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Inflation hits middle east { February 2008 }

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Growing Gulf economy ups inflation in Mid East
John Defterios / CNN
Time Published on Mon, Mar 31, 2008 at 21:13 in Business section

London: Americans are all too aware of their weakening currency. But a devaluing dollar has ramifications for people in other countries too.

The global prices of oil and gold, for example, have hit record highs partly because the commodities are traded in dollars. Many currencies in Middle Eastern countries are pegged to the greenback, as well. But that's only partially to blame for inflation there.

In Bahrain, inflation jumped to nearly five per cent. Bankers there blame the rising food prices. In Dubai, a shortage of housing could drive rents up 15 per cent this year. In Kuwait, the central bank plans to curb consumer lending to try and rein in prices. And in Saudi Arabia, the government has reported inflation up almost 25 per cent since January.

“The Gulf Cooperation Council (GCC) economies have jumped almost three times the size from $350 billion to about $800 billion, and looking at projects of 2008, to one trillion. So you need to see it in that context. You cannot have that degree of growth without some commensurate increase in prices,” Deputy Chief IMF Gene Leon says.

All GCC countries, save Kuwait, peg their currencies to the dollar. Unlike the US Federal Reserve, most central banks in the region don't have the tools to try and absorb the excess cash.

"These economies are growing so quickly, so fast, that the central banks had kind of had to catch up. I think it's a critical part of the region's development, and it's one of the reasons why this liquidity problem is there at the moment," Daniel Hanna, a visiting fellow at Chatham House (home of the Royal Institute of International Affairs) says.

There's no easy solution. Some experts say stop pegging currencies to the dollar. Others say revalue the peg. But even countries like Egypt — not pegged to the dollar — are hitting inflation highs.

“I think we need to recognize that the kind of price growth that were seeing is what is expected when economies grow this quickly. When you are growing that quickly, you are going to see pressure on prices,” HSBC economist Simon Williams explains.

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