Kuwait beset by inflationary pressures

A new report issued by National Bank of Kuwait (NBK) shows that Kuwait is the fourth Gulf country in which inflation has exceeded 10%.

This will result in a decline in the purchasing power of the Kuwaiti Dinar in the local market by 50% within seven years, according to the report.

According to Credit Suisse bank, inflation in Kuwait is fuelled by the rising prices of imported goods such as food and construction and power supplies, alongside restrictions imposed on supply, as demand continues to grow in basic economic sectors.

The bank believes that the social policy of the government and its generosity in welfare has encouraged young people not to join the workforce.

Added to this are the restrictions imposed on migration and foreign labour, which worsen the crisis.

According to NBK, the rate of increase in inflation over the past six months has been particularly rapid, having more than doubled from 4.8% since August 2007.

Housing, food and household goods and services accounted for approximately 77% of inflation's overall rise in the past year.

Housing costs have risen 16.1% over the past year while food costs rose 9.2%.

The increases have not been limited to retail, but extend to the wholesale prices of local goods becoming more expensive than imported ones.
Wholesale inflation was running at 6.6% and 5.8% respectively for locally produced and imported goods, according to the report.

Government combats inflation

The Kuwaiti government is trying to fight inflation but recent political problems have curbed its ability to do so.

The first initiative taken by the government to combat inflation was to de-peg from the dollar and revert back to a basket of currencies in which the dollar still holds a predominant weight, a measure which pushed the dinar's value up by 5%.

NBK stated that containing inflationary pressures is the top priority in the central bank's monetary policy.

Following the de-pegging, the central bank has taken many measures to limit the growth of loans, but admits that these will not have far reaching consequences in an economy which is witnessing high growth, fuelled by high oil prices and an increase in government expenses.

The trend to impose restrictions on prices to curb inflation may yield short term results, but not in the long run.

Any new measures to combat inflation must be shouldered by the monetary policy, noting that the options available to monetary decision makers are very limited in the light of the need for more investments.

The report concluded that it would be difficult to contain higher inflation rates, but the government is considering a number of steps to contain the negative impact of inflation on the purchasing power of consumers.

According to Credit Suisse, the best way to combat inflation is to take precautionary measures; including slashing expenditure and restrictions on loans adding that such measures will be difficult to implement politically because of the effect on parliament's public popularity.

See also:
Inflation puts Qatar peg back under the spotlight
High fuel prices begin to take their toll on Gulf airlines