5 May 2022

The war in Ukraine could bring economies of poorest countries on brink of catastrophe

by Ratnakar Adhikari / in News

The impact of the war in Ukraine on food and fuel prices will weaken economies already battered by the COVID-19 pandemic and climate-related disasters. 

We live in an interconnected world where the impact of missile strikes on a Ukrainian city can be felt as far away as in Ouagadougou, the capital of Burkina Faso in West Africa, through price hikes on a bag of wheat or at a fuel pump.

In its April World Economic Outlook update, the International Monetary Fund (IMF) has slashed the Global growth forecast by 0.8 per cent to 3.6 per cent in 2022 compared to the January forecast with the economic impact of the war in Ukraine reverberating globally through the commodities market, trade and financial linkages. 

Much has been made of Europe’s heavy dependence on Russia for its energy needs. Less visible – but no less important – is the pain of higher fuel and food prices across many parts of the world due to supply disruptions from the world’s second-biggest oil exporter – Russia – and the world's fifth-largest exporter of wheat – Ukraine – caused by the war and related sanctions.

Least developed countries (LDCs) have been vulnerable and in dire need of support in the best of times. With the triple onslaught of climate change, COVID-19 and the war in Ukraine, we are facing a potential human catastrophe.

Policy and decision-makers need to urgently address this challenge not only with humanitarian aid but also with coherent, targeted action and investment into greener and more resilient trade and economic development.

As the Director-General of the WTO stated, the current system "was not built for a world where a climate disaster can interrupt factory operations worldwide, or a microscopic virus can upend the movement of goods, services and people almost overnight. This is no case for a retreat from trade, which helps us adapt to those and other shocks."

In addition to concerns about energy supplies, more and more leaders of international organizations and EIF partners, including the Director-General of the WTO, are warning about imminent food crises as countries across the globe shut down their commodities markets. Some even fear a repeat of 2007 where a mix of drought, conflict and financial implosion sparked a global economic crisis from which many countries were yet to fully recover when the coronavirus pandemic struck.

LDCs are particularly at risk of a food and fuel crisis. Thirty-eight of the 45 countries in sub-Saharan Africa are net oil importers for whom higher global prices translate into higher import bills, higher transport costs and higher prices for most goods. For populations in LDCs, this can mean less purchasing power, less growth and ultimately, more poverty.

In addition, Russia and Ukraine together produce over half of the world’s sunflower oil, roughly 30 per cent of wheat and barley and 17 per cent of corn. A lot of this food makes its way to plates in poorer countries across intricate global supply chains.

Between 2018 and 2020, Africa imported 45 per cent of its wheat from the two countries, according to UNCTAD. One in two African countries imports more than a third of their wheat from Russia and LDCs like Lao PDR, Benin and Somalia source more than 90 per cent of wheat from the two countries.

Food prices rose by nine per cent between 2019 and 2020 in sub-Saharan Africa, and another two per cent last October. The Food and Agriculture Organization warns that prices are likely to keep rising even faster if imports from Russia and Ukraine remain disrupted or cost more because of higher oil prices.

Already, the World Food Programme says it is paying 30 per cent more for supplies than it did in 2019. The agency says the number of people facing famine has risen from 27 to 44 million since 2019 and another 232 million remain at risk.

Food insecurity often morphs into unrest and political instability. Rising food prices in 2007/8 triggered riots in Haiti and Bangladesh before feeding the rage that led to the Arab Spring. Bread protests, such as those seen in Sudan in 2019, could break out again if prices keep rising.

Subsistence farmers are somewhat insulated from this food inflation and could even benefit from higher prices if they are able to sell some of their surpluses. But they, too, remain vulnerable to the effects of climate change, and the potentially higher prices for inputs and implements. As such, climate change has been documented as an amplifier and multiplier of the political crisis that was building up in Syria in 2011.

As LDCs are increasingly experiencing climate disruptions compounded with rising food and fuel prices, this situation creates a perfect storm for a slower economic recovery, increased poverty, and social unrest.

Donors have responded to the situation by providing humanitarian assistance to the people of Ukraine, including to those seeking refuge in neighbouring countries. This is commendable but incomplete.

To prevent the next global crisis and support socio-economic and financial stability and growth, lessons learned from past crises show it is imperative to focus on all countries, particularly the most vulnerable and those that might be geographically removed from the theatre of conflict. Although this has been clearly recognized by world leaders, including in the recent LDC5 declaration, the following months will show if commitment can be turned into action and ensure no one is left behind.

Aid for Trade and support mechanisms like the Enhanced Integrated Framework can play a fundamental role in helping most vulnerable countries recover from and adapt to exogenous economic shocks. In today's interconnected world, these countries need support to strengthen the resilience of their economies in view of future crises – especially related to food security. As we know, Ukraine has now missed the planting season for corn and sunflower which will have further repercussions on global food supplies.

The twelfth WTO Ministerial Conference and Aid-for-Trade Global Review are key events for global leaders to put practical action behind political commitments to LDCs, including through the continued provision of aid for trade support to build stronger and connected trade and development systems.

The war in Ukraine has again reminded us of how closely interlinked the world has become through trade and global supply chains. While the conflict is local and its immediate effects regional, the impact is global and so should the responses to it be. 


Photo by Polina Rytova on Unsplash

Any views and opinions expressed on Trade for Development News are those of the author(s), and do not necessarily reflect those of EIF.