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AGCC inflation rates seen remaining low

DUBAI - The six member Gulf Cooperation Council Countries' (GCC) inflation rates rates are likely to remain low during the next two quarters while the interest rates are likely to follow the international trends.

A recent report on GCC economies by Al Rajhi Banking and Investment Corporation projects the GCC inflation rates to remain low during the current year. The report projects the UAE inflation at the highest at 3 per cent, followed by Kuwait at 1.6 per cent, Bahrain and Qatar at 1 per cent each and Saudi Arabia at 0.8 per cent and Oman at -0.9 per cent.

Substantial budget surpluses from relatively high oil prices and increased oil production have seen the region's economies grow without inflationary pressures usually associated with economic expansion. The GDPs of the GCC countries are expected to surge this year. The real GDP growth in 2004 is expected to grow at 7.5 per cent for Bahrain followed by Oman at 5 per cent, UAE 4 per cent, Saudi Arabia 3.7 per cent, Kuwait 2.9 per cent and Qatar 2.4 per cent.

Riding on the oil revenue surplus, the region's non-oil activities are projected to grow substantially. “The growth in oil revenues would allow governments in the Gulf to pursue expansionary fiscal policies and enhance private sector confidence, thus private activities are expected to accelerate. The expected robust growth in 2004 of the six Arab Gulf countries is expected to continue until mid 2005,” the study said.

While the global inflation rates have been in the range of 2-3 per cent, the US and the Euro Zone are experiencing higher inflation on account of higher energy and food prices. In real terms, the GCC rates have been lower because of the oil windfall.

Though the global interest rates experienced sharp fall in 2003, the rates began to climb by the middle of this year with the 3-month money market rates touching as high as 4.91 per cent in the UK, 2.11 per cent in the Euro Zone and 1.64 per cent in the US. In five of the GCC countries the rates moved up marginally during this period, with the exception of Kuwait whose currency is not pegged to the US dollar.

Three global currencies, Euro, GBP and Japanese Yen are seen appreciating against US dollar during the past three months. The five GCC currencies pegged against the dollar depreciated against other major currencies due to dollar's depreciation against these currencies. Unlike other countries, GCC states normally do not resort to currency appreciation or depreciation (market intervention) in controlling inflation as their currencies are effectively pegged to the dollar. Even in Kuwait's case the dinar is linked to a basket of currencies, in which the US dollar has a major share, and thus, the exchange rates do not experience wide gyrations in the short term.