Revaluation to contain inflation

A small appreciation of the dollar-pegged Gulf currencies will immediately help the region to reduce the prices of basic staples, leading investment bank Shuaa Capital said.

Prices of consumer staples such as food and basic supplies jumped to new highs in the GCC region due to the depleting value of the dollar, shortage of supplies locally and internationally and rising food prices.

Shuaa Capital issued a report on inflation in the region saying the dollar reached new lows and imported inflation in the GCC region, especially in food prices, jumped to new highs.

“The need for a monetary response is more and more crucial at this time,” the report said.

Sahar Tabaja, associate researcher in macro economy at Shuaa Capital, told Emirates Business that food prices are increasing very rapidly in international markets.

“Wheat prices increased by 90 per cent in two months and there is a global bottleneck in supplies of food and other commodities. Most GCC food imports come from Europe, China, India and other Asian countries and their currencies are appreciating against the dollar and accordingly against GCC currencies. So we see high inflation rates.”

She said: “We cited three main reasons for inflation in the region; shortage in property supplies, imported inflation and high liquidity. By revaluating currencies, Gulf central banks will be able to control the last two factors.”

Financial experts agreed that shortage in properties is the main driver of inflationary pressure in the region but they disagreed with the idea that appreciation of local currencies would have immediate impact on prices of basic commodities.

“Increases in rents of properties represent 40 per cent of total inflation in the UAE. Other factors are fuel prices and cost of transportation. So revaluation of the UAE dirham will have a limited impact on food prices because this will reduce original prices of imported commodities but it will not reduce the rents and other costs,” said Ziad Dabbas, financial consultant of the National Bank of Abu Dhabi.