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Dubai: Gulf countries should revalue their currencies to stem rising inflation or risk harming the competitiveness of their diversifying economies, ratings agency Fitch warned in a report yesterday.
It said inflation in the six Gulf Cooperation Council (GCC) states is set to worsen because the governments lack effective policy tools to control the price rise resulting form the US dollar's decline against the world's major currencies.
"GCC inflation is its highest in over 30 years. As in the 1970s, some of the region's increased oil wealth is feeding through into higher prices, and with policy tools limited, inflation will rise further before it starts to fall," said Richard Fox, head of Middle East and Africa Sovereign Ratings at Fitch.
The ratings agency said inflation will damage the GCC's economic competitiveness.
"It could also discourage investment and slow the drive to diversify econ-omies away from oil. Some projects will have to be abandoned because of soaring costs," it said in the report Inflation in the GCC - A Growing Concern.
Double-digit
Oman, Qatar and the UAE are experiencing double-digit inflation, while it is close to 10 per cent in Kuwait and Saudi Arabia. Bahrain's inflation rate of five per cent is seen as "more moderate".
Because their currencies are linked to the US dollar, Gulf countries have been lowering interest rates to match US Federal Reserve's reduction of rates since September.
"Real interest rates [in the Gulf] are increasingly negative; fiscal policy is expansionary and administrative measures have had little impact on the main inflation drivers rent and food," said Charles Seville, associate director and the report's main author.
Fitch said the region's increased oil wealth "warrants an increase in real exchange rates."
"With the exception of Kuwait, GCC countries have yet to take the step of revaluing their currencies against the US dollar, the one measure which could, at least in the short-term, bring some relief from rising prices," the report said.
It said inflation "could also raise political risks" because of the fall in citizens' purchasing power.
Gulf countries have adopted different measures, including salary hikes and subsidies, to lessen the impact of inflation on people.
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