cover story

How
full is your
t h e B y c o s t o f l i v i n g d e B at e s i n d h u n a i r

basket?

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when we started working on the story of cost of living, we heard only murmurs of assent. But as the month passed, the verdict was loud and clear. the cost of living in Qatar has certainly gone up, and there are statistics to prove it. But in a country that shows such high growth rates, isnt inflation unavoidaBle? who controls the costs, and what are the factors that control the cost of living? while housing is a major factor in the rising of cost of living, Qt poll results and market interviews zero in on the rising food prices as the trigger for the rise. according to the monthly consumer price index (cpi) figures puBlished By the Qatar statistics authority (Qsa), over the past two years, cpi has increased By 3%, which would imply that cost of living in Qatar has increased By a similar figure.

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ost of living depicts the financial resources required to maintain a certain standard of living. CPI is a theoretical price index which measures the relative cost of living over a period of time with reference to the price of a set basket of goods and services. In the absence of taxes, and all other conditions being equal, an increase in the price of the basket of goods and services would mean that at least an equal increase in income would be required to maintain the same standard of living. Head of Valuation Services at Deloitte, Milhan Baig explains that the largest constituent of the CPI is rent, utilities and housing, which accounts for 32% of the index. This is followed by transport and communication, which constitutes 20% of the CPI. This suggests that the cost of living is most sensitive to changes in these two constituents, as they make up more than half of the CPI. And this explains why the CPI index went to record highs in 2008 and then stabilised the next year, to again increase slightly in the year just ended. According to the International Monetary Fund (IMF), Qatars highest inflation rate of 15% in 2008 was driven by a surge in rental prices, coupled with an increase in government expenditure to fuel economic growth. Control measures to decrease rentals were introduced in 2009, which led to a sharp drop in the inflation rate, so much so that in 2009 there was deflation (negative inflation) of -4.9%, says Baig. Dr Alexis Antoniades, Assistant Professor at Georgetown University, explains the effect inflation has on our lives. He says:

Inflation, which is defined as a continuous rise in the price of most goods and services, can have adverse effects on the economy. Rising prices hurt the consumers, they make firms less competitive as the cost of production rises, and they slow down the growth rate of the economy. Supply bottlenecks contributed to the rising prices experienced in 2008. Due to Qatars high growth rate, the countrys population doubled between 2004 and 2008, while housing supply was limited. The excess demand in housing, along with a rise in the cost of construction material, resulted in a significant jump in rental prices. At the same time prices, supply bottlenecks in other sectors (such as schooling), rising food prices and commodity prices worldwide were the main factors that caused the high inflation rate that the country experienced in 2008. The following year the world economy went into a recession and as a result, food prices and commodity prices deflated from the 2008 peak levels. In Qatar, many of the construction projects were completed, adding substantial amounts of residential and commercial space in a market that had already experienced a softening in demand. The excess demand for housing experienced in the previous years became an excess supply in 2009, rental prices collapsed by 40-50%, and inflation declined substantially, he adds. At a more macro level, GDP growth allows for more government expenditure which in turn facilitates further economic growth and the availability of higher disposable income. However, GDP growth may not necessarily be a good thing for the cost of living.

Source: Qatar StatiSticS authority (QSa)

cpi index graph

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More disposable income would mean that, if the supply of goods and services does not increase relative to demand, more money is being spent to buy too few goods. A comparison of GDP growth and inflation provided in the graph corroborates this, says Baig. In other words, the availability of more disposable income in the hands of consumers could mean more spending which increases the demand for goods and services. This is what economists call demand pull inflation. In the past, we have seen the effect of this coupled with rental hikes when inflation increased to rates as high as 13.7% in 2007 and 15% in 2008, he says.

experts

the housing factor

While all this explains the 2008 and 2009 crisis, why does the CPI index still indicate high figures in 2011? As housing and rents constitute a major portion of CPI, lets first explore what variations are shown in this sector. We have figures from a real estate agecy to prove that rents have stabilised since last year and 2012 rent projections say that there will not be too much of a variation in the figures or prices. Real estate agency and analysts DTZs Associate Director, Mark Proudley, says, In general, rental rates across most real estate sectors have remained reasonably stable over the whole of 2011, though we have witnessed some increases on good-quality stock in areas which are limited in supply, such as one-bed apartments or smaller office suites. We believe the trends recorded over the latter half of 2011 will prevail during 2012, with rental rates remaining comparatively stable as new developments reaching completion increase the levels of supply in parallel with new demand driven by economic activity creating employment opportunities and population growth, he says.

