Domestic credit in the Gulf countries has expanded rapidly, growing at about 30 per cent a year since 2004, and reaching an estimated 56 per cent of GDP in 2007, the IMF said.
Both domestic and external factors have contributed to rising inflation.
On the domestic front, aggregate demand has been growing rapidly. Gross capital formation, including public and private investment, increased from about 35 per cent of non-oil GDP in 2003 to about 48 per cent in 2007.
Since 2003, government current spending has risen cumulatively by 58 per cent, mainly reflecting increases in wages and subsidies.
The private sector has contributed significantly to the spending boom, supported by inflows of FDI and increasing external and domestic debt.
Supply constraints have contributed significantly to inflationary pressures in a number of non-tradable sectors, especially construction. Specifically, shortages of residential and commercial housing units have led to higher rents.
Consumer price inflation has also been affected by external factors.
Rising international prices of food, capital equipment, and raw materials have added to inflationary pressures in goods and services with a large import content, the IMF said.
The depreciation of the US dollar vis-a-vis other majorcurrencies has also contributed to inflationary pressures, but to a lesser extent.
In fact, the GCC countries' average nominal effective exchange rate (Neer) was relatively flat during 2004–06, but inflation in the region was rising.
In the high-inflation countries, such as Qatar and the UAE, inflation rose much faster than the rate of depreciation of the Neer.
Over the medium term, substantial domestic investments will continue to drive economic growth. Aggregate demand is expected to remain strong, fueled by high oil prices and robust growth in the non-oil sector.
At the same time, supply constraints are expected to ease, especially if more rental units come on the market.
While inflation is projected to increase slightly to about seven per cent on average in 2008, it is expected to gradually decrease over the medium term.
Unified inflation data system
The UAE and its partners in the six-nation Gulf Cooperation Council are discussing a unified inflation data system as they push ahead with landmark plans to create the Middle East's first monetary union. A committee grouping GCC statistics officials met in Doha yesterday and debated a common inflation data mechanism, a pre-requisite for the monetary union which is to be initially launched in 2010.
The committee has met three times over the past year to discuss how to bridge the gap in inflation calculation in the six members, which are also seeking standard criteria on debt, GDP growth and other fiscal matters needed to establish a monetary union and create their first single currency. GCC sources said the discussions on inflation data cover unification of the components of the consumer price index, narrowing the gap in the relative weighting of each of those components and issuing timely inflation data. GCC heads of state are expected to decide on the 2010 monetary union deadline when they hold their annual summit in Muscat just before the end of this year.