The Analysis of the causes of food price increase and policy options to enhance food security in Rwanda


Bachelor Thesis, 2018

43 Pages


Free online reading

Table of Contents

DECLAIRATION

APPROVAL

DEDICATION

ACKNOWLEDGEMENT

ABSTRACT

CHAPTER ONE
GENERAL INTRODUCTION
1.1 Background of the study
1.2 Problem statement
1.3 The Objectives of the study
1.4 Hypotheses
1.5scope and limitation of the study

CHAPTER TWO
LITERATURE REVIEW
2.1 Overview of global food prices
2.2 Economic determinants of commodity food price inflation
2.3 Effects of food price inflation on the economy

CHAPTER THREE
METHODOLOGY
3.1 INTRODUCTION
3.2 Research Design
3.3 Data Sources, Type, Variables and sampling period
3.4 LIMITATIONS OF THE STUDY
3.4.1 VARIATION IN PRICES
3.4.2 INACCESSIBITY TO SECONDARY DATA SOURCES
3.4.3 FINANCIAL CONSTRAINTS
3.4.4 TIME FACTOR

CHAPTER FOUR
DATA ANALYSIS AND INTERPRETATION
4.1 INTRODUCTION
4.2 Some possible policy responses
4.3 Causes of food price increase in Rwanda

CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.0. INTRODUCTION:
5.1. Conclusion
5.2 Recommendations

BIBILIOGRAPHY

ABREVIATIONS AND ACRONYMS.

Abbildung in dieser Leseprobe nicht enthalten

LIST OF TABLES

Table 1: Average price of maize

Table 2 :Average price of Rice

Table 3:Average price of Irish potatoes

Table 4:Average price of Beans

LIST OF FIGURES

Figure 1:The trend of maize prices

Figure 2:Trends in price for maize

Figure 3:Trends in prices of rice

Figure 4:Trends in the prices of rice

Figure 5:Trends in prices of Irish potatoes

Figure 7:Trend in price of beans

Figure 8:Trend in price of Beans

DEDICATION

The road ahead has been rough, the climb has been stiff, but by the grace of God we have come to the end of long journey, we also thank our beloved supervisor Mrs. Aline mutabazi for her unceasingly support for the publication of this book.

ACKNOWLEDGEMENT

We are grateful to many people for making this work successful. It is difficult to enumerate the names of all of them. Nevertheless, it would be insolent of us if we did not thank some of them by name. Profound thanks and appreciation goes to our supervisor Mrs. Aline mutabazi for her untiring support throughout this work. We recognize with gratitude her high intellectual assistance and enormous contribution in shaping and improving the quality of this work.

Finally, we thank Almighty GOD for his grace, faithfulness and loving-kindness for giving us the opportunity to study at university of Rwanda.

ABSTRACT

Market is the main arbiter of how the available food is distributed both within and between countries. Food price volatility informs consumers and price analysts and availability of food in the region. Food price surges reduce purchasing power of households that are weekly linked to markets and remain obstacle in the way to feed the poor adequately .thus, food price surges lead poor people to limit their food consumption and shift to even less balanced diets, with harmful effects on health in short and long run.

The research found out that prices escalated from 2008-2015 and the major factors gearing food price volatility is said to be caused by a number of factors such as climatic changes, population explosion, Development of tourism which increased aggregate demand and joining world market.

In the light of the government of Rwanda efforts are aimed to ensure food security to its population, food price volatility could capture the attention of the government of Rwanda, therefore food price policies should be oriented to stabilization of price of food commodities which price volatility granger cause price volatility in other food commodity prices.

CHAPTER ONE GENERAL INTRODUCTION

1.1 Background of the study.

Rwanda is a small country (26338sqkm) with high population density more than 416 people/ SQ km from a tragically low starting point; Rwanda has accomplished a lot in the last decade.

The literature shows that for the last two decades, agriculture system in Rwanda has been improved and the majority of households in Rwanda continue to be employed in agriculture sector (80%), nevertheless, food security analysis shows that from February 2009 to February 2014, consumer price index (CPI) of food has showed an upward trend.

Rwanda like many other developing countries has experienced considerable food price volatility that has led to a great deal of concern because high food prices may have devastating effects in rural and urban areas of Rwanda in terms of market access and food security.

In an attempt to combat food price volatility problem, the ministry of agriculture and animal resources has started a nationwide campaign to promote agriculture mechanization to improve the sector’s performance. The drive also seeks to arise awareness on the use of farm machinery to increase food productivity and enhance food security in the country.

Food crisis continues to be a very fundamental challenge because local masses or local farmers still practice subsistence farming but the ministry concerned is now modernizing farming methods to improve crop production, ensure food security and increase household’s income. Commercialization of agricultural sector is the one of the key components of the country’s strategic plan for transformation of agriculture that is aimed at offsetting the problem of food price surge and reduces household poverty and drive growth.

MINAGRI initiated this program of agriculture mechanization in 2009/10 to promote appropriate farm mechanization options to farmers to cub down the problem of food price increase and developed broad-based skills in farm machinery.

