Inflation has accelerated across the world’s biggest oil-exporting region, touching a 27-year peak of 8.7 percent in Saudi Arabia and an 18-year high of 11.1 percent in Oman and just off a record at 13.7 percent in Qatar.
“Inflation is the biggest challenge in the Gulf because we are pegged to the dollar,” Sheikh Khaled bin Zayed Al-Nahayan, chairman of Bin Zayed Group, said at a conference in Dubai, the Gulf region’s commercial hub.
“As the United States fights recession, we are pegged and throwing fuel to the fire … We don’t have the right tools,” said Nahayan, who is also chairman of Tamweel.
Almost two-thirds of Gulf executives have said the pace of inflation was having a negative impact on their businesses, an HSBC survey showed last week.
Dollar pegs force Gulf oil producers to track US interest rate cuts while the dollar’s tumble to record troughs against the euro this month has driven up import prices.
Inflation in the United Arab Emirates, the second-largest Arab economy, hit 9.3 percent in 2006 and probably accelerated to a 20-year peak of 10.9 percent last year, according to a National Bank of Abu Dhabi estimate.
“We are feeling it,” Sheikh Khaled told Reuters of inflation’s impact on Bin Zayed’s business, which is mainly focused on the real estate and construction sectors.
“You have to increase your prices as it’s costing more now and the most important thing is the drop in low-margin businesses,” he said.
The UAE last week accepted a committee’s recommendation to keep the Gulf Arab oil producer’s dirham pegged to the dollar at the current rate.
“De-pegging won’t be the answer to inflation,” Sheikh Khaled said, citing domestic factors, such as rents, as the main drivers.
“Inflation needs to be managed internally rather than externally,” he said.
The country’s Central Bank Governor Sultan Nasser al-Suweidi called for currency reform in November after more than 30,000 South Asian construction workers rioted in Dubai over savings lost to the dollar’s weakness.
He has since repeatedly backtracked on those remarks, pointing to the dollar peg as a source of stability and a way of attracting foreign investment.
Any reform of currency policy would happen only in concert with Gulf Arab neighbours preparing for monetary union as early as 2010, Suweidi said this month.
Kuwait’s central bank severed the dinar’s peg to the dollar on May 20, 2007 and started tracking a basket of currencies, saying the dollar’s decline on global markets was driving up inflation and making some imports more expensive.
It has declined to give the composition of the basket, saying only that the dollar is its biggest component.
