Gulf oil producers need to study the real causes of soaring inflation rates over the past few years to determine a proper policy response, according to the International Monetary Fund (IMF).
Such response could include a revision of their currency peg to the US dollar but it should be based on the reasons that are driving inflation in the long term, the Washington-based Fund said. In a study released this week, the IMF said the six Gulf Co-operation Council (GCC) are suffering from their second major inflation problem since their first oil boom three decades ago.
It described the present inflation "episode" as relatively mild in the GCC except in the UAE and Qatar, which are suffering from double digit inflation rates coupled with high economic growth.
But the IMF acknowledged what it said was their impressive success in maintaining price stability over the last two decades following the first inflation episode that started during 1970s.
"Inflationary pressures have emerged since 2003 in all GCC countries with the recent oil boom putting tackling inflation on top of the agenda for policy makers in the region," it said.
"Some have blamed these pressures mainly on the peg to the US dollar, others on global shocks related to high food prices, local supply shortages related to rent and demand shocks induced by large fiscal spending and an expansionary monetary stance imported from the US through the peg."
According to the study, such factors had prompted member states to consider anti-inflation measures, including revaluation of their currencies or adopting more flexible exchange rate regime to gain monetary policy independence, higher subsidies, addressing supply bottlenecks, and containing government expenditures.
"Although all these factors might have played a role in the recent inflationary pressures, the design of an appropriate policy response, especially the choice of exchange or monetary regimes, will likely be guided by the forces driving inflation in the long run," it said. GCC states have resisted strong pressure to appreciate their currencies against the ailing dollar.
But speculation about a revaluation has persisted amidst growing inflation in all members. With the exception of Kuwait, which quit the dollar in favour of a basket of currencies last year, all GCC members still maintain the long-standing peg.
Official figures inflation hit a record 13.7 and 11.1 per cent in Qatar and the UAE respectively last year.
It was estimated at 5.5 per cent in Oman, 4.7 per cent in Kuwait, 4.1 per cent in Saudi Arabia and 3.39 per cent in Bahrain, which is not an oil exporter. "The GCC region has witnessed two episodes of relatively high inflation; both of them have coincided with oil booms," the IMF said. " With the exception of UAE and Qatar, the second episode has been relatively milder."
The IMF noted that because GCC authorities have no control over trading partners' inflation, the limited pass-through effect, and
projected global oil prices, containing inflationary pressures under the peg regime would have to be based on containing domestic
demand and addressing non-tradable supply bottlenecks, especially in the real estate sector.
It said: "Containing inflation through expanding the subsidy system has to be balanced with the fiscal and efficiency cost of subsidies. In any case such domestic factors should play only a temporary role. Similarly, the slide in the US dollar is unlikely to become a permanent fixture."