We’re now living through a global inflation crisis. Prices are skyrocketing all over the world, from the US, where inflation hit 7% last year (unseen since 1982), to Turkey where inflation reached 36% (highest level for the last 19 years). Generated by the swift post-Covid economic recovery, made worse by the Eurasian energy crisis, which has driven energy prices to unprecedented levels, in 2022 inflation will spill over to another critical segment – foodstuffs.
A global problem; local consequences
Food prices are highly sensitive to energy prices. To grow crops you need fertilizers (made from natural gas) and fuel. To process foodstuffs, you need heat and electricity. Those requirements, in a nutshell, are all the things that have seen their prices skyrocket in 2021. Food commodity prices have already jumped by 28% (10-year maximum) globally in 2021 due to this, with more on the way.
Ukraine is no exception to these trends.
Inflation hit 10% last year, with food prices in particular climbing by 13%.
This year, they might go even higher – experts speak about 20% or more. The country’s status as a major agricultural producer helps keep food supplies secure – something with which other countries might have problems this year. But it certainly doesn’t make Ukraine immune to global price trends.
At the same time, Ukrainians are still relatively poor – in fact, the poorest in Europe, according to official data. Half of the average Ukrainian family budget is spent on food.
This means that skyrocketing foodstuff prices would hit the country’s population quite hard. This will create suffering and negative social consequences.
Moreover, skyrocketing prices tend to have major destabilizing political implications. The historical examples are numerous – and you can look at Kazakhstan for the most recent one. There it took just a couple of days for a price hike on popular fuel to create countrywide protests that toppled the government and led to foreign intervention by ODKB forces. Ukraine’s democratic system of governance, where citizens don’t necessarily have to take to the streets to change power, makes the country more stable – but still, the potential for destabilization remains.
How to handle it
The looming food price crisis thus requires a strong response from the government. What can be done to deal with it?
Fortunately, there are solutions that can be borrowed from the developed world – in particular, the US and the EU.
Since the 1930s the US has had food stamps in place – so-called SNAP (Supplemental Nutrition Assistance Program). This program provides money from the government to low-income Americans via a specialized debit card system that can be used only to buy cerrtain foodstuffs. Before switching to an electronic system, the government printed coupons (“stamps”) which had a certain nominal value in US dollars and could also only be used to buy food in shops, with the shops then exchanging the coupons with the government for real money.
Ukraine already has a similarly designed program called eSupport, which was deployed in the aftermath of the most recent lockdown. Funds are provided electronically via the DIA e-governance application. eSupport provides citizens with 1000 UAH from the government, which can only be spent on goods and services produced by the industries hurt by lockdown – such as museums, bookstores and travel.
The same system can be used to deploy a Ukrainian version of SNAP. The expenditures would be limited to foodstuffs and the eligibility criteria would need to be introduced so that the program is clearly targeted at low-income citizens. Since not all such citizens have access to smartphones and, hence, the DIA application, “stamps” can also be printed by the government and distributed to the population, similarly to how the US used to do SNAP in the past.
In fact, this idea has already gained traction in expert circles and in the media. The Office of the President has picked it up and according to Oleh Ustenko, one of the President’s economic advisors, is working on such a program. This is good news, as food stamps could go a long way towards alleviating the problem of food inflation for the poorest Ukrainians.
Another instrument, used actively in the EU, is the introduction of lower VAT rates on foodstuffs consumed by the poorest – such as buckwheat in Ukraine, for example. VAT is levied on top of the price of goods (at 20% rate in Ukraine) and is paid by the consumers. Lowering VAT rates thus allows to keep prices lower. Such lower VAT rates are explicitly allowed by the EU tax legislation and some countries – like Poland, for example – are already using lower VAT rates to combat current food inflation. The same instrument can be used by Ukraine.
Of course, both food stamps and lower VAT rates would require budget resources to be re-allocated, in the form of additional spending or lower revenues. To preserve the budget balance, resources would have to be diverted from other areas. Nevertheless, taking into account acute the inflation crisis is becoming, such budget reallocation would certainly be appropriate – and the faster it’s done, the easier will Ukraine weather the storm.
Inflation in food and other essentials is dangerous beyond its immediate economic consequences. This much is clear from history – both most recent (take Kazakhstan) and ancient (look at ancient Rome’s bread riots, if you don’t believe me). Alleviating the pain of price growth for low-income citizens is a job of any responsible government. It is very important for Ukraine to handle this job well and quickly. The well-being of millions Ukrainian families, as well as the socio-political stability of the country, is at stake.