for many goods prices are rising fast, but in the cpi this rise is offset by falling rental prices. since households allocate different shares of their income across goods such as housing, food, education, entertainment and health, changes in prices affect different households in different ways. dr alexis antoniades
assistant professor at georgetown university

high on food

that Brings us to the other major component of a rising cpi, food prices.

the situation. Carrefour City Centre's General Manager, David Zamagna, says: The cost of grocery items has increased tremendously, not only in the last two years, but over the course of the last 10 years.(The majority of respondents (54.1%) in the QT Cost of Living survey shop at Carrefour. Another official from one of the other prominent department stores says: Food price increases over the past few years have been a global phenomenon, and no country is exempt from it. In countries like Qatar, where the vast majority of food items are imported,

ccording to Qatar Todays Cost of Living opinion poll, 81.8% of our respondents said that the cost of living had spiralled. About 70% of the respondents believed that the increase in cost was due to rising food prices. To understand how prices have risen over the years, Qatar Today approached leading grocery retailers in the country to understand

the impact will be higher than in other countries. Mohamed Althaf, Regional Director, Lulu Hypermarkets and Department Stores, doubts the authenticity of the reports that show a higher CPI index in the food category. (31.8% of our respondents shop at Lulu.) He says: Last year Qatar had a growth rate of around 15%. None of the other countries around the globe has shown such remarkable figures, and some countries which have had high GDP rates have had equally high inflation rates. In Qatar, if inflation has been controlled in the face of such high GDP rates then it is a commendable effort by the Qatari government. Althaf does agree that prices have gone up in some commodities, but then he dismisses it as a natural phenomenon that every country faces. But what about pulses, which used to cost QR4 per kg in 2006 and now cost close to QR12 per kg? What does this imply? Well, there have been increases in some items. But if you look at other items, like vegetables, they were more expensive than what

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experts
they are now. Meat is also much cheaper, says Althaf. Spinneys Head of Business Unit Elias Tabet says there has not been an increase in food prices. We have not increased prices, as we are not dependent only on the import market. There has been no major price increase from the local market, either. Moreover, we target the high-end customer, says Tabet. Tabet does agree that a price rise has been seen in some commodities, but he believes this is a global phenomenon and not particular to Qatar. Qatar has a bigger concern as it depends on imports from all countries for its supply. Even the basic availability of food items has become a matter of concern, especially in countries like Qatar, which plans for the long term. And that explains why Qatar is investing in farms in Africa, Philippines and other places to ensure they will have priority access to some basic items. The increase in prices is attributed to everything from the growth of China and India as major consumer nations to changes in weather due to global warming, a rise in transportation costs, global population growth, and so on, says an official of a prominent hypermarket, who prefers to remain anonymous. Qatar has very limited production facilities and farms. It imports almost everything, and anything that affects the exporting countries (like natural disasters or even hikes in fuel costs) will affect food prices here. Does that mean that food prices are entirely dependent on the import market? Everything except a limited supply of vegetables and somewhat adequate supply of fish is imported. This includes basic items like flour, sugar, dairy products and oil, and price variations on these items lead to price variations in items produced using these basic items," adds the anonymous official. There have not been particular shortages of specific items, but we need to remember that global crises like Bird Flu have been able to cut off poultry availability, and other incidents like Indias ban on rice exports led to 'temporary availability issues' on these items. This resulted in additional price increases for an indefinite period. But when the restrictions were lifted, price increases eased, and they are now market driven. Since most commodities are imported, where do the retailers source the commodities from? Brazil is the biggest source for poultry not only for Qatar but for the entire world. We have vegetables coming from Europe, India, Philippines and Sri Lanka. Oil comes from the UAE, and so on. Basically, we look at how to deliver the best value for the customer and identify such sources as can help us do the same. We are also constantly on the lookout for alternatives that appeal to the customers, says the official. Lulu employs multiple sourcing, and that is how they keep a check on the prices and availability, says Althaf. We source from the local market, but our main supply is sourced from Thailand, Sri Lanka, Holland, Belgium, some from the US and Lebanon. But when one depends on imports, prices and availability will depend on the market conditions or even the climatic conditions of these source countries. Not if you have multiple sourcing. When we encounter such shortfalls we make it up and go to other sources. Like last year, when there was flooding in Thailand and production was affected,

