Central America squeezes budgets in food crisis

TEGUCIGALPA Thu Feb 3, 2011 3:30pm EST

TEGUCIGALPA (Reuters) - Central American governments faced with rising global food prices are cutting import tariffs, freezing prices and subsidizing food to try to stave off a devastating hunger crisis.

Already struggling to keep fiscal accounts in check after a sharp economic downturn, the region's small countries risk higher budget deficits and distortions in local markets as they take measures to protect the poorest families.

World food prices hit a record in January, even higher than the levels seen in 2008, when a food crisis sparked violent protests in some countries around the world.

Forecasts show no easing in grains prices in 2011 and the U.N. Food and Agriculture Organization, or FAO, estimates 925 million hungry or malnourished people in developing countries.

The sugar and coffee exporting countries of Central America are better off than parts of Southern Africa and South East Asia, but they are dependent on corn and wheat imports, and poverty levels are among the highest in the Americas.

In Honduras, 70 percent of the population is poor, and 40 percent of people in rural areas of Guatemala and Nicaragua live in abject poverty, according to the United Nations.

While high grains prices are helping an economic boom in grain exporting powerhouses like Argentina and Brazil, small farmers and the urban poor in Central America are vulnerable, especially after droughts and floods wrecked local harvests last year. The poor in Bolivia and other small South American countries are also at risk.

Honduran farmers lost nearly half their red bean crop in 2010 after bouts of extreme weather. Prices of beans, a staple of the Honduran diet, nearly tripled in the second half of 2010 until price controls were imposed. Even now they are up 75 percent, and more in some areas of the country.

"Before I would buy five pounds of beans every 10 days. Now I can only afford half that," 66-year-old retiree Amada Lopez said at a central market in Tegucigalpa. "If this situation lasts much longer, we will have to eat one less meal a day."

To dampen the effect, Honduras' Congress froze prices on 33 products, including beans, corn meal, dairy products, meat and eggs in November. On January 19, lawmakers extended the temporary measure for 20 more days, despite complaints from the farm industry that it will discourage production.

El Salvador's government, which has watched red bean prices double since June of last year, decided to buy $5 million worth of tariff-free beans from China and sell them at a discount.

It also plans to increase spending on anti-poverty programs by 30 percent this year.

INEQUALITY, TOUGH CHOICES

Guatemala is considering slashing import tariffs on wheat and is handing out food and cash vouchers to rural workers who earn less than $5 a day cutting sugar cane or picking coffee.

Guatemala is Central America's largest economy but deep inequalities have left around 45 percent of the population chronically malnourished. It is the only country in Latin America where the proportion of undernourished people increased between 1990 and 2007, even before the 2008 price spikes, a trend also seen in North Korea, Burundi and the Democratic Republic of Congo, the FAO said.

Food inflation is putting some basic goods including sugar, chicken and beef out of the reach of many people in several South American countries, including landlocked Bolivia.

Leftist President Evo Morales blames capitalism and global warming for steep food price increases in Bolivia, and warns that severe frosts could bring famine in the Andean highlands.

Even such basic steps to stem hunger pose serious dilemmas for Central American leaders. Lower tariffs ease prices in the short term but risk expanding budget deficits. The FAO warns that price controls can distort local markets, and subsidies can have the unintended side-effect of aggravating shortages.

"The problem is that some of the grain, given that it's being subsidized, has escaped to other countries because the prices are low," said Maximo Torero, an expert at the Washington-based International Food Policy Research Institute.

El Salvador, already seeing lower growth rates than the rest of the region, had its credit rating slashed by Standard & Poor's this month. The ratings agency said low government revenues, just 18 percent of GDP, constrain El Salvador's fiscal flexibility, given that its debt has risen rapidly from 35 percent of GDP in 2008 to 46 percent in 2010.

"This is a tricky time right now for a lot of these governments as they are just starting to recuperate from the impacts of the global economic downturn," said Heather Berkman, a Latin American expert at Eurasia Group consultancy.

"(They) have a lot less money in the bank to support these initiatives, like giving out food or reducing tariffs or increasing subsidies, so they have to be careful to manage the fiscal impact when trying to help the local population."

(Additional reporting by Mike McDonald and Mica Rosenberg in Mexico; Alex Leff in Costa Rica; Herbert Hernandez in Guatemala; Ivan Castro in Nicaragua; Nelson Renteria in El Salvador; Writing by Mica Rosenberg; Editing by Kieran Murray)

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

Photo

California's historic drought

With reservoirs at record lows, California is in the midst of the worst drought in decades.  Slideshow