Across the Middle East and North Africa, price rises are disturbing the efficient movements of the market, drawing the attention of governments to intervene, and harming the average consumer in the process. While nobody in the region is particularly fond of inflation, the causes and effects of it cannot be ignored and must be studied in a regional and global context. Many variables, including a growing appetite for commodities and natural resources by the developing world, a weak dollar to which many regional economies are pegged and tremendous growth rates of most economies in the region, are to blame.
Consumers, businessmen, and central bankers alike are feeling the squeeze as the economics of prices are spilling onto the domestic scene of many countries. Citizens in the Gulf stand to benefit, or at least enjoy some respite, from the economic solution their governments know best: public handouts in the form of further stipends and allowances.
While these sort of archaic practices remain as questionable in theory as in practice, governments are trying to stave off the sort of disenfranchised public rioting that’s been seem in the streets from the Levant to North Africa. As MENA countries continue to experiment with development strategies for their economies, they must combat the devil of rising prices.
Inflation gaining momentum in the MENA region
Although inflation has many experts, it has even more variables, which is why the context in which it is occurring in the region is further exacerbated by the inherent disparities between economies. From conflict-ridden Lebanon, to the resource-rich countries of the Gulf Cooperation Council (GCC), to Maghrebis faced with lower purchasing power, the drivers of inflation are shared at the international level, but diverge at the domestic level.
Globally, a slew of resource-hungry developing countries are pushing up international prices for basic commodities, including energy resources like oil and natural gas. As the newcomers continue to develop, they will demand goods at faster rates than produced in the past, leading to price increases as demand overshadows supply. As the developers in Africa and Asia purchase more building and energy materials, the MENA region will have to face the challenge of acquiring goods at decent prices.
A weak dollar is another culprit for global price rises, especially for a region in which many countries maintain a greenback peg. For the resource-rich Gulf, selling oil in dollars to then purchase goods in Euros will be all the more expensive as the dollar continues its slide relative to the EU currency.
The flame feeding the outstanding economic growth rates of Gulf countries is not so revered when observed through an inflation-adjusted lens. While double-digit growth remains the highlight of countries in the peninsula, the inflationary menace lurks deep inside the structures of industries essential to the region’s growth and development. As inflation continues to pick away at the Gulf’s economic growth, it also poses a threat to regional adhesion to the monetary union planned for Gulf Cooperation Council countries in 2010.
In February, Dubai’s Chamber of Commerce and Industry (DCCI) warned that GCC member states might be unable to meet the set inflation criteria necessary to form a union as housing shortages and rising import costs maintain inflationary pressure. The criterion specifies a 2% rate as the maximum allowed for the average of the three years in which inflation appeared the least. According to data from the International Monetary Fund (IMF), only Kuwait, Oman, and Saudi Arabia fit the criteria from 2003 to 2008 figures, but even they may not be able to stave off incredible price rises for long.
Abandoning the greenback
One step other GCC economies might opt for is switching from the greenback peg to a mixture of currencies more equitable with the Euro and possibly even a currency linked to the commodity in which they specialize: oil and natural gas. Egyptian-based investment bank EFG-Hermes forecasted a 60% possibility that central banks will reform their currencies in 2008 to fulfill one of their main goals of price stability.
But not all Gulf central bankers are likely to follow suit. On the converse, maintaining a weak currency peg is inherently attractive to foreign investors as well a country’s exporters, both of which allow a country to offset inflation. Hamood Sangour Al-Zadjali, governor of the Central Bank of Oman, ruled out revaluing his country’s rial from the US dollar for just those reasons.
Nevertheless, the currency peg usually only highlights the disparity between international currencies, but fails to mention the steps central banks must take to maintain the momentum of the US Federal Reserve. When the Fed tackles its own domestic troubles and attempts to spur economic growth through interest rate cuts, GCC economies are forced to follow suit as long as they remain pegged; however, rate cuts are the last thing Gulf economies need when some are reaching double digit inflation.
