UAE to have lowest Arab inflation in 2011

A continued downturn in the real estate sector could allow the UAE to record the lowest inflation rate in the Arab world in 2011 despite massive public spending, according to a Western report.

Inflation in the UAE, the second largest Arab economy after Saudi Arabia, is projected to edge up from around 0.6 per cent in 2010 to 1.9 per cent in 2011 on the back of higher global commodity prices and a surge in public expenditure, showed the report by the Washington-based Institute for International Finance (IIF).

Despite the rise, the rate will be the lowest in the Arab region, with that in Saudi Arabia projected at as high as 5.7 per cent.

Most other Gulf oil producers and Arab nations in other parts of the Middle East will likely see an increase in inflation rates this year because of the rise in commodity prices, including oil imports.

“Inflation is on the rise across the Arab region, led by higher global food prices and substantial increases in government pending. To forestall discontent arising from political and economic conditions, most governments in Arab countries announced supplementary spending programmes,” IIF said in a report on the Arab world in light of the current political turmoil.

It showed inflation in Saudi Arabia, the world’s dominant oil power, would rise from 5.4 per cent while it is expected to swell from around four per cent to 6.2 per cent in Kuwait.

Inflation will rise from 1.9 to 2.4 per cent in Bahrain and from 3.3 to around 3.6 per cent in Oman, IIF said.

In Qatar, the fastest growing Arab economy, inflation is forecast at around three per cent this year after the world’s largest gas exporter recorded a deflation of about 2.4 per cent in 2010.

Outside the Gulf, inflation is projected at 15 per cent in Yemen, 11.5 per cent in Egypt, 10 per cent in Sudan, eight per cent in Syria, seven per cent in Iraq, 6.5 per cent in Lebanon, 6.1 per cent in Jordan, 5.1 per cent in Algeria, 4.2 per cent in Tunisia and around 3.3 per cent in Morocco. The report gage no 2011 figures for conflict-battered Libya, where inflation stood at 2.5 per cent in 2010.

For the six-nation Gulf Cooperation Council (GCC), the combined inflation rate is expected to rise to 4.4 per cent this year from 2.9 per cent in 2010. IIF projected the combined Arab inflation rate to grew to nearly 5.7 per cent in 2011 from about 3.4 per cent in 2010.

“In Saudi Arabia and Kuwait, the spending increase will generate more inflationary pressures as domestic demand was already Strong….in the UAE and Qatar, inflationary pressures will remain limited as a further fall in rents, albeit at a slower pace, will partly offset the rise in food and other items.”

The report showed that despite the surge in public expenditure, the consolidated fiscal surplus of the GCC will widen from 7.9 per cent of GDP in 2010 to 13.2 per cent in 2011 under the assumption of an average oil price of $115 per barrel for Brent.

“The sharp increase in government revenue from oil and gas due to higher crude prices, and an expected five per cent increase in export volumes for the GCC as a whole (28 per cent increase in LNG exports in Qatar), will more than offset the substantial increase in government spending in Kuwait, Qatar, and Saudi Arabia,” it said.

“In the UAE also, the consolidated fiscal balance will show a large surplus equivalent to 7.2 per cent of GDP in 2011, as compared to a small deficit of less than one per cent in 2010.”

In the Arab oil importing countries, the political upheaval in the region will widen their fiscal deficits and postpone the much-needed fiscal reforms, said IIF, which groups several key Western bank.

“To help mitigate the adverse impact of the spike in global food and oil prices, most oil importers increased food and fuel subsidies, raised wages and pensions, and expanded employment in the public sector. This, combined with weaker economic activity will widen the fiscal deficits for oil importers as a group from six per cent of GDP in 2010 to nearly 7.4 per cent in 2011.”

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