Various questions arise regarding the reliability of food market information generated from existing econometric analysis. For example the increase of cereal prices occurred from 2006 to 2013 when compared to the prices of cereals from 1998 to 2005 were not instrumentally forecasted accurately with existing econometric models.

This rose from the fact that factors contributing to food price volatility were not deeply examined and not accurately forecasted. Crop yields did not increase at a significant rate to cope with the incremental population growth that occurred between 2002 to 2012.

From 2000 to 2013, (Rwf vs vehicle currencies like USD and EURO) was significantly deteriorated .from 1998, 2003, 2009 and 3013 1USD was approximately equivalent to 309 Rwf, 538 Rwf, 568Rwf and 647Rwf respectively (BNR, 1998-2013)

This situation affected prices of food commodities and agriculture input imported. From 2008­2012, domestic fuel price increased considerably compared to the significant decrease in fuel price happened at world market (1998-2013).

Given the links that exists between food security and food price volatility and the importance of econometric models to analyze causality in food price volatility, the reviewed work show that literature examining food price volatility in Rwanda is scarce.

Monthly food prices are recorded and some descriptive statistics are produced mainly in monthly bulletin on crops produced by the ministry of agriculture and animal resources (MINAGRI).apart from this analysis, the national institute of statistics of Rwanda (NISR) produces monthly consumer price index (CPI) and producer price index (PPI).

As limitations, such analyses provide little information on specific sources of food price volatility and are weak to investigate shocks and their different properties to explain how shocks may differ in their persistence and degree of predictability.

This paper uses six agriculture commodities (sorghum, maize, rice, beans and Irish potato) however; this paper aims at forecasting food price volatility in Rwanda and to find out the possible policy options to be undertaken by the government of Rwanda to offset this devastating situation of food price volatility.

As a result, most rural and urban poor households buy few quantities of food and other commodities from market due to over increasing food prices (World Bank, 2003).

Not only food price volatility resulted in poor household’s reduction of their food consumption levels but has also shifted consumption to less balanced diet of food and spends less on other longer term household needs such as education and health. Abundance domestic food production prompted reduction in both food and non-food inflation rate.

Although the prices of food basket in Rwanda have reduced significantly in the years of fertilizer subsidy program, they still remained 102% higher compared to other countries in the region (FAO, 2008). This has been attributed to factors such as weather shocks, high imperfect market information, Geographical locations and high intensity of poverty .in addition many other commodity prices like rice, beans and Irish potatoes have risen sharply over decades, consequently causing many people to experience hunger in times of plenty, hence there is need to determine factors responsible for high commodity food price volatility.

High and rising prices food commodities and products such as maize, Irish potatoes, rice, beans, fish and beef have undermined food security, propagated malnutrition, and hunger and threatened the livelihood of the vulnerable poor households by eroding their limited purchasing power.

High food volatility reduces individuals purchasing power of food and it has distribution effect which favors non-poor more than the poor masses in low income countries (hymn and Nanak,2006).As such food inflation has huge impact on perpetuating abject poverty and household food insecurity because majority cannot access basic needs both food and non-food items.

The fact that people’s welfare in Rwanda suffers mostly as food prices increases for major agricultural commodities and food products, in particular cereals, protein sources and vegetable oils cannot be over emphasized. It is also reported that high commodity food prices have also caused serious problems to various groups such as net producers, poor consumers, net deficit producers, surplus producers and poor net rice sellers in Rwanda.

The over dependence on both rice and Irish potatoes as main staple foods in Rwanda in presence of many other food crops also contribute to rising price pressure .This suggests that the quantity demanded of maize is always high compared to other food crops like cassava, sweet and Irish potatoes, bananas and yams.

Unfortunately crop or food diversification has not been exploited as a potential means to end high food price in Rwanda.

Most studies have focused on empirically analyzing the determinants of global food emerging and developing countries and these studies therefore provide important insights on crucial determinants of food price volatility and its implication on the economy.

1.2 Problem statement.

Rwanda has experienced a continuous escalation of staple food commodities in the last decade that has resulted into food insecurity ,despite the consecutive years of good harvest .the price of both maize and rice in Rwanda has increased by 141 percent between 1998 and 2008,and has since risen further causing food price volatility for example in October 2008 when there was shortage of maize supply in some parts of the country .This pushed the prices of maize and inflation rate in November to 7.2 % from 7.1% in September.(Namwaza,2008).

Food price volatility has been more pronounced in the last decade and lean periods every year. However in 2007/2008 growing season, Rwanda registered 1.3 million metric tons of food surplus attributed to fertilizer subsidy program and good weather conditions which turned the country from continental food deficit nation to a more food secure country.

Policy interventions can be divided into three broad classes. I, intervention to ensure food security by strengthening targeted safety nets, ii, interventions to lower domestic food prices through short-run trade policy measures or administrative action and iii, interventions to enhance longer-term food supply. Within all three categories of policies there are first best or preferred options that are more effective and equitable and introduce fewer distortions.