For many Gulf central banks the only move to combat inflation is to raise the reserve requirement, the rate at which banks borrow money. By keeping more money in their vaults they are able to dampen money supply growth and future inflationary pressure because less money is chasing around the same amount of dollars. Saudi Arabia pursued two increases in the reserve requirement in two months to stave off inflation higher than the current 7%. According to an interview with Reuters, Saudi Arabia’s Central Bank Governor believes that “inflation will decline in the second half of this year after it peaks in the first half,” hoping that “recent government measures [handouts in addition to central bank moves] will have the greatest effect on inflation in the second half which will contribute to stabilizing inflation, keeping it close to its levels in 2007.”
Kuwait is usually held as the prime example of moving away from a dollar peg. In May 2007, the country revalued its currency to the dollar amid a weakening greenback. However, Nassib Ghobril, Head of Economic Research at Byblos Bank, believes that “it has not solved the problem.” Instead he pointed to economic growth slowing in industrialized countries and the decrease that global demand should experience, which will in turn reduce inflationary pressures.
How high can it go?
While the GCC countries continue to erect skylines in the desert, inflation is climbing along with it as the region’s building boom is nowhere near catching up with demand, leading to demand-driven inflation. In Qatar, the General Secretariat for Development Planning indicated that rent and utility prices rose by 28% in the fourth quarter of 2008, similar to prior performance, but much higher than other components in the inflation-watchers price basket. In Abu Dhabi, the National Bank reported that rents in the emirate rose by 19% last year and accounted for 61.8% of Abu Dhabi’s total inflation.
As downstream industries like cement and other building supplies face price increases from heightened demand in developing countries, tenants and owners are facing not only the stiffening competition from supply constraints, but from inflation in basic materials leading to projects which are more costly.
Dubai’s ruler Sheikh Mohammed bin Rashid Al-Maktoum issued a verdict aimed at lifting custom duties on cement and steel to control inflation in building materials costs. In-country suppliers to the UAE are facing a tough time keeping pace with the emirate’s demand, which has led to further delays in construction projects.
Government response to housing inflation remains mixed, but all countries seem to favor some general blend of economic steps aimed at easing the in-country price climate like price controls in addition to welfare measures like increased stipends or money from the government.
Qatar decided to freeze rent increases for the next two years to ease inflationary pressure in its housing sector. The move is expected to “shave off roughly 40% of the
annual inflation figure,” according to Giyas Gokkent, Head of Research at National Bank of Abu Dhabi.
Other attempts by regional governments, including the UAE, to cap rent increases have yielded little results because the legislation applied to existing contracts, but failed to even mention any application of the law to future contracts as tenants fill the apartments build as part of the Gulf’s construction boom. For 2008 rent increases were capped at 5%, down from 7% in 2007.
Handouts
To offset the price rises on the pockets of its citizens, many Gulf countries are turning to handouts to compensate lost purchasing power. Kuwait plans to spend $3.7 billion on a cost-of-living allowance scheme for Kuwaitis. Around 430,000 Kuwaiti workers and pensioners will receive the allowances, amounting to a real wage increase between 15% and 133%. Bahrain is also pursuing welfare measures aimed at improving the situation of those most affected by price increases. A $106 million payout was approved during March whereby low-income families will receive $133 each month.
A UAE plan to give citizens discounts on certain foods, gasoline, and fuel at government-operated cooperative supermarkets to offset inflation is also in the works. In an interview with Reuters, Jamal Al-Saeedi, Executive Manager of the Emirates Society for Consumer Protection, stated “There is too much inflation and it is hitting households. People cannot live without these items so we are looking for a way to reduce the costs.” The UAE’s federal employees also benefited from a 70% salary raises at the beginning of the year.
Although handouts do not signify a government strong on tackling inflation at its roots, they do have some merit in economies where price hikes are hitting people in the stomach. UAE fast food chains KFC, Pizza Hut, and Hardees all reported average monthly price increase of 10%, while Burger King reported 15-30% increases.
Price caps and agflation
Retailers are also experiencing the pressure of inflation through a mixture of supply worries and maintaining competitiveness, but also government intervention in setting price caps. In the United Arab Emirates (UAE), retailers have responded negatively to a government edict to cap prices for basic consumer goods, including food and water. Caught between receiving a $2,700 fine for selling above the set price to a $5,450 fee for hoarding products, retailers are worried that they will not be able to guarantee the supply of some products for long.
