posted on 13/05/2008: 592 views
The International Monetary Fund (IMF) yesterday said inflation in the UAE, estimated at 11 per cent in 2007, is set to drop to nine per cent in 2008, but cautioned that dirham's de-pegging from the dollar or revaluation could have little impact in controlling escalating prices.
Mohsin Khan, Director of IMF's Middle East and Central Asia Department (MCD), said the UAE would see a sustained growth with its nominal Gross Domestic Product (GDP) achieving 24.5 per cent growth — from US$192.6 billion in 2007 to reach US$239.9 billion in 2008. However, real GDP growth would slow down from 7.4 per cent in 2007 to 6.3 per cent in 2008, he said.
Speaking to Khaleej Times following the release of the Regional Economic Outlook, Khan said de-pegging or revaluation would not help curb inflation. "The benefit of the dollar-peg outweighs its negative impact for oil exporting GCC countries that account for combined external assets of US$2 trillion. With a 20 per cent revaluation, the region would have to take a big hit with the value of their overseas assets shrinking by US$400 billion. Dollar denominated oil revenues will also suffer a similar setback."
Khan said the drop in inflation would be the result of a predicted decline in rents and food prices. "Spiralling rents which account for more than 50 per cent of the consumer price inflation, will soften with more residential units coming to the market," he said.
IMF's forecast of an easing of inflation came as economists warned of a three per cent surge in inflation across the GCC in 2008. "Inflation will continue to rise for years. We expect inflation in GCC countries to add 2-3 points in 2008 above its level in 2007. In Qatar for instance it is expected to reach 16-17 per cent in 2008 from 13.7 percent in 2007,” said Abul-Haleem Al Muhaissen who heads the studies department at the Federation of Gulf Cooperation Council Chambers (FGCCC).
Muhaissen was quoted by Reuters as saying that revaluing or de-pegging from the weak US dollar can ease inflationary pressures for the GCC only if accompanied by expenditure cuts and tighter monetary policies. Echoing IMF's view, he said "revaluing the currencies or dropping the dollar peg alone can't reduce inflation, it has to be done as part of a whole package of measures that should also touch tightening monetary policy and cutting public spending.”
The IMF director said almost all countries in the region experienced a rise in inflation during 2007. "The most immediate challenge for these countries is, therefore, to bring inflation back down. These countries will need to follow policies that will reduce rollover risk and prevent a reversal of capital inflows. The appropriate policy mix will depend on the particular circumstances of each country, but would typically call for fiscal and monetary tightening, possibly allowing greater exchange rate flexibility, where appropriate."
However, Khan said in oil-exporting countries with currencies pegged to the tumbling dollar, it will be a challenge to control inflation as long as there is continuing monetary easing in the US. – Khaleej Times
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