IMF forecasts decline in UAE inflation

Speaking to Khaleej Times yesterday, Mohsin Khan, IMF director for Middle East and Central Asia, said central banks in the GCC are in a dilemma as they have to invariably follow the policy of the US Fed with regard to interest rates, no matter whether it aggravates or eases inflationary pressures.

Referring to the recent Fed rate cuts, which most GCC countries followed, he said unlike in the US, which is undergoing slow growth, interest rate cuts in the GCC countries would serve only to further fuel inflationary trends. "This is the cost of a dollar-peg. You will not be able to follow an independent monetary policy. As long as both the US and GCC economies are moving in the same direction, following the Fed policies would be alright, but at times when they are moving in the opposite direction, it will restrict GCC countries' ability to control inflation."

However, he pointed out that benefits of maintaining the dollar-peg would outweigh its drawbacks as the alliance will give a sense of stability to international investors and importers. "Seventy per cent of all the imports of the GCC countries are still priced in dollar," he said.

He urged the Central Banks in the region to use fiscal policy tools to contain prices that have soared to record levels last year on rising rents and weak-dollar driven imported inflation. He hoped that a reliable Cost Price Index, which would be ready next year, would help assess UAE inflation more precisely.

Inflation in the UAE, which peaked to 9.3 per cent in 2006, would fall to eight per cent this year and 6.4 per cent in 2008 as more housing supply enters the market, Khan said quoting IMF's Regional Economic Outlook for Middle East and Central Asia.

According to the report, in Qatar, where inflation hit a record 15 per cent at the end of March, annual price growth would hit 12 per cent this year before falling to 10 per cent in 2008. Inflation in Saudi Arabia and five other oil producers will reach an average of 4.4 percent this year, its highest since at least 1998, before falling to four per cent next year, said the IMF report.

Khan said the projected surge in the supply of housing units in 2008 and the rent cap are factors which will slow down inflation in the UAE. "The increased supply of housing in 2007-08, together with caps on rents introduced in Dubai and Abu Dhabi, is expected to dampen the pressure on consumer prices," he said. In Saudi Arabia, the world's largest oil exporter, inflation would hold steady at a seven-year high of 3 percent in 2007 and 2008.

Forecasting a slower growth in GDP for the GCC at 5.4 per cent in 2007 and 2008, the report said the UAE economic growth would fall to 6.6 per cent in 2008 from 7.7 per cent this year and 9.4 per cent in 2006 while the Saudi economic growth will reach 4.3 per cent in 2008, compared with 4.1 per cent this year. Qatar will have the highest growth at 14.2 per cent in 2007 and 14.1 per cent in 2008.