting countries. At the beginning of 2022, this region has struggled with the pandemic as well as other economic and political events, such as Lebanon’s port explosion and debt crisis. Then, the Russia-Ukraine crisis has a complicated impact: oil-exporting countries, such as gulf Cooperation Council member states, can receive higher revenue from higher oil prices; But for oil importers, such as Egypt and Morocco, the higher food and energy price and decreased international demand curbed economic growth. Food insecurity occurred in MENA as well. Over half of Yemen’s population is food insecure.
In Sub-Saharan Africa (SSA), the growth rate is expected to fall to 3.7 percent in 2022, compared with 4.2 percent in 2021. Food insecurity is a big issue for the African economy and society. 63.4 percent of wheat consumed in Africa is projected to be imported outside of the Continent. Shortage of food caused severe problems for countries that are highly reliant on food imports from Russia and Ukraine (Congo, Ethiopia, Madagascar, Tanzania. At the same time, the higher risk premium and interest rates could reduce the foreign aid from other countries to promote the development of Africa.
Global Actions Should be Put in Place
Global solutions and efforts to reduce inflation and recover economies should be implemented as soon as possible based on each country’s condition. To curb inflation, the global economy should keep global commodity markets functioning well and tighten financial conditions. Moreover, governments should design and implement social protection programs and prioritize the protection of the poor and the vulnerable.
Links
https://data.humdata.org/dataset/oxford-covid-19-government-response-tracker
https://www.freightos.com/freight-resources/coronavirus-updates/
https://news.un.org/en/story/2022/05/1118172
https://www.csis.org/analysis/impact-russias-invasion-ukraine-middle-east-and-north-africa
https://www.un.org/africarenewal/magazine/may-2022/how-russia-ukraine-conflict%C2%A0impacts-africa
EDITOR’S NOTE: TBG attentively tracks on the current global inflation and provides global solutions to the developing world. We leverage a Global Network comprised of more than 1000 experts in over 150 countries. Through TBG Consulting, TBG Global Advisors, TBG Purpose and TBG Capital, we undertake global projects — from Kenya to Kazakhstan — and transform challenges into opportunities.