Kuwait's food prices: When saving money harms you

Published May 1st, 2012 - 12:03 GMT
Economist Hajjaj Bukhadour thinks that increasing the amount of subsidized foods or increasing salaries of locals is a temporary fix to a long-term problem
Economist Hajjaj Bukhadour thinks that increasing the amount of subsidized foods or increasing salaries of locals is a temporary fix to a long-term problem

The Minister of Commerce and Industry, Anas Al-Saleh recently announced a proposal to distribute free food to citizens until August 2014. This would be an extension to the already ongoing food subsidies of basic food stuff such as sugar, rice, cooking oil, and milk power that was implemented by last year.

“I take all of the items that I am allowed to take, sugar, powdered milk, rice and so on,” says Umm Hani, a Kuwaiti mother of five. She says that she takes the food because it is free and it is there, saying “why not take it if it’s being offered to me.” The family usually does a good job at going through the items, but do find themselves with some surplus during some months. “When its nearing the end of the month and I still have some items untouched, I donate the rest of it to mosques or people that I know need it,” says the mother of five

This mentality seems to be a common one, as many families take to subsidized foodstuff simply because it is there, and not because they need it. Therefore, they end up having a surplus that gets donated. Stories of surplus, donations or even of items being sold in the black market are not rare.

Co-op societies

“All of the food that is subsidized by the government is taken by the families that are entitled to it,” says Hakam Rida Maree, Commercial Manager of Khaldiya Co-op Society, adding “if a family is allotted five kilograms of rice or sugar, they take all five kilos home; they leave nothing behind.” Maree explains that the food is picked up at a store near the local co-op society which distributes some items and sells others at a very subsidized rate to locals. “The food is of high quality and the prices are amazing compared to the regular prices in the supermarket,” says Maree. The most popular items are rice and chicken, but there is also a high demand for all the items provided to Kuwaiti families. The commercial manager of Khaldiya sees no slowdown in this system and mentions that dates and meat might be added to the list of subsidized food next month. Maree estimates that 80 percent of the food being taken are used by the families themselves, and the other percent being either donated or sold in the black market. Maree sees this as a great way to protect locals from high prices and inflation, but there is nothing for the expats. “In the 90’s, before the Iraq invasion, we used to all collect free and subsidized food from the government. Both locals and expats used to have this right and this was truly fair,” remembers Maree.

The subsidies protect locals from soaring prices of commodities, but could this proposal be doing more harm than good when it comes to the inflation situation in Kuwait? Economist Hajjaj Bukhadour seems to believe so. He thinks that increasing the amount of subsidized foods or increasing salaries of locals is a temporary fix to a long-term problem.

The solution

“Inflation is at eight percent, and I suspect that it is above that, actually. Annually, it is going to be averaging, from now until 2014 at 10 percent, if not more. This is the inflation on the food worldwide,” said Bukhadour. He explains that this is due to the limitations on farming areas, weather conditions and more demand as the world population is increasing. “Countries like India and China used to live on what they grew. They are now importing foods due to higher demand; this is significant as they represent a large portion of the world population,” says Bukhadour. The economist believes that it is important to know this in respect to Kuwait’s inflation situation.

“The problem with food supply worldwide is the key to create instability and chaos,” explains Bukhadour and he believes he knows the answer to alleviate some of the upcoming inflation in Kuwait with a few steps. “The answer is to invest in the food industry. Those countries that invest in the food industry will have more stability in their countries. The best strategy of Kuwait is to invest in its food industry – buy land in countries that have the ability for high production of food, seeing as Kuwait is limited in this area, and focus on this investment as a priority, before any other investment,” says Bukhadour. He believes that investing in food is more important than focusing on border security or supplying and paying salaries to the army. This is because economic stability of the countries is directly related to food security.

“As Kuwait does not produce its own food and does not invest in this process, they are importing the inflation. For Kuwait to control the inflation, there are steps that need to be taken,” Bukhadour says. He believes that the second step is to prevent delay in the supply of food to Kuwait. “There should be a laboratory at any border, there should be appropriate facilities such as chiller rooms and storage space in the border rather than only inside Kuwait. In this case, the food is not delayed, you avoid rotten foods that eventually become unsafe for human consumption, and you have quality control to reduce cost of logistic costs. The delays are also causing a part of the inflation as the food is not getting in the country,” says Bukhadour of the current situation at the border. The third step is to have more storage facilities within Kuwait, this would encourage volume import, which is called volume economy. Bukhadour believes that the system of cooperative needs to be changed, saying “the system is a monopoly which is never good for an economy. Also, the managers are not qualified or have a political agenda and have a tribal mentality. The choices are not made based on logic or with a business mentality but to benefit themselves; not based on quality or profit.” Bukhadour says that the co-operative societies need to be run in more efficient ways, and people on the board of directors need to be qualified to run such a business. “The objectives should be to reduce the cost and increase competition and control quality; these three do not exist here,” says Bukhadour. Changing the co-operative system is the third step, according to him.

“Co-operative societies are supported by the government as they are given free land, electricity and so many other things are subsidized to them. The private groceries in Kuwait have their own land, have no subsidies from the government but still make more profit, have less costs and offer better quality. If the private sector can make profit without subsidies, why can’t the co-operative societies do so with such subsidies,” explains Bukhadour.

Laws that protect

The fourth step to reduce or control inflation lies in the laws of the country. “Late Sheikh Jaber Al-Ahmad Al-Sabah issued an Amiri decree stating that bread should not exceed 50 fils and that a falafel sandwich should not be sold for more than 100 fils. And this decree is still in existence, over 35 years later. You can just imagine how much inflation has occurred decades later, the 50 fils now costs at least half a KD or more. If you go to the market, they are still being sold for the same amount, this is a good thing because this is food to the people; both locals and expatriates can benefit from these prices. These are the sorts of laws we need. These restaurants are still making money because they are getting controlled foods supplied to them. More decrees of this sort is the fourth step in reducing inflation when it comes to food,” says Bukhadour.

“The fifth step to controlling the inflation lies with the Ministry of Commerce,” says Bukhadour, adding “they need to change their policy to allow for more competition, but at the same time exercise control on quality Are subsidies causing inflation? and prices. They need to implement strict regulations that allow flexibility while being given concrete guidelines. The municipalities need a unit of control that can police the quality and prices, and allow for open competition.” “The sixth step is in the monetary policy, as the Central Bank needs a better monetary policy than what it has right now. They apply the rate of interest to control the inflation, this is also an issue for loans, so we better control the consumption attitudes in the community, moving from consumerism to productivity, imbibing earning values as well as a saving attitude. The Central Bank should implement policies, says Bukhadour of the current value system being held by a majority of people in the country. Finally, the subsidies.

“The final step would be subsidizing food to the people to avoid inflation. By implementing the first steps, subsidizing can be done in a more efficient way. Increasing salaries results in more inflation, as more cash in the market will inevitably fuel more inflation. The economist also believes that subsidies should benefit all who are living in Kuwait, local and expat, as he thinks the cost of living should be fair to all. Bukhadour believes that subsidizing food is but a small part of controlling inflation and should be the last stage in the system. The solution lies in changing the logistic system, the co-op society system, the current value, and once inflation is in control, subsidizing food responsibly.

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