Oman has also called for price caps on food sales. According to Khalil bin Abdullah Al-Khonji, Chairman of Oman’s Chamber of Commerce and Industry, “the idea is to cater to the needs of the lower middle class and those sections of society for whom the slightest price can cause a major dent in their budget.”
Although some understand that agflation – a term given to agricultural inflation – contributes largely to the rise in food prices, many have turned once again to their government to offer protection either in the form of pay raises or subsidies.
Marcus Marktanner, professor at the American University of Beirut’s Institute of Financial Economics, believes that not much can be done by policy makers to ameliorate inflation. Playing with price ceilings and alternative rationing “has little effect if the price shock is long term. The damage that messing around with the price mechanism causes to allocation efficiency regularly outweighs its social benefits.”
The Levant’s experience
Discussing inflation in the context of Lebanon makes for a hybrid case mixing textbook economics with the tough experiences of dealing with continued conflict and instability. Led in recent years by Lebanon’s Central Bank and its sage Riad Salameh, who has averted a country-wide financial disaster numerous times, this small state was doing well until the Summer 2006 War with Israel. Coupled with the country’s need to import energy at high costs, as well as maintaining the Lebanese Lira’s peg to the dollar, “the consequences of war led to higher inflation for 2006 and carried over into 2007,” according to Ghobril. The country’s trade deficit is further exacerbated by the rising Euro, which is making imports more expensive.
Ghobril also noted the problems of measuring inflation in Lebanon. With the Central Administration for Statistics issuing quarterly figures, the Central Bank issuing only end-of-year figures, and the Consultation and Research Institute studying the situation monthly, the country relies on international organizations like the IMF and the World Bank to maintain its numbers. Trying to weed through the several possible figures for 2007 ranging from 6% to 15%, Ghobril believes that “frankly the increasing prices have been manifested in the last quarter of last year and so far this year.”
According to Edward Gardner, the IMF’s Senior Resident Representative in Lebanon, the fund relies “on the consumer price index used by the Banque du Liban, largely because it affords a common frame of analysis with the authorities. This index suggests that consumer prices rose by nearly 6% by end-2007, with about half of the increase in the index originating from higher food prices.”
Ghobril believes that “there is not a lot [the government] can do” to combat inflation. Noting the global nature of the problem, he thinks that Lebanon is in a better situation that many of its regional neighbors, including those in the Gulf and in North Africa. Calls from Lebanese industrialists for local consumption should be heeded as local production can be consumed at cheaper prices than imports coming from Europe.
Gardner concurs that “there is very little the Lebanese authorities can do to counter global trends. By reducing gasoline excises – at a considerable fiscal cost – the government has moderated the impact of higher international fuel prices on consumers and CPI inflation,” adding that, “with gasoline excises now near zero, the government’s room for manoeuvre has been exhausted.” On the monetary side, Lebanon’s peg to the dollar “provides this anchoring role” of preventing a price-wage spiral.
Jordan, another small state whose economy depends on international currents, is facing rising food and fuel prices, both of which are being experienced across the globe and attributable to international factors. In addition to these international causes, the 700,000 Iraqi refugees living in Jordan are increasing demand as well.
According to Rasha Manna, Vice President of Research at Jordinvest, “another inflationary factor is the lifting of fuel subsidies from the government. They have been phasing out oil subsidies for some time, which were abolished completely in February 2008.” A recently-published study from the Ministry of Industry and Trade shows the effect of fuel prices on production cost. It seems that in around 90% of factories, fuel represents only about 10% of expenses. Of course this figure varies from one industry to the other, in cement accounting for up to 40% of expenses.
Inflating North Africa
West of the Levant, inflation continues to take its toll, but for the economies experiencing the gravest effects – Algeria, Egypt, and Morocco – the high prices cannot be attributed to small statehood as in the case of Lebanon, or bountiful riches, as is the case in the Gulf.
