Bahrain, Qatar mull spending cuts

INFLATION BATTLE: Qatar and Bahrain have been warned that the Gulf state must reduce state spending in order to rein in inflation. (Getty Images)

Bahrain and Qatar should rein in state spending as part of plans to curb inflation, which is hovering near record levels in the Gulf Arab region, officials said on Sunday.

"In totality, we want to see lower government spending," Rasheed Al Maraj, Central Bank of Bahrain (CBB) governor, told newswire Reuters in reference to the 2009/10 Bahrain budget.

He made the comments in an interview ahead of a World Economic Forum (WEF) conference in the Egyptian resort of Sharm El-Sheikh.

Like most other Gulf states, Bahrain's dollar peg forces it to track US monetary policy at a time when the Federal Reserve is cutting interest rates to help the US economy ward off recession.

The Fed has slashed rates by 275 basis points in six moves since September 18.

Bahrain inflation hit 5.24% in March on food prices and rents.

"We'd like to maintain the growth [real GDP] level between 6.5 and 7%," Bahraini Finance Minister Ahmed Al Khalifa said. "The challenge is to keep growth ahead of inflation."

Citing the Qatari emir's economic adviser Ibrahim Al-Ibrahim, London-based Meed magazine said in its latest issue his country was carrying out a review of government spending.

"We are restructuring our government to make sure there is no inefficiency or weakness," Al-Ibrahim said. "The main thing is to convince [the government] you cannot do everything. If you do everything, it will be transferred into inefficiency and then, ultimately, inflation. We have to define priorities," he said.

Plagued by price rises, Gulf governments have boosted subsidies, introduced rent controls, raised state employee salaries, increased welfare payments and slashed import duties to offset the impact of inflation on their populations.

Although currency reform could help ease inflation, Gulf Arab states, bar Kuwait, have repeatedly said they would not revalue their currency pegs to the weak dollar.

"[Cutting government spending] is the most important policy tool available to them [Gulf countries] at the moment," Hany Genena, senior economist at Bahrain-based Gulf Finance House said.

Qatar is trying to cap inflation at its current level of 13.7%, below a peak of 15% seen earlier this year, the country's finance minister told Meed.

"My government is trying to keep inflation at not more than it is today," Youssef Hussein Kamal said.

"I think inflation is now 13.7% from the peak of 15%."

Inflation in Qatar, which has yet to publish first-quarter data, rose slightly to 13.74% at the end of December, its second-highest figure on record, as rents and food prices surged.

Around 70% of the country's inflation was now driven by domestic factors, Meed said, citing Kamal.

Kamal said in March that a two-year rent freeze introduced at the start of that month and plans to increase housing supply would help curb inflation.

He said a 30% rise in global food prices in 2008 and 2009 and an increase in building material costs would also keep inflation at about 13.7%.

"If we compare inflation in Qatar with all the GCC, I think now we are at the same level," Kamal told the magazine. "Saudi Arabia and Kuwait, of course, have less inflation than we have but now I think we are almost on the same level because we grew more than the others earlier." (Reuters)

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