Strategy

The Ramadan effect

The surprising economics of Ramadan show that sometimes less is more.


 


(Photo: Shakil Adil/Associated Press)

Ramadan, the holiest month of Islam, which began July 20, is often seen as a time of “less.” The faithful refrain from eating, drinking, smoking and sex from sunrise to sunset. Yet a closer look at the numbers shows that the annual observance results in both economic losses and gains.

For starters, economists have shown there is a calming “Ramadan effect” on the stock market. Returns were higher and markets less volatile during the holy month in 14 Muslim nations between 1989 and 2007, according to a 2009 paper co-authored by a group of university professors from New Zealand, the U.S. and the U.K. They proposed that observant traders were investing in a more morally conscious way.

As well, Muslims stock up before the holiday and feast at sunset, meaning consumption of some goods actually rises. That puts pressure on commodity prices and drives up inflation. Many governments are forced to impose temporary price fixing on staples in response. The month’s end brings further jolts, as Muslims typically splurge on a wardrobe of new clothes.

Still, Ramadan does take an economic toll. Fasting workers go without food and water for 14 hours a day. To help employees cope, governments mandate a reduced six-hour workday in many majority-Muslim nations.

Losing about 40 hours of work takes a predictable bite out of productivity. A 2011 study by consulting group Dinar Standard suggested that Ramadan slashes GDP by roughly 4% per hour that the workday is shortened. In Egypt, that would have translated to US$1.4 billion lost last year; in Saudi Arabia, US$2.4 billion. With Canada’s Muslim population set to triple by 2030, economists here might do well to start factoring the Ramadan effect into our forecasts too.