Oman Inflation remains a problem - but no riots yet

As everywhere, raising prices for basic food stuffs – rice, flour, oil, eggs, fish – is hitting low earners in Oman hard. No sign of any food riots here yet, but the price of basic sustenance for people who spend a significant proportion of their monthly income on food and rent is, as in most parts of the world right now, a huge issue. Recent reports put January Oman's food inflation at well over 20%, and rising. Most food in Oman is of course imported, and the link between Omani rials and US Dollar hasn't helped either. The global price of rice has tripled in the past 6 months.

For many of the poor in Oman, especially those expat semi-skilled workers from Indian, Indonesia, Pakistan and Sri Lanka who do not get accommodation and food as part of their package, the triple whammy over the past 12 months of rising rents (often more than 100%), the falling dollar, and rising food prices means their effective disposable income (and thus the money they can send home to dependents in their home country) has disappeared. A similar impact is being felt by the Omani lower classes, as in addition they usually have many dependents per income earner. The pay rises for public employees mandated by His Majesty earlier this year, while they may sound impressive in % terms, actually have not even filled the gap as base salaries are so low.

The problems are precipitating calls in Oman for further Government control. See this article today in The Tribune
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Hamad Al Adawi, a consumer, said almost all essential commodities have gone up. It has made life difficult for the common man.

“We call upon the authorities to take steps to control prices. The government should fix the profit margin for each commodity. The departments concerned should inspect the distribution outlets and supermarkets to punish the manipulators.

Aziz Al Hasani, another consumer, urged the government to give top priority to measures that will arrest the trend.

I think this temptation for a central Government fix is a dangerous and expensively inefficient route that Oman should resist. Subsidies for essentials become very difficult to unwind later, and lead to all sorts of bad side effects such as corruption, blackmarkets, bureaucracy, rationing, and shortages. Just look at Egypt (see article and link at the end of this post as well). Even here in Oman, the price of a litre of petrol is still 120 biasa (for my foreign readers that’s about US$0.32 per litre, or $1.19 per US gallon), fixed by the Government with the petrol supplied by Government refineries running on Government crude oil. Given world spot prices for Gasoline are around $3.00 per gallon, this amounts to approx a $2.5 million subsidy per day (close to a billion a year) by the Omani Government. And in the current economic climate, any upward revision seems polically impossible.

The cement issue is also already leading to a robust blackmarket despite occasional arrests when the right payments aren't made, as standard economic theory predicts in any situation where a subsided product (eg Omani cement or Egyptian bread) is not available in sufficient quantity to meet demand. A contractor friend said last week (when we were discussing exposure on a contract with escalation clauses for rises in basic materials for a big building) that the contractor would have no problem getting cement, they would just have to get it on the blackmarket at 4 rials a bag, but we would insist on using the official price as stated in the contract for the escalation clauses. The Omani Government is already effectively nationising the national cement distribution system. This is an old-school Soviet central-planning type of solution that will not work guys.

The solution to the inflation issue is to enforce an indexed minimum wage for all employees (not just Omanis!), and to have a transparent indexing of wages and state benefits to consumer price inflation. Sure, enforce anti-profiteering legislation if necessary, and get rid of Government policies that are actively making things worse (like bans on cement importation), but direct market intervention to fix these problems just lead to worse problems.

So, OCCI, Ministry of Commerce, Ministry of Manpower, and Ministry of National Economy – please use cash and the market to slove these problems instead, and just pay people a living wage.

And maybe start to think about a system of progressive income taxation to enable a transfer of wealth from those that have the most to those who don’t.

Here's a picture of what's in store for Oman if Government intervention is used, and possibly what awaits if incomes are not increased properly: VOA article

Egyptian Bread Crisis Stirs Anger
By Challiss McDonough Cairo 24 March 2008

In Egypt, a shortage of subsidized bread has resulted in long lines and occasional clashes in which several people have been killed. The president has ordered the army to use its bakeries to try to end the bread crisis, but the roots of the problem are more than just simple supply and demand. Rising food prices and poverty have combined with corruption to create a bread problem that will not be easily solved. VOA Correspondent Challiss McDonough has more from Cairo.


An Egyptian woman carries a tray of bread at a public oven in Giza, Egypt, 16 Mar 2008
About 30 people are crowding around two small windows at a Cairo bakery, shouting at each other and jostling for the best place in line. The heat is blistering already, and women in the crowd shade themselves from the sun with plastic bags.

