IMF warns Gulf of inflation threat

BRIGHT FUTURE: According to the IMF, rising prices are the region's most serious challenge in the short-term. (Google Maps)

The International Monetary Fund (IMF) on Monday warned the Gulf that inflation was the most serious economic issue it faced in the short-term, particularly because economies in the region do not have the tools to cap rising prices.

Publishing its biannual report on Regional Economic Outlook for the Middle East and Central Asia, the IMF said that inflation in just the Arab Gulf region wil average 7.1% this year, up from 6.1% in 2007, driven by persistently high fuel and food prices, strong domestic demand, and supply bottlenecks.

"Inflation is now a serious problem - because there are very few ways of tackling it," Mohsin Khan, director of the IMF's Middle East and Central Asia Department, told the UK's Financial Times (FT) in Dubai. If the Gulf tried to increased wages to solve rising prices, Khan said, it risks a region-wide inflation spiral.

Rising prices, already affecting the UAE and Qatar, had spread across the GCC members to traditionally low-inflation countries such as Saudi Arabia, where inflation is approaching 10%.

RELATED: Saudi inflation hurtles toward 10%

Central banks in the region lack any monetary policy tools to tackle inflation as many regional economies are pegged to the dollar, thereby limiting policymakers' tools to only fiscal spending, rent caps and price subsidies.

"Do you slow down fiscal spending and delay development of the economy or live with fiscal spending and inflation - that's a tough choice for policymakers," Khan told the FT.

"Inflation creates social pressure, demand for transfers and wage increases, which runs the risk of inflation becoming entrenched."

Khan also said that unlike Kuwait which depegged from the dollar last year, other Gulf state will not depeg or revalue their currencies, because any benefits from trying to relieve inflation would be marginal when compared to attacks on their currencies by market speculators.

Last November rumours of a revaluation in the UAE, first published by ArabianBusiness.com, sparked speculative inflows of $45 billion in one month, almost a third of the UAE's gross domestic product.

RELATED: UAE revaluation as early as Sunday

The main long-term challenge for Gulf countries, and others in the wider Middle East, would be creating jobs for the region's growing youth population, the report also said.

Overall, the Middle East and central Asia as a whole are set to continue their strong performance as emerging markets, with oil-exporting countries seeing growth pick up to 6.25%.

Oil and gas exports in the region will amount to $940 billion this year, almost $200 billion more than in 2007, as an almost five-fold increase in the price of oil bouys GCC revenues. The IMF estimates that the the Gulf's combined GDP will reach more than $1 trillion this year, up from $805 billion in 2007.

The region's external current account surplus, set to grow to $1.4 trillion for 2004-2008, allows the Gulf to continue to invest abroad, while at the same time coping with a rise in imports and investments into their economies.

Foreign direct investment into the region was four times as high as in 2002, reaching $80 billion in last year, 55% of which went into Egypt, Saudi Arabia and the UAE.

Inward investment would also face increasing uncertainty, Khan said, if prices continued to rise.

"If inflation persists it could be that, at the margin, investment could fall," he said.

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GULF INFLATION THREAT
Posted by BUDDHADEB MOOKERJEE, Dubai, U A E on Tuesday 13 May 2008 at 17:16 UAE time


That inflation is a serious problem is stating the obvious. It does not require an IMF Director to observe. It has always been a problem. But the more serious problem is lack of effective fiscal measures being taken by the authorities despite the nagging problem persisting over nearly a year. Problems can be very seruious but solutions are always simple. The authorities need to identify these sooner that later.

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