International Journal of Computer Science and

International Journal of Computer Science and Management Research

Vol 2 Issue 1 January 2013 ISSN 2278-733X

Rising food prices in Saudi Arabia By Dr. Riyazuddin Qureshi Assistant Professor & Head of the Department Department of Business Administration Jazan Community College, Jazan University, Jazan Kingdom of Saudi Arabia Mobile: +966-541255843

Keywords: Food prices, inflation, open-market economy, trading partner, riyal, pegged, US dollar, recession, fiscal cliff.

ABSTRACT Food prices play a major role in setting inflation rates, and in recent years’ global climatic conditions has worsened a lot while global demand is increasing due to the growth of the middle class in countries such as China and India. Rising food prices remains a key concern for the government of Saudi Arabia. Saudi Arabia remains vulnerable to increases in food prices due to its high dependence on imports. The Saudi economy is an open-market based economy which is reflected by data of foreign trade with trading partners of the Kingdom. High degree of economic openness of a country causes the domestic inflation rate to be affected by change in the prices of goods in the country of origin. Saudi government is facing the challenge of limiting inflation amid a spike in global food prices. Another major challenge to the effectiveness of the Saudi monetary policy is the lack of autonomy due to the pegged exchange rate system with the US dollar. This paper attempts to study the market dynamics of the kingdom of Saudi Arabia, drivers responsible for inflation and measures that has been taken by the government to deal with the situation.

Dr. Riyazuddin Qureshi

Introduction Inflation is steady increase in the prices of goods and services in a country, usually measured in terms of a specific annual percentage. This decreases the purchasing power of currency by reducing the amount of goods or services a person can get for the same amount of money. There are many different possible causes for inflation. Saudi Arabia remains vulnerable to increases in food prices due to its high dependence on imports. In its new report analyzing the impact of higher global food prices on the Saudi Arabian food sector, NCB Capital believes that the inability to fully pass on higher costs to consumers will exert pressure on the margins of food companies. A sharp increase in food prices; globally, is being registered since the year 2007-08 due to various structural reasons including growing demand, increased use of crops for bio-fuels and falling efficiency gains in terms of land

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International Journal of Computer Science and Management Research 2013 use. Although it is expected that food prices may fall but analysts believe over the longer term, inflation will be the norm. The Food and Agriculture Organization (FAO) believes that the prices of soft commodities over the coming decade will be on average upto 15-30% higher than over the past decade.

Vol 2 Issue 1 January ISSN 2278-733X

about 43 percent of the size of the cost of living basket, registered inflation rates higher than the averages they recorded in the previous five years. The goods and other services increased by 8.8 percent, the transport and telecommunications by 2.2 percent, the group of education and entertainment by 2.2 percent, the group of fabrics, clothing and footwear by 1.1 percent as compared to the average during the past five years.

Saudi Arabia depends significantly on imports to meet its food requirements with food imports set to more than double to SR132bn by 2020 from SR63bn in 2010. The reliance on imports is set to remain given that domestic production is restricted due to the scarcity of water and unfavorable weather conditions. Thus, rising food prices remains a key concern for Saudi Arabian food companies due to their exposure and reliance on this as a key raw material.

On the other hand, the other main groups that comprise the general cost of living index registered inflation rates lower than the averages recorded during the previous five years. The group of renovation, rent, fuel and water rose by 7.9 percent, the group of medical care by 0.5 percent. Lastly, the group of furnishing went up by 1.4 percent (Table 1) and most importantly the group of food and beverages by 4.8 percent which alone constitutes highest percentage of the size of the cost of living index.

Inflation in Saudi Arabia During the period starting with April 2011 – March 2012, four main groups, representing

Table 1: Change in the General Cost of Living Index and its Major Groups (%) Volume (relative impor tance)

General Index Food and Beverages Fabrics, clothing and footwear Renovation, rent, fuel & water Home furnishing Medical care Transport & telecommunication Education & entertainment Other goods & services

100 26 8 18 11 2 16 6 13

Average of Inflation level for the period Apr 2006 to Mar 2011 5.5 7.0 -0.6 10.5 4.1 2.4 -0.2 1.0 7.3

