Business | Economy
Measures to contain inflation 'are superficial'
ING economist says economic growth is taking precedence over tackling increasing price rises in the region.
- By Andrew Shouler, Editor of GN Quarterly Financial Review
- Published: 23:42 August 21, 2008
Dubai: Measures to tackle inflation in the Gulf Cooperation Council (GCC) states are "superficial" and the tools already used are "inefficient", reflecting the priority of pursuing economic growth, according to ING Bank's regional economist Dorothee Gasser.
There is a risk in terms of retaining the services of expatriate workers, she suggested, but the preference in favour of growth over stability is "obvious". It could create shortages, and a halt in some construction activity, but ultimately it's not clear analytically that policymakers can be blamed, given a choice of strategy.
In any case, Gasser told Gulf News's magazine GN Quarterly Financial Review, average inflation in the GCC would recede from 10 per cent in 2008 to just over 5 per cent in 2010, owing to a combination of factors.
In the past year the UAE and Qatar have led the field in recording consumer-price inflation increases in double-digits, as a consequence of oil-driven monetary momentum, leveraged by negative real interest rates.
Gulf authorities have dismissed revaluation or de-pegging to attempt to respond to that condition, preferring to intervene in supply structures, such as applying price-restraining agreements with hypermarkets, than to tackle demand.
Basic source
ING's Gasser expects that the basic source of inflation in the Gulf, namely "fiscally-driven excess liquidity", will remain in place, with oil prices staying comparatively high, and governments adopting income-enhancing measures to respond to inflation's symptoms rather than its cause, with public spending therefore expansionary rather than providing the orthodox remedy of restraint.
However, in a detailed description of the GCC's economic fundamentals and forecasts, she told Financial Review that inflation would subside well into single digits because of rent-cap restrictions, weaker food-price pressures, a strengthening US dollar (as is now being witnessed), which reduces import prices, and technical, statistical effects.
Ironically, the experience of inflation has not, Gasser claims, scuppered the chances of a swift move towards a single currency in the Gulf. On the contrary, it provides an incentive for monetary union, besides the fact that inflation has actually converged (a key criterion), albeit at higher levels, she says, helping to meet a criterion of the project.
Moreover, the GCC has tended historically to move forward on the basis of geopolitical impulses, and the re-emergence of Iran as a regional power, creating a tense situation, provokes the political will to create a coherent Gulf economic bloc.
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