The large magnitude of the terms of trade shock primarily owing
to oil prices along with the acceleration of food prices, especially staple food grains of wheat and rice, have imposed a tremendous burden on South Asian countries, particularly on the low income economies of Afghanistan, Bangladesh and Nepal. The adverse effects of food and fuel price crisis have been compounded by the global financial crisis. South Asian governments have responded in varying degrees to contain the rise in prices as well as to mitigate the adverse effects on the poor. Steps have also been taken to stabilize the economy and accelerate growth. Yet, the negative impact remains substantial and further efforts are needed to respond more effectively to the external shocks.
Short-term policy responses: Policies taken by governments in the first round were aimed at stabilizing food prices. Some of the policies like trade bans, price controls and subsidies may have been justifiable as short-term response on political economy grounds, but they have adverse implications for efficiency and resource allocation over the longer term. As well, the fiscal space is scarce and the magnitudes of the subsidies entailed are not likely to be sustainable. Similarly, the efforts of governments to initiate safety net programs are laudable; yet there is a need to examine the programs carefully to ensure their effectiveness and fiscal sustainability. Finally, the longer term agenda of addressing the supply problems in agriculture remain to be fully tackled.
Long-term policy agenda: At the heart of South Asia’s supply response is the challenge of farm productivity. South Asian governments need to pay much more attention to the productivity issue in order to reconcile the rising input prices with the objective of keeping food prices stable and affordable for the poor. Other key long-term policy issues concern trade policies, stock management, input-output pricing, safety nets and regional cooperation.