| UN Country Team discussion paper on rising food prices |
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Introduction
This discussion paper provides a snapshot of the present situation in Cambodia and outlines a framework for action linked to national priorities with consideration for the sustainability and potential consequences of any interventions made in the short term . The paper aims to generate further discussion at the technical and policy level, with input from all partners. 1. Overview The rising price of food and its economic and social impact is a serious and complex issue for Cambodia. The impact on vulnerable communities and all sectors is increasingly clear. UN agencies and their partners are concerned that high food price increase will obstruct the attainment of the Millennium Development Goals and significantly threaten the food security and socio-economic well-being of Cambodia’s poorest. With current trends predicted to continue, a coordinated response that allows for immediate action, is necessary in order to meet critical needs such as food aid and acute malnutrition (in the < 5 age category). Detailed and consistent data management and analysis, ongoing policy dialogue with government, the development of macroeconomic instruments and evidence based agricultural strategies will help Cambodia to respond to the current situation and build resilience. With appropriate support measures, higher prices may benefit Cambodia’s farmers and strengthen the agricultural sector and may create opportunities midway through the NSDP 2006-2010 term. The UN Country Team thus proposes a response which prioritizes: robust data management and analysis; reduced vulnerability including food security and social safety nets; development of macroeconomic instruments; and advances in agricultural productivity. 2. Food price increase in Cambodia The surge in global food prices has been driven by various factors including rapid increases in demand, low global stocks and high oil prices. Cambodia is a net importing country and record food and oil prices together with a depreciated US dollar have driven inflation to a 9 year high of 10.8 percent, at a time when the domestic economy is already showing some signs of slow down. GDP grew by 9.6 percent in 2007 led by garment exports, tourism and construction. FDI reached $600 million which was slightly more than Cambodia received in official development assistance (ODA). Internally, the banking sector has expanded rapidly leading to the sudden proliferation of credit, and increased cost of construction materials and some wages. The higher oil and commodity prices have driven inflation and the depreciated dollar may hurt sectors that are vulnerable to price competition. Economic risks have increased including the slowing down of garment exports (impact of US sub-prime mortgage crisis and increased competition from Vietnam), but the mix of growth in services (tourism and housing construction) means that the economic outlook for 2008/2008 is generally considered good. Price of oil Since 2003, the price of crude oil has risen from $22 to $126 per barrel in May 2008 and is forecast to rise to $200 by 2010 . Cambodia imports 100 percent of its oil and only 25 percent of the total population is connected to the electrical grid. Cambodian farmers are largely dependent on diesel generators for household operated water pumps and/or irrigation. The current price of oil in Phnom Penh is around 5,450 riel/$1.36 per litre. Domestically, the rising cost of fuel has pushed up the cost of local and industrial transport and agricultural inputs such as fertilizer, which has increased in cost by 2-3 times in the past year. Weakened US dollar The Cambodian riel (KHR) is artificially pegged to the US$ (at about 4,000 riels). As well as dealing with eroded purchasing power, Cambodia is importing inflation on imports from neighbouring countries whose currencies have appreciated against the dollar. Dollarization presents a further challenge for policy makers devising sustainable policies to address the current food crisis. Price of rice Rice is the staple food item in Cambodia and constitutes 50 percent of the total food consumption of poor families. From March 2007 to March 2008 rice prices in Cambodia have doubled. Such fluctuations in the price of rice will impact poverty reduction efforts and the World Bank predicts that a 10 percent increase of the rice price would increase the national poverty rate by 0.5 percent (in both rural and urban areas) . In addition to critically low levels of global food stocks and higher production and transport costs, the global rice price has been compounded by export restrictions from large exporting countries and significant rice purchases from importing countries at higher prices. To stabilize the rice price, the Royal Government of Cambodia’s short-term interventions in March 2008 included a 2-month ban on rice exports (excluding three provinces) and the release of subsidized rice to selected Phnom Penh markets. According to the Royal Government of Cambodia, Cambodia was a net exporter of rice in 2007. The rice surplus is calculated from an estimate of the total rice production minus total food requirement. For 2007 the estimated rice surplus was 1,640,000 metric tonnes . Although these figures suggest that Cambodia is a rice exporting country, undeveloped domestic processing means that farmers often sell their paddy to neighboring countries immediately after the harvest. Paddy is sold at low price (often to repay debts) and milled rice is bought back at greater cost. Some pockets of the country remain rice deficient due to distribution and infrastructure constraints. Whilst future trends are difficult to forecast in the short-term because of the direct link between world food markets and energy markets, FAO/OECD predicts that higher cereal prices will continue for the medium term 2007-2016. The Royal Government of Cambodia does not anticipate a rice shortage in 2008/09. As in the past, however, availability alone does not ensure equal access for the poor to purchase/consume rice. Most vulnerable In 2004, the total food poverty line