Average For the period Apr 2011 to Mar 2012

5.1 4.8 1.1 7.9 1.4 0.5 2.2 2.2 8.8

Ranking of Components On the basis Of Avg. for The period April 2011 To Mar 2012

3 2

1

Source: Central Department of Statistics and Information

The above Table 1: gives us a clear picture of how food and beverages secure 3rd position for highest in the cost of living index. Dr. Riyazuddin Qureshi

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International Journal of Computer Science and Management Research 2013


Table 2: Comparison of Inflation Rates in Some Countries (Annual Percent Change) Country Bahrain Brazil China Egypt India Jordan Kuwait Oman Qatar Saudi Arabia Turkey United Arab Emirates Venezuela

2004 2.2 6.6 3.9 8.1 3.9 3.4 1.3 0.7 6.8 0.4 8.6 5.0

2005 2.6 6.9 1.8 8.8 4.0 3.5 4.1 1.9 8.8 0.6 8.2 6.2

2006 2.0 4.2 1.5 4.2 6.3 6.3 3.1 3.4 11.8 2.2 9.6 9.3

2007 3.3 3.6 4.8 11.0 6.4 4.7 5.5 5.9 13.8 4.1 8.8 11.1

2008 3.5 5.7 5.9 11.7 8.3 13.9 10.6 12.6 15.0 9.9 10.4 12.3

2009 2.8 4.9 -0.7 16.2 10.9 -0.7 4.0 3.5 -4.9 5.1 6.3 1.6

2010 2.0 5.0 3.3 11.7 12.0 5.0 4.1 3.3 -2.4 5.3 8.6 0.9

*2011 1.0 6.6 5.5 11.1 10.6 5.4 6.2 3.8 2.3 5.0 6.0 2.5

Average 2.4 5.4 3.3 10.4 7.8 5.2 4.9 4.4 6.4 4.1 8.3 6.1

21.7

16.0

13.7

18.7

30.4

27.1

28.2

25.8

22.7

*Estimated Data Source: International Monetary Fund, World Economic Outlook Database, Apr 2012.

The above comparison shown in Table 2, of thirteen (13) countries presents a clear scene of inflation rates. In this ranking made on the basis of ‘Average’, Saudi Arabia stands at eleventh (11) position which is third from the bottom i.e. low. Considering the average for past eight (8) years i.e. (4.1) it can be very well said that Saudi Arabia succeeded in maintaining low inflation rate. This situation is quite impressive when one of its major importers – India, registered a very high average of inflation rate i.e. (7.8).

The Saudi economy is an open-market based economy which is reflected by data of foreign trade with trading partners of the Kingdom. High degree of economic openness of a country causes the domestic inflation rate to be affected by change in the prices of goods in the country of origin. Table (3) shows the values of the Kingdom’s imports from major trading partners during 2011. The inflation rate in the People's Republic of China (PRC) increased by 5.5 percent in 2011 compared to 0.4 percent in 2000. The relative share of the Kingdom’s imports from PRC increased to 4.0 percent in 2000 to 13.9 percent in 2011, amounting to SR 58.3 billion. The relative share of the Kingdom’s imports from India also figured up by 2.8 percent in 2000 to 3.5 percent in 2011 and stood at SR 14.7 billion. India witnessed higher inflationary pressures especially during the last three years, with the inflation rate reaching 10.9 percent in 2011 due to higher domestic consumption. Data of the IMF (World Economy Outlook, April 2012) indicate higher inflation rates in the Kingdom's trading partners during 2011 compared to 2010.

The Saudi Economy – Trading Partners’ & Inflation In recent days much hyped stories of inflation in the kingdom were being published by the local as well as international media (both print and electronic). The economist accused national production companies for rising chicken prices in the kingdom. On the contrary, according to a United Nation’s report food prices rose globally. This was attributed to one of the worst droughts in more than 50 years in the US alongwith drought in Russia and other Black Sea exporting countries.