A woman named Fatma says she waits here for two to three hours every day to buy bread for her family of five.

Gesturing toward the chaos at the bakery window, she says, "What can I say? You can see this bread problem for yourself. The prices of everything have gotten so high."

This bakery is selling round loaves of government-subsidized bread, known locally as "balady" or country bread. The price is fixed at five Egyptian piasters, or less than one U.S. cent a loaf.

In recent months, rising food prices have fueled a shortage of this subsidized bread, leading to long lines and short tempers. Several people have been killed in fighting that has broken out in bread lines or clashes between customers and bakers.

Last week, President Hosni Mubarak ordered the army to use its bakeries to make balady bread in an effort to stem the shortage. But it is not simply a matter of supply and demand; even the president acknowledged that part of the problem is corruption.

Economist Hanaa Kheir el-Din is executive director of the Egyptian Center for Economic Studies.

"All other food prices have risen. There are a lot of food prices which rose sizably - look at the oil price for instance, rice, sugar, everything is rising - but balady bread has been kept at five piasters a loaf, and the flour which goes into it is delivered at a much lower price while the baker can sell it on the black market at several times the price," said Kheir el-Din.

The corruption is not limited to selling subsidized wheat flour on the black market.

At the bakery, a heavy metal door swings open and then clangs shut quickly, and a man scurries away holding five round pieces of freshly baked bread.

Another man who gives his name only as Samir waves his hand angrily toward the door.

He says the bakery employees let some people inside to get bread quickly while he and the rest are waiting in line outside in the sun for hours.

This is an emotional issue. Bread is such a vital staple food here that Egyptians use a different word for it than other Arabic-speakers do - they call it "aish," which literally means "life."

Egypt's government has taken other measures to try to rein in rising food prices, including stopping the export of locally grown rice. And other governments in the region are facing similar troubles - over the past few months, food prices have sparked demonstrations and riots in countries such as Morocco, Yemen and even wealthy Saudi Arabia.

In Egypt, the bread crisis is a symptom of a larger problem - one of stagnant wages that have failed to keep up with the cost of living. There is no shortage of bread for those willing and able to pay higher prices for it. Some people who buy the subsidized product resell it just down the street for twice the price. And unsubsidized bread is in plentiful supply at local markets, but that costs five times as much.

Fatma says the unsubsidized bread is too expensive, and the loaves are smaller than the real balady ones. She says she simply cannot afford to feed her children that way.

She says her family of five lives on a single pension of only 350 Egyptian pounds a month, or just over $60. That is similar to the wages earned by civil servants and factory workers, and even doctors in public hospitals.

Fatma says each of her family members eats two pieces of bread a day. If she had to buy unsubsidized bread at five cents apiece, she would end up spending about one quarter of her monthly income on bread alone.

The rising food prices have helped fuel protests and strikes by working professionals around the country.

Economist Hanaa Kheir el-Din says the entire wage system needs to be overhauled, and the food subsidies cannot be removed until ordinary working Egyptians can earn a living wage.

"You cannot pay a person 100 pounds a month as income and then let him buy whatever commodities are available in the market at market prices," said Kheir el-Din. "One has to revise the subsidy program along with revising the income policy, particularly wages in the government sector."

The World Bank says Egypt's economy has been growing at a healthy rate of seven percent per year, but at the same time, poverty has been growing too. So Egypt's poor are not seeing the benefits of the economic growth, and roughly 20 percent of the population is below the official poverty line, living on less than two dollars a day.

The last time the Egyptian government tried to remove subsidies on bread, in 1977, riots broke out and more than 70 people were killed.

But food subsidies now take up a huge portion of Egypt's annual budget, one that is growing as global food prices rise.

Kheir el-Din says the subsidies need to be targeted to the neediest people.

"Balady bread in particular should not be made available to people who can afford better bread," he said. "This should be targeted to the people who cannot afford to buy a 25- or 40-piaster loaf. But everybody may get this subsidized bread, and this is where the subsidy program has to be revised."

Back at the bakery, Fatma sighs as she stares at the raucous crowd pushing and shoving to get closer to the front. She shakes her head and moves into line, saying under her breath, "May God have mercy on the poor."