India, Pakistan and Egypt would be hardest hit by the rise in food costs, with a general government deficits of 5.9 per cent, 6.5 per cent, and 6.9 per cent of GDP respectively, projected for 2008, says a Standard & Poors report.

India, Pakistan and Sri Lanka, having revenue at less than 20 per cent of their GDP, have put these economies in precarious position of large deficits and narrow underlying revenue bases, the report added.

It said, even developed countries are vulnerable to food-price inflation and susceptible to increased political instability if there is a mismatch between higher revenues from food exports or domestic supply.

“Although global food price rise in itself is unlikely to be direct cause of adverse rating action, for many sovereigns it will significantly increase overall susceptibility to negative rating movements by exacerbating already weak external and fiscal positions, or through potential for political and social unrest,” S&P Sovereigns and International Public Finance Ratings group’s Agost Benard said.

The other main pressure points would be on fiscal balances, which would likely be from both the expenditure and the revenue side, it said.

Subsidies for staple foods are common in many nations in the lower and middle-income ranges, and in many cases governments derive significant revenues from sales taxes and import tariffs on food.

Higher food prices would, therefore, result in higher subsidy expenditure while foregone revenues from reduced or discontinued taxes and import tariffs on food would further compress often already narrow revenue bases.

“Governments around the world will need to bring about significant investment in agriculture and infrastructure to address the problem long term, which, for low-income sovereigns, could mean more recourse to borrowing or increase in aid,” Benard pointed out.

While steps such as increased subsidies and export bans would contain political fallout, they come at a cost of additional fiscal and external pressures, which in many cases would be unsustainable.