Food crisis may divide Middle East's oil haves, have-nots

Bloomberg | 17 May 2008

By Glen Carey and Ayesha Daya

May 18 (Bloomberg) -- The wealth gap among Middle Eastern nations may widen as countries with crude oil spend their way out of the food crisis and those without bust their budgets.

The region's powers are pursuing different approaches to defusing the tensions unleashed by the jump in the cost of staples such as rice, vegetable oils and dairy products. Egypt has forbidden the export of rice and is raising taxes to help pay for an 88 percent increase in subsidies, while Saudi Arabia can afford to lower tariffs and the United Arab Emirates is looking to buy farms as far away as Thailand.

``Oil producers can easily pay for food subsidies,'' John Sfakianakis, chief economist at Riyadh-based Saudi British Bank, said in a telephone interview. ``The countries without oil are more fiscally challenged and face public contention and discontent.''

Egyptian President Hosni Mubarak says he will raise the issue of skyrocketing food costs when he hosts world leaders including U.S. President George W. Bush as well as business executives at the Middle East's World Economic Forum starting May 18th. Economic disparities mean regional leaders are unlikely to agree on a coordinated response.

``Our entire food system is broken,'' said Carin Smaller, an agricultural trade analyst in Geneva for the Institute for Agriculture and Trade Policy. ``Some countries have to take unilateral measures now because there is not enough food on the world market. It's going to intensify the crisis.''

Clashes With Police

The issue is critical in non-oil countries like Egypt, where three people were killed last month in clashes with police during a two-day riot over climbing prices. The cost of rice, staple for half the world's population, has almost doubled in the past year, reaching a record $25.07 on April 24. Wheat prices jumped 69 percent in the same period.

Mubarak has promised to increase government salaries and added 15 million people to the country's ration-card system, ending a 20-year freeze on new memberships. Egypt also has banned rice exports from April through October.

To fund the 14 billion Egyptian pounds ($2.6 billion) needed for the salary increases, parliament approved higher taxes on fuel and cigarettes and raised duties on vehicles, which will generate 12 billion pounds.

Spending on subsidies will increase 88 percent next year to 128 billion Egyptian pounds, or 39 percent of the government budget -- at a time when the current budget deficit is 6.9 percent of gross domestic product.

Food Subsidies

``The problem is Egypt doesn't have the money to pay for food subsidies,'' said Simon Kitchen, an economist and strategist at Cairo-based EFG-Hermes.

In Saudi Arabia, which has an economy three times the size of Egypt's and a third its population of 81.7 million, the government cut duties on wheat imports and lowered tariffs to 5 percent on frozen chicken, eggs, vegetable oil and canned food. That cost 6 billion riyals ($1.6 billion) a year in revenue, Okaz newspaper reported on April 3. Saudi Arabia, the world's largest oil exporter, is also planning to boost welfare payments and acquire farms abroad.

The U.A.E., which stashed away about $875 billion in its sovereign wealth fund as oil more than quadrupled, is considering purchasing farms in Cambodia, Thailand and Africa because ``the weather doesn't help us grow items in the country,'' Mohammed Ahmed bin Abdul Aziz, undersecretary of the Planning Sector at the Ministry of Economy, said in a May 13 interview.

Bought the Farm

``Buying farms is not a bad thing,'' Panos Konandreas, acting director of the UN Food and Agriculture Organization in Geneva, said in a telephone interview. ``If you are like Saudi Arabia and have all the resources in the world, you can help farms optimize their strategies and there will be more production.''

Higher prices have led to record levels of inflation throughout the Gulf and oil producing states have been under pressure to follow Kuwait and drop their currencies' dollar pegs to help slow price increases. All have kept the links, citing the need to keep currencies fixed until they form a monetary union in 2010.

Food scarcity in the Middle East, the world's largest wheat importer, is expected to be a key subject of discussion at the forum though it is not on the formal agenda, said Daniel Davies, head of the forum's Middle East program. Those attending include European Union Trade Commissioner Peter Mandelson, World Bank President Robert Zoellick and U.S. trade negotiator Susan Schwab.

The increased trade restrictions and subsidies come as Middle Eastern countries have been opening their economies to global trade. Saudi Arabia joined the World Trade Organization in December 2005, Bahrain signed a free trade agreement with the U.S. in 2004, and Egypt has been cutting duties as it seeks a similar accord with the U.S.

``Countries are overreacting by imposing bans on exports or over-importing and hoarding food, which pushes prices higher,'' Konandreas said.

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