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Fri 18 Sep 2015 03:19 PM

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Focus: The impact of the Bahrain food subsidies row, what it means for the wider region

Sources also claim at least half the butchers in the island state will disappear once meat subsidies are scrapped, while the impact will ripple down to restaurants and some supporting businesses may struggle to survive

Focus: The impact of the Bahrain food subsidies row, what it means for the wider region
Bahrain is progressing with plans to cut food subsidies from this year, followed by energy and other subsidies in the ensuing months to help plug an estimated $4bn budget deficit.

Last month, fish markets across Kuwait were practically deserted when residents boycotted traders for racking up the price of fish.

The ‘Let It Rot’ campaign saw consumers steadfastly refuse to pay almost 50 percent more than normal for pomfret, known locally as ‘King of Fish’, after prices rose to $49.50 per kilo.

This, as analysts pointed out at the time, is not much less than the price of a barrel of oil in Kuwait.

The campaign gained momentum on social media and was reportedly so successful that prices per kilo have dropped back down to $29.70.

The story illustrates how sensitive local populations are to changes in the cost of living. In Kuwait’s case a sharp increase in food prices literally caused a stink, as hundreds of thousands of dollars’ worth of valuable fish were left to turn bad.

It has also been viewed by commentators as a sign of the problems Gulf governments could face if they cut the subsidies that for decades have ensured the region’s vast oil revenues are distributed among citizens, not just the elite.

In the UAE, fuel subsidies were scrapped this summer with petrol prices rising 24 percent as a result.

A Saudi newspaper report suggested at the beginning of September that the kingdom may follow suit, in an attempt to save money and reduce economic vulnerability while oil prices remain low.

Meanwhile, Bahrain is progressing with plans to cut food subsidies from this year, followed by energy and other subsidies in the ensuing months to help plug an estimated $4bn budget deficit.

Its proposal to cut subsidies for red meat, originally set to be implemented on 1 August, is now due to take effect from 1 October but the government keeps pushing back the date — presumably because it has yet to work out how to handle what could be the biggest economic shock the country has experienced in decades.

Experts predict the cost of meat could surge by up to 70 percent once subsidies are removed, hiking the cost of living and placing hundreds of livelihoods at risk.

Residents are anxious. Majeed Al Hulaibi, whose family founded retail butcher S Majeed Al Hulaibi Fresh Meats 200 years ago and continues to manage the business, tells Arabian Business: “I am not happy about it, for sure. Costs will go up for everything in the trade: meat, storage warehouses, labour — you name it. It is going to be very difficult.”

Bahrain’s government has confirmed that the delay is to “consolidate cooperation” in parliament, suggesting there is disagreement at present, and to allow time to conduct a proper assessment of the economic impact on people’s standards of living.

The main concerns, explains Pat Thaker, London-based Middle East and North Africa (MENA) director at the Economist Intelligence Unit, are the effects of higher food prices on low-income earners and the lack of competition there will be in the meat market. To deal with the first of these, Bahraini nationals (not expats) will receive cash compensation — registration for which began last week — when the subsidy is removed. However, they make up only around 45 percent of the population.

“The dramatic fall in oil prices means the need to cut spending is clear and urgent,” says Thaker. “The Bahrain government, which still receives 90 percent of its revenue from oil, expects to run a budget deficit of $3.89bn this year. Its 2016 budget states that expenditure on subsidies [around $800m per year or at least 30 percent of the total budget] will fall by just under $264m next year, of which meat subsidies will account for around $100m, thus implying more cuts are planned for next year.

“The continued postponement of the cut in meat subsidies suggests the authorities will struggle to reduce other subsidy payments in line with the 2016 budget, putting more pressure on the fiscal balance.

“On top of this, there has been continued social unrest since early 2011 and subsidy cuts on everyday goods, such as food, risk igniting tensions, particularly in poorer Shia areas.”

Few working in Bahrain’s meat trade would speak to Arabian Business — demonstrating how sensitive the issue is. One well-placed industry source, who asked to remain anonymous, points out that the main subsidy programme has been in place for almost 40 years — the government covers around 30 percent of the cost of beef and 70 percent of the cost of lamb — and doing away with it will be a huge shock.

“I personally believe [the government] should be doing a phased implementation over three to five years rather than one hard hit, which is going to be a shock to the system and result in a massive cultural change in how people buy meat.

“You have very low wages across much of the population in Bahrain as it’s not a rich country. It’s not super poor but it’s not the UAE or Saudi — the vast majority of Bahrainis earn little over BD500 [$1,300] per month and the impact of removing subsidies is going to cause a substantial uplift in the price of meat,” he says.

This is in part because Bahrain has some of the cheapest meat in the world. Most of its subsidised products come from Australia, though it also imports beef and lamb from Pakistan and Sudan.

