By Zaved Ahmed and Camilla Nestor, Grameen Foundation, published by the MixMarket Microbanking Bulletin, Issue 18, Spring 2009, pages 14-16, available at:
http://www.themix.org/sites/default/files/MBB%2018%20Spring%202009.pdf
According to the report in the Spring 2009 MixMarket Microbanking Bulletin, food prices in developing countries remain elevated (above international market prices) and continue to negatively impact microfinance clients. Amazingly enough, approximately 1 billion people (nearly one-sixth of the world’s population) subsist on less than USD 1 per day. Both Ahmed and Nestor of the Grameen Foundation note that increasing food prices have the greatest effect on the poor populations that spend between 70 and 80 percent of their household income on food.
While global food prices have somewhat retreated from their mid 2009 highs, the report notes that data from the United Nations Food and Agriculture Organization (FAO) indicate that this has not trickled down to the retail level. It references that the price of rice (the principal source of food for most developing countries) remains significantly higher in most developing countries when compared to December 2006. The Grameen Foundation utilized data from the FAO that looked at the retail prices of rice in 10 countries during 2007-2008. The coauthors took quarterly data and indexed it against Q1 2007. The findings provided the following:
Index of Retail Prices of Rice by Quarter
1Q 2007: Bangladesh (100); Brazil (100); Egypt (100); India (100); Pakistan (100); Mozambique (100); Peru (100); Philippines (100); Senegal (100); Vietnam (100)
1Q 2008: Bangladesh (160.85); Brazil (107.36); Egypt (153.69); India (120); Pakistan (174.26); Mozambique (123.38); Peru (116.14); Philippines (136.01); Senegal (120); Vietnam (124.92)
4Q 2008: Bangladesh (124,26); Brazil (126.99); Egypt (N/A); India (146.67); Pakistan (199.83); Mozambique (156.04); Peru (142.46); Philippines (N/A); Senegal (180); Vietnam (151.04)
The 50 percent price increase in rice has forced families (who previously spent up to 85 percent of their income on food) to eat less to consider ways to increase their income. The report also notes that the role of the informal ‘barter system’ has played to balance the increase cost of food with agricultural laborers receiving 5 kg of grain per day as an alternative form of payment. According to the report’s references to the Financial Times, the disconnect between international market prices and retail prices in developing countries is due to time lags, poor harvests and lack of trade finance. There is also the possibility of excess profiteering by wholesalers.
The report provides an index of projected real food crop prices from 2007 – 2015 that will likely increase as the result of increased utilization. The FAO predicts that the total grain end stocks will reach a 25 year low by the end of crop year 2009.
Index of Projected Real Food Crop Prices (2004=100) (Note: Table below shows that prices are likely to remain well above 2004 levels through 2015 for most food crops.)
2007: Maize (139); Wheat (154); Rice (130); Soybeans (119); Soybean Oil (136); Sugar (133)
2015 Maize (148); Wheat (140); Rice (160); Soybeans (115); Soybean Oil (110); Sugar (182)
The change in food consumption has also impacted microfinance borrowers. According to Grameen Foundation’s discussions with microfinance institutions (MFIs), clients have cut down on food consumption for certain food groups (such as meat, from once a week to once a month). The coauthors have expressed concerns for clients and the risks associated with cutting back on food consumption, potentially leading to permanent health risks to the clients.
In addition, MFIs have started reporting a decrease in the voluntary savings rate (in some of the countries where MFIs are allowed to accept savings). Microfinance institutions reporting in the Philippines and Nigeria note that some mature clients are withdrawing their savings to finance their working capital needs. Not only does this impact/reduce savings as a funding source for MFIs, but also the ‘safety net’ of income that clients may hope to weather the continued price increase.
Several MFI leaders have noted that they expect to see an uptick in portfolio at risk if food prices remain elevated. Finally, the report notes that while inflation naturally drives up wages and salaries, MFIs will have to find alternatives to absorb the increase in prices or possibly face the unattractive option of raising interest rates to end borrowers. A prolonged period of continued elevated food prices will have a significant impact on microfinance clientele; however, it is still too early to measure.
By Zoran Stanisljevic
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