Rise in food prices puts pressure on fiscal policy

Rise in food prices puts pressure on fiscal policy
By Nadim Kawach on Friday, March 21 , 2008

A surge in global food prices has put pressure on the fiscal balance of Gulf oil producers and complicated their efforts to stem inflation given their heavy reliance on farm imports, according to official data.

Without heavy government subsidies, higher food prices will remain a key factor in soaring inflation rates in the Gulf Co-operation Council (GCC) along with a surge in rents, high public spending and excessive domestic liquidity.

Official figures showed food prices have jumped by four to 10 per cent in the GCC over the past three years mainly as a result of soaring farm costs in many countries that are considered a key source for GCC food supplies.

“Over the past year, prices of some food products have risen substantially. For many economies, food represents a significant share of export receipts or import payments. Thus, higher food prices can have a significant impact on a country’s net trade balances,” the International Monetary Fund said.

It said some food-exporting countries in the Western Hemisphere – such as Argentina, Bolivia, and Chile – and in southern Africa – such as South Africa, Namibia, and Swaziland – have benefited from higher food prices since 2002.

However, many of the poorer regions of Africa and a number of countries in Asia as well as in the Middle East are net losers, the IMF said in a study.

Higher global food prices put upward pressure on the cost of living, both directly and through their potential impact on non-food prices. Average domestic food price inflation [defined as the purchasing-power-parity weighted aggregate of an individual country’s domestic food price inflation] rose to about 4.5 per cent in the first four months of 2007 from about three per cent over the same period in 2006. The figure is more than nine per cent for developing countries.

Experts said the surge in food prices constituted a major obstacle for the GCC’s efforts to tackle inflation as farm imports account for a large part of the group’s total imports. The foodstuff’s relative weight in the consumer price index (CPI) in some members is as high as 25 per cent, which means any increase in food prices will have a heavy impact on total inflation.

In Saudi Arabia, by far the largest and most populous GCC member, food prices surged by 5.6 per cent in 2006 and 7.1 per cent in 2007.

The increase, along with a steady rise in rents and prices of other items, increased the Kingdom’s inflation rate to its highest annual average of 4.1 per cent in 2007.

The continuous increase in food prices in Saudi Arabia, the world’s top oil exporter, has given rise to smuggling of some foodstuffs and manipulation by traders to influence prices and net higher profits.

On Wednesday, the official media reported that Saudi Arabia’s new Trade Minister Abdullah Zainal formed a committee to study the price increase after meeting representatives of food traders.

He said the committee would consider measures to halt smuggling and manipulation and curb price increases. In the UAE, the largest importer in the Middle East, food prices soared by 5.5 per cent in 2006 and eight per cent in 2007, according to the Central Bank.

Economists said this surge was one of the main causes of inflation along with high rents as foodstuff and beverage is the second largest component of the country’s consumer price index, with a relative weight of 14.4 per cent.

Central Bank figures in other GCC members also showed sharp increases in food prices, which shot up by at least seven per cent in Qatar last year, 6.8 per cent in Kuwait and 10.8 per cent in Oman.

“There are a host of factors responsible for the inflation problem in the GCC and the surge in food prices is one of the main factors,” a UAE bank manager said.

“While member states can deal with the other factors, including high public spending, excess liquidity and a surge in local rents, I do not see how they will deal with the food price problem as it is an international problem unless of course they will introduce heavy subsidies. But as you know, subsidies are only a temporary solution and they will also be a big burden on the budget. The main problem is that the GCC countries receive most of their food through imports.” GCC states are among the largest food importers in the world given their poor farm potential due to their desert nature.

The bulk of their food imports come from outside the Arab region, including the United States and other countries.

Official Arab figures showed the GCC’s combined farm imports peaked at around $46.29 billion (Dh169.8bn) during 2005-2007.

They accounted for around 45 per cent of the total Arab food import value of $102bn although the population of the six members of around 35 million does not exceed 11 per cent of the total Arab population. A breakdown showed Saudi Arabia was the largest Arab food importer, with a value of $26bn during 2005-2007. Imports by the UAE totalled $9.3bn, while they stood at $4.5bn in Oman, $4.3bn in Kuwait, $1.4bn in Bahrain and around $790 million in Qatar.




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