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Table 3: Sources of the Kingdom’s Imports and Inflation Rates Country United States Japan Republic of China United Kingdom South Korea India Australia Euro Zone Countries of which : Germany Italy France Other countries Total

Imports (Million Riyals) 2011* 2000

(%) Share of Imports 2000 2011*

Inflation Rate (%) 2000 2011*

21802 11837 4485

53857 26503 58301

19.3 10.5 4.0

12.9 6.3 13.9

3.4 -0.7 0.4

3.0 -0.4 5.5

7308

12158

6.5

2.9

0.9

4.5

3846 3132 2907 26878

26782 14732 5530 81993

3.4 2.8 2.6 23.7

6.4 3.5 1.3 19.6

2.3 4.0 4.5 2.2

4.5 10.6 3.5 2.5

9164 4698 4675 31045

29808 15589 13761 139186

8.1 4.1 4.1 27.4

7.1 3.7 3.3 33.2

1.4 2.6 1.8

2.2 2.6 2.1

113240

419042

*Provisional Data Source: Central Department of Statistics and Information, World Economic Outlook Database, Sept 2011 – IMF

Imported Inflation – ‘Fiscal Cliff’ The US is sailing on rough seas. Growing rate of unemployment, natural calamities, budget cuts and recession have been proving major impediments in the growth cycle of the US. The very latest warning by the US Federal Reserve Chairman, Ben Bernanke, highly demands to avert ‘fiscal cliff’. His prediction that the current unemployment rate of 7.7 will be quite difficult to be curtailed to the highly needed 6.5 till the year 2015, explains the intensity of the problem. Analysts’ are anticipating that the year 2013 will be rough for the economy. Some forecast that the consumer in the US will have to face food inflation rise from 3% to 4%, and some predict that the US will face ‘hyperinflation’ in the year 2013. The IMF’s extensive research reveals that higher prices of imported goods have a direct and rapid bearing on domestic prices in Saudi Arabia. Under such circumstances the Saudi riyal’s peg to the US dollar is importing inflation in the Kingdom. Dr. Riyazuddin Qureshi

Government spending on the development of the Kingdom Year 2011, was marked by a substantial increase in government spending. Following King Abdullah’s announcement of two extrabudgetary packages in February and March, respectively, overall government spending rose some 23 percent last year. Civil servants were awarded two extra months’ salary payments in March. King Abdullah’s concern for the unemployed Saudi youth attracted a huge financial package alongwith social security safety nets set to target lower-income Saudis. Funds were also allocated to write off debts of deceased borrowers and prisoners. In recent years a handsome number of universities, colleges, hospitals and housing projects have been taken up by the government of Saudi Arabia. To name a few: 1251

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International Journal of Computer Science and Management Research 2013 1. Foreign Investments jump $ 34 Bn in six (6) years. 2. Over 1,00,000 young Saudis are on scholarships overseas. 3. Hotel and Tourism industry is booming in the Kingdom. It is estimated that by the year 2020 total investment in this industry would reach SR 97.5 billion. 4. Mega project providing 6000 homes worth SR 6 billion for the displaced of Jazan region. 5. Government spends SR 5.5 billion annually on the jobless. 6. Aggressive and reckless car driving by the Saudi youth makes Saudi roads the world’s most dangerous roads. A


record high of 19.1 deaths a day on average costs Saudi government SR 6 billion per year to provide preventive measures to avoid these accidents. Additional SR 250 million per year is spent on medical care for those injured in these accidents. 7. Contracts worth SR 2.68 billion were signed to carry out a number of university projects. Table 4, gives an idea about percentage of government expenditure during the year 2005 to 2011. It is observed that the percentage increased prominently in the year 2011.

Table 4: Most Significant Factors Affecting the Inflation Rate in the Kingdom Money Supply Govt. Expenditure GDP Growth Rate: - Private Sector - Govt. Sector

2005 11.6 21.5 2.80 7.8 12.5

2006 19.3 13.5 0.81 7.9 10.7

2007 19.6 18.5 .81 8.3 3.1

2008 17.6 11.5 2.8. 8.7 5.4

2009 10.7 14.7 -2081 3.1 13.6

2010 5.0 9.6 19.7 8.6 9.6

2011 13.3 26.4 2.82 14.2 14.5

(-) Not Available. Source: SAMA, Ministry of Finance and Central Department of Statistics and Information

pricing the subsidized commodity higher than the profit margin specified by the Council of Ministers. Finally, the Saudi government has been providing subsidies to food companies to mitigate higher raw material costs. Such subsidies provide some respite, but are inadequate to completely absorb higher raw material prices. This exerts pressure on margins of food companies in coming years.

Government initiatives to control inflation Saudi government faces the challenge of limiting inflation amid a spike in global food prices. Food prices account for a 26% weight in the consumer price index used to measure inflation in the Kingdom, thus any increase in food prices substantially impacts overall inflation in Saudi Arabia. The government has undertaken different measures to counter these challenges.

