Spending spree to boost liquidity and keep inflation high

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27 March 2008
Gulf Arab states are again expected to be tempted by soaring oil prices to overshoot planned spending and keep inflation at their highest level this year despite recurrent warnings by the International Monetary Fund.

Over-spending over the past two years because of a sharp growth in petrodollar incomes has been cited as one of the main factors have pushed up inflation rates in the six countries and triggered IMF warnings and counter-measures by some member states.

But none of the measures involved spending cuts and bankers believe there will be a big increase in actual expenditure this year because of higher revenues.

"I don't see any let-up in this spending spree by the countries," a Saudi banker said.

"Actual revenues are surpassing the forecast revenues and these countries find it an opportunity to carry out some projects and complete shelved ones. Since they are unable to cut current expenditure, I think this excessive spending will only boost liquidity and keep inflation rates high."

In 2006, Saudi Arabia overshot forecast spending by nearly 13.5 per cent and went further last year by boosting expenditure by nearly 17 per cent after its revenues rocketed by around 55 per cent.

The surge in expenditure allied with soaring rents and food prices, a decline in the riyal against non-dollar currencies, and festering liquidity pushed inflation in the Kingdom to its highest annual average of 4.1 per cent in 2007. According to a Saudi investment centre, inflation could rise to 4.5 per cent this year as Riyadh looks set to overshoot spending again , buoyed by the fact that it could net its highest ever income in 2008.

"Actual expenditure surpassed its budgeted total by 17 per cent last year though it was up only 13.5 per cent on actual spending in 2006. The latter number is very significant," Jadwa Investment Company said in a study.

In Qatar, high public spending, a surge in rents and food prices pushed the tiny Gulf country into its worst inflation cycle, with the rate climbing to nearly 12 per cent in 2007.

The government responded by enforcing caps on rents but has not yet heeded IMF calls for restricting expenditure. The IMF noted that, although Qatar's medium-term prospects are very favourable, high inflation remains a concern and its reduction should be a priority.

Figures by the government-controlled Qatar National Bank showed inflation in Qatar has more than doubled in recent years, averaging six per cent during 2002-2006 compared to 2.6 per cent in the preceding five years.

This increase in inflation over the past few years can be primarily attributed to heavy spending and the rapid and sustained increase in housing costs.

Central Bank figures showed a sharp growth in Qatari public spending over the past few years. From around QR36.1 billion (Dh36.7bn) in fiscal year 2004-2005, expenditure jumped to QR50.8bn in 2005-2006 and to QR66.3bn in 2006-2007. Spending was forecast at QR65.7bn for 2007-2008, but bankers expect actual expenditure to be much higher. In Kuwait, which is also reeling under heavy inflation rates, budget spending swelled from KWD6.31 billion (Dh75bn) through 2004-2005 to KWD6.86bn during 2005-2006 and KWD10.3bn in 2006-2007.

Expenditure was projected at KD11.3bn for 2007-2008 and bankers expect Kuwait to be the odd one out as it could undershoot spending in the current budget in an apparent bid to stem inflation.

"The prospects for the government's finances remain extremely impressive as we see oil revenues reaching KWD17.4 bn to KWD18.2bn this year, compared to KWD14.5bn in 2006-2007," NBK said in a report on Kuwait's budget.

The UAE has not yet released figures for its 2007 and 2008 consolidated budget, which covers federal spending and the local budgets of each emirate.

But a budget breakdown for the previous years showed the country has sharply boosted spending to take advantage of oil earnings. From Dh86.6bn in 2002, spending grew to Dh91.4bn in 2003, to Dh96.2bn in 2004 and Dh104.4bn in 2005. It peaked at Dh128.2bn in 2006, but the budget also recorded its highest surplus.

By Nadim Kawach

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