Threat of high inflation has not yet passed

Newly-released data point to lower inflation rates in Gulf Cooperation Council (GCC) countries, partly due to developments in real estate markets. Official figures from Saudi Arabia hint at inflation rates going down from six per cent in March to 5.21 per cent in April. The new figures are being attributed mainly to a drop of 19 per cent in rental rates in April.

In Kuwait, inflation is projected to be around six per cent by the year-end. The figure compares positively with a nine per cent average increase in prices in the country in 2008.

Qatari officials are claiming zero or negative inflation rates. Ebrahim Al Ebrahim, economic adviser to the Qatari ruler, said as much during a newspaper interview. To be sure, Al Ebrahim has a credible track record, admitting an inflation rate of 14 per cent in 2007.

Like authorities in Saudi Arabia and Kuwait, Qatari officials attributed lower inflation rates to the development of their respective real estate sectors. Official statistics arrived at estimates of a nine-per cent decline in the consumer price index in the first three months of 2009 compared to the last quarter of 2008.

The fall in property prices can be linked to a dampening of economic prospects. However, prices could rise again unless financial institutions cease conservative lending policies. Restrictions on supply of property could lead to shortage of property and thus drive prices higher.

In retrospect, the GCC economies suffered from extraordinarily high inflation rates, exceeding 14 per cent in Qatar for three consecutive years. The inflationary pressures stemmed from a combination of factors, notably the adverse effects of higher oil prices. The price of oil reached as high as $147 per barrel by mid-2008, only to drop to nearly $40 per by the year-end. The fall reflected changes in sentiments worldwide following the collapse of the subprime market in the US.

Traditionally, inflation rates in regional economies largely reflected developments on the international front, notably the American economy. Similar trends are also visible on the policy front, with Kuwait alone opting not to peg its currency to the dollar. Still, the dollar accounts for 60 per cent of the basket of currencies used in calculating the value of the Kuwaiti dinar.

By one account, imported inflation has been responsible for nearly 30 per cent of the overall inflationary pressure that has engulfed GCC economies in the past few years.

Reference is made to linking the currencies to the dollar, which in turn suffered from declining value for several years. The lower value of the dollar translated into higher prices of imports from currencies not pegged to the greenback. GCC economies are dependent on imports from euro zone countries and China for a considerable amount of their imports, including vehicles and machineries.

All said, declining economic growth rates should keep inflation rates in check. The IMF's revised forecasts call for growth of 5.1 per cent in 2009 down from seven per cent in 2009. The gloomier prospects mirror the state of oil prices in the international markets. On average, the petroleum sector boasts nearly 70 per cent of treasury income and 80 per cent of total exports of GCC economies.

However, return of inflation is possible in the not too distant future due to firm public spending. For instance, Saudi Arabia's budget for 2009 is generous on spending notwithstanding uncertainties related to the credit crunch. Projected expenditures amount to $126 billion, up by 15 per cent versus originally planned figure for fiscal year 2008. Stronger public spending is partly meant to make up for potential loss of private sector investments due to complexities associated with global financial crisis.

- The writer is a member of parliament in Bahrain.