Chapter 4


food consumption. It must be assumed that the high price elasticities of food demand of low-
income households imply that a price increase in staple foods or essential supplementary
food items will result in an overall decline in the volume of food demand and food
consumption by low-income groups.

3.4 Impact on national and household food security

After having analysed the effects of an exchange rate devaluation on the critical factors
determining food supply and demand, we summarise the effects and draw some major
conclusions as to the likely impact of a currency devaluation on the state of aggregate
national as well as household food security.

3.4.1 Effects on the aggregate national food situation

The impact of a devaluation on the aggregate national food situation is the result of the
supply and demand response to the increase in domestic food prices, induced by the
devaluation, and the depressing effect on food imports resulting from the exchange rate-
price-market mechanism. The effects are illustrated in Figure 4.4 (for conceptual background
see Annex 1).

 Figure 4.4: Impact of a devaluation on the aggregate food situation

 price requirements


 demand I production
 /domestic supply







 B
 p------- -------- --- ^ new
 p----------- ------------------------- total supply
 I :* I-> volume
 pr pr' s' s R

 As a result of the devaluation, the internal market price of food (tradables) rises. The price
 increase affects food supplies from domestic production as well as food demand. Point A
 shows the market equilibrium situation before, point B after the devaluation. In situation A,
 the domestic market price is p (equalling the world market price, expressed in local currency
 before devaluation, see Annex 2B for explanation), the volume of domestic production is pr,
 the volume of food supplies is s, and the balance (s-pr) is imported. In this situation, the
 aggregate production deficit amounts to R-pr, and the supply and demand deficits amount to
 R-s.


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