Gene Leon at the IMF’s Middle East and Central Asia Department while addressing a forum on GCC Inflation: trends, sources and policy options, said that domestic demand was expected to remain strong over the medium term, fueled by high oil prices and flow of substantial investments in the region.
Leon was among the other experts, policymakers and representatives from the private sector who at the forum discussed growing inflationary trends and how to curb upward trends in a price hike across the GCC.
In his presentation he mentioned that in Qatar inflation has surged to around 14 percent in 2007 while consumer prices in the UAE were estimated to have risen to around 11 percent.
Organized by the general secretariat of the Federation of GCC Chambers (FGCCC), the event called the Gulf Forum held in co-operation with the secretariat of the GCC and the Bahrain Chamber of Commerce and Industry.
Leon said that high oil prices were expected to sustain planned public investments. As supply constraints ease rental units increase, he said, so will inflationary pressures in Qatar and the UAE. Talking about the policy options he said that given the pegged exchange rate regimes in most GCC countries, the effectiveness of monetary policy is limited in controlling inflation.
However, Leon said, fiscal policy is the only effective instrument to tackle this issue. “Revaluation of the exchange rate could have a limited impact, but we should keep in mind that inflation has been fueled mainly by supply-side factors and the choice of effective regime should be motivated by more than just the need to reduce inflation,” he said.
Highlighting the factors behind the inflationary pressures across the region, Leon said that domestic factors include supply constraints and tightness in the housing market (increasing rents).
“Other factors include rapidly increasing population and flow of expatriates and ability of expatriates and foreigners to purchase real estate. The abundance of liquidity and domestic investments and government expenditure are also other domestic drivers keeping a pressure on inflation,” he said.
The external pressures, Leon said, include the rising international prices of food, capital equipment and raw materials making the situation even worse in the current scenario. To a much lesser extent, depreciation and the currencies of major trading partners are other factors contributing to the inflation.
The IMF figures also showed inflation rising over 4.1 percent in the traditionally low inflation economy of Saudi Arabia, which is the largest in the Middle East.
Inflation increased by around 5.5 percent in Oman, over five percent in Kuwait and was estimated to have increased by over four percent in Bahrain, according to the IMF.
Khalid Aloush, UN resident coordinator, said that record earnings backed by high oil prices, internal political stability and sound economic management have resulted in a robust growth.
“The GCC’s share in world GDP increased from $ 481 billion in 2004 to $ 791 billion in 2007. Since 2004 all GCC member states experienced growth rate of more than 4 percent yearly 9excpet Kuwait 3.5% in 2007). Qatar has been the leading GCC in economic growth in recent years. Future growth of GCC economies hinge on ability to integrate into the international market and the use of financial resources and human talents to reap the benefits of globalization.”
