Surging commodity prices on the back of the Russia-Ukraine conflict are pushing up food price inflation in Middle East and North African (MENA) economies and could pose risks to existing sociopolitical dynamics. 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.

Historically, surges in international food prices have been associated with higher risks of sociopolitical instability, especially in lower-income economies. Indeed, sharp increases in food prices are considered one of the catalysts of the Arab Spring, the series of political uprisings in the region that began in 2011. The current disruption of key food imports from Ukraine and Russia is threatening supplies and affordability to MENA countries that are net importers of staple food commodities, such as wheat. Given social pressures, we believe governments will mount fiscal programs aiming to cushion the impact and prevent social discontent, either through subsidies or other forms of support.

The Russia-Ukraine Conflict Will Continue To Pressure Commodity Markets

The conflict has triggered steep increases in commodity prices because both countries are major exporters of many key commodities (see chart 1). Energy markets are hard hit, given Russia's pivotal role in the global energy supply, with Brent oil price up by 50% this year. Food markets are also among the most affected, as Russia and Ukraine together account for almost 60% of global exports of sunflower oil, over 25% of wheat, and almost 15% of corn. Russia and Belarus are also important producers of fertilizers. Consequently, prices for cereals have surged following the start of the conflict (see chart 2). 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. 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 (see "Global Macro Update: Growth Forecasts Lowered On Longer Russia-Ukraine Conflict And Rising Inflation,", published May 17, 2022, on RatingsDirect). As far as food markets are concerned, this year's events will also likely negatively affect next year's harvest, reflecting risks to the sowing season in Ukraine and soaring prices of fertilizers.

Chart 1

Chart 2

Several MENA Economies Are Among The Hardest Hit

We examined the spillover effects of the Russia-Ukraine conflict on 35 emerging markets (EM) globally. We found five economies in the MENA region— Egypt, Jordan, Lebanon, Morocco, and Tunisia (MENA-5)— are among the heaviest affected. The first reason for this is that these economies depend significantly on imports of food or energy, or both. Lebanon and Jordan are the most exposed, spending more than 10% of GDP on energy and food imports (see chart 3, lower left quadrant). Tunisia's food and, above all, energy imports are also significant. Morocco's energy import bill is one of the largest as a share of GDP across our sample. Morocco's position as a large potash exporter goes some way to alleviating this. Yet, despite being a net food exporter, its economy is still vulnerable to ongoing developments in food markets given its high reliance on imports of cereals. Egypt has recently become a gas exporter, but is potentially highly vulnerable to rising food prices. Given that our data relies on 2019 GDP (latest available data pre-pandemic), we generally expect larger energy and food deficits this year on the back of significantly higher energy and food prices in 2021. That said, the situation differs between countries—for example, Jordan's switch to long-term gas contracts will provide some protection from rising prices.

Chart 3

Compounding import dependencies, the MENA-5 economies are also vulnerable to food-supply disruptions because Russia and Ukraine account for the largest part of region's cereal imports (see chart 4). Egypt, the world's largest importer of wheat, receives around 85% of its wheat imports from Russia and Ukraine.

Alongside wheat and corn, the MENA-5 economies import significant amounts of cooking oil: 73% of Egypt's sunflower oil supply, for example, comes from Russia and Ukraine, according to the Middle East Institute. Making situation worse, most food exports from Russia and Ukraine go through the Black Sea and the Sea of Azov, where risks of trade disruption are very high because of ongoing hostilities. In 2020, for example, 70% of all Ukraine's trade went by sea, according to Ukraine's ministry of economy.

MENA economies have prepared strategic wheat reserves to protect themselves from the possible food-supply disruptions. Jordan has the largest reserves of the MENA-5 economies, covering around 16 months' consumption. Egypt's reserves are more limited and, together with domestic production, will last through November 2022. Morocco received most of its 2022 annual wheat orders from Ukraine before the conflict escalated. Nevertheless, the region's food markets are likely to come under pressure, especially if conflict drags on.

Chart 4

Food Inflation Hits Net Importers Hard

Given that the MENA-5 countries—with the exception of Morocco—are net food importers, international food prices have a significant impact on domestic food prices. Food-subsidy programs partly mitigate the impact, while other factors, such as exchange rates and efficiency of local supply chains also affect domestic food price dynamics. Overall, sustained increases in international food prices create significant pressures on domestic food prices (see charts 5a-5d).

Chart 5a

Chart 5b

Chart 5c

Chart 5d

Surging food prices pose a key inflation risk for the MENA-5. Lower income levels and the inelasticity of food demand mean that, as in many other EM, food accounts for a higher percentage of their CPI consumption baskets than in advanced economies (see chart 6).

Meanwhile, rising energy prices are adding to inflationary pressures. Households in emerging economies generally spend less on energy than on food, but the impact of soaring international energy prices will still be keenly felt. Higher energy prices also feed through to producer prices, both domestic and global, and then, at least partly, to core consumer prices.

