Khan Zahid, chief economist and executive of al khaliji's treasury and debt capital markets department, said as the fall of the dollar had caused the Qatari riyal and the dirham to become undervalued by 20-30 per cent, an appreciation of those currencies by as much would "help mitigate the impact of inflation by allowing consumers to catch up with the loss of purchasing power from accumulated imported inflation."

 Zahid was quoted in CPI Financial as saying that inflation in the GCC was aggravated by two factors: a weakened dollar, despite its recent recovery, stoking imported inflation, and temporary supply-scarcity driving up food, commodity, property and rental prices.

However, according to analysts at investment bank Shuaa Capital, the dirham had depreciated against a basket of trade currencies including the euro, Chinese renminbi, Japanese yen, Indian rupee and the US dollar between 12 per cent and 17 per cent since 2006, while the riyal dropped in value by around 13 per cent to 18 per cent. A report by Deutsche Bank AG said the UAE dirham was undervalued by 10-15 per cent and the Saudi riyal by 25-30 per cent.

Most Gulf-based economists concur with the view that while the GCC countries cannot control the rocketing commodity price surge at the source, they can mitigate its impact on local prices by revaluing their weakened currencies. All of the GCC states, except Kuwait, have their currencies pegged to the dollar.

Merrill Lynch said the rapid pace of expansion in the GCC comes at a cost, as it expects inflation to hit 9.7 per cent in 2008. Analysts maintain that relentless inflation is the price that any country has to pay for growth andGCC countries have been battling increasing levels of inflation for quite a few years. Escalating cost of living has become a critical issue for consumers, businesses and policy makers in the whole GCC region, they said.

While Saudi Arabia's inflation has surged to all time record high of above 11 per cent, Qatar and the UAE are reportedly reeling under inflation levels in excess of 14 per cent and 12 per cent. Last year, inflation was at around 14 per cent in Qatar, and 11.1 per cent in the UAE.

Although International Monetary Fund forecast an easing of inflation this year, economists warned of a three per cent surge in inflation across the GCC in 2008. "Inflation will continue to rise for years. We expect inflation in GCC countries to add 2-3 points in 2008 above its level in 2007. In Qatar for instance it is expected to reach 16-17 per cent in2008from 13.7 percent in 2007," said Abul-Haleem Al Muhaissen who heads the studies department at the Federation of Gulf Cooperation Council Chambers (FGCCC).

CPI Financial said it expected inflation rates to remain high this year, at 12 per cent in Qatar and nine per cent in the UAE. This compares with average inflation rates below five per cent until the year 2003.

However, analysts in Dubai said with soaring rents, the main driver of inflation showing now signs of easing, inflation rates would continue to beat 14 per cent and 12 per cent respectively. They said inflation was a natural product of the liquidity-driven economic boom that theGCCis currently enjoying.

According to RGE Economic Outlook for Emerging Markets, GCC countries would continue to lead the region in GDP growth (IMF predicts 6.1 per cent real GDP growth in 2008), with continued high oil prices supporting the large foreign reserves accumulation and fiscal expansion. UAE and Qatar are expected to post the highest real GDP growth rates - eight per cent and 14.3 per cent, respectively.

"Inflation is the 'price' that any country has to pay for growth. If people want to avoid the pain of inflation, they have to pay a price in the form of lower growth. This involves cutting government spending and liquidity, also known as demand, the underlying reasons behind the hydrocarbon liquidity driven boom in the GCC," CPI Financial said.

"GCC governments can cut spending on a targeted basis to mitigate some of the pain. Instead of cutting day-today expenditure, for example through wages and consumption, that have a direct impact on people's welfare, they can stretch out or delay some investment projects farther into the future." While food prices and rents in the GCC recorded steep hikes, construction costs have risen 20 per cent or more in 2008.

By Issac John

© Khaleej Times 2008

 

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