Ensuring household food security via targeted safety nets. First best options to address food insecurity include targeted cash transfers to vulnerable groups. These support the purchasing power of the poor without distorting domestic incentives to produce more food and without reducing the poor food sellers.

Ensuring household food security by lowering domestic food prices. First best option to lower domestic prices includes reducing tariffs and other taxes on key staples. Many countries impose taxes on food imports, both to encourage domestic production and boost domestic revenues

Measures to stimulate the medium term food grain supply response. While higher grain prices are clearly a burden to poor net purchasers of food, they also prevent an opportunity to stimulate food grain production and enhance the contribution of agriculture to a medium-run growth.

1.3 The Objectives of the study.

The main objective of the study was to analyze the implications (causes) of food price increase on the economy of Rwanda between 2006-2016 periods, with a view of enhancing food security and stability.

The specific objectives were to:

(a) Examine price trends of major commodities between 2006-2015.

(b) Analyses factors affecting escalating food price surges.

(c) Determine the effects of high food price increase on poor masses and the entire economy of Rwanda.

1.4 Hypotheses

To achieve objectives, subsequent hypotheses were formulated:

(a) Crop diversification index, maize prices, and other related food commodities like rice, Irish potatoes and input prices, real wage, oil (diesel ) prices exchange rates, money supply(m2),real interest rates, lagged monthly rate of change in consumer price index of food weather and adverse weather conditions (prolonged droughts) do significantly influence monthly rate of change for consumer price of food.

(b) High food price inflation negatively affects the real agricultural gross domestic product (GDP) and real national GDP of Rwanda.

1.5scope and limitation of the study

This paper provides insights on economic determinants of food price increase and examines causality effects between food inflation rates and its determinants . it also highlights implications of food price volatility on the economy of Rwanda and policy responses to enhance food security.

The major limitation as far as this study is concerned ,was to find consistent data set because some institutions in Rwanda had no computerized data set and also that they had breakup in data collection exercises due to various reasons .in analyzing the factors that affect food prices increases, the study used only consumer price index for food as dependent variable compared to non-food consumer price index as the former captures increase in price of all major components or commodities of food basket. However the study will provide useful information concerning dynamics of food price volatility in the country because crucial data limitations were thoroughly investigated for consistency by obtaining and checking with other institutions that had some information. The data set used in the analysis covered Rwanda only and as such, policy recommendations from the study results are only applicable to Rwanda.

CHAPTER TWO

LITERATURE REVIEW

2.1 Overview of global food prices.

The global food crisis experienced in 2008 led to escalating price of major agricultural commodities and products, the global impact of this crisis induced responses from various countries .A wide range of researchers have attempted to identify factors which might have caused the global food price inflation. Largely empirical work have reached an agreement that global food prices were sparked by economic factors such as depreciation of world currencies ,low interest rates, high oil prices ,rapid income growth in densely populated countries ,high fertilizer prices ,low food stocks ,domestic policies such as export restrictions and bans ,market structure and weather shocks (BALTAZER, 2013).

(Nazir, 2010) Suggested that despite the decline world food prices for maize and rice, food prices in Tanzania have persistently remained high and volatile since 2008 global food prices. High food crisis and volatility call for radical government policy measures towards enhancing food security going beyond lifting up of export ban and producer subsidy program. Significant efforts are required towards investment in storage facilities and infrastructure that support market integration such as construction and improvement of primary and secondary markets, market information system, strengthening institutions for correct food price data as well sustaining road infrastructure improvement to be passable all year around.

(Minot, 2010 ) The global food crisis of 2007-2008 was characterized by sharp spike in the prices of most commodities, including staple grains in Sub Saharan Africa.

(Meyers, R 2008). This paper evaluates the effectiveness of private sector maize marketing system in Malawi using threshold auto regression models. Results indicate that spatial price transmission and seasonal price patterns in private sector of maize markets are generally high. (Ngailo j, 2007 )This study surveyed three villages important for rice production in maswa district Tanzania.

China was pointed out to increase the world price volatility between 2007/2008 for two reasons, its tremendous demand on agricultural products and imposing of export restraints on certain agricultural products. While continued focuses on the pressure of china’s demand on world food market, it is also important to see how changes of world prices actually affect the welfare of food producers and consumers in china. To address those two issues, it becomes essential to analyses how agricultural market integration of china affects food security of its own population and of other countries. The agricultural market of china was heavily controlled by the central state of the government until late 1980s. After several decades of gradual liberalization of the market, the domestic market becomes more integrated and share of agricultural and food trade of china in the total world trade improves considerably.

(Moser, 2009) spatial integration at multiple scales: Rice markets in Madagascar .The dramatic increase in the price of rice and other commodities over the past year has generated new interests in how these markets work they can be improved .This article uses an exceptionary rich data set to test the extent to which markets in Madagascar are integrated across space at different scales of analysis and to explain some factors that limit spatial arbitrage and price equalization within a single country. We use rich price data across four quarters of 2000-2001 along with data on transportation costs and infrastructure availability for nearly 14000 communes in Madagascar to examine the extent of market integration at three different spatial scales. The results indicate that markets are fairly well integrated at sub regional level and that factors such as high crime rates, remoteness and lack of information are among the factors limiting competition.

