Counting the rising cost

UAE consumers are paying more for everything from rice to eggs, and the problem is worsening.

The Government is taking drastic measures to avert a crisis.

The world's insatiable appetite for oil has hit UAE shoppers in their stomachs as well as their wallets with spiralling food costs. And the problem appears to be growing. Consumers are paying more for everything from a bag of rice to a carton of eggs, simply because it takes oil to run farm machines, power the processing and packaging factories and fuel all modes of transport. "Food prices are directly correlated to oil prices," explains Marios Maratheftis, the head of research for Standard Chartered Bank. "We can't sell US$140 barrels of oil then expect food prices to go lower."

In recent months higher oil prices have manifested themselves locally in the form of higher commodities prices, the pain of which is passed on to consumers. As the most demanded staple food, rice has soared to unprecedented levels, with global prices up from $650 (Dh2,386) per tonne to a 25-year high of $1,000 in just the first three months of this year. A decision by India's government to halt exports of non-basmati rice - in an effort to curb prices and avoid domestic shortages - has exacerbated the situation here, driving prices even higher. India's move has been widely criticised by UAE retailers whose businesses thrive on sales of the grain.

"We have a lot of Indian people here who want to eat their rice, even if the price of basmati rice keeps getting more expensive," says Burham Turkmani, the general manager of Al Rabiah Trading in Dubai. Khaled Zanul Abid, the manager of Talal Supermarket in Jebel Ali, agrees. "I am Indian, so I know how my customers feel. They like to eat certain kinds of rice from India. But they have to eat, even if the price gets very high," he says. "Everything is becoming so expensive for the people now."

Food inflation is foremost among concerns of the federal government, which reported a 11.1 per cent jump in inflation last year. Although inflation has largely been driven upwards by rents, food, beverages and tobacco accounted for 11 per cent of the rise and are believed to contribute as much as 30 per cent to overall GCC inflationary pressures. According to the Emirates Consumer Protection Society, domestic food inflation could rise as high as 40 per cent this year.

"Inflation will not go away," warns Andy Barnett, a professor of economics at the American University of Sharjah (AUS). "Problems will continue indefinitely until people give up and let the underlying adjustment that's taking place take hold." Various measures - some more controversial than others - have been taken to ensure that the situation does not spiral out of control. The initial response was price caps. Earlier this year the Government signed agreements with various domestic retailers including Baniyas Co-operative Society, Carrefour, Union Co-operative Society and LuLu hypermarkets for implementing price caps on items such as chicken, rice, flour and eggs in an effort to combat rising prices set by suppliers. In April, the Government announced it was stockpiling more than a dozen "essential" food items to reduce the likelihood of food shortages, often a backlash after price caps. One month later, officials with the Economy Ministry announced that 15 items - including dry and condensed milk, frozen and canned vegetables, baby food, chicken, edible oil, rice, flour, fish, meat and tea - were to be placed on a free import list in a bid to contain inflation.

"Price caps should be on the suppliers, not the retailers," says David Berrick, the retail general manager of Abela Supermarkets, which has a domestic headquarters in Abu Dhabi. "They're implementing these policies on just 16 or 20 commodities. What about the other 20,000 products in our supermarket? We can lower our prices and use the marketing tool of 'everyday low prices', but if supplier costs go up, we have no choice but to raise prices."

However, a spokesman for LuLu hypermarkets said that price caps were just a small gesture by retailers and the Government to ease the burden of inflation. "You can't put a blanket cap on everything we sell," says V Nandakumar, the head of corporate communications for LuLu, adding that EMKE Group, which owns the chain, is absorbing financial losses that might result from price caps. "Over the long term, if there are fundamental reasons for that price to go up then they will do this indefinitely, even if they hold prices," adds Dr Barnett. "The prices are not going to go away. When we talk about the prices on world commodities then that's the world price - eventually the domestic price will have to go there."

In April, the Economy Ministry urged retailers to start stockpiling basic food items to prevent shortages caused by export bans in countries such as India, Egypt and Brazil. The government is now exploring the option of signing agricultural deals with several countries in an effort to boost strategic food reserves. Most recently, the UAE signed a memorandum of understanding with the Philippines to ensure the availability of certain food stocks. Although the Philippines, like the UAE, risks rice shortages, its government has reportedly agreed to supply other products such as corn, vegetables, bananas, pineapples and poultry items.

Egypt, the world's fourth-largest producer of rice, is also in talks with the Government of Abu Dhabi to embark on a number of projects ranging from farmland investment and development to infrastructure of agribusiness and food processing. Abu Dhabi has finalised a scheme to purchase 29,400 hectares of farmland in Northern Sudan, a project due to begin by the end of this year. Pakistan is also on Abu Dhabi's radar for farmland investments, although no official proposals have been announced.

Various factors, including limited water and agricultural land, force GCC countries to rely heavily on imported food items. The UAE imports nearly 85 per cent of its food. There are six parties in the chain: the farmer, broker, exporter, importer, wholesaler and retailer. According to Government officials, each party retains a five per cent margin per transaction, and by eliminating several steps, the Government can bring the cost of food down by 20 to 25 per cent.

However, Sunil Bhanji, the general manager of Tilda in the Middle East, warns that there is an inherent danger when government officials set agricultural policies. "It takes several years before newly farmed land produces anything substantial," he says. "Unfortunately, awareness of this crisis comes only when it is hitting their pockets. A lot is being done in the UAE and Saudi Arabia, but people are not listening and not ready to look at different ways of saving."

The idea of food subsidies in particular has provoked mixed responses from Government officials and analysts alike. "[If] worst comes to worst, the Government can afford to bear the costs of rising food prices," suggests Mr Maratheftis. The chief economist at Gulf Finance House, Ala'a al Yousuf, disagrees. "The idea of food subsidies belongs to a very different economic system than that which exists in the Gulf," he says. "I don't see the apparatus in the Gulf as capable of handling it, or as able to put in a system where subsidies will not be abused."

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