Chart 6

From Food Price Shocks To Political Shocks

Historically, rising international food prices have been associated with higher risks of sociopolitical instability, especially in lower-income economies. Numerous empirical studies link the rise in international food prices with a higher probability of sociopolitical instability, including riots, protests, social unrest, and violent conflicts (see "External research" below). The MENA-5 economies are no exception, with many riots over the past decades sparked, at least partially, by sharp increases in food prices. Examples include the 1977 bread riots in Egypt, the 1984 riots in Morocco also known as the bread intifada, the 1989 protests in Jordan, and the 2008 protests that occurred broadly across the region. The Arab Spring protests in 2011 also coincided with sharp increases in food prices (see chart 7). While other important factors were also behind the social unrest in 2011-2012, such as high youth unemployment, income inequality, as well as general discontent with then-present political systems, the rise in food prices—in particular the cost of bread—is considered one of the factors that sparked mass protests.

Chart 7

In the MENA region, strong rises in food prices hit households' real incomes hard because of the high weight of food as a proportion of consumer spending. In some cases, sharp price increases may also lead to food shortages given the higher risk of food insecurity in MENA compared to developed economies, although it is lower than in many other emerging economies (see chart 8). Lebanon is especially at risk because, according to the World Food Programme, about one-half of the population was vulnerable to food shortages and in need of assistance in 2021.

Chart 8

Increasing food prices could also exacerbate income inequalities in MENA economies, sparking social discontent. Income disparities are already high, especially in Lebanon, according to the World Inequality Database 2022. Data from national household surveys found that spending on food among poorer households in MENA accounts for a far higher proportion of their incomes than comparatively wealthier households (see chart 9). For example, in Egypt, food purchases among the poorest households (the 10% with the lowest incomes) account for around one-half of their total expenses. Aggravating this situation, poorer households' consumption baskets are more skewed toward cereals and cereal products, which are heavily affected by the Russia-Ukraine conflict. In Jordan, for instance, cereals account for 14% of the total food budget among poorer households, while among high-income households they account for around 7% because richer households consume more meat and dairy products. Household surveys from the MENA-5 economies also suggest that the poorest households, residing in rural areas, may actually spend more on food in absolute terms compared to city dwellers because food may be costlier in the provinces.

In MENA, as in many countries, distrust in government is typically higher among low-income groups. This means that households most affected by the food price increases are those that are dissatisfied the most with their respective governments in general (see chart 10).

Chart 9

Chart 10

It's Not Just Food

Another development to watch is youth unemployment, also a contributor to the Arab Spring protests in 2011. Youth unemployment in MENA remains among the highest in the world outside Sub-Saharan Africa, despite having moderated somewhat in Egypt and Tunisia over the past 10 years (see chart 11). According to UN population projections, in Egypt, Tunisia, and Morocco the proportion of young people in the total population will increase again over the next 10-15 years (see chart 12). If jobs are created in tandem, this will contribute to higher growth in these economies. But if job creation fails to pick up, youth unemployment will increase again, raising the risk of social unrest.

Chart 11

Chart 12

Governments Will Mount A Fiscal Response

Given the risk of rising social tensions triggered by soaring food prices, we expect MENA-5 governments will try to cushion the blow to the population and at least partially cover the cost of higher prices. Many measures have been already announced. The Moroccan government, for example, has suspended custom duties on wheat and increased flour subsidies. In Egypt, under the existing subsidies program, nearly two-thirds of the population receives five loaves of bread daily for 50 U.S. cents a month, and we think it likely that the government will largely cover the cost of higher wheat prices. It has already postponed a planned narrowing of the number of recipients of the bread subsidy scheme.

A protracted Russia-Ukraine conflict that kept food prices elevated over the medium term bears a risk of worsening fiscal dynamics in MENA economies.

Related Research

S&P Global Ratings

• Global Macro Update: Growth Forecasts Lowered On Longer Russia-Ukraine Conflict And Rising Inflation, May 17, 2022
• Egypt 'B/B' Ratings Affirmed; Outlook Stable, April 22, 2022
• Lebanon’s Staff-Level Agreement With IMF Is Only One Step Toward Much Needed Reform, April 13, 2022
• Morocco, April 4, 2022
• Economic Research: Which Emerging Markets Are Most Vulnerable To Rising Food And Energy Prices? April 21, 2022
• Emerging Markets Monthly Highlights: Russia-Ukraine Conflict Causes A Storm Across Commodity Markets, March 16, 2022
• Jordan 'B+/B' Ratings Affirmed; Outlook Remains Stable, March 11, 2022

External Research

• Arezki. R., Bruckner, M. (2011) "Food Prices and Political Instability," IMF Working Paper
• Bellemare, M. (2012) "Rising Food Prices, Food Price Volatility, and Social Unrest," APSA 2012 Annual Meeting Paper
• Clark, D., Regan, P. (2022) "Mass Mobilization Protest Data"
• Haerpfer, C., Inglehart, R., Moreno, A., Welzel, C., Kizilova, K., Diez-Medrano J., M. Lagos, P. Norris, E. Ponarin & B. Puranen et al. (eds.) (2020) "World Values Survey: Round Seven – Country-Pooled Datafile. Madrid, Spain & Vienna, Austria: JD Systems Institute & WVSA Secretariat
• Ismail, Z. (2021)."Interaction Between Food Prices and Political Instability," K4D Helpdesk Report, Institute of Development Studies
• World Food Programme (2022) "WFP Lebanon 2021 in Review"
• World Inequality Database (2022), May 2022