(Abdulai, 2000).This paper utilizes recently developed threshold cointegration tests that are low for asymmetric adjustment towards a long run equilibrium relationship to examine price linkages between principle maize markets in Ghana .The findings indicates that major maize markets in Ghana are well integrated, both the threshold cointegration and asymmetric error correction models reveal that wholesale maize prices in local markets are increasing drastically.

According to (Abbas, 2008)food inflationary pressures have been so sensitive to the productive shocks than the impact on monetary policy operations .However factors do not provide concrete explanation to causality effects. The responses of domestic prices to some causal factors have been strong enough in the presence of complexity in price transmission and robust nature of domestic economies.

In sub Saharan Africa and middle east Asia, a number of authors have imperially attempted to analyze the determinants of general inflation and a few have concentrated on food inflation . (Barnichon&peiris, 2008 ) Explored the sources of inflation in sub-Saharan Africa by examining the relationship between inflation, the output gap and real money gap using heterogeneous panel cointegration estimation technique.

They found both gaps were significant in explaining the evolution of inflation with a larger role played by money gap, Ocran (2007) applied Johannsen cointegration test and error correction model to find determinants of inflation in Ghana , and identified inflation inertia , changes in money ^treasury bill and exchange rates as determinants of inflation in the short run. Studies by Rutasitara (2004) laryea and suniaila (2001) and Dalamine el at (2001) found that exchange rate ,output, monetary factor, foreign price ,real wages and lagged inflation influenced inflation in Tanzania and Swaziland respectively (Durevall, 2001) also noted that exchange rates foreign prices and terms of trade had long effect on food inflation,, while money supply and interest rate only had short run effect in Kenya between 1974 and 1996 , in a more recent study by (shahnoushi, 2009)vector error correlation model VECM was applied to examine the relationship between food prices and monetary policies in Iran. It was reported that food prices had long run and short run granger causality with money supply.

Global food prices started rising sharply in 2006 and reached record levels in the second quarter of 2008, although domestic food prices in eastern and southern Africa(ESA) are not totally un related to world prices , a study by the association for strengthening agricultural research in East and central Africa (ASARECA), the regional strategic and knowledge support system for eastern and central Africa (RESAKSS-ECA).and the consultive group on international agricultural research (CGIAR) Alliance shows that national and regional factors are very important in very important driving domestic food prices .while global food prices have exhibited declining trends since June 2008 ,several ESA countries have experienced increasing food prices in 2008 and early 2009 .The price surges appear to be further fueled by some of the policy responses that countries have employed in their attempts to address food price problem.

This brief provides an update on food price trends in eastern and southern (ESA).it starts by comparing the food and agricultural organization of the united nations (FAO) global price index and food price index (FPI) in individual countries followed by an update on price trends for specific commodities .this information serves to remind policy makers that easing global food prices do not present any immediate relief to the food crises facing their individual countries. Ethiopia experienced the regions highest food price increase beginning in March /April 2008.its food price index shot up by about 54% from 2007 harvest.

In E.S.A, maize prices steadily increased during the period between April 2007 and June 2008, this may be attributed to the poor harvest, and poor rainfall, and increased input prices December 2007, maize prices were higher in Uganda than in any of the selected countries in E.S.A.

For Madagascar, Malawi, there is no strong correlation between countries, food price index. (FPI). Madagascar had experienced a moderate increase in its FPI while Malawi experiences the most volatility.

Over four- month period from April to august 2008, Kenya followed Ethiopia in terms of the food price hike, followed by Uganda, Zambia and Tanzania respectively.

2.2 Economic determinants of commodity food price inflation.

Some scholars have comprehensively investigated factors affecting domestic inflation as compared to food inflation, their empirical work has confirmed that both demand and supply influence inflation. Zgovu (1994) and Ndaferank hande (2000) found that money wages, transport costs, net credit to commercial banks and price deregulation were significant determinants of food inflation.

(Ndaferankhande., 2000) Applied derived error correction inflation model to investigate the determinants of inflation and reported that lagged inflation, food supply shocks, exchange rate, money supply and growth in real income significantly influenced the dynamics of inflation. Kaluwa (2004), used cost-push inflation, demand pull error correction model to forecast and determine factors affecting prices of (inflation).They conducted that exchange rate, wages, money supply growth, lagged inflation and maize price dynamics.

In most countries, inflation is mainly influenced by exchange rate, wages, money supply, food supply shocks, oil prices and income growth .prices of food basket have relatively reduced for the last decade. There is need to evaluate the factors the factors that are responsible for high food prices beyond traditional inflation factors and knowledge .furthermore, a good number of studies have analyzed factors affecting general inflation as opposed to domestic food inflation. Therefore, this study tends to bridge the gap by determining factors that affect food price inflation rate.

