The UAE and other Gulf oil producers have resorted to food subsidies and large salary increases in their war on inflation to deflect criticism of the peg between their currencies and the weakening US dollar, according to the World Bank.
Besides soaring rents and food prices, the surge in inflation rates in the Gulf Co-operation Council (GCC) has also been caused by the drop of the dollar against other major currencies as most GCC currencies are linked to the greenback, the World Bank said in a report on the Middle East and North Africa (Mena) region.
"In the GCC countries, the policy response is a mixture of higher public sector pay, selected subsidies, and various initiatives focused on increased price transparency and voluntary price restraint through agreements with supermarket chains," the Washington-based bank said in the report, released this week.
"These should be seen as responses not just to high food prices, but rising prices generally – and as attempts to deflect criticism of the dollar pegs under which five of the GCC countries operate."
"An anecdotal evidence for these countries confirms that property prices are a bigger concern for many people… of course in all six countries, food and housing together account for much of the increase in inflation," the World Bank said.
"While growth was not affected on average, the same cannot be said for inflation, which rose almost everywhere in the region in 2007 and continues to rise in 2008… the spike in 2008 is largely due to food price pressures. Countries which peg their currencies to the dollar, inflationary pressure has been exacerbated by the sharp fall in the value of the dollar relative to other hard currencies, such as the euro and the yen."
The report said all GCC governments had taken measures to curb inflation, including introducing more subsidies on food and increasing the salaries of civil servants. It also referred to recent agreements between the UAE Ministry of Economy and local supermarkets and co-operative societies to fix the prices of common consumer items.
But the report criticised regional states for lacking social protection programmes for their own citizens and the dominant expatriate community in the region.
It said the salary rise for civil servants primarily targeted GCC nationals as most of them are employed by the public sector.
"GCC countries have relied on public sector pay as an insulating mechanism, at the expense of wage-price feedback because most nationals in GCC countries work for the government. Increased public sector pay has offered a method of compensating the national population for the direct effect of food price increases – albeit at the cost of ineffective targeting and complications in the longer-term labour market strategies of these countries [which presume an increased attractiveness of private sector employment]," the report said.
"However, higher food prices have compounded wage pressures in the GCC expatriate population, where the declining value of the dollar had already reduced the value of remittances. Since most expatriate jobs carry low pay, this group is likely to be strongly affected by high food prices. However, GCC countries lack the information base to design social protection measures for either their less well-off nationals or expatriates."
World Bank forecasts showed Qatar would remain the main victim of inflation in 2008 given the sharp growth in its economy, with the rate expected to surge to14 per cent.
Inflation is projected at around 11 per cent in Oman, and nearly nine per cent in Saudi Arabia and Kuwait. According to the report, the UAE and Bahrain have revised or are in the process of revising their CPIs (consumer price index), "which has impeded availability and comparability of recent CPE dates".
The World Bank report put inflation in food prices at as high as 20 per cent in Oman, 14 per cent in Saudi Arabia, around 10 per cent in Qatar and seven per cent in Kuwait.