Saudi Arabia seeks to reduce costs of cereal subsidies

Current low oil prices are forcing Arab governments to look again at ways of cutting their food import bills - one of the most serious drains on their shrinking foreign exchange resources.

Economic realities dictate some sort of action, and quick. Oil revenues in the Near East and North Africa jumped from $10.5 billion in 1972 to $225 billion in 1981. With this rate of increase they were well able to afford a sevenfold rise in the cost of their food imports from $1.7 billion to $12.7 billion over the years 1970-72 to 1978-80.

But while oil revenues have dropped over the last five years, food imports have not. This year, if the price of oil averages $15 a barrel, Arab countries will net $71 billion. If, as is more likely, it stays at around $10 a barrel, revenues will be a mere $48 billion, or less than twice the most recently computed total for food imports to the Arab world-$27 billion in 1984.

Agriculture accounts for only 1 per cent of Saudi GDP, according to FAO figures. In 1984, the last year for which full figures are available, 2.3 per cent of resources went an agriculture and related water resources.

There are various remedies available to this region with its problem of a declining food self-sufficiency ratio. Near Eastern countries can simply resolve to cut down their purchases abroad. But that is not as easy as it might seem. In the last decade Arabs, moving to cities and then further afield to work and travel overseas, have gained a taste for non-traditional foodstuffs. At the same time, Arab importers have found themselves the target of stiff competition from the heavily subsidized farmers of Europe and the United States.

Through regional research centres like ICARDA and ACSAD, and their national equivalents, Arabs have had some success in improving the quality of their seeds and the efficiency of their farming practices. But the practical effects of any new measures have yet to filter through to the field, let alone be noted in increased output.

Therefore many Arab governments are looking to see what lessons they can draw from the most ambitious solution of all to the food deficit - the attempt by the richest country in the region, Saudi Arabia essentially to pay its farmers to produce a surplus.

In 1984 Saudi Arabia, was the largest importer of agricultural products in the region. It paid $5.7 billion (up from $1 billion eight years previously) to buy in food for a population of just 10.4 million. In the same year food imports in Egypt amounted to only $4.1 billion, in Iraq $3 billion, in Algeria $2.7 billion, and in Morocco, Kuwait and Libya around $1.5 billion each.

However, such a high food import bill amounted to only 4.75 per cent of Saudi Arabia's GDP (Egypt's by comparison amounted to 12.2 per cent). Saudi Arabia was in a unique position to juggle its budget and use its oil wealth to provide subsidies to boost domestic agricultural production.

Initially Saudi Arabia's planners decided to use wheat as a test case to show it was possible to revert the tide of growing imports. Just a few years earlier US Agriculture Secretary John Block had infuriated the Saudis by telling them it was not worth growing wheat in such an inhospitable environment as theirs. They should buy it all abroad. In some respects Block was right. Even in their most expensive year, 1981, Saudi wheat imports were valued at just $117 million - negligible compared with Saudi Arabia's total food imports in 1984 of $5.7 billion.

Aware, however, of their vulnerability to the "food weapon" should the US ever decide as some threatened - to use it against the Near East if oil prices rose too high and the newly emerging Arab economies became too powerful, the Saudis were determined to reduce their dependency on the outside world and to become self-sufficient at least in one crucial commodity, wheat.

During 1984 the incentives offered to farmers made Saudi wheat, at around $1 000 a metric ton at the farmgate, nearly ten times more expensive than the world's average price. A Saudi farmer receives free seed and pesticides, free irrigation water, half the cost of feed and fertilizer and 45 per cent of the cost of imported agricultural machinery. If he imports over 50 cows at one time, the state pays him a 100 per cent subsidy. In addition, loans to farmers from state institutions exceeded $1 billion in 1984.

Nevertheless, this policy brought immediate results. Wheat production in 1984 doubled to 1.3 million tons - up from 130 000 tons in 1970 and 875 000 tons in 1983. During the year domestic demand of 900 000 tons a year was exceeded for the first time. In 1985 output increased to 1.5 million tons and the harvest completed this July may top 2 million tons.

This extraordinary advance has not been made without some criticism. From the start it was clear the Saudis' subsidy policy encouraged too many weekend farmers, just in the business for the capital appreciation. Experts began to say it was contributing to the depletion of the Kingdom's scarce water resources. What is more, Saudi Arabia simply did not have the storage space for the crop. Taking all these factors into consideration, the state-run Grain Silos and Flour Mills Organization (GSFMO), which has a capacity of 900 000 tons, unilaterally reduced its wheat procurement price in 1985 from $999 per ton to $570 per ton for farmers selling over 500 tons.

The farmers themselves were outraged at this unheralded change of policy, which played havoc with their planting schedules. They appealed to King Fahd to overrule the order, which he did. To deal with what now amounts to overproduction, Saudi Arabia has begun exporting wheat, first to Bahrain, Qatar and the UAE, and, by way of food aid, to the Sudan and Bangladesh. Having achieved self-sufficiency in wheat, and bearing in mind currently reduced oil revenues, the Saudi Government is now trying to rationalize its subsidy policy. It needs to trim expenditure on subsidies while at the same time continuing to boost agricultural production.

It seems likely this year it will once again try to cut back the prices it pays for wheat purchases from the larger farms, but for this policy to be successful and well received, it will need to be implemented well in advance of the planting season starting in November. Lately the Saudi Government has turned its attention to its most costly food import, barley. In 1984, Saudi Arabia imported around 6 million tons of barley, mainly for animal feed. For this it paid its importers a subsidy of $82 a ton, again almost three times the world price. Now there is talk that the Kingdom will abolish this import subsidy and pay its farmers to grow more barley at home. However, thoughts of attaining self-sufficiency and producing anything like 6 million tons in Saudi Arabia are currently unrealistic. Saudi Arabia's planners will also still be able to call upon, and, if need be, tinker with the existing panoply of financial incentives designed to boost agricultural production.

What does all this mean for interested Arab countries? In bald terms, not very much at the moment. In their present reduced circumstances, other oil producers do not have Saudi Arabia's resources to throw at agriculture. A fair number of them are struggling with budget deficits and even talking to the IMF about stand-by loans. What would the IMF say if Egypt, for example, took Saudi Arabia's lead and spent about $1.3 billion (in 1984) buying in home-grown wheat that could have been acquired on the world market for just $225 million? Such policies fly in the face of the solemn arguments for freer trade, both internally and externally, put forward by the World Bank in its latest World Development Report.

On the other hand, and probably more significantly in the long run, Saudi Arabia has at least shown it is possible to reverse the trend of the Arab world's food deficit. Over the past decade, while they enjoyed budget surpluses, other Arab countries, such as Iraq and Libya, have also managed to boost their agricultural production, though the momentum has now rather fallen away. There is no reason to doubt that, when the oil market picks up again in perhaps four or five years, the Near East will not be able to turn the necessary resources to agriculture once more.

Andrew Lycett