Inflation to rein in UAE growth

Dubai: Galloping inflation may slow the growth of Gulf economies, especially the UAE and Qatar, a top IMF official said yesterday. « The unprecedented economic boom driven by oil revenues and the recycling of regional liquidity has seen Gulf GDPs racing at a pace close to those of some of the East Asian countries. But inflation is becoming a major limiting factor, » Mohsin S. Khan, director of the International Monetary Fund’s (IMF) Middle East and Central Asia Department, told Gulf News yesterday. The real GDP of the UAE and Qatar is growing by almost 10 per cent annually and the other Gulf countries are growing by 6 to 8 per cent. With the surge in econ-omic growth these countries are facing high inflation, primarily driven by supply constraints. The UAE Ministry of Economy earlier said nominal GDP last year grew by 23.6 per cent to Dh599 billion. « In the UAE, inflation is estimated at above 10 per cent. However, this figure is for the whole of the UAE and for a city like Dubai the inflation rate could be much higher, » he said. With the rising cost of living, the UAE is facing upward pressure on wages and an overall cost escalation in all economic sectors, especially tourism, hospitality and financial services. According to the IMF, a key driver of inflation in the UAE and Qatar is soaring house rents. Despite assurances by the government and the central bank, the IMF does not expect new supplies of housing this year to cool inflationary pressure. « New supplies of housing units will have some impact on rents and inflation, but not as much as the central banks would expect to happen, » Khan said. On the monetary policy measures taken to tame inflation, Khan said the Gulf countries in general have limited options because interest rates follow the US rates due to the currency peg. Curtailing liquidity by other measures such as variable reserve requirements or bank rates is not effective in the region because of the sheer volume of liquidity that is floating in the financial system. Apart from the huge liquidity available in the region, Khan said stock market corrections have resulted in a lot of money re-entering the banking system and real estate. According to Khan, the inflationary pressure caused by excess cash flows in the region is compounded by the sheer lack of assets that can absorb liquidity. « Ideally, the corporate sector in the region should create an active debt market. The emergence of sukuks and convertible sukuks to some extent is a viable solution to rein in liquidity but the current size of these asset class is relatively small, » the IMF official said. Not cool enough According to the IMF, a key driver of inflation in the UAE and Qatar is the soaring house rents. Despite assurances by the government and the central bank, the IMF does not expect new supplies of housing units this year to cool inflationary pressure. Source : el watan