Al-Qassimi: Inflation a major challenge for the Gulf economy

This economic prosperity has been supported by several factors and considerations that have resulted in Gulf economies achieving such high levels.

This development has taken place at a time when there have been many difficulties, such as the deflation of important international economies, which has led the American monitoring authorities to lower interest rates and decrease share values and investments in general, as well as the sub-prime mortgage crisis in the United States.

Addressing a group of delegates at the Arab Economic Forum, His Highness, Sheikh Tariq Bin Faisal Al Qassimi, Chairman of Emirates Investment Group, said, "Low interest rates accompanied by increased government spending has lead to price increases and Gulf countries now face a critical situation surrounded by the international economic circumstances and its various ties. The amount of liquidity in the Gulf region has reached record highs. On one hand, the level of development and expansion required to achieve this exponential growth requires an unprecedented level of government spending to renew and expand the infrastructure. Meanwhile, interest rates have fallen due to regional currencies being pegged to the U.S. dollar, which itself has depreciated to its lowest levels in five years, whereas Gulf budgets have also achieved record surpluses, and conventional economic theory and schools of thought concur that low interest rates matched by high government spending are a clear factor in feeding rising prices."

"Control over interest rates under these circumstances is hindered by the dollar peg, and yet any de-pegging from the dollar carries an entire host of unknown consequences, particularly since many of the Gulf's exports are priced in U.S. dollars through long-term purchase agreements. This would entail a period of dangerous currency speculation with dual ramifications, and I do not believe anyone is willing to take these kinds of risks at this time," Al Qassimi added.

Sheikh Tariq expressed the opinion that it is necessary to find alternative means to control an increasingly precarious rate of inflation, pointing out the need to take action before inflation spins out of control, which in turn could erode the region's competitive edge. This is especially true in light of the impressive level of foreign investment and worldwide institutional interest that the region has received over a relatively short period of time, particularly when compared to many other countries.

Sheikh Tariq pointed out that rapidly rising property prices across the region are a main driver of inflation, which in turn has a knock-on effect. "In the same way that the unreasonable oversubscriptions of Initial Public Offerings had to be limited by setting individual investor ceilings and varying IPO classes, in addition to other regulations that helped return IPO subscriptions to more acceptable levels, the tightening of investment inflows in the real estate sector will have a positive impact in the medium and long-term. Although property sales may be impacted in the short term, this will not have a negative overall impact, as prices will return to more reasonable levels, as will growth rates in the construction, real estate and other related sectors."

Legislative action in the property market is being eyed as a way to introduce a healthy level of balance in the rental market. This would protect the economy and society from the negative effects of inflation and reduce the rental burden on salaried classes, in addition to providing a safeguard against reverse migration of investors from the region, and protecting small and medium-sized businesses, which form the bedrock of the economy.