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The issue of inflation has gained major media coverage and social interest in the Arab Gulf region, which has not witnessed such high rates of inflation before. This inflation is expected to continue during 2008.
Practical solutions have not yet been reached to tackle this phenomenon, which has negative impacts on the standard of living.
Inflation - a monetary phenomenon - is always associated with economic systems and rules, and results from high prices, and decline in currency value and its purchasing power. Inflation is a monetary and currency-related problem, and needs proper solutions.
There are also additional factors, such as price monitoring and propping up basic commodities.
However, developing countries do not have the necessary monetary tools to curb inflation, as most of these countries' currencies are pegged to other international currencies, especially the dollar.
When inflation rates rise in industrial countries, the first thing they do is increase interest rates in order to curb price rises and reduce currency in the market. This leads to a decline in loans, available liquidity and consequently eases the demand pressure.
These procedures need an independent monetary system in a country whose currency is pegged to a basket of currencies that gives it the necessary flexibility and allows it to set its currency trends.
Any country whose currency is pegged to one particular currency is exposed to that currency's trends regardless of the economic situation.
And, this is the case with the current situation in the Gulf. High inflation rates require GCC countries to urgently increase interest rates in banks. But, these countries cut interest rates several times in the last three months, just to be in line with the US which reduced interest rates lately.
Cutting interest rates added to the problem, as it encouraged loan taking and increased liquidity in the market, leading to an increase in prices of commodities and services as demand spiralled.
Changing exchange rates against the dollar as suggested by some economic analysts is not a solution. Instead, it is necessary that Gulf currencies be pegged to a basket of currencies.
Being pegged to one currency such as the dollar takes away the necessary flexibility in monetary policy.
GCC countries are currently going through a phase of change towards an affective regional market, which depends on large oil and gas production. They are also on the way of becoming an important financial and commercial centre in both the Middle East and the world.
Such an important economic zone of the GCC countries must have their own monetary policies and trends that meet their domestic economic requirements, to avoid negative impacts or the difference between monetary policies and the current economic situations.
In view of the major economic prosperity witnessed by GCC countries due to high oil prices and high economic growth rates, high inflation rates will be worrying economic decision makers in central banks and ministries of finance.
Alan Greenspan, former chairman of the US Federal Reserve Board, lately emphasised that the disentanglement process is long and tedious.
It needs collective work and coordination between the six GCC nations.
Backing commodities, monitoring prices and controlling bank credits and loans are temporary solutions that will lead to decreasing inflation rates and contribute to the stability of the economies of GCC countries.
The writer is a UAE economic expert.
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