Business | Opinion
Currency depegging not a panacea for Gulf economies
Recently released statistics point out to growing inflationary pressures in Kuwait notwithstanding the delinking of dinar with the dollar.
- By Jasim Ali, Special to Gulf News
- Published: 00:05 June 8, 2008
Recently released statistics point out to growing inflationary pressures in Kuwait notwithstanding the delinking of dinar with the dollar.
Yet, the development suggests that fighting inflationary pressures requires collective monetary and fiscal policy measures.
According to a report issued by Central Bank of Kuwait, inflation rate stood at a whopping 10.4 per cent in February. In contrast, inflation rates amounted to 9.5 per cent in January and still a lower 7.5 per cent in December 2007.
The report advised that rises in property and food and beverages were chiefly responsible for the spiralling growth of inflation rates. More specifically, rental rates increased by some 16 per cent, only to be followed by rises of 15 per cent in drinks and tobacco products and nine per cent in food items.
Undoubtedly, inflation rate in Kuwait remains less of a problem compared to Qatar and the UAE, which in turn suffered from rises of 14 per cent and 11 per cent in 2007, respectively. However, Kuwaiti authorities had assumed that ending the link with the American currency would help bringing inflation under control.
In May 2007, the Kuwaiti government ended a four-year old practice of linking its dinar to the dollar. Instead, the authorities decided to return to the customary practice of linking the dinar to a basket of currencies.
Still, it is believed that the dollar carries a significant weight in the basket, some 60 per cent by one estimate. So is the case because a sizable portion of Kuwait's international trade is denominated in the greenback. This is particularly true of the petroleum industry, which in turn dominates Kuwait's exports.
The persistent decline in the value of dollar is partly responsible for inflationary pressures.
Nevertheless, the significance of other factors including consequences of rising oil prices on importing countries cannot be overlooked. Kuwait imports products from some of these importing countries, which in turn suffer from ever-rising prices of petroleum products.
The other factors causing rising inflation rates concern consequences of extraordinary growth of gross domestic products (GDPs) of major emerging economies such as China, India and Brazil. Chinese real GDP grew by some 10 per cent in 2007.
Still, there are other local factors adding to inflationary pressures, notably the solid governmental spending on the back of rising oil income, in turn allowing for steady rise in spending.
Actual results for fiscal year 2007-08 that ended in April indicated total revenue jumping by a hefty 138 per cent to $72 billion. Oil sector alone contributed $67 billion of total income, considerably higher than the projected figures of $31 billion.
Containing inflationary pressures would possibly require adoption of a mix of monetary and fiscal policies. These entail placing a cap on growth of public sector spending, as part of a broader fiscal policy. Still, similar to Qatar, Kuwaiti officials may have to consider other policy options such as putting a cap on rental rises.
Likewise, Kuwaiti authorities need to deal effectively with declining interest rates in the US. To be sure, Kuwait continues to import interest rates prevailing in the US despite linking the dinar to a basket of currencies.
At any rate, the Kuwaiti experience shows that a single measure, namely ending the link to the dollar, could not contain inflationary pressures. Solving the inflationary problem is much more complicated than probably assumed.
The writer is a Member of Parliament in Bahrain.
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