Across the Gulf, inflation is surpassing wage increases, leading to a significant erosion of purchasing power and this phenom-enon is expected to continue for a few years, according to economists.
"The (recent) average cost-of-living increases were the highest in the UAE, Kuwait and Qatar, and have outpaced annual wage gains by more than 14 per cent, 10 per cent, and 9 per cent, respectively, signalling an acute deterioration of local buying power," said Antonina Antonova, an analyst with Societe Generale Asset Management in a note.
Economists say it is the structural factors that are causing the price surge in the region and these will have medium to long-term impact.
"The huge surge in regional liquidity has been channelled for economic diversification and infrastructure projects that have produced structural shortages causing general increase in prices," said John Sfakianakis, Group chief economist of the Saudi British Bank.
Over the past three years, the Gulf countries have experienced unprecedented rates of growth and fiscal prosperity, buoyed by the rising tide of oil prices. Analysts say the stubbornly high inflation is likely to continue for a few years ahead as it is difficult to stop the restructuring of the region's economies that currently under way.
"The medium-term outlook [of inflation] remains tight because of the fast pace of economic expansion in the non-hydrocarbon sector and spending on national infrastructure projects. Both of these factors reflect various stages of economic restructuring underway in the region, and neither factor can, nor should, be easily reversed," said Antonova.
According to recent data, Qatar's inflation increased to 14.8 per cent year-on-year in the first quarter before declining to 12.8 per cent in the second quarter. The country will have a problem containing rent inflation until additional housing supply comes online, but that is not expected until 2009. In the UAE, official inflation reached 9.3 per cent in 2006, also driven by the rent component, closely followed by soaring food prices.
Imported inflation is expected to persist until US dollar weakness abates. The decline of the dollar has been proportionately reflected in the falling exchange rate of Gulf currencies against other currencies due to their peg against the dollar.
Faced with a combination of the falling purchasing power of Gulf currencies and the appreciation of currencies of their home countries, expatriates living in the region are facing huge financial losses.
Although revaluation of Gulf currencies or delinking the currencies from the dollar is likely to reduce imported inflation and exchange rate losses, econ-omists believe inflation will continue to be a problem as long as governments encourage domestic spending. "There are huge structural reforms taking shape in the Gulf countries which will have their impact on the future of economic diversification, employment creation and attracting foreign direct investments," said Sfakianakis.( Gulf )