IMF and EU solutions to fight inflation in the Gulf

 

The International Monetary Fund (IMF) and the European Union will propose solutions to the exacerbating inflation problem in the six-nation Gulf Co-operation Council (GCC) when they meet in Bahrain on Monday.

The proposals will be included in two separate papers they will present at a conference on inflation in the GCC. Scores of officials and experts will participate in the two-day conference, which will include several papers on means of tackling inflation that has hit GCC countries over the past two years because of a surge in oil prices, soaring rents and food prices, the decline in the US dollar and other factors.

“The IMF working paper will include the fund’s policies in tackling soaring prices in the Gulf, while the EU paper will focus on the European experience in curbing the increase in prices,” said the Federation of the GCC Chambers of Commerce and Industry, which is organising the meeting.

The UAE Ministry of Economy is presenting a paper along with the participants from the other GCC states.

Abundant liquidity, triggered by high oil revenues and the effect of currencies pegged to a weakening dollar, are fuelling inflation in the Gulf, economists say.

“The growth of money supply in Gulf countries has in some cases exceeded 20 per cent,” leading Bahraini economist Ahmed Al Yusha said. “This reflects in [higher] demand, and consequently affects prices.”

The IMF expects overall GCC inflation to rise to six per cent in 2008, with consumer prices in some member states rising at much higher rates. Most inflation figures for 2007 have not been released, but inflation is estimated to have hit 11 per cent in the UAE and 12 per cent in Qatar.

A key element in higher prices is the sharply higher cost of housing. Even though the region is experiencing a frenzy of construction, there is still a bottleneck in supply.

The increase in the cost of goods that are imported from non-dollar zones is also blamed.

A December study by the Federation of GCC Chambers blamed inflation mainly on the huge money supply and the peg of all GCC currencies – except the Kuwaiti dinar – to the deteriorating dollar.

“Available liquidity that is accompanied by a fixed supply of goods and services… and the drop in the value of local currencies due to the weakening of the dollar” are the two main reasons for inflation, said the Saudi-based federation, which groups the region’s chambers of commerce, industry and agriculture.

The study said the weakening greenback contributes to the “increase in the cost of GCC imports from countries whose currencies had appreciated against the dollar, like the European Union, Japan and China. The imports of the GCC states jumped from $154.5 billion (Dh567bn) in 2003 to $376bn in 2007, a 143 per cent increase”, the study said.

The dollar peg forces GCC central banks to follow the US Federal Reserve in setting interest rates. But while the US central bank continues cutting rates to stimulate a sluggish economy, GCC central banks are faced with expanding economies that were already overheating at the higher rates.

Last week, the Federal Reserve slashed key interest rates three-quarters of a point, lowering the federal funds rate to 2.25 per cent, and most GCC central banks followed suit with cuts of their own. (With inputs from AFP)