State spending worsens inflation

Dubai: Financial experts say government action to offset the effects of rising inflation will have only marginal impact for the consumer, but higher government expenditure itself could make the problem worse.

Gulf countries have announced various spending programmes - including subsidies, wage hikes, reduced government fees and price controls on essential goods - to soften the cost-of-living effect on the common man.

On Tuesday, Saudi Arabia announced a 10 billion riyal package, with measures such as reduction in government fees and additional allowances to state employees and pensioners. In November the UAE government said salaries of federal government employees would rise by 70 per cent for 2008.

Kuwait raised food subsidies in December, and Qatar is reportedly considering an expanded subsidy programme. "An increasingly important and potentially troubling driver of government expenditure hikes is inflation," said Moody's analyst Tristan Cooper.

Economists said governments should tackle inflation's core components, like housing shortages, and repeg their currencies against a currency basket, not just the US dollar. "It would help to curtail imported inflation," said Monica Malek, an economist with EFG Hermes.