2.3 Effects of food price inflation on the economy

Food inflation is undeniably one of the leading macroeconomic issues that threaten the development of any modern economy ( ogbokor,2004) .like many developed and developing countries , one of the most fundamental objectives of macroeconomic policies in any given economy is to sustain high economic growth together with low food price inflation .There are different policy instruments aimed at reducing food inflation such as fertilizer subsidy program with more allocation of budgetary resources at macro level ,exchange rate, trade fiscal and monetary policies are affected by high food prices through different ways (FAO,2008,kargbo2005).

Food inflation also affects household welfare that is both consumers and producers in different aspects. For example, it reduces the quality of food products purchased by consumers and reduces producer’s price in long run. Hence food inflation affects the entire economy through different avenues and its impacts are more pronounced in poor economies that are agro-based where food expenditure takes larger proportion of people’s incomes.

Recent studies by a number of scholars (ogbokor, Gokal, Hanif, khan and senhadji) have used regression models to investigate the relationship between food inflation and economic growth.

They have reached a consensus that inflation is counterproductive to economic growth of Namibian economy .Global and Hanif (2004) established that a weak negative correlation existed between inflation and growth. In Fiji.

Khan and senhdji (2001) also revealed that there was strong existence of a threshold beyond which food inflation exerted a negative effect on growth .food inflation levels below the threshold had no effect on growth while inflation rates above the threshold had a significant negative effect on growth.

According to (KHONJE, 2007, pp. 30-40) there was a long-run response of output to permanent inflation shock in Brazil.

Most countries have been seriously been affected by the consequences of high food price inflation such as food insecurity and macro-economic instability.

Empirical work highlights that food inflation induces poverty, food insecurity and reduction in expenditure on other important services such as health and education.

The magnitude of impacts for high global food prices on domestic food prices and consequently on household welfare depends on price transmission and the ability to domestic economy to absorb food price inflation.

Related shocks (Dewbre et al, 2008).in addition vulnerability of households to both negative and positive effects of food inflation varies across countries country wide.

Von-Broun (2008), observed that high food price surges have serious implications for food security, macroeconomic and political stability .it was further noted that the financial crunch also reduced the availability of capital at time when it accelerated investment in agriculture is urgently needed to avert high food prices .food and financial crises have strong and long lasting effects on emerging economies and poor people.

The current global recession has made more people especially farmers to suffer since the demand for agricultural food products is reducing to the maximum there by lowering incomes of farmers .This is even worse in developing economies where prices of food baskets have remained high despite the implementation of different policy instruments.

This study contributes to the existing literature on food price in many different ways.

Firstly, empirical analysis on general inflation has been done in several countries but there are no known studies on the causes of food price surges and its effects in most of those countries.

Secondly, besides, tradition inflation factors like exchange rate, interest rate and money supply, and many other Variables such as crop diversification are included in the analysis which has not been found in the past.

Thirdly, the study will empirically analyze the direct link between food inflation and output.

Lastly, the study will analyze the factors that influence the rate of food inflation in agro-based economies as well as their effects. This will trigger the development of policies and institutional frame work aimed at averting high food price inflation.

CHAPTER THREE METHODOLOGY

3.1 INTRODUCTION

The study was done in Rwanda using annual data which were collected from different provinces that is eastern, western, southern and northern regions of the country.

3.2 Research Design.

The research study on the analysis of food price increase in Rwanda was designed to find out the trends of food price volatility with time frame between 2008 to 2015.The study period was appropriate due to availability of relevant of secondary data for accurate analysis.

3.3 Data Sources, Type, Variables and sampling period.

Data were collected from secondary sources (published and un published) in different institutions and utilized to test the hypotheses of the study. The data collected include: Domestic imports and exports, maize, rice and Irish potatoes annual production used to compute crop diversification and oil prices.

Food inflation rate, national consumer price index, consumer price index for food, nominal exchange rates, national gross domestic product and agricultural GDP, Nominal interest rates, Real wages and money supply (m2) all were obtained and input prices were also obtained. Monthly data used in analyzing determinants of food priced surge were also obtained from January 2008 to December 2016 while annual data used in determining the effect of food inflation on the economy were obtained between 2005 and 2015.

3.4 LIMITATIONS OF THE STUDY.

In conducting this study, various problems were encountered which affected the study in terms of effectiveness as the ongoing analysis holds:

3.4.1 VARIATION IN PRICES.

Food prices rise when markets get tight due to coinciding spells of unfavorable weather conditions leading to low crop production and hence affecting price stability. The production shortfalls, relative to trends, would in its self have been enough to send prices higher, under normal conditions stocks would have buffered the market and dampened the price rice.

3.4.2 INACCESSIBITY TO SECONDARY DATA SOURCES.

In carrying out this research, the road ahead has been rough, the climb has been stiff to obtain secondary data due to lack of sufficient information resulting from market failures and deficiencies in documentation of vital information.

