The Gulf Cooperation Council (GCC) economies are, fortunately, not suffering from serious inflationary threats nowadays. Causes of this welcoming development include checked prices of imported foodstuffs, government subsidies, and the near absence of a rise in property rates.
The average inflation rate hovered around 4 per cent in 2011, up from 3 per cent in 2010. However, this is a far cry from inflationary pressures that prevailed in 2007 when GCC member state Qatar sustained a punishing 14 per cent inflation rate.
At any rate, inflation rates in the GCC partly reflect imported inflation. This is a reference to prices of imported goods. The rule of thumb goes that sharp rises in oil prices provide justification for petroleum-importing countries to raise prices of their exports, thereby contributing to the phenomenon of imported inflation.
However, oil prices have not been experiencing growth over the last few years. In reality, oil prices have dropped at different periods in the recent past due to market sentiments relating to challenges of the American dollar and the future of the euro, to name a few reasons.
To be sure, GCC countries are noted for importing a substantial portion of their foodstuff from abroad by virtue of being open economies, a virtue that should be maintained. By one account, GCC economies import as high as 90 per cent of their food needs.
Food security is not a competitive advantage in GCC countries at large, with limited exceptions. Oman enjoys food security in fisheries, partly owing to its geographic location.
Satisfactory surpluses
Inflation rates are also partly checked by government subsidies for food products. Subsidies are affordable at the moment not least because of satisfactory surpluses registered in national budgets.
For example, Qatar has prepared the budget for fiscal year 2012-13, starting in April, with a projected surplus of $7.7 billion (Dh28.28 billion). Still, the actual surplus is widely expected to be higher as the authorities prepared the budget with a low average oil price of $65 per barrel.
Certainly, oil income is a key contributor to the state budget. For its part, Saudi Arabia posted a notable surplus of $82 billion in the fiscal year 2011.
Only last week, authorities in Bahrain issued a statement providing $175 million worth of subsidies for three products — red meat, chicken, and flour. Needless to say, this subsidy is provided by the smallest economy in the GCC. Others have a tradition of providing substantial subsidies, for instance Kuwait.
Also, time is not ripe for doing away with subsidies amid events unfolding during the Arab Spring. This, in turn, requires authorities to undertake measures for satisfying, rather than angering, the masses.
Decline in food price index
Still, factors such as ample food supply with an improvement in the supply of agricultural products help push prices downward. The food price index declined by 1.8 per cent month-on-month in June, according to the Food and Agriculture Organisation (FAO), a UN agency.
Another key component of inflation is rent, which, in turn, has not experienced upward pressures for mixed reasons, including oversupply of office and residential units. In fact, the real estate sector remains largely dull across the region ever since the sub-prime market problem of 2008. Not surprisingly, landlords do not seem interested in selling their assets at a loss.
It has been suggested that inflation is the worst enemy of any economy, more so than unemployment. Inflation hurts all at varying degrees. Conversely, unemployment adversely affects the jobless and the immediate stakeholders, including family members and financial institutions, with outstanding credit.
— Dr Jasim Ali is a Member of Parliament in Bahrain