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Excess cash, peg to weak dollar fuel Gulf inflation

AFP, Manama
Abundant liquidity, triggered by sharply higher oil revenues, and the effect of currencies pegged to a weakening dollar are fueling inflation in the Gulf region, economists say.
And the situation is so serious that Gulf business leaders will meet in Bahrain on Monday to get advice from the International Monetary Fund (IMF) and the European Union on how to tackle the problem.
"The growth of money supply in Gulf countries has in some cases exceeded 20 percent," leading Bahraini economist Ahmed al-Yusha told AFP this week. "This reflects in (higher) demand, and consequently affects prices."
Gulf Cooperation Council members Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates have been enjoying a windfall of oil revenues on the back of record crude prices.
But the surge in revenues, which have injected GCC economies with a shot of energy reflected in impressive economic growth, has also left countries awash in cash.
The IMF expects overall GCC inflation to rise to six percent in 2008, with consumer prices in some member states rising at much higher
rates.
The UAE and Qatar registered 9.3* percent and 11.8 percent, respectively, in 2006. Most final inflation figures for 2007 have not been released, but inflation is estimated to have hit 11 percent in the UAE and 12 percent in Qatar.
Saudi Arabia, which traditionally had a fairly low inflation rate, reported a 4.1 percent rise in its consumer price index in 2007.
A key element in higher prices is the sharply higher cost of housing. Even though the region is experiencing a frenzy of construction, there is still a bottleneck in supply.
The increase in the cost of goods that are imported from non-dollar zones is also blamed.
A December study by the Federation of GCC Chambers blamed inflation mainly on the huge money supply and the peg of all GCC currencies --except the Kuwaiti dinar -- to the deteriorating dollar.
"Available liquidity that is accompanied by a fixed supply of goods and services... and the drop in the value of local currencies due to the weakening of the dollar" are the two main reasons for inflation, said the Saudi-based federation, which groups the region's chambers of commerce, industry and agriculture.