3.4.3 FINANCIAL CONSTRAINTS.

While conducting this research, financial embarrassments such as transport costs and internet cost were experienced to reach the data collection sites which delayed the research process.

3.4.4 TIME FACTOR.

Time was limited to collect, analyze data from different parts of the country for the effectiveness of the research besides that it was conducted alongside other class activities.

CHAPTER FOUR

DATA ANALYSIS AND INTERPRETATION

4.1 INTRODUCTION.

The study analyses how rising food prices are contributing to high food inflation in many countries specifically Rwanda for this matter. Some households benefit from higher prices; others are hurt by them, depending on whether they are net producers or consumers of the staple foods and the extent to which wages adjust to higher food prices.

In general, poor people especially in urban areas suffer due to rising food prices. Using a sample of household data for eight low income countries including Rwanda, the recent paper analyses the impacts of higher prices of key staple foods on poverty, taking into account direct impacts from changes in commodity prices. The problem of food crisis in Rwanda between 2008 and 2013 is estimated to have increased by poverty by 3 percent.

The government of Rwanda has not kept a blind eye to the problem of food insecurity but has embarked on the program of cash transfers to vulnerable groups by supporting purchasing power of the poor without distorting domestic incentives to produce more food and without reducing the incomes of the poor food sellers. Various kinds of cash transfer programs are currently used in Rwanda but are not always a feasible options in low income countries with weak administrative capacities .Also food prices are not the main driver of malnutrition they do affect nutritional outcomes through their impact on real incomes and household purchasing behavior.

This paper analyses the factors contributing to the rapid rise in food prices and assesses the impact of food upsurge on poverty because poor households spend a substantial amount of their incomes on food which has resulted into chronic poverty in many households across the country. The recent steep price increases of major crops (cereals) and oil seeds were triggered by a combination of production remaining somewhat below trend and stronger growth of demand and thus shooting up food prices.

A low and a declining level of stocks have added to the price, as has probably no significant increase in investing in agricultural productive assets. The coarse grains ,rice and oil seed crops all nearly doubled between 2008 and 2010 marketing years and continued to rise until early 2011.These increases in agriculture commodity prices has been a significant factor driving up the cost of food and has led to a fuller awareness and justifiably heightened concern about the problems of food security and hunger .

The causes of this price spike are complex and due to a combination of mutually reinforcing factors, including draughts in key grain producing areas low stocks for cereals and oil seeds. Prices rice when markets get tight between 2011 and 2014 there were coinciding spells of unfavorable weather in major producing regions(provinces) pushing crop yields in those areas below long term average levels.

Rwanda is among countries in the region that experiences the highest food price increase beginning March, 2009 and its food price index (FPI) shot up by about 54 percent from 2008 harvest, the April to June hunger period began two months early and the dry conditions delayed the onset and establishment of the April to June rains. This largely hindered crop cultivation of the region’s single season crops and these results follow two consecutive below average agricultural production seasons are reflected in food prices which has been rising since the third quarter of 2011 eroding households purchasing power and undermining their potential for alternative sources of food. The rising food prices shot up to unprecedented levels between 2011 and 2015 while sharp prices exhibited rising trends until June 2016.

The price surges in Rwanda appear to be further fuelled by some of the policy responses that the country has employed in an attempt to address the food price crisis and this brief introduction provides an update on food price trend in the country and serves to remind policy makers in Rwanda that the easing global prices do not present any immediate relief to the food crisis facing the country .Food prices have exhibited declining trends since June 2012 and in several other east African countries experienced increasing prices in 2012 and 2013.

In Rwanda, maize prices steadily increased during the period between April 2009 to June 2011. This may be attributed to the poor harvest, poor rainfall and increased fertilizer input prices

4.2 Some possible policy responses.

At present, the greatest demand for government of Rwanda’s engagement is to help institutions evaluate the economic and social implications of rising food prices, as well as available policy responses. Since the government is faced with political economy pressures to implement sub- optimal and even counterproductive and policies that can provide analytical inputs to highlight the least distortionary courses of action and help institutions forge an effective and integrated responses. Increased financial support may be appropriate in the intuitional contexts

There has also been demand for advice on market interventions to smooth supply and lower food prices and intensified dialogs on food stocks .Rwanda could scale up financing in existing program and ongoing investment projects for safety nets and agricultural programs. Additional government support can expand and improve the existing programs by providing:

Technical assistance to improve coverage and programmatic financing for strengthening social protection systems and contingent financing for budgetary flexibility in the face of large scale shocks.

TABLES AND GRAPHICAL PRESENTATION OF MAJOR STAPLE FOOD PRICE TRENDS IN RWANDA.

Table 1: Average price of maize

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Figure 1: The trend of maize prices.

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The graph above shows the average increase of maize for the period of 2008 to 2015 in Rwanda.

Prices first rose from 206.2 in 2008 to 238.6 in 2009 and then dropped to180.6 in 2010 and later increased dramatically for the following year that is 2011 to 2015 as it is depicted on the graph above.