Qatars decision to maintain its currency peg to the us dollar is likely to restrict the use of conventional monetary policies to moderate inflation, although increasing interest rates could encourage consumers to save more and borrow less. this could help reduce spending levels, but in a country which has one of the highest gdps in the world, high disposable income levels could circumvent its effectiveness.
head of valuation services, deloitte

milhan Baig

Qt poll has the cost of living in Qatar gone up in the past year?

yes 81.8%

no 4.5%

not sure 13.6%

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the consumers

we immediately took action and got our supply from Indonesia. In 2010, India put up a moratorium for exporting non-basmati rice we are not talking of huge quantities, only 250,000 tons this was immediately purchased from Thailand instead. This year we expect a shortfall from Thailand, but then India has had bumper growth. We work efficiently to overcome such shortfalls, says a confident Althaf. This brings in the question of quality, which Althaf clarifies, saying the Qatari market is very strict on what it imports and has quality assurance at different levels to help control that issue.

price control

Zamagna agrees that there has been a global price increase in food items and adds another interesting factor. To protect the consumer, the Qatari government has put pressure on us as the retailer to maintain or monitor price increases, he says. The Ministry of Business and Trade has created a commodity list, which is the list of around 250 items on which the price is blocked and monitored by the ministry. We have to supply the prices of these commodities to the ministry every week. Any price increase from our supplier should be validated and upheld by the Ministry of Business and Trade. In our case, our profit margin is not increasingit is decreasing because we dont

Qatar is a small nation with the worlds highest gdp per head. after winning the 2022 world cup, the state earmarked $200 Billion to Be spent within ten years.
The scale of the enterprise is so huge that it will need nearly 200 million workers to complete the infrastructure works, but the country doesnt have the capacity to cope with such a vast workforce. Demand has naturally outstripped supply, because availability is so low and demand is so high. This is the main reason why Qatar has become one of the most expensive countries in the world. Recent price rises will be nothing compared to what lies ahead. Figures will be astronomical within the next few years. The cost of doing business is not as high as some people think. The recent inflationary ripple is not a healthy phenomenon, but a reflection of the countrys lack of readiness and advanced preparation. The main reason for this is a lack of planning and a paucity of strategies in the country, especially in respect of arrangements for the 2022 World Cup. No schedule has been drawn up yet for the works to be carried out. No committees to monitor tenders have been formed. If there is no timetable in place by the end of 2012 the country wont be ready to host the World Cup, and prices will go even higher as a result of the mess. Right now Qatar doesnt even have the places to accommodate all the expatriate labour that will inevitably be needed in order to bring supply in line with demand.

experts

we believe the trends recorded over the latter half of 2011 will prevail during 2012, with rental rates remaining comparatively stable as new developments reaching completion increase the levels of supply in parallel with new demand driven by economic activity creating employment opportunities and population growth.
associate director, dtz

abdulhadi al-shahwani
Businessman

mark proudley

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retailer
want to put the full impact of the increase in cost price in our margin. We know that the pricing issue is a very serious one in terms of the purchasing power of the people, so we are also fighting against that, says Zamagna. Althaf explains: You cannot have a unilateral price increase. We are not allowed to increase the prices on our own. If we want to increase the price of any commodity it comes under strict scrutiny, and you have to validate the reason for the rise in price, which then needs to be approved. It is a scientific process that they have adopted and it is almost fool-proof. This new rule was introduced during Ramadan to control price rises of around 250 essentials before they extended the period. It is still being practised. More than imposing any laws, they have opened up competition, feels Althaf. To make sure that the items are also available on the racks, the officials also make spot checks. Zamagna talks about another action put in place a year ago by the government. We also have to work on a daily price list from the government. This covers the main fruit and vegetable prices. The prices are fixed and we cannot play with them. We receive this list between 9 and 11 o clock in the morning. As soon as we receive this price we have to apply it in the aisles. The price they are imposing is very low, sometimes below our costs. Zamagna says that cigarette prices have just gone up from QR8 to QR9, but they cannot impose it if they do not get approval from the Ministry of Business and Trade. A step to help the consumer, no doubt, but one that is affecting giants like Carrefour and Lulu. But Althaf is quite positive even in the face of such impositions. Profits have come down, but we have to increase our operational efficiencies and try to get even. We are also working with the Ministry to look at factors like duties that add to our overheads. Ten percent of the cost is due to logistics inefficiencies which have to be worked on. For this we are working in tandem with the ministry to remove the border inefficiencies and congestion at the port. They are implementing this price control all over, and it is not restricted just to groceries but also for automobiles, etc. This is not a one-way restriction; the ministry is trying to make it easier by reducing certain logistical overheads and costs, so in the end all this should be beneficial to the consumer and the retailer. Carrefour is also dealing with the imposition by beefing up its operational efficiencies. We are finding other ways to combat this price increase. We manage our costs and the energy we consume to maintain our profitability.

