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Inflation could pop Gulf's economic bubble

  • Story Highlights
  • Inflation could pose a serious risk to Gulf economies, said the IMF this week
  • In the U.A.E. inflation is hovering at around nine percent -- a 19 year high
  • Experts say governments are beginning to realise they must manage growth
  • It may prove difficult because Gulf currencies are pegged to the weak U.S. dollar
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(CNN) -- This week, the International Monetary Fund (IMF) warned the Gulf countries that inflation could pose a serious risk to their economies.

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Foundations for the Dubai metro system, one of many huge infrastructure projects fuelling growth

For Dubai and similar Gulf economies, price rises are an expected side effect of explosive development. Nonetheless, in the United Arab Emirates today, inflation is hovering at above nine percent -- a 19 year high.

This is increasing the financial pressures on everyone. Food prices are rocketing and rents are spiralling out of control caused by a large influx of expatriate workers and the growing prosperity of local residents.

"It's an overheated economy, [there is] a lot of pressure on the resources and that's pushing labor costs and prices upwards very sharply," said David Wyss, Chief Economist, Standard & Poor's.

Record oil prices mean Gulf governments are currently able to cushion the population from the worst of the price hikes.

But a global economic slowdown could result in a substantial drop in oil prices -- and that could pose a serious risk to the Gulf economies, according to the IMF.

Experts in the region say high inflation is a fact of life and it will be with the region for the next two to three years because of the rapid expansion.

The region's governments are beginning to acknowlege current levels of growth are not sustainable and that they have to take action to alleviate the risk of a boom-bust scenario.

"In reality, a lot of governments are now taking a look at how they are going to soften this growth, both on the inflation side as well as how they can sustain for a long-term period. But I think there is a long way to go because of the lack of build-up in the infrastructure, and that's happening now," Khaled Bin Zayed Al Neyhan, Chairman of Bin Zayed Group which has interests in industries as diverse as real estate and shipping.

In the short term, the U.A.E. government is allowing retailers in some sectors, especially construction, to go directly to suppliers to reduce costs. Custom tax has also been cut in an attempt to tackle inflation.

In the long term, Gulf governments will have to manage growth