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The Economic Effects of Ramadan: An Analysis


15-06-2016
English | العربية

Elizabeth McKinney-Bennett

Senior Non-Resident Fellow -Global Affairs


Tag: Middle East economy Policy Analysis Public Policy Research
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During the holy month of Ramadan, Muslims across the world are obligated to fast between dawn and sunset. While the physiological effects of fasting are well studied and accounted for, there are fewer analyses on the economic consequences of Ramadan. However, in an increasingly-global market place, and particularly for Dubai and Abu Dhabi as centres of international commerce, questions about the economic effects of Ramadan are becoming increasingly important to international markets and investors. 

 

Whilst  independent international analyses have been carried out (such as that by Professors Felipe Campante and David Yanagizawa-Drott,  public policy professors at the Harvard Kennedy School, who studied the effects of Ramadan fasting on economic performance in Muslim countries, analysing over six decades of data in order to establish whether or not Ramadan has a negative economic impact ), it is notable that neither the Organisation of Islamic Countries (OIC) nor its constituent countries have ever undertaken or commissioned research to assess the precise impact of Ramadan on their respective economies. What is perhaps more surprising is that global organisations, such as the World Bank, the International Monetary Fund and the United Nations Development Programme, have also resisted carrying out this research; perhaps because of its culturally-sensitive nature.

 

 

The prevailing narrative - and certainly in the West - tends to assume that there is an overall decline in economic activity during Ramadan; yet in reality, the answer is rather more complex.

 

 

There is evidence to show that fasting in the month of Ramadan could have a negative effect on the health of employees which, in turn, may have an adverse impact on productivity and economic output of majority-Muslim nations. In most of these countries, the private and public sectors shorten their workdays by two or three hours to alleviate the physiological consequences of fasting and to allow employees to participate in Ramadan-related activities. In the United Arab Emirates, the work day is shortened by two hours by law. In 2012, the UAE's Ministry of Labour imposed a ban on outdoor work between noon and 3pm in order to protect fasting manual workers from increased susceptibility to heat illness and this policy is strictly policed by the authorities.

 

 

In their study, Professors Felipe Campante and David Yanagizawa-Drott  found that  the longer the period of fasting, the greater the effect on productivity. This is particularly evident when Ramadan (as it is based on the fluctuating, lunar-based Islamic calendar) falls during the summer months in north European countries, as is the case in 2016. The duration of the daily fast this year in Scotland, for example, is around 21 hours; in Greenland, there is a midnight sun!

 

 

However, studies show that the economies of Muslim-majority countries do not simply slow down during Ramadan; rather, their economies change. As these countries grow their role in the global economy, they are more likely to find ways to mitigate the domestic economic effects of Ramadan to ensure competitiveness in the global marketplace. For example, instead of reducing working hours during Ramadan in Malaysia and Indonesia, some companies employ policies which adjust working hours so that all employees start and end their workdays earlier. In Saudi Arabia, where many staff in the financial services sector are non-Muslims, the government allows only Muslims to limit their working hours during Ramadan. Although in perhaps a more inclusive manner (as befits a global employer), this motif is similarly seen in the UAE, where global companies such as Emirates Airlines effect a popular 'culture swap': allowing Muslim staff to work restricted hours during Ramadan, and repaying the favour for Christian colleagues during the Christmas holidays: evidence of a multi-cultural and truly enlightened - yet profit-driven - business!

 

 

Efficiency studies suggest that productivity declines not only from the physical strain of fasting but from the disruption to the flow and organisation of work and the postponing of decisions and delays in processing of transactions - particularly in respect of government entities. Even the Dubai Police offer advice to motorists reminding them that patience is shorter, tempers may fray more easily and minor road traffic accidents will occur in the hour before the end of the fast, as people race home in time to share Iftar with family and friends.

