“I hardly have any money to pay my bus ticket to the city of Cusco. Now it costs too much to bring food to my house.” Vidal Quispe, a resident of Marampaqui.
On the 24th February, 2022, Russian troops invaded the territory of Ukraine, starting an armed conflict that has lasted more than several months. In addition to the human and material losses, the war is also causing strong effects on the economy, mainly affecting the reduction of growth expectations and an increase in inflation all over the world.
Vidal Quispe surprised with the new prices.
Vidal lives in Marampaqui, a town three hours from the city of Cusco. Here, life is calm, however the global situation has affected his already very precarious economy. The rise in prices came as a surprise to them, like a bucket of cold water. Every time he wants to travel to Cusco by bus, he has to make an effort to pay for his bus ticket. When he arrives at the Cusco market, he is even more surprised by the higher prices of basic necessities, such as chicken, sugar, oil, bread, meat, rice, noodles, etc... On his way back to Marampaqui, he realizes that his bags with the purchased products weigh very little. He nods his head and says: "this situation will make my family have to eat less than before; we will have to endure hunger".
How does war affect the economy of a country?
The effects of war are being felt in three dimensions:
- Higher inflation stemming from rising food and energy prices;
- Problems in international trade and supply chains;
- Greater uncertainty in the markets
“Russia and Ukraine are major producers of raw materials, and the disruptions have caused global prices to spike, especially for oil and natural gas. Food costs have skyrocketed; wheat, of which Ukraine and Russia export 30% of the world, has reached historical prices”, indicated the international organization International Monetary Fund (IMF).
It is warned that if this situation continues, GDP growth worldwide would fall 1 percentage point, while global inflation would increase 2.5 points.
In Turkey, there was year-on-year inflation of 54.4% in February. In Spain, inflation was close to 10% year-on-year, its highest value since 1985. And in the United States it reached 7.9% in the year, the highest figure in 40 years. In many countries around the world, inflation levels are at their highest rates in more than 30 years. International organizations announce a slowdown in growth and an increase in prices driven mainly by the rise in food and energy.
In Peru, the changes and the crisis in the global economy have had a negative effect on the increase in the prices of oil, wheat and cereals. As a consequence, we have the increase in local prices in transport and food.
The COVID-19 pandemic and the crisis
The world economic situation before the war between Russia and Ukraine was already complex. After the paralysis of the economy in 2020 as a result of the coronavirus pandemic, the sanitary restriction measures were reduced for the year 2022 and a slowdown in growth was expected. “The global economy is simultaneously facing COVID-19, inflation and policy uncertainty; public spending and monetary policies are entering uncharted territory,” said David Malpass, president of the World Bank Group, last January.
This international situation also affects the economy of the region and Peru. An IMF report maintains that in Latin America "high commodity prices are likely to significantly accelerate inflation."
In addition to the price problem, the world has delayed investment decisions in emerging countries like Peru. As for agricultural products, any increase in international prices also affects the local market.
Peru in check
The massive strikes, due to the increase in fuel costs, unfortunately left at least six dead as a consequence. The anger of the people was compounded by the discontent of farm workers, who have been hit by rising fertilizer prices, which in turn caused food prices to skyrocket. Also, exports are now affected by interruptions in chain supply.
A group of Peruvian truckers called a general strike, demanding cheaper gasoline at all costs. Drivers used their trucks to block roads, including major highways. In some regions, schools have closed and reverted to e-learning due to the COVID pandemic, fearing it would be dangerous for children to travel (if they were able to) during the unrest.
The Peruvian protests highlight the effect that the war, and the resulting price rises, are having on Latin America. The conflict could still go in any direction and there is a risk that it could worsen due to strategic failures on either side. Faced with a possible new cold war, it would be difficult for Latin America not to align itself with one side or the other, knowing that any decision will have costs and consequences.
All of this has exposed the country's economic vulnerability and triggered a wave of street manifestations, strikes and roadblocks.
When the economy was slowly recovering…
The Peruvian government has attributed the rise in fuel prices to the war in Ukraine. Peru imports most of its oil and the impact has been severe, unlike Latin American countries like Venezuela or Argentina, which have oil. To make matters worse, high fuel costs hit just as Peru's economy was beginning to recover from a pandemic that devastated the country. Peru has the highest recorded per capita COVID mortality rate in the world.
July 2022
