Subsidising basic food prices across the GCC may be a short-term solution for governments, but in the longer term it will result in food shortages, said an expert.

Standard Chartered Bank's Middle East and North Africa economist Mary Nicola said inflation in Bahrain was now probably above five per cent and would continue to rise towards the end of the year.

Speaking at Standard Chartered Bank's commodity market road show at the Ritz-Carlton Bahrain, Hotel and Spa on Wednesday, said food price inflation would surge ahead of headline inflation in all GCC states except Kuwait, which is the only country pegging its currency to the US dollar.

'The GCC is heavily reliant on the rest of the world for food,' Nicola pointed out.

'The UAE imports 90 per cent of its food. With shortages and global food prices on the rise, the GCC and the rest of the region is suffering, she said.

'The depreciating US dollar has made food even more expensive for the dollar-linked countries.' 

'Food price inflation has exceeded headline inflation in these countries. Headline inflation in Saudi Arabia, Qatar, UAE, and Oman is in the double digits.

'Food price inflation in the UAE hit 27 per cent and 14.2 per cent in Saudi Arabia.'

'The policy response by the GCC to the rise in food prices has been through price controls and subsidies on basic goods including rice, milk and flour,' the expeert said.

'However, the problem with price controls is that it creates market distortions. Saudi Arabia and Oman could suffer serious social implications with the rise of food price as GDP per capita is around $15,000 for these two countries.

'Riots in Egypt, the most populated Arab country, and Yemen because of the rise in food prices, underline the sensitivities involved, she said.

The situation will only get worse as several countries including Egypt, India and Thailand have limited the amount of rice exports in the coming months.

Notably, Saudi Arabia has decided to invest in agricultural technology to become more self-reliant in the future.

However, policies like these will take time to show results. The GCC can reduce the impact of food price inflation through currency reform.

However with global food prices climbing, this will be a burden the region will have to bear.'

She added that she believed market sentiment about the US was over optimistic. There would be no recovery until next year and interest rates were likely to come down to 1 per cent, creating event more problems for GCC states who will have to follow suit to maintain their dollar peg.-TradeArabia News Service