Traders say that the increase is as a result of the recent fuel hikes and predicted that more commodity prices are likely to go up. They also attributed the increase to low supply from major producing areas especially northern districts of Burera and Gicumbi .

Nevertheless, experts are hopeful that the country still has the capacity to swim over global price volatility to keep the economy afloat if it accelerates its effort to boost export receipts needed to bridge the current trade deficit.

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Figure 2: Trends in price for maize.

The Figure above shows the average prices of maize increase over years in various parts of the country, the average price of maize between January and December 2008 rose in all provinces but more especially in Kigali city where the main causes were high population in Kigali that pushed prices high and high transportation costs of maize from upcountry to the city which eventually pushed the prices high unlike in other provinces.

In the northern province the average price of maize also increased for the first two years that is 2008 and 2009 and later dropped in 2010 and then shot up in following years and it was found out that the main cause of the increase was high population density and high demand that is induce by developed tourism in the region thus a sharp increase of prices as it well shown on the above graph.

Table 2 :Average price of Rice

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Figure 3: Trends in prices of rice.

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The prices of rice did not shoot up before September 2009 to un precedent levels in the country.Rwandas agriculture observed that the increase in rice prices in Rwanda could partially be explained by temporary imbalance in the supply and demand which created more profits for farmers as prices for maize shoot up.

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Figure 4: Trends in the prices of rice

The price of maize first increased in 2009 and later dropped in 2010 the causes of price surges for rice is said to be the joining of EAC which increased the demand for rice. The recent negative yield shocks in key producing provinces that have contributed to the price increase should be viewed as temporary. Barring any underlying climate change or water constraints that could lead to permanent reductions in yield, normal higher output can be expected in the short term.

The oil price and energy prices more generally is critically important contributing factor to the increase in production costs for agricultural factors and ultimately in the market price for this particular food item.

Table 3: Average price of Irish potatoes

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Figure 5: Trend in prices of Irish potatoes.

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After maize, Irish potatoes is the most important crop produced in Rwanda .Rwanda’s Irish potato production is about 350,000 tons every year, but the country needs to produce more tons annually to meet consumption .Irish prices slightly increased from 2009 to 2013 but later in 2014 prices escalated as it is depicted on the graph.

Abbildung in dieser Leseprobe nicht enthalten

Figure 6: Trends in price of Irish

Rwanda’s Irish prices remained stagnant until 2012 and 2013 and from 2014 prices shoot up the. Analysis attributes the sharp increase to increase in the overall prices of potatoes internationally.

Potatoes price sharply increased in Kigali due to increased transport costs from other provinces to Kigali and this eventually increased prices in Kigali. And prices shoot up in other provinces due to government policy of interchanging crops after the other that reduced production and supply of potatoes hence dramatically pushing potato prices up.

Table 4: Average price of Beans.

Abbildung in dieser Leseprobe nicht enthalten

Figure 7: Trend in price of beans

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Prices of beans in all of the provinces for the period between January 2008 and 2011 was somehow stagnant but later increased in 2012 and it further more sky rocketed in 2014 and 2015 across the region. Price of beans in Rwanda was lowest for almost all the years considered.

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Figure 8: Trend in price of Beans

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Bean prices started rising sharply between 2014 and 2015 respectively and this was attributed to the increase to low supply from major producing regions emanating from unfavorable weather conditions .the steep price increase of this particular crop were triggered by a combination of production remaining somewhat below trend and strong growth of demand thus shooting up the price.

4.3 Causes of food price increase in Rwanda.

Food crisis continues to be a very fundamental challenge because local masses (local farmers still practice subsistence farming which has kept agricultural food production low hence causing food prices to rise. Agricultural mechanization has been undertaken in an attempt to increase food production to promote appropriate farm mechanization options to farmers to curb down the problem of food price increase and develop broad based skills in farm machinery.

The rapid rise in oil prices has increased the energy costs of food production especially the fertilizer cost which has more than doubled over the past four years. Bio fuel production is unlikely to have a strong impact on staple food production in developing countries including Rwanda, However, the rise in oil prices has put a considerable pressure on input costs of Agriculture in general, including those for rice and other food stuffs.

The above factors continued mainly to be the long term trend in food price increase in Rwanda, However, The spike in rice price seen in April/May 2008 was largely the result of the panic arising from export restrictions imposed by major exporters.

The scenario of decreasing investments in agricultural science and technology in Rwanda is extremely unfavorable. Should this scenario become a reality, Food price in 2020 would be nearly doubled of the projected reference scenario prices in the same period.

A substantial boost in agricultural and infrastructure is needed to increase growth in agricultural productivity which would help lower food prices. National systems are also unable to invest adequately in agriculture and this has been a major cause of food price increase in Rwanda. It has been found that in the case of rice and other grains, Rain fed areas are slightly under invested in Rwanda and it is important to ensure that research priorities among grain growing areas and various components of research are adequately balanced for generating the maximal impact.

Weak scientific progress is yet another cause for price rise in areas of research and sufficient investment now and in the future is needed to develop viable solutions.

