This post is the third installment of the Feed the Future Enabling Environment for Food Security (EEFS) project’s examination of the Feed the Future Learning Agenda. The series shares an evidence-based perspective on the role of the enabling environment in building competitive, inclusive, resilient, nutrition-sensitive agricultural market systems to support countries’ Journey to Self-Reliance. For more on the series, see the first and second installments.

Feed the Future Learning Agenda Question:

Policy Systems — What is the emerging evidence on the relationship between policy systems (defined as policy agendas, institutions, relationships, and processes) and food security? (Theory of change).

The importance of the impact of macro-level monetary and fiscal policy has arguably been underexamined and insufficiently considered in sector-specific agricultural development initiatives. This post seeks to shine a light on the tangible impacts that macroeconomic policies have on farm and firm investment decisions. Cross-sectoral efforts to identify and address macro-level policy reforms are needed for transformational change in the agriculture sector.

In the food security realm, both policy projects and farm-to-market initiatives often focus on a particular subsector, market system, or value chain. As a result, the cross-sectoral issues most burdensome for firms and farmers can be overlooked, and agriculture-specific policymaking siloed in the relevant agriculture ministries. The result of analyses and policy reform initiatives may therefore be too narrow to produce transformational policies that address underlying challenges influencing all sectors of an economy — not least of which is the agriculture sector.

While sector-specific reform initiatives are well intentioned, and remain necessary, many challenges to private sector investment and growth are likely to persist if macroeconomic considerations are not integrated. To achieve transformational change in the agriculture sector, it is necessary to pursue reforms in matters related to monetary and fiscal policies that influence issues such as the cost of capital, exchange rates, and foreign currency reserves.

This observation of the need to broaden policy analysis and reform efforts is consistent with the USAID Policy Framework, which states:

“We will promote cross-sectoral integration. Technical specialties and program areas allow useful divisions of labor within USAID, but they do not reflect the real world. … Our programs must recognize this interconnectedness. We will institute regular, meaningful cross-sectoral collaboration and, where appropriate, integrated programming.”

“Similarly important are policies that ensure macroeconomic stability: well-managed monetary policy, responsible public financing, and open markets.”

Monetary Policy Impact on the Ground

The EEFS project identified these broader challenges in previous analytical work. In 2018, EEFS released its Private Sector Voices report highlighting the practical experiences of agricultural firms in Feed the Future countries. The issue of monetary policy was raised by a Nigerian firm:

“Fluctuating currency values can devalue funding sources overnight. One business received funding to establish a vegetable oil and animal feed factory. By the time the funds were received, the value of the Nigerian naira against the U.S. dollar had sunk by more than 50 percent, forcing the business to shelve the project and focus on primary production.”

Ethiopia is another Feed the Future country where monetary policies and relative macroeconomic instability often hinder the investment capacity of farms and firms. Recently, The Growth Lab at the Center for International Development at Harvard University, with support from USAID, conducted an assessment that identified several macroeconomic imbalances that limit agricultural sector growth in Ethiopia. A key finding of the work summarizes, “The binding constraint to sustained rapid growth in Ethiopia is the shortage of foreign exchange to afford imports (e.g. raw materials, intermediate inputs, spare parts, etc.).”

Since international trade is conducted in U.S. dollars, agricultural firms that are oriented towards the domestic market do not generate the dollars needed to purchase critical production inputs that must be imported. Alternatively, export-oriented firms that generate foreign exchange are more likely to receive credit but remain limited in their ability to access sufficient imported inputs. In these cases, the result has been low productivity, rising domestic prices, and stagnant real wages. The Growth Lab’s study goes on to point out:

“As exports lag and without new sources of foreign exchange that can outpace overall growth, imports as a share of GDP have been forced to decline in order to resolve the balance of payments. This risks intensifying a vicious cycle, where potential exporters are constrained by the inability to access forex to import and increasingly cannot produce the exports that would generate forex.”

In 2017, the Feed the Future Ethiopia Value Chain Activity conducted several value chain assessments which identified this challenge, finding that the foreign exchange shortage was drastically impacting the livestock sector. Without sufficient foreign exchange, Ethiopian firms were unable to import improved genetic material in the poultry, meat, and dairy value chains — effectively constraining farmer access to technology and limiting their productivity. A similar challenge was also faced by animal feed processing enterprises who were unable to import critical feedstuffs like amino acids necessary to produce high-quality feeds. The impact of this was persistently low supply and high prices of quality animal feed — again, limiting productivity improvements for primary producers.

This forex shortage is in part a result of massive infrastructure project investments and an imbalance of payments. Monetary policies set by the National Bank of Ethiopia, such as a requirement for foreign exchange remittances to the bank, were devised to address these challenges but may have exacerbated them. In September 2019, the Government of Ethiopia announced a “Homegrown Economic Reform Program” supported by a nearly USD $3 billion loan from the International Monetary Fund to implement reforms, including a more flexible exchange rate regime, financial sector reform, and opening new sectors to foreign investment to help resolve the forex shortage, curb inflation, reduce debt vulnerabilities. These intended reforms appear to be a step in the right direction.

Key Takeaways for Practitioners

These issues are not confined to the examples raised from Ethiopia and Nigeria. They are often evident in many of the least developed countries — particularly Feed the Future countries — where USAID works. Until critical macroeconomic policy issues like these are considered and addressed, many sector-specific policy interventions are unlikely to achieve the transformational, systemic change that they intend. Going forward, USAID and its implementing partners across all operating contexts would be well served in fostering efforts to analyze and address cross-sectoral monetary and fiscal policy issues that influence private sector investment, trade, and productivity in the agriculture sector.

Doing so will in part require increased cross-sectoral collaboration and cross-ministerial policy reform efforts. This approach is an important step toward the transformational change process that the USAID Policy Framework and the Feed the Future Learning Agenda seek.

References

Feed the Future Ethiopia Value Chain Activity, “Value Chain Analysis: Dairy,” Feed the Future Ethiopia Value Chain Activity, October 2017.

Feed the Future Ethiopia Value Chain Activity, “Value Chain Analysis: Poultry,” Feed the Future Ethiopia Value Chain Activity, October 2017.

Feed the Future Ethiopia Value Chain Activity, “Value Chain Analysis: Live Animals and Meat,” Feed the Future Ethiopia Value Chain Activity, October 2017.

Feed the Future Enabling Environment for Food Security, “Private Sector Voices,” Agrilinks, September 2018, https://www.agrilinks.org/sites/default/files/resources/ftf-eefs_call_2_ps_voices_-_technical_report_final_approved.pdf.

International Monetary Fund, “Six Things to Know About Ethiopia’s New Program”, IMF, December, 23, 2019, https://www.imf.org/en/News/Articles/2019/12/23/na122319-six-things-to-know-about-ethiopias-new-program.

The Growth Lab at the Center for International Development at Harvard University, “Addressing Macroeconomic Imbalances to Sustain Growth in Ethiopia: Initial Findings of a Growth Diagnostic,” The Growth Lab, July 23, 2019.

USAID, “USAID Policy Framework: Ending the Need for Foreign Assistance,” USAID, April 10, 2019, https://www.usaid.gov/sites/default/files/documents/1870/WEB_PF_Full_Report_FINAL_10Apr2019.pdf.