 

 

If one assumes an average of  21 working days per month, the shortening of the working day translates to a loss of 42 working hours. So, if on average, 1,700 hours are worked during the year, this loss represents a 2.5% reduction in output per year.  It is therefore reasonable to assume that decline in productivity would further reduce economic output by at least 3% each year, which would represent a significant annual recessionary impact of Ramadan.

 

 

However, evidence shows that, whilst this may suggest a significant short-term decline, the annual effects are limited: the Dinar Standard study revealed that in the weeks following Ramadan, increased levels of productivity quickly compensated for the economic losses in the majority of countries.

 

 

Furthermore, studies have also shown the social and spiritual components of Ramadan can positively influence international stock markets. A 2011 report by the University of Leicester looked at markets in fourteen Muslim countries (Bahrain, Egypt, Indonesia, Jordan, Kuwait, Malaysia, Morocco, Oman, Pakistan, Qatar, Saudi Arabia, Tunisia, Turkey and United Arab Emirates) between 1989 and 2007, which revealed that on average, stock market returns in Muslim-majority countries during Ramadan were almost nine times higher and far less volatile than they were during other times of the year. According to Dr. Tomasz Piotr Wisniewski of the University of Leicester, this could indicate a “.. heightened sense of social integration and possible salubrious effects of the changed dietary regimen.”. Or, in other words, the self-imposed virtue and sense of community promoted in the Muslim world during Ramadan  helped to improve markets. Moreover - and though perhaps oxymoronic - this phenomenon has occurred most years, regardless of whether the world is in the grip of a global economic depression or is enjoying a boom year. 

 

Zakat

 

 

 

 

 

 

 

Another key religious imperative of Ramadan is the principle of Zakat. This is the mandatory contribution for all Muslims to donate at least 2.5%, or one-fortieth, of their wealth each year to benefit others in need. Some countries have institutionalised it (namely Libya, Malaysia, Pakistan, Saudi Arabia, Sudan and Yemen), whilst others have instituted a voluntary system (such as Egypt, Indonesia, Iran, Lebanon and United Arab Emirates). Any statistics which consider Zakat evince a strong effect on Muslim countries: in Kuwait, with a population of only 2.5 million, the Kuwaiti Zakat House has registered financial aid totalling $575 million since its founding. In Pakistan, the Ministry of Zakat and Ushr showed $160 million in 2006-2008 and $92 million in 2009-2010, whilst in UAE, the non-institutionalised Zakat Fund’s total income reached about $12 million with an additional $3 million at the end of 2010. In Saudi Arabia, Zakat makes up the majority of the Kingdom’s public revenues in the non-oil sector, accounting for $18 billion in 2007. These are considerable sums which should be seen as a clear riposte to those (mainly in the West) who may castigate the Muslim world for its perceived lack of engagement in charitable endeavour.

 

 Consumer spending

 

 

 

 

 

 

 

 

 

 

Beyond fasting, Ramadan has a prominent social and spiritual component, which encourages Muslims to spend more time with their families, participate in community gatherings, and contribute to charities. So, while productivity may arguably decline during the month, spending increases significantly due to Ramadan related activities. A 2010 survey by Nielsen Indonesia recorded a 9.2 percent growth in sales of consumer goods from all income levels in Indonesia during Ramadan. Similarly, the central bank of Saudi Arabia claimed in 2014 that household spending during Ramadan reached a record $193 billion.

 

 

Despite the apparent privations, in countries where Muslims are the majority, consumption increases during  Ramadan. This happens not only in high-income countries, such as Qatar and the UAE, but also in developing countries such as Indonesia. Traditions such as shared meals, new clothing and gifts spur consumer spending during Ramadan, and preparations for Eid al-Fitr, the end of Ramadan, further drive this trend.

 

 

Meals taken during Ramadan help reinforce family ties and increase social interactions. In the fasting month, Muslim families usually have Sahur – the pre-dawn meal – and Iftar – the fast breaking meal – together, with more elaborate menus than in other months, which generally necessitates greater spending on groceries and ingredients. People also have more social gatherings by breaking the fast together in restaurants, at malls or in mosques.

