Qatar, UAE hardest hit as inflation outlook

 by AFP

Inflation in the oil-rich GCC is set to rise to about 7% in 2008, compared with an earlier forecast of 6%, the International Monetary Fund said on Monday.

"Overall inflationary pressures in 2008 are expected to increase to about 7% on average," Gene Leon, deputy chief of the IMF's Middle East and Central Asia section, told a forum in Bahrain.

The IMF had earlier forecast overall inflation in the six GCC countries to be 6% in 2008.

The IMF had expected inflation in Qatar and the UAE to ease to around 12% and 8% respectively in 2007.

Inflation was expected to ease further in Qatar and the UAE to 10% and 6.4% respectively.

But on Monday, the figures provided by Leon showed that inflation in Qatar surged to around 14% in 2007 while consumer prices in the UAE were estimated to have risen by around 11%.

The IMF also showed inflation in 2007 rising by more than 4.1% in Saudi Arabia - the largest economy in the Middle East - which has reportedly been battling with inflation of more than 7% this year.

Inflation in Saudi Arabia has been traditionally low, unlike neighbouring Qatar and the UAE.

Among the other GCC states, inflation increased by around 5.5% in Oman in 2007, more than 5% in Kuwait and more than 4% in Bahrain, according to the IMF.

GCC members have been enjoying windfall revenues on the back of record oil prices.

"I would not say the picture is dismal, moving from a projection of 6 to 7%. There is little more inflation than we thought," Leon told newswire AFP on the sidelines of the forum, attended by regional business leaders.

According to Leon, housing costs - in an ever expanding market - contributed to about 67% of inflation in Qatar and dominated inflation factors in the UAE.

The surge in oil revenues has seen the GCC economies enjoy impressive growth rates but has also left them awash with cash.

Leon said Gulf governments must curb current expenditure in order to control inflation.

"When we say reduce expenditure, we think more of containing the current expenditure," he told AFP. "At the same time, there is room to reduce the pace at which capital investment is taking place to help contain inflation."

Among the external factors fuelling GCC inflation Leon highlighted rising world prices for food, capital equipment and raw materials, as well as the depreciation of the US dollar to which all GCC currencies, except the Kuwaiti dinar, are pegged.

But Leon stuck to the IMF's argument that depegging GCC currencies from the weakening greenback, or a revaluation of those currencies vis-a-vis the dollar, would have a limited effect in the long term.

"It is not the most significant (cause) and we think there are other more effective ways of solving the problem," he said.

source::Arabianbusiness.com