Gulf inflation is now at its highest level since the end of the 1970s. More worrying, as GCC governments persist with their dollar parity policies and expectations of inflation bed in further, inflation is more likely still to accelerate.
Recent estimates suggest inflation in Qatar and the UAE is now running at 15 per cent a year.
Some argue that cost-push factors in one or more sectors are fuelling a general price level rise. The cost-push theory suggests that the right action is to ease bottlenecks and control prices by fiat.
In the GCC, the prime culprit is the housing sector and governments have been pressing for more home-building. But it takes time to increase the supply.
Rent controls are now in their third year in parts of the GCC. In Abu and Dubai, the ceiling has been dropped to five per cent.
And yet, inflation is still going up. Cost-push theorists now blame steel, cement and food – but price controls in any or all of these sectors will be a temporary expedient.
There is no such thing as sustained cost-push inflation. Prices can only keep on rising if money supply growth is accommodating. If it is not, the cost of money will eventually rise to a level that will halt demand growth.
But if money is abundant, prices will simply keep on rising. Gulf states fall into the second category. Annual money supply growth in some is now around 40 per cent. The potentially inflationary monetary overhang is enormous.
Fiscal policy can temper inflationary pressures only if government takes spending power out of the system through tax or expenditure cuts.
No GCC state has a functioning personal tax system yet. Cutting spending will hurt low-income groups. And there is no benefit in deferring public capital programmes to stop inflation.
Five of the six GCC states deny themselves the monetary option by accepting the dollar peg. Their problems are compounded by maintaining parities that have been unchanged for more than 20 years. Inflation, as a result, can only accelerate as the GCC follows US interest rate cuts designed to fend off recession.
So what can businesses do? You can’t ignore it. But the right policies aren’t obvious. Doing business is difficult when inflation is high and rising at an unpredictable rate.
In 2008, every GCC business will record double-digit revenue growth. But some will report lower real margins, because they underestimated inflation. In extreme cases, inflation can be fatal.
There are serious human resource implications. People considering a job offer are more sensitive to inflation than people already employed. Companies desperate to hire will make concessions to secure new employees. The result will be that equally-qualified people are doing identical jobs for different pay.
Few things damage team-working and performance more than perceived unfairnesses in wages. It is a rule that is being broken all the time in the GCC.
That is another reason why most GCC businesses believe dollar parities should change to reflect the diverging performance of the region’s real economy, compared with that of the US.
Speaking at MEED’s Qatar 2008 Conference in Doha in January, Standard Chartered’s head of Middle East research, Marios Maratheftis, called for an end to the dollar peg in due course and revaluation now. But are GCC governments listening?
Exchange rate policy is not just about economics. The five GCC states still pegged to the dollar want to move in step, and Saudi Arabia remains resolutely against revaluation. It is possible, therefore, that the status quo might be held through 2008 and even to 2010, the target date for the GCC single currency.
That means inflation could continue at present and even higher levels. Businesses and householders will call for action to control prices. But GCC governments are reluctant to go beyond rents.
Business is going to have to help itself. Much more could be done to co-ordinate behaviour in individual markets to contain avoidable price increases, which are intensifying the inflationary spiral that money supply growth facilitates.
If governments won’t use monetary policy and can’t use fiscal measures, businesses may have to do more to halt pointless competition for scarce resources, from building materials to skilled labour.
The worst option is to turn a blind eye to the inflationary realities, allow price rises to erode real wages and watch talent walk out almost as soon as it arrives.