 

 

Even non-Muslim countries benefit from Ramadan: the Indonesian government has to ensure that beef, the main ingredients for the festive meals, is stocked for Ramadan and Eid holidays. Thus Australia, as the biggest exporter of live cattle to Indonesia, benefits economically from the Ramadan season. In the US, the market for halal-certified foods has soared in the past decade. The Islamic Food and Nutrition Council of America (IFNCA) recently estimated an 80% growth in the market for halal-certified ingredients and food products since 2005. "This increased interest for U.S. halal market ingredients and products," according to the IFNCA statement, "may reflect the overall estimated $170 billion US dollar purchasing power of American Muslims."

 

People take the time to visit family and friends during Ramadan and Eid al-Fitr. In Muslim majority countries, the time around Eid is a long holiday, so spending on travel, accommodation and leisure pursuits increases concomitantly. In Indonesia, the government obliges employers to pay a religious holy day bonus. This one-month salary bonus helps increase the public’s spending power during Ramadan and Eid.

 

 

For many businesses, the positive side of Ramadan is a higher demand for goods and services and higher consumption, regardless of the restricted trading hours during the day. Despite government intervention to regulate prices, such as in the UAE, to prevent consumer exploitation, in reality this often means higher prices for goods and services, which translates into higher profit margins for merchants, supermarkets, stores, restaurants and cafés - especially those which arrange amusement programmes for after Iftar.  When Ramadan coincides with the summer vacation, this is an added advantage for cafe owners. One man, who runs a cafe on King Fahd Road in Jeddah, Saudi Arabia, told researchers last year that "There has been a 100% increase in the number of customers during the holy month." he said "Ramadan attracts huge increases in profits compared to the rest of the year.".

 

 

In the Muslim world, Ramadan also brings with it special entertainment. Television scheduling for the period of Ramadan is very much geared around the fact that groups of friends and extended families are sitting together, watching the latest specially-made soap opera episodes which attract millions of viewers across the Arab world and beyond. The Ramadan period also therefore sees a significant increase in advertising revenues and particularly during key 'cliff-hanger' soap opera episodes - of which there are many.

 

 

Ramadan - and particularly Eid - is also a time when everyone exchanges gifts and men, women and children seek new clothes for the festive season. Even western couturiers and high-street retailers have identified the Ramadan and Eid period as a peak retail opportunity and have launched specific 'modest fashion' collections to exploit this burgeoning market in the Middle East and beyond.

 

 

But, in the same manner as Christians bemoan the rampant commercialisation of Christmas, many within the Muslim community are becoming concerned that Ramadan is losing its meaning and becoming a commodity, increasingly being seen by commercial enterprises as an opportunity to make a profit. Many people fear the original intent of the fasting, prayer, privation and Zakat-offering has been lost amidst this commercialisation, giving way to overindulgence and commoditisation of the Holy month. People stay up all night and they overeat. In some places food consumption goes up two or three times and people actually put on weight during Ramadan, which defeats the purpose of seeking communion with those who suffer hunger and deprivation. Some even invert their lives, becoming nocturnal in their social life and sleeping through the 'difficult' daytime hours.

 

 

Yet, it is evident that, contrary to some lazy Western narratives, Muslims do not seek the excuse of religious imperative to curtail their work during Ramadan, nor does it damage Muslim countries' economic output:  on the contrary, the Holy period of Ramadan offers a real opportunity for all Muslims to benefit from - and contribute fulsomely to - the religious, social, economic and charitable fabric of their nations. And whilst maintaining international economic and commercial competitiveness during Ramadan is important, it is evident that any economic consequences which may occur during the month are more than compensated for in the fullness of time - but more importantly, in the happiness and satisfaction of the people for having obeyed and fulfilled their religious imperative.  


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