Inflation is becoming a serious problem for the Gulf states, and the Gulf governments are not used to managing this sort of situation. They do not have an institutional memory of how to handle inflation, and are consequently looking for the right tools to bring inflation back under control.
In addition, the governments are contending with sustained public outcry and debate about the effects of the high inflation on both businesses and individuals.
The business communities of the Gulf Cooperation Council (GCC) countries are well able to make their points to the authorities, but any dialogue between the wider population and the governments is not channelled and lacks focus.
Inflation ran at an average of just over 6 per cent across all the GCC states during 2007, and was highest in Qatar at 12 per cent and the UAE at 10 per cent, according to the IMF's latest figures presented in Abu Dhabi last week at the Emirates Centre for Strategic Studies and Research (ECSSR) conference.
Even Saudi Arabia which has not had inflation over 2 per cent for as long as anyone can remember is dealing with 6 per cent today.
The GCC governments' main problem is that they do not have many policy options open to them since (other than Kuwait) they are all committed to a fixed link between their currencies and the US dollar.
This link has brought currency stability to the region for decades, but now it means that the GCC states are going through a boom with their currencies tied to the US just as it goes through its worst recession for many years. This means that the GCC states are importing the USA's reflationary policies, just as they should be calming their own economies.
In terms of policies, the fixed link to the dollar means that both monetary policy and exchange rate controls cannot be used to ease inflation. This leaves the governments only one policy tool to work with, which is intervening in the markets to try to control prices.
In the UAE there have been several government initiatives to try to control prices: Dubai has had rent caps for a few years now; import tariffs on some construction basic materials were waived a few months ago; and most recently the authorities have been working with several food retailing chains to keep prices at 2007 levels for a range of basic foodstuffs.
Determined
This activity has not stopped the business and financial communities from calling loudly for the GCC governments to revalue their currencies. Several months ago they wanted the governments to move to link the currencies to a basket of currencies, but that idea did not get very far as all the GCC states except Kuwait remained determined to keep the link to the dollar.
The business community then switched to asking for a revaluation of the Gulf currencies against the dollar, and have continued to do so despite repeated assurances from all concerned that this will not happen.
All central bank governors, ministers and other leaders have been very clear that there will be no revaluation, but the business community still insists on asking for one.
One reason for the business community's continuing insistence is that they have not really believed the government's denials of any wish to revalue, for the obvious reason that if such a move was planned, no-one in authority could say so. If they did, the markets would take immediate advantage and so wreck any value the move would create.
However, continued government statements are making it clear that the governments are committed to the present level of their currencies against the dollar.
The UAE's Central Bank governor was quite explicit when he said last week that the dollar link was agreed and confirmed at the last GCC summit and he made clear that it is only at that level that any debate on this issue may be had.
The five GCC governments still on the link want to be as united as they can manage on this issue (other than Kuwait), and the last GCC summit was very clear that the five other GCC countries did not want to change. They see the value of a fixed link with the world's largest currency as outweighing the short term relief to their business communities and residents.
This is not good news for the residents as they wrestle with surging food and rent prices (the two areas the IMF and the GCC governments agree are causing most of the present problem).
It may be that 2007 saw the peak of inflation, but salaries against most currencies have been eroded, business costs have gone up, and even if inflation starts to fall it will take some years for the effects to work through the system. If it continues at present levels, then the effects will work into the economy with even more corrosive results.
Having to deal with inflation is a tough new challenge for most GCC governments, and is in vivid contrast to their other main challenge which is how to manage the rapidly expanding state revenues triggered by the high oil price.
These are giving the GCC governments vastly more reserves than they planned on only a few years ago, but the combination of managing huge government revenues and high inflation is testing the policy makers.
Your comments
This is a very realistic overview of a matter of deep concern to a very large number of all residents of the country especially the expatriates.
I am sure the government does care and would find some way to mitigate these genuine concerns/hardships.
zafar
Abu Dhabi,UAE
Posted: April 10, 2008, 11:20
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