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Depegging unlikely to stem Gulf price rise

Depegging currencies from the dollar will not solve Gulf's inflation problem as structural issues are the main cause of rising prices, Yvan Mamalet, an analyst with Societe Generale Asset Management said in a report on Tuesday.

  • By Babu Das Augustine, Banking Editor
  • Published: 23:47 July 29, 2008
  • Gulf News

Dubai: Depegging currencies from the dollar will not solve Gulf's inflation problem as structural issues are the main cause of rising prices, Yvan Mamalet, an analyst with Societe Generale Asset Management said in a report on Tuesday.

Fuelled by skyrocketing oil prices the Gulf countries have enjoyed one of the longest economic expansions. The flip side of this boom, however, has been a sharp pick-up in inflation.

While Saudi inflation was 10.4 per cent in May, Oman's inflation hit a new peak a record 13.2 per cent in May. While the UAE's inflation averaged at 11.1 per cent for 2007, Qatar had the highest average inflation rate last year at 13.8 per cent.

Food prices represent a large part of the consumer price basket in the GCC. "In our view, the real issue is not food prices but the fact that the demand side is running much faster than the supply side. Against this backdrop, policy tightening is necessary. But the contrary has been true, with the policy mix turning very loose recent years," said Mamalet.

On the fiscal policy side, the massive increase in GCC oil revenues, from $95 billion in 1999 to $310 billion in 2007, has allowed Gulf governments to develop a vast programme of investment in infrastructure.

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