The key determinants of food inflation in the kingdom of Eswatini

Abstract

It is important to track food inflation from a development perspective as it is indicative of food access for the poor. Discussions on food inflation in Eswatini have gained traction due to its effects on welfare erosion of lower income groups. Eswatini is faced with a problem of periods with high food inflation which hampers food access and affordability for low income groups. Patterns of high food inflation in Eswatini persists yet the drivers of food inflation remain unknown. A thorough understanding of these drivers is the first step towards sound policy intervention related to inflation management. This study drew on literature on food inflation in other countries to identify energy and agricultural prices and inflation dynamics of key importing partners as potential drivers of food inflation. An Autoregressive Distributed Lag model was implemented to determine the key determinants of food inflation in the Kingdom of Eswatini using monthly time series data from January 2009 to January 2020. The Gregory-Hansen technique was used to test for structural breaks in the series as numerous changes related to climate and political circumstances could have impacted relationships over the long run. The Gregory-Hansen technique facilitated the identification of this which ultimately allowed for more accurate estimation. The study found that all variables considered in the study had a positive and significant effect on Eswatini’s food inflation at 5% confidence level and further unveiled that a 10% change in South African food inflation is associated with a 16.1% increase in Eswatini’s food inflation while a 10% change in global oil prices increases Eswatini’s food inflation by 56.7%. The results also revealed that a 10% change in global agricultural prices is associated with a 17.7% increase in Eswatini’s food inflation. The error correction model was used to determine the magnitude and speed of adjustment of Eswatini’s food inflation after a shock to the long-run equilibrium. The results from the error correction show that the speed of adjustment for Eswatini’s food inflation shock in the long run relationship is almost instantaneous at 96.6% per month. This suggests that food inflation in Eswatini reflects changes in global oil prices, agricultural prices and inflationary changes in South Africa fully and immediately. The Toda Yamamoto Granger causality test revealed that South African food prices granger causes food prices in Eswatini at 5% confidence interval. Based on these findings, policy interventions focusing on curbing food inflation would include ensuring the efficiency of food production and distribution in Eswatini so that exogenous shocks can be buffered by high level of local production and availability.