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Cablegate: Response: Impact of Rising Food/Commodity Prices - Bahrain

VZCZCXRO8809
PP RUEHDE RUEHDIR
DE RUEHMK #0301/01 1291729
ZNY CCCCC ZZH
P 081729Z MAY 08
FM AMEMBASSY MANAMA
TO RUEHC/SECSTATE WASHDC PRIORITY 7849
INFO RHEHNSC/NSC WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHZM/GULF COOPERATION COUNCIL COLLECTIVE PRIORITY
RHMFISS/HQ USCENTCOM MACDILL AFB FL PRIORITY
RHBVAKS/COMUSNAVCENT PRIORITY

C O N F I D E N T I A L SECTION 01 OF 02 MANAMA 000301

SIPDIS

STATE FOR EEB/TPP/ABT/ATP JANET SPECK, NEA/ARP

E.O. 12958: DECL: 05/08/2017
TAGS: EAGR ETRD PGOV EFIN BA
SUBJECT: RESPONSE: IMPACT OF RISING FOOD/COMMODITY PRICES - BAHRAIN REF: A. MANAMA 184 B. 07 MANAMA 1089 C. 07 MANAMA 887 Classified By: Charge d,Affaires a.i. Christopher Henzel, reasons 1.4(b ) and (d).

1.(U) This message is a response to State 39410, which instructed posts to summarize the impact of food and agricultural commodity price increases on each of the following seven topics: food and agricultural commodity demand, supply, domestic economy, politics, host government policies, environment, and Post programs. Posts were also asked to submit any relevant policy proposals. ------- SUMMARY -------

2.(SBU) Higher food prices in Bahrain can be attributed to domestic inflationary pressures and the rising value of the euro relative to the dollar-pegged Bahraini dinar. The GOB remains faithful to the peg, but, has increased government subsidies in an effort to offset rising prices for lower-income families. American food items are effectively five percent cheaper than they were before the FTA came into effect in August 2006. End Summary. ----------------------------------- SUPPLY, DEMAND, AND ECONOMIC IMPACT -----------------------------------

3.(U) Like other countries in the Gulf region, Bahrain is experiencing an economic boom. Although Bahrain is not a major oil producer, its standing as an important financial center has made it a prime destination for oil revenues. This boom is driving broad inflation. On top of this the run-up in food prices worldwide has created concern on this densely populated island that must import nearly all its food from abroad.

4.(U) Bahrain's officially-published inflation rate of

2.9 percent is widely perceived as lacking credibility. Post has established an "FSN basket of goods survey" to provide a more realistic measure of inflation (ref C). This survey indicates that the same items purchased in 2003 for BD 75 increased in price to BD 95 by late 2007, a nearly 27 percent increase over four years, for an average annual rate of

6.75 percent. (Note: The Bahraini dinar is pegged to the dollar at a rate of USD 1 to BD 0.377. End Note.) Of essential commodities, vegetables and other perishables have been the worst hit, increasing in price by roughly 50 percent since the beginning of 2007. Rice, a staple here, has increased in price by 60 percent in the last eight months. Over the same period, wheat products were up by 40 percent, dairy products by 35 percent, and poultry by 20 percent.

5.(U) Domestic production of foodstuffs is negligible (seafood, dates, mutton, and a limited range of fruits and vegetables) and Bahrain imports almost all of its food supply, thus making it a net importer of food commodities. It purchases approximately 60 percent of these goods from EU countries. With the dollar peg, Bahrain's currency has lost considerable value against the euro. This has, in turn, driven up the cost of European foodstuffs. Reductions in EU subsidies for certain European goods has contributed to the price-rises. ---------------------- POLITICAL CONSEQUENCES ----------------------

6. (C) Bahrain has seen no demonstrations or disturbances associated with rising food prices. However, in a March 18 meeting with the Ambassador (ref A), Central Bank of Bahrain Governor Rasheed Al-Maraj pointed to riots arising from recent bread shortages in Egypt, which he believed resulted from hoarding, and hoped these conditions would not spread to Bahrain. Al-Maraj said that Bahrain's political authorities were feeling the heat of public pressure to de-peg from the dollar and cited rising prices of basic staples as a primary factor in this. -------------------------- GOVERNMENT POLICY RESPONSE -------------------------- MANAMA 00000301 002 OF 002

7.(C) Nevertheless, Al-Maraj has reiterated on several occasions that Bahrain has no plans to de-peg from the dollar. However, he expressed concern to U.S. Treasury Deputy Secretary Kimmitt in October 2007 (ref B) that the peg compelled the Bahraini Central Bank to follow the U.S Federal Reserve's interest rate cuts, though this was contraindicated for Bahrain's current economic conditions and deprived him of a useful tool for fighting inflation. "Our economy is very strong. I should be raising rates," he told D/S Kimmitt.

8.(U) Senior GOB officials have recently expressed their sentiments on the food price issue in the local press. Minister of Industry and Commerce Hassan Fakhro reportedly remarked, "Our businessmen are not greedy; prices are controlled by the international market." Prime Minister Shaikh Khalifa was quoted as assuring Bahrainis that, "the Government will continue its subsidies on basic daily products."

9.(U) The GOB in fact has responded to food price increases by raising food subsidies from 2006 levels of BD 11 million to BD

15.5 million in late 2007. These subsidies principally cover meat, chicken, flour, and bread. The GOB has also introduced an "inflation relief fund", under which low-income families receive BD 50 per month to offset rising food prices. -------------------- ENVIRONMENTAL IMPACT --------------------

10.(SBU) Post notes that Bahrain's primary current environmental issues, including arable and coastal land degradation, damage to coastal reefs, overfishing, periodic oil spills, and industrial pollution are in no way attributable to rising food commodity prices, though in some cases they may aggravate the problem by reducing already limited available supplies of indigenous seafood and fresh produce. ----------------------- IMPACT ON POST PROGRAMS -----------------------

11.(U) Rising food prices were a significant factor in the decision to increase wages for LES personnel (ref C). ---------------- POLICY PROPOSALS ----------------

12.(U) One noteworthy factor mitigating rising food costs in Bahrain has been the U.S.-Bahrain Free Trade Agreement (FTA). Under the agreement, 98 percent of all U.S. products, including food items, enter Bahrain duty-free. Since the FTA was implemented in August 2006, prices have effectively dropped by 5 percent or more on a range of American-made food items. Thus, Post assesses that renewed USG endorsement of broader reductions in protective tariffs in light of the urgent global situation could be one important tool in combating rising global food prices. ********************************************* ******** Visit Embassy Manama's Classified Website: XXXXXXXXXXXX********************************************* ******** HENZEL

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