was US$0.42 per day (the poverty line in rural areas was $0.34 per day) and 2.6 million Cambodians were food poor . Poorer households spend a larger percentage of their household consumption on food and have few assets or savings. The poorest of the poor spend 83 percent of their total consumption on food. Consumption inequality among rich and poor, urban and rural has grown considerably. In the absence of formal social safety nets, Cambodian households face a variety of risks. Illness or death of a family member can push even relatively wealthy households into poverty and poor households into destitution, As high food prices continue, vulnerable groups are being forced to reduce their food intake or to consume cheaper and less nutritious food products, which reduces general health and well-being, exposing families to illness and rendering them less productive and more economically vulnerable. The present food crisis threatens to drive a greater number of families below the food poverty line. Those most at risk are the net food consumers namely; the urban poor, economic migrants and their families, fixed salary workers, the landless or land poor, poor rural families and families affected by HIV/AIDS. With the strain of rising consumption costs, it is likely that existing coping mechanisms will be burdened further. This may trigger sales of household or farming assets, taking out high interest loans (exacerbating the debt trap), a spike in orphanage admissions (as one of the only available safety net for families), decreased school attendance, a rise in child labour, internal migration pressures, and severe stress to people affected by HIV/AIDS, TB and other chronic illnesses. 3. Agricultural Sector If Cambodia continues to produce a rice surplus, higher prices could benefit farmers, encourage increased production and create an opportunity to promote agricultural development. However, the increased cost of inputs, most notably fertilizer and energy/transport costs, are limiting factors to agricultural growth. In April 2008 the fertilizer price peaked at three times higher than 2007 and according to the Cambodian Center for Study and Development in Agriculture approximately 50 percent of Cambodia’s estimated 2 million farmers have been adversely affected by the price rise .Farm (own) produced food accounts for only 25 percent of consumption in rural areas, so like the rest of Cambodia, most farmers are also paying higher food prices for the majority of their consumption . Agricultural growth is currently constrained by lack of irrigation, post harvest management constraints, roads, markets, access to loans, lack of diversification and capacity of farmers. The Government has invested in agricultural particularly in infrastructure, however it is not clear whether the 2006/2007 rice surplus is the result of more stable production or good rainfall. There was also significant demand from Viet Nam in 2007/2008 due to lower domestic yields and natural disasters. For the time being, rising food prices are not benefitting a significant number of farmers. 4. Government response Actioned May 2008 -- Immediate short-term intervention measures:
Proposed medium-term measures:
Long-term response -- priority areas
Government focal point The Committee on Economic and Financial Policies has agreed to establish a Price Monitoring Working Group to continuously monitor inflation and provide technical recommendations to government. The working Group will consist of Ministry of Economics and Finance, National Bank of Cambodia, Ministry of Planning, Ministry of Commerce, Ministry of Agriculture, Forestry and Fisheries, and the Supreme National Economic Council. To ensure alignment with national priorities and to establish dialogue on priority need confirmation of the government focal point is needed. In the absence of this focal point, the UN Country Team will consult with the newly created Price Monitoring Working Group and the Supreme National Economic Council as first points of contact. Government has so far not released inflation data and may be prohibited from formulating an action plan in the short-term due to current election priorities. The post-election period, may provide the opportunity for discussion regarding social safety nets and the development of a comprehensive national response plan. 5. Civil Society priorities The NGO Forum on inflation and poverty that was held on 6 May 2008 included presentations and discussion by Government, development partners and civil society and established the following recommendations:
6. UN Response In the medium to long term, focusing on macroeconomic policy and technical assistance to advance agricultural productivity and invigorate private sector investment in rural development. Overall the UN sees a priority for robust surveillance and access to data analysis; a focus on vulnerability to economic shocks including issues of social safety nets, nutrition and illness, school attendance and child labour; agriculture with a focus on immediate agricultural inputs to the poorest farmers, productivity and post harvest potential. The UN’s response views high food prices as a motivator for sustainable social investments to mitigate future risks and a potential catalyst for economic growth and poverty reduction. To establish this plan the UN and development partners will support the Royal Government of Cambodia with action on an immediate, short-, medium- and long term basis. 7. List of Resources UN Headquarters 1. UN Secretary-General’s High Level Task Force on the Global Food Security Crisis (established 28 April 2008) available at http://www.un.org/issues/food/taskforce/ Government Resources: 5. NIS Consumer Price Index Bulletin March 2007-March 2008, December 2007 (Monthly inflation was 18.7 January 2008) Reports: 10.IMF Report: Economic Policy in a Highly Dollarised Economy: The Case of Cambodia, (2003) Presentations: 22. ILO Presentation Impact of Rising Food Prices on Child Labour in Cambodia, UNCT Meeting UNESCO 7May 2008
32. Cambodia Initiative on Soaring Food Prices (ISFP) Recommended plan of action: Phase 1 May 2008 Meetings: 45. UNCT Meeting Record 7 May 2008 |
