Fiscal Expansion Fuels Inflation: Gulf States Need Monetary Policy Tools to Combat Rising Prices Driven by Excess Liquidity

Martin, Matthew, MEED Middle East Economic Digest

GCC

Inflation is the biggest economic issue in the GCC right now, threatening to tear apart plans to unite the region under a single currency. Governments frequently point to the huge scale of projects under way and claim they will alleviate some of the demand constraints that are driving up prices. This is their main strategy for fighting inflation.

A key contributor to the problem is the huge amount of money the governments in the region are spending. Even a cursory glance at the figures shows the correlation between the most fiscally expansionary regimes, UAE and Qatar, and those countries where inflation is highest (see chart page 41).

At its peak in Qatar in 2005, money supply growth was more than 40 per cent for the year. The inability of the markets to cope with such huge volumes of capital slowly pushes up prices.

A general measure used by economists is that if money supply is greater than real gross domestic product (GDP) growth, inflationary pressures will increase in the short term. Although this is an oversimplification, it illustrates that GCC members will have major problems from excess liquidity, not just demand pressures or the weak dollar, which are typically blamed by politicians and …

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Publication information: Article title: Fiscal Expansion Fuels Inflation: Gulf States Need Monetary Policy Tools to Combat Rising Prices Driven by Excess Liquidity. Contributors: Martin, Matthew - Author. Magazine title: MEED Middle East Economic Digest. Volume: 51. Issue: 49 Publication date: December 7, 2007. Page number: 39+. © 1999 MEED Middle East Economic Digest. All Rights Reserved. COPYRIGHT 2007 Gale Group.

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