Bahrain Food and Drink Report Q2 2008

Bahrain's food subsidies are once again in the spotlight this quarter, as discussed in BMI's recently published Bahrain Food & Drink Report for Q208. In February the Bahraini government agreed to extra bread subsidies of BHD3mn (US$7.9mn) in order to keep down the price of this food staple. Under the new scheme, a 50kg bag of flour will be sold to bakeries for BHD2 instead of the BHD2.7 it would have sold for. This move follows an extraordinary parliamentary meeting in January in which the Prime Minister announced the creation of a BHD40mn fund for social allowances and food subsidies to mitigate the effects of inflation on lower-income groups.

The Bahraini food sector operates on a scheme of massive government subsidies in order to keep the price of staples low, and ensure a high standard of living for its citizens. However, these subsidies have recently come under scrutiny as food prices continue to skyrocket. To give just one of many examples, world wheat prices have been soaring due to increasing demand and a squeeze on supplies following a series of floods and droughts that damaged crops in Australia, Canada and Europe, causing inventories to drop to the lowest level in 60 years. This has had a major knock-on effect, with prices for bread, pasta and many other foods rising rapidly. The government is now reportedly considering abolishing the existing system in favour of a coupon scheme that favours the country's lowest income groups. However, the proposal has met with dissatisfaction among Bahrain's middle-income groups who argue that their needs are being ignored. But in the long term, these subsidies could end up doing more harm than good and work against the government's efforts to reduce inflation by keeping food affordable and thus consumption and demand high.

Although figures released by the government claim a fall in inflation in December, price pressures will remain elevated in 2008. We remain sceptical as to the reliability of the government's figures, not least because neither its monthly figures nor a full breakdown of the consumer price index (CPI) are made publicly available. In November, officials said that food and housing costs were the biggest contributors to inflation, rising by 9.3% and 7.3% year-on-year (y-o-y) respectively. Although inflation is lower in Bahrain than in some other Gulf States - in the United Arab Emirates (UAE) and Qatar it has reached double digits - it still poses risks to the Kingdom's political stability. Our short-term political risk ratings for Bahrain are already dragged down by worker unrest and strikes, with the downward slide expected to continue if inflation is not kept under control. This will inevitably have an impact on the business environment and the attractiveness of Bahrain as a place to do business.