“The same carcass that’s selling in Bahrain for $45-$50 (around $2.60 per kilo, or just one Bahraini dinar) is selling in Australia for closer to $84 — double the amount,” the source explains. “Then, by the time the Australian butcher starts building in the price of his own work to break it into chops and cutlets and so on, the carcass is grossing for more like $200.

“If you tell the locals they’re getting their meat for half the price as the rest of the world they are quite shocked. But it’s true: they’ll be paying at least double for meat when subsidies are removed and possibly way more than this.”

Al Hulaibi says he believes prices will go up as much as 70 percent and agrees the government should be phasing out the subsidy step by step to allow traders to adapt to new business models. “We need to be careful,” he says. “If we lose money from meat price rises, how are we going to cover other costs, like rent?”

Sources claim at least half the butchers in Bahrain will disappear once meat subsidies are scrapped, and the damaging impact will ripple down to restaurants and other supporting businesses that may struggle to make ends meet. “There will be no guaranteed margins any more,” another source says. “They are going to have to work out what business model to go after.”

Wholesalers, meanwhile, will be forced to negotiate with a depleting pool of customers and adapt their business plan accordingly. “They will work more closely with a customer who wants a large number of carcasses consistently than with someone who takes a carcass every second or third day,” the source says.

Unlike the butchers, wholesalers face the challenge of greater competition. At present, Bahrain Livestock Company (BLC) is the sole importer of live animals under the national subsidies programme and enjoys a comfortable share of the market. It is a private company, in which sovereign wealth fund Mumtalakat has a 25 percent stake. However, the removal of subsidies will open up the market for others wishing to tempt cash-strapped consumers with the offer of cheaper products.

BLC declined to comment at length about the potential impact on its business. Its chairman Ebrahim Zainal said in a statement to Arabian Business: “At this stage it is too early to predict any clear reflection on the market as Bahrain has been accustomed to [the] meat subsidy for over 25 years. The only clear point is that selling prices to consumers would be up and in line with similar selling prices on other GCC markets [such as the UAE and Qatar that do not subsidise meat]. 

“The government did confirm a certain policy to compensate local family consumers with additional monthly cash. Competition will grow and the choice will be left to consumers. I have no more to add at the moment.”

In terms of competition, a source notes: “Bahrain is not a big market. It has 1.4-1.5 million people on a good day, mainly on low incomes, so there is not a lot of room to split the pie. I expect a few people will have a go, but how many of them will still be here two or three years down the line is another matter.” Particularly if, as many anticipate, there is a dramatic drop in consumption as people initially recoil from buying meat.

Most of the traders Arabian Business contacted predicted an initial 40 percent drop in revenues, bottoming out at around 50 percent and settling at around 30 percent. There is concern that such a squeeze on margins is going to negatively impact Bahrain’s economy, making it less attractive to investors at a time when the country is striving to attract foreign businesses and diversify away from hydrocarbons.

Gulf-wide retailers are sure to feel the effect. Carrefour and LuLu Group declined to comment when contacted by Arabian Business, but the chief executive of another prominent Middle East retailer notes that Bahrain’s budget could suffer as higher costs are passed to the consumer, spending power weakens and inflation goes up. “The government has painted themselves into a corner with this,” he states.

Al Hulaibi says protests of the sort seen in Kuwait are likely to occur in Bahrain. “I think people will be very vocal about something they’ve had access to at a particular price for so long.”

The EIU’s Thaker says this and the presence of elected parliaments in countries such as Kuwait and Bahrain is why government policy on Gulf subsidies has moved forward only “with caution”. Kuwait in particular, she says, is navigating a challenging domestic political environment.

“Although policymakers in the UAE do need to consider the public reaction when implementing sensitive decisions, they can ultimately force through measures without parliamentary scrutiny or the threat of being blocked by an elected assembly.

“Kuwait’s activist parliament means officials are finding themselves trying to balance the maintenance of political stability against the need for tough economic decisions that risk galvanising parliamentary opposition to government policy.”

Decisions to remove any type of subsidy are all the more controversial because of the traditional Arabic culture of sharing, one source argues. “This goes right back to the Bedouin tribal arrangements — everyone shares food at meals, looks after everyone else; there are large families, large social gatherings, strong communities based around local mosques, and that culture extends right up to the ruling families, who historically have felt obliged to share some of the oil wealth they’ve accumulated in the form of food and services to citizens.

“All the countries in the Middle East are roughly the same and you are not going to change that welfare culture overnight. People will need time to get used to paying commercial prices, and that’s the same for all subsidies removed in future.”

Still, analysts believe this is a natural economic adjustment that must be borne out.  In spite of the inevitable, and in some cases disastrous, consequences, a heavily subsidised economy is not a sustainable one, they argue. “We are living in a false reality,” one source says. “Economics is like mother nature: there is only so much you can play around with it before it will turn around and bite you.

“So, the more subsidies you pour into the market and the more you compensate people, you bigger mess you put yourself into.”

Removing subsidies might represent the Gulf’s first steps to becoming a truly free market, but the journey there could be tough.