JEDDAH, 10 October 2007 — Despite incessant calls from various sectors in the Kingdom, as well as in neighboring countries, for affirmative action to rein in galloping inflation that further squeezed consumers’ purchasing power, the region’s policymakers remained firm, contending that the strong economic fundamentals could withstand the marked increase in prices of consumer products brought about by prevailing “global trends.”

A study by Riyadh-based Jadwa Investment on recent food price increases in Saudi Arabia, a copy of which was sent to Arab News, said “there is little the government can do” to check the surge in prices, as they (prices) are in line with global economic developments and are a result of “shifting consumption pattern” by the nouveau riche or the new breed of working class with higher income, particularly in India and China.

“As people get wealthier their eating habits change. With a combined population of nearly 2.5 billion, the shifts occurring in China and India are having a big impact on global food prices. For example, higher Indian consumption is largely responsible for the sharp increase in rice prices in Saudi Arabia,” Jadwa said in the report.

And following the Keynesian theory, the sudden growth in spending capacity of consumers would create a ripple effect on the economic environment as a whole.

“With a combined population of nearly 2.5 billion (just over one-third of the world’s total), the shifts occurring in China and India,” it said, their “rising income levels have caused a major shift in global food consumption patterns.”

The newfound affluence led to a change of lifestyle, including eating disposition, “with staple foods increasingly supplemented and replaced by those that provide a greater source of protein. Income per capita is rising at an annual rate of around 7 percent in India and nearly 10 percent in China, generating a surge in demand for meat, eggs and milk; beef and chicken consumption is currently increasing by 20 percent per year in China.”

Stressing that inflation in the Kingdom, which hit a seven-year high of 4.4 percent in August, was primarily foreign-borne, the report said that the unrelenting rise in local food prices is furthermore ascribed to use of crops for energy production as the world search for alternative sources of fuel amid skyrocketing oil prices.

“Production of crops for use as a feedstock for ethanol production (mainly corn, wheat and sugarcane) has reduced the area planted with foodcrops (particularly in the US) and sharply pushed up prices,” it said.

The report moreover said that poor growing conditions in key agricultural producers due to bad weather also contributed to high prices. “Most significantly, Australia suffered its worst drought in at least a century in 2006, Europe and parts of North America have also experienced poor growing conditions in recent years,” it said.

These factors pushed up food prices throughout the world, the report added.

The study also noted that weak dollar disproportionately tilted the food import-export equation, pushing food prices even higher. “The rise in food prices has coincided with a period of US dollar weakness which, because of the exchange rate peg, has raised the riyal price of imported goods that are not priced in US dollars. The bulk of agricultural commodity trade is done in US dollars, but many of the final products available in the shops are priced in other currencies,” the Jadwa report said.

Due to continued weakness of the greenback, speculation about the dollar peg hogged the headlines recently. The broadly declining dollar came under intense pressure. However, Saudi Arabia said it was keeping its currency tied to the dollar, noting that high liquidity and strong economy can absorb the imported inflation.

Jadwa Investment said “the weakening of the riyal is not a major part of the food price inflation story, so a revaluation would have little success in lowering food prices. A revaluation would also have many other negative effects on the economy.” It added that “as rising food prices are the result of international factors, policies that could be used to combat broader inflation, such as raising interest rates, will not be effective.”