Conclusion

The Saudi government has been actively tracking retail prices of key food products such as barley, milk, wheat, sugar and flour. This is done by continuous inspections and imposition of penalties on retailers that increase prices without a valid reason. Also, in May 2011, the government penalized 10 barley importers for Dr. Riyazuddin Qureshi

The government of the Kingdom of Saudi Arabia is been zealously taking utmost care of the interests of Saudi citizens. A huge amount of its annual budget is allocated to the sectors which in real sense are growth drivers i.e. the Education (Primary till Higher & Research), Health, the basic amenities and National 1252

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6. “Jobless costs SR 5.5 bn yearly”, Wednesday, 28 March 2012, Jumada I 6, 1433, http://arabnews.com/saudiarabia/article5 99359.ece 7. “Experts rate Saudi roads as among the world’s most dangerous”, Thursday, 8 November 2012, Dhulhijjah 23, 1433, http://www.arabnews.com/experts-ratesaudi-roads-amongworld%E2%80%99s-most-dangerous 8. “SR 2.68 bn boost for education”, Monday, 19 November 2012, Muharram 5, 1433, http://www.arabnews.com/sr268-bn-boost-education 9. Inflation Report – August 2012, Jadwa Investment, September 2012 www.jadwa.com/.../inflation-reportaugust-2012/research-8-1-2-1-1-... 10. SAMBA Report Series, “Saudi Arabia: Baseline Forecast 2012-13, January 2012, http://www.samba.com/ENGLISH/Com mon/HTML/economyWatch_01_01_en. html 11. SAMBA – Economic Monitor, September 2012, http://www.samba.com/ENGLISH/Com mon/HTML/economyWatch_01_01_en. html 12. SAMBA Report Series, “Inflation in Saudi Arabia: Drivers, Trends, and Outlook, April 2010, www.samba.com/GblDocs/Inflation_in_ Saudi_Arabia_Eng.pdf 13. Inflation Report – First Quarter 2012, SAMA, http://www.sama.gov.sa/sites/samaen/R eportsStatistics/ReportsStatisticsLib/130 0_R_Inflation_ArEn_2012_Q1_2012_5 _13.pdf 14. “Fed warns of looming US recession if fiscal cliff not averted”, Thursday, Dec. 13, 2012, http://www.presstv.ir/detail/2012/12/13/ 277790/us-recession-looms-if-fiscalcliff-hits/

Security. Great deals of welfare and development packages are being offered to women. Most importantly they are being given chance in the national politics. But the unemployment rate coupled with the expatriates’ presence in the market, various schemes concerning fee structure and penalties being revised recently on a wide range of eservices offered to expatriates’ by the Saudi government has started showing its impact on food prices as well as labor charges. Simultaneously, data pertaining to global recession and inflation alongwith ongoing development projects in the Kingdom show expected continued domestic inflationary pressures, especially in the group of food and beverages, the group of renovation and rent, and the group of goods and other services in near future.

References: 1. “A chicken crisis on the rise”, Tuesday, 9 October 2012, Dhulqadah 23, 1433, http://www.arabnews.com/chickencrisis-rise 2. “Food prices rise, stay near crisis levels”, Tuesday, 9 October 2012, Dhulqadah 23, 1433, http://www.arabnews.com/food-pricesrise-stay-near-crisis-levels 3. “Foreign Investments jump to $ 34 Bn in 6 years”, Monday, April 16, 2012, Jumada I, 25, 1433, http://arabnews.com/economy/article61 3090.ece 4. “Boom in hotel investment”, Tuesday, 13 November 2012, Dulhijjah 28, 1433, http://www.arabnews.com/boom-hotelinvestment 5. “2000 homes for Jazan’s displaced are ready”, Tuesday, 07 February 2012, Rabiul I, 15, 1433, http://arabnews.com/saudiarabia/article5 71986.ece Dr. Riyazuddin Qureshi


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wsrelease/12-1019/U_S_Economy_Recovering_but_Re cession_Looms_in_2013_if_it_Falls_O ver_the_Fiscal_Cliff.aspx 17. “Food Inflation May Rise to 3% to 4% in 2013 After Drought”, By Alen Bjerga, July 25, 2012, http://www.bloomberg.com/news/201207-25/food-inflation-may-rise-to-3-to-42013-after-drought-1-.html

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