Food Prices, Government Subsidies and Fiscal Balances in South Mediterranean Countries

Abstract

Soaring food and energy prices sparked the revolts in Northern African countries at the end of 2010. This article investigates empirically the impact of world food prices on inflation and government subsidies for Algeria, Egypt, Israel, Jordan, Lebanon, Morocco, the occupied Palestinian territories and Tunisia during the ten‐year period 2002–11. Its findings reveal an asymmetry in the response of consumer‐price inflation to shocks in world food prices that made inflation rise fast while nominal rigidities prevented it from falling. Moreover, it shows that government balances deteriorated to 2% of GDP in 2008 and 2011 owing to the incremental government food subsidies, while they hardly improved in value terms when world prices fell sharply in 2009.