The analysis presented above clearly indicates above that the fundamental causes of the current food crisis in Rwanda are long term imbalance between demand and supply for major staple foods.

CHAPTER FIVE SUMMARY, CONCLUSION AND RECOMMENDATIONS 5.0. INTRODUCTION:

This study investigated the determinants of food inflation rates in Rwanda and showed that input fertilizer prices, crop diversification, oil prices, real exchange rates and real interest rates significantly and positively influenced high food inflation rates which have remained high in Rwanda, despite consecutive years of good harvest. Higher fertilizer prices resulted into sky rocketing food price volatility and this is crucial to Rwanda’s agriculture whose productity absolutely depends on fertilizer usage. Lack of crop and diversification is a serious problem as it increases demand of monotonic food commodities or products ultimately hiking food price surge.

Real exchange rate over valuation or appreciation made domestic tradable food products very expensive to be exported and less competitive on the international market, on the contrary

devaluation or depreciation can result in high prices of both food stuffs and finished products notably petroleum products and fertilizers. High real interest rates also stimulated savings which reduced investment in agricultural productive assets and this triggered high food price volatility in the country. Farmers, who took advantage of high food price inflation by increasing agriculture investment through agricultural loans, are now failing to pay back the loans due to high interest and lower producer price emanating from global recession.

In addition, food inflation, imports ,exports ,real interest rate and exchange rate significantly influence both real agriculture output(GDP) and(national GDP),while high food prices induce low purchasing power to consumers there by reducing expenditure on consumable goods, however food inflations has a more pronounced negative effect on both real agriculture output and national GDP.

5.1. Conclusion

Results showed that high inorganic fertilizer prices escalated food inflation in Rwanda; this calls for input policy aimed at reducing high price inorganic fertilizer. Government and private sector need to invest in fertilizer manufacturing plants or reduce high fertilizer transport costs.

Besides, pro-poor organic farming practices ought to be initiated and promoted by government and development partners since most farmers are poor and could hardly afford inorganic fertilizers. This would help to increase agricultural production in the era of escalating prices of inorganic fertilizers on staple food commodities such as maize, government should advocate for agricultural policies that will boost agricultural production of major staple foods.

Government should also embark on irrigation farming in order to secure consistent supply of food .it also needs to regulate grain prices and supply of crucial food stuffs to the regions hit by draughts and areas with poor infrastructural development, deliberate policy on crop and food diversification is needed so that Rwandese are sensitized by the government and private sector on the need and promotion of this program through pro-poor food processing and value addition along a value chain. This would help relax high demand of rice and Irish potatoes through utilization of other crops such as banana, sweet potatoes, ground nuts and cassava.

High food price inflation spiked by high oil prices requires government to invest in alternative sources of energy like bio-fuel production which would reduce high demand for petroleum products, oil prices are also high because most oil transporters use land transport which is expensive compared to water transport despite Rwanda’s landlockednes.

Lastly, the government should regulate low interest rates through prudent management of macroeconomic policies i.e. monetary policies. This would help to promote agriculture production and ultimately reduce food price increase. Devaluation or overvaluation ought to be checked by adopting flexible exchange rate regime in order to reduce or avert incidence of high food inflation in the country and this would enhance economic growth development and social stability in Rwanda.

5.2 Recommendations.

Further research should focus on detailed analysis on how food diversification influence high food prices compared to crop diversification. Besides ,there is need to understand why pro-poor food processing, packaging and value addition along the value chain that result in more diversified food products have not been exploited in the country .This would help formulate robust policy interventions or strategies on food diversification that could reduce high food prices.

For Rwanda and the rest of the world, to foster growth and development especially in poorest countries investment in agriculture including agricultural research, extension and education may be the best way to cut poverty and solve the problem of food crisis and stimulate economic growth.

In many cases, investment in improving the overall environment in which agriculture operates may be the most appropriate, improving governance systems, macroeconomic policy, infrastructure, technology, education and health would all help to develop individual countries and solve the problem for good.

There is also need to foster growth and development in poor districts to improve the purchasing power of the food buyers. Agricultural trade policies require further reform in order to ensure an effective supply response.

More to the above, in order to take the right policy decisions, we need to understand what caused the current price spike, what the implications may be for prices and price volatility in future and how various countries and members of society may be affected. This note aims to improve this understanding and thereby to contribute to sound policy formulation.

BIBILIOGRAPHY

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[...]

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Details

Title
The Analysis of the causes of food price increase and policy options to enhance food security in Rwanda
College
University of Rwanda  (college of Business and Economics)
Course
Bsc.Economics
Authors
Year
2018
Pages
43
Catalog Number
V427554
ISBN (Book)
9783668716032
File size
658 KB
Language
English
Tags
analysis, rwanda
Quote paper
David Rwanyamugabo (Author)Stephen Mugabi (Author), 2018, The Analysis of the causes of food price increase and policy options to enhance food security in Rwanda, Munich, GRIN Verlag, https://www.grin.com/document/427554

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