Gulf inflation to climb 3% this year

INFLATIONARY PRESSURE: Gulf inflation will continue to climb for years to come, Al-Muhaissen said. (Getty Images)

Inflation in Gulf Arab countries is expected to rise by about three percentage points in 2008 and will continue to rise for years, an expert at a regional business bloc said on Monday.

Revaluing or depegging from the weak US dollar can ease inflationary pressures for GCC countries only if accompanied by expenditure cuts and tighter monetary policies, said Abul-Haleem Al-Muhaissen, who heads the studies department at the Federation of Gulf Cooperation Council Chambers (FGCCC).

"We expect inflation in GCC countries to add 2-3 points in 2008 above its level in 2007... In Qatar for instance it is expected to reach 16-17% in 2008 from 13.7% in 2007," Muhaissen told newswire Reuters in a telephone interview, adding that his forecasts were on the basis of present policies.

The GCC is a loose political and economic alliance that also comprises Saudi Arabia, the UAE, Oman, Bahrain and Kuwait. Kuwait is the only GCC country that no longer pegs its currency to the dollar.

FGCCC, based in Saudi Arabia, was launched in 1979 by chambers of commerce, industry, and agriculture in the GCC to defend the interests of business.

Inflation is a key challenge across the oil-exporting region, where governments which link their currencies to the dollar are raising wages and subsidies, slapping on price controls and tightening lending curbs to ease the impact of price rises.

"It's difficult to reduce inflation rates or control them in the near future because of the large contribution of exogenous factors," he said, citing Saudi Arabia where 70% of inflationary pressures come from abroad.

Inflation in Saudi Arabia, the largest Arab economy, reached 9.6% in March, its highest level since the 1970s.

RELATED: Saudi inflation hurtles toward 10%

The surge in food prices and the decline in the US dollar have put pressure on GCC countries as large proportions of the population began to feel the pinch of the global rise in food prices at a time when oil prices rose sixfold in as many years.

"When it comes to dealing with the effects of inflation on consumers... the choices are abundant since oil is generating a lot of wealth for these countries," Al-Muhaissen said.

Public wage increases, subsidies, and lower import levies on various food items are among measures some GCC governments have introduced to tackle inflation.

Dollar pegs force GCC states, bar Kuwait, to track the US in cutting interest rates. With the dollar tumbling this year to record lows against the euro and a basket of major currencies, some imports have become more expensive.

The combination of rising prices and falling purchasing power has already triggered riots by migrant labourers in the UAE and Bahrain.

Although currency reform could help ease inflation, it will not solve the problem largely fuelled by high global food prices, Al-Muhaissen said.

"Domestic demand will continue to grow because of the oil surge and this will stoke inflationary pressures," he said. "So inflation is expected to continue rising in the coming few years.

"Revaluing the currencies or dropping the dollar peg alone can't reduce inflation, it has to be done as part of a whole package of measures that should also touch tightening monetary policy and cutting public spending," he added.

In Kuwait, which severed its link to the dollar in May 2007 and has allowed its dinar to rise almost 9%, inflation more than doubled in the seven months to January to 9.5%. (Reuters)

RELATED: Kuwaiti inflation hits record high

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