Inflation is killing plans for economic and currency union in the Gulf, says MEED

In its latest issue, MEED says that governments in the Gulf face a stark choice between taking measures to tackle rising inflation in order to maintain current growth levels, and meeting the convergence criteria agreed between the six states in order to deliver economic and currency union by 2010.

The six states which form the Gulf Cooperation Council (GCC) - Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates - committed in December 2001 to work towards monetary and economic union. MEED's analysis, however, provides new fears that the process is under threat.

Richard Thompson, editor of MEED, said:

"GCC governments must decide whether to pursue their own agendas to maintain growth or adapt their policies, and possibly curtail growth, to work towards the long-term aim of establishing a homogeneous economic bloc in the Gulf. The result is already obvious. Despite often-repeated statements of commitment towards the single currency and economic union, most, if not all, will choose to maintain current growth levels. But this is not the wrong course to follow. The aim of economic union is to create jobs and boost prosperity for the Gulf's growing population. If putting currency union on hold is the cost of delivering that more quickly, then that is a reasonable price to pay."

Inflation in the Gulf has increased dramatically in the past six years, with the UAE seeing inflation of 13.8 per cent in 2006, compared to a figure of 1.4 per cent in 2000, and similar trends occurring in the other five GCC economies, none of whom have seen a drop in inflation since 2001.

Interestingly, while many in the region have blamed the GCC's currency peg to the US dollar - itself an element of the process of currency union - as the cause of rising inflation in the region, MEED says that this is misleading.

Although there are many similarities between the six national economies of the GCC, the causes of inflation are different in each country. While increases in migrant workers of 84 per cent and 112 per cent respectively are seen as key drivers of price rises in Qatar and the UAE, which have the region's highest levels of inflation. A surge in government spending is at the root of inflation in Saudi Arabia that has reached historically high levels.