in our case, our profit margin is not increasing. it is decreasing because we dont want to put the full impact of the increase in cost price in our margin. we know that the pricing issue is a very serious issue in terms of the purchasing power of the people, so we are also fighting against that.
general manager, carrefour city centre

david zamagna

Qt poll where do you prefer to do your shopping? lulu 31.8%

carrefour 54.5%

economics that works

all 22.7%

spinneys 4.5% family food center & other retailers 27.3%

FEBRUARY 2012

Dr Antoniades tells us that overall inflation is low, currently. Yet many people feel the impact of rising prices. This happens because the consumer price index, which is used to calculate inflation, measures only the price of a representative basket of goods. It does not measure the true cost of living for each household. For many goods prices are rising fast, but in the CPI this rise is offset by falling rental prices. Since households allocate different shares of their income across goods such as housing, food, education, entertainment, and health, changes in prices affect different households in different ways, he says. Moving forward, inflation remains a threat to Qatar,

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Qt poll which of these factors have contriButed most to the cost of living? housing rents 25% food 70% all 20%

the consumers

school fees 20%

retailer

electricity & water 10%

the recent price rises have not Been Big; in fact they have Been modest. 2011 was a relatively calm and to some extent staBle year, as supply exceeded demand in residential Buildings.
Qatar charges some of the lowest rates anywhere for electricity and water services to offices, warehouses and management suites, and also doesnt charge housing fees for nationals. All of this made 2011 relatively quiet on all fronts, and although there were some price rises, these were trivial when compared with neighbouring states. Business costs are relatively high, which is due to high rental costs because of the shortage of offices, shops and warehouses, and also the taxes imposed by the state, which are high in comparison with neighbouring states. The salary increase for public sector workers and labourers also did a great deal to worsen the problem of inflation. Higher shipping costs have led to an increase in the cost of importing foodstuffs and a rise in charges for health and education services, as well as an increase in the price of building materials, leading to higher building costs. However, its a fairly slight increase given the growth in construction and infrastructure activity in the country.

we are not supposed to increase the prices on our own. if we want to increase the price of any commodity it comes under strict scrutiny, and you have to validate the reason for the rise in price to then get approved. it is a scientific process that they have adopted and it is almost fool-proof.
regional director, lulu group

kazem al-ansari

owner of al-kazem group

mohamed althaf

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retailer
according to Dr Antoniades, especially when rental prices begin to stabilise and then rise. Global food prices are on the rise again, and spending for the World Cup 2022 will cause supply-side bottlenecks again. The state does pay a lot of attention to the issue of inflation, and serious work is under way to improve measures of inflation. Breaking up the domestic monopolies will be a step forward, as it will open up the market to healthy competition that will bring prices down and benefit the consumers. Communicating the causes of inflation to the public and making an effort to maintain inflation at low levels will help manage expectations about inflation. Often just the expectation of inflation creates inflation, as workers ask for a raise in salaries and firms readjust prices in anticipation." Controlling prices of some goods will not help as wholesalers and retailers will adjust the prices of goods without price control so that their average profit across all goods remains the same, feels Dr Antoniades. According to Baig, inflation can be controlled by either fiscal or monetary policies. Qatars decision to maintain its currency peg to the US dollar is likely to restrict the use of conventional monetary policies to moderate inflation, although increasing interest rates could encourage consumers to save more and borrow less. This could help reduce spending levels, but in a country which has one of the highest GDPs in the world, high disposable income levels could circumvent its effectiveness. Therefore, in the absence of effective conventional monetary policies, the government may look to apply certain fiscal policies to moderate inflation levels. For instance, the use of specific government subsidies (as opposed to direct government expenditure) can help maintain local commodity and food prices within a desired range. (continued on pg 42)

we have not increased prices, as we are not dependent only on the import market. there is no major price increase from the local market, either. moreover, we target the high-end customer.
head of Business unit, spinneys

elias tabet

tHe regional picture

onsumer price inflation in the GCC picked up to 3.3% in 2011, up from 2.8% in 2010, according to analysis from QNB Capital. Despite this small rise in inflation, price growth in the region is below the global average of around 4.5% and well below the 13.8% average that QNB capital estimates for the rest of the MENA region. Part of the reason for the relatively subdued inflation relative to other countries is fuel subsidies. These subsidies have insulated the region from the direct impact of the sharp increase in oil prices, which has seen the benchmark Brent crude rising by 39% on average in 2011, even more than the 34% increase in 2008. Instead, the strongest contribution to inflation in the GCC last year came from rising food prices, driven by shortages in the first half of the year which saw a 23% average rise in the UN Food & Agriculture Organizations benchmark index of basic food prices. Rents saw declines in three of the countries, but increases in the others. In most other price categories, such as communications, there were only mild rises across most of the region. QNB Capitals assessment utilises the full year consumer price index (CPI) data for five countries and an estimate for Oman, based on its data until November 2011. The regional inflation figures have been calculated by weighing inflation in each country against their estimated shares of regional GDP.

Source: NatioNal StatiStical ageNcieS aNd QNB capital eStimateS

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Qt poll do you consider Qatar to have a high cost of living versus your native country?

the consumers

yes 63.6% a numBer of factors could dictate whether the cost of doing Business will increase or decrease, including But not limited to cost of office space, employee housing, salaries, marketing, etc. from a marketing perspective, i Believe that costs are going down as Business owners are starting to market more creatively and effectively, especially online.
Salaries will inevitably go up with inflation, but an essential cost that plays a role in salary packages is the cost of housing. Weve seen real estate prices generally drop and stagnate over the past couple of years, so theres really no evidence that salaries and associated real estate costs are going up any time soon. Furthermore, Qatar has developed an international name for itself and has become an appealing place to live, so hefty salary premiums to incentivise people to move to Qatar are no longer needed, especially in light of the global economy. Add the fact that the government has shown support in instituting initiatives such as Enterprise Qatar or the Qatar Development Bank to assist SMEs from the regulatory and financial standpoints, I would find it hard to argue that the cost of doing business is going up, in the short-to-medium term.

no 18.2% on par 18.2%

Qt poll has your house rent increased in the past year? yes 31.8%

no 68.2%

khalifa al misnad

owner of coreo real-estate

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the consumers

Qt poll have you cut Back on any luxury items?

yes 72.7%

the Business environment has not changed since last year. it will take another year or so for the different initiatives and regulations to Be implemented. no 27.3%

However, the cost of business went down due to rents going down, allowing the overall operations expenses of any business to drop.

shareefa fadhel

cofounder & managing director, roudha centre for entrepreneurship and innovation

Qt poll have car insurance rates increased or decreased? increased 52.4%

(continued from page 40) This is already in place, and the Ministry of Business and Trade is trying to put a cap on rising food prices. Another example would be the government mandating more gas dollars to its sovereign wealth fund to make foreign direct investments, in an effort to reduce the amount of cash circulating in the local market. With less cash circulating in the market, consumer spending and hence inflation can be controlled to some extent, says Baig. Baig also feels that new business development initiatives encouraged by the government, the Qatar Exchange SME Market, Enterprise Qatar and ictQATAR, will over time stimulate new business entrants and thereby increase competition in the market, which is likely to result in price reductions for goods and services. These initiatives may also have the effect of balancing supply with demand to ease the effect of any 'demand pull inflation'. Overall, there is no doubt that a delicate balancing act is required between employing certain economic policies and how those policies translate into changes in inflation and cost of living. Or, as Tabet puts it: We just need more people in the country for the sales to go up. And hopefully for prices and the cost of living to come down, too (With inputs from Peter Larson and Ezdhar Ibrahim)

decreased 0%

same 47.6%

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