Egypt’s urban consumer price index, fuelled by food and beverage inflation, hit an eleven month high in February with a year-on-year growth of 12.1%, up from 10.5% in January. The 16.8% inflation in food and beverage prices was largely attributed to a 26.5% rise in the prices of bread and grain, as well as 20.1% increase in dairy prices. The country’s inflation stems mostly from international price rises on imported products, including supply constrains on domestic production. As the country is not tied to the US dollar, Egypt’s central bank raised its interest rates in February to combat price rises after having held the rate steady for a year.
Algeria’s inflation rate is on par with Egypt’s and has hit double digits in the past year, although the government continues to maintain 3.5% as the official inflation number. Algeria’s inflation is linked to the prices of several heavily consumed products, including milk and cereals, which Algeria imports in large amounts.
According to Algeria’s National Statistics Office, inflation hit 3.5% in 2007 against 2.5% in 2006, but independent research groups, like Casey Research, believes the figures do not reflect reality. Recently oil, milk, and other products have doubled in price, and although imported inflation is a worry for most North African countries, Algeria’s own products have also faced inflationary pressure, with apples, for example, increasing in price by 50%.
The government remains steadfast and Said Barakat, Algeria’s Minister of Agriculture, blamed “speculation” for the price increases. In addition to ascribe responsibility to the private sector, Algeria’s Minister of Commerce also shouldered some of the blame, but retorted that, with only 3,000 price controllers to oversee one million suppliers, his task to maintain prices is impossible. With imports rising to $27 billion in 2007, against $21 billion in 2006, Algeria’s inflation will continue to be affected by cereals and basic foodstuff imports.
Morocco
The price explosion many Moroccans witnessed in early 2008 for basic necessities came as a surprise and adversely impacted the purchasing power for many. Consumer protection associations came to denounce the inflationary spiral while the Moroccan government assure them that the situation is manageable.
Mohammed Belmadi, President of the National League of Consumer Protection, said in an interview that “the reason for increased costs of living is attributed to the index of consumer prices and the dizzying rise is has undergone in the past three months.” Prices have risen by up to 50% and the long list of costlier items is not limited to food but also includes transportation, health care, medicine, school supplies, clothing, housing, water, electricity, and cleaning products, among others things.
On the issue of distribution and supply chains in the country, Belmadi noted that “logistics are badly supervised and poorly structured, stressing the need for price controls to preserve the purchasing power of citizens.” He pointed out that “In addition to the controls, it is important to reduce supply costs from imports, consolidate small shopkeepers to centralize purchases, and diversify supply sources.” The goal, he said, “is to ensure that consumer rights and business competitiveness are protected through constant support to efforts aimed at promoting quality and safety.”
Nizar Baraka, Delegate Minister of Economic Affairs, painted a reassuring picture when he asserted that “the government has taken financial and fiscal measures to cope with the price increases on the international scale, avoiding their impact on the national market and preserving the purchasing power of citizens.”
Speaking at a government council to explain the current price situation, the minister cited increases in the budget for the compensation fund from $1.78 billion in 2007 to $2.74 billion in 2008, which will go towards subsidizing wheat for the first time, abolishing tariffs on wheat and the elimination or decrease of certain taxes on consumer products. Thanks to these measures, Baraka noted, “no increase in the prices of subsidized products had been recorded, rising prices for some unsubsidized commodities was halted, and the rate of inflation fell to under 2% in 2007 while general living cost have been on the decline since last October.”
For his part, Abdellatif Jouahri, Governor of the Central Bank, noted that “the main uncertainties are inherent in perspective of the evolution of production and income, and the pursuit of rapid growth and bank credit. Similarly, the downward pressure on the dollar had a significant impact on financial portfolios, which could result in greater volatility of capital flows.”
Where to go?
With strikes and riots in the Gulf, injuries and deaths at bread stations in Egypt, and a general, MENA-wide sense that prices for basic commodities are rapidly increasing, it can only be hoped that the various policies by the regional authorities are having the desired effects. In the end, the biggest threats to stability are not revolutionaries, Islamist or otherwise, but a populace that feels the government is not playing its part in the ‘moral economy’ — guaranteeing affordable provision for the masses of the basic commodities: food, shelter and heating.
