The combination of diets heavily reliant on wheat and wheat supplies dependent on imports means that events in global wheat markets play an outsized role for welfare outcomes in the region, and this link between international markets and domestic welfare will likely strengthen with time. Population growth in MENA is projected to be 1.7 percent per year, significantly higher than the world rate of 1.1 percent (World Bank, 2009). At the same time, the potential for expanding supplies on irrigated lands is severely constrained; per capita water availability is projected to fall by half by 2050, with serious consequences for the region’s already stressed aquifers and natural hydrological systems (World Bank, 2007). As a consequence, projections of the region’s food balance indicate that imports will increase by almost 64 percent over the next twenty years (World Bank, 2009).

When price shocks occur, governments often intervene. In MENA, the interventions come in many forms, but consumer subsidies are the most favored instruments (Lampietti et al., 2011). For example, in Tunisia, Jordan, Morocco, Egypt, Syria, and Iraq, where disaggregated data are available, food subsidies averaged 1.6 percent of GDP in 2009 and totaled $8.1 billion (World Bank, 2011c). More recently, and in response to high food commodity prices and popular uprisings, many governments have expanded consumer subsidies, likely contributing to significantly higher costs.

At the same time, the capacity of governments to shore up safety net programs against high food prices differs among countries in the region (World Bank, 2009, 2011c). All else equal, countries with large fiscal deficits and high cereal import dependency are least able to absorb a wheat price shock. These are mostly the oil importers (Jordan and Lebanon) and the region’s developing oil exporters (Yemen, Iraq and Syria). In contrast, the Gulf Cooperation Council (GCC) countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates) have ample budgetary resources to absorb higher costs, even though they are entirely dependent on the international markets for their wheat. Moreover, in these countries rising food import bills are frequently offset by rising export revenue, because of the positive correlation between energy and food prices. Egypt and Morocco do not have the luxury of ample fiscal space to absorb sustained higher prices, although their higher domestic production levels help cushion price shocks.

Despite the preponderance of consumer subsidies, evidence suggests that international food price shocks are nonetheless transmitted to various degrees to domestic food prices throughout the region (World Bank, 2011c). Over a five year period ending in February 2011, domestic food prices rose, on average, by more than 10 percent annually in Egypt, Iran, and Yemen, and by nearly 5 percent or more in Djibouti, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia and the United Arab Emirates.<sup>4</sup> Rising world food prices have been a major factor behind increases in domestic food prices, typically explaining some 20 to 30 percent of the

> 4 Average annual food price rates of increase are based on 60 months of data, with the following exceptions: 58 months of data was used for Lebanon, and the West Bank and Gaza; and 57 months were used for Yemen.

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