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Dubai: Gulf states are facing a "very tricky time" in trying to control inflation because they cannot use monetary or exchange rate policy tools, and any fiscal actions they choose will have their own distorting effects on the economy, according to an IMF official.
"Monetary and exchange rate policies are tied to the US, which is in the middle of a downturn, while the GCC is going through a boom," said Mohsin Khan, director for the Middle East and Central Asia in the International Monetary Fund.
Taking any fiscal action now means "pain in the economy", said Khan, addressing the annual conference of the Emirates Centre for Strategic Studies and Research. However, he added that taking no action would only prolong inflation: "If governments do not act now, inflation will last longer," he said.
As an illustration of the severity of the change, he referred to the situation in Saudi Arabia where for years inflation drifted between one to two per cent, and is now running at 8.5 per cent. "We used to talk of what action or intervention would be needed if inflation went over two per cent, but it is way past that now," he said.
In the medium term Khan was optimistic for the Gulf economies. He foresaw four significant medium term features for the region: domestic demand remaining strong; average Gulf inflation at seven per cent; huge current account surpluses continuing the GCC playing a very important regional role.
The substantial current account surpluses built up since 2003 were the focus of Khan's optimism. "The high oil price has transformed the region's situation," he said.
"They started growing substantially in 2003, and the governments did not spend this extra money. Partly because they were being cautious and partly did not expect the oil prices to remain so high. As a result, more than $700 billion extra money has mostly not been spent and has been invested, so it is available for use," he said.
He noted that foreign investment into the Gulf (mainly in the oil sector) and outward investment by the Gulf states (mainly in real estate) are about level.
Outward Gulf investment has been supported by the new GCC interest in the Middle East. Egypt has had the most investment with over $3 billion, with Tunisia and Lebanon following just behind with just under $3 billion.
GCC current account surpluses
- Year - Amount
- 2003 - $50 billion
- 2004 - $80 billion
- 2005 - $160 billion
- 2006 - $205 billion
- 2007 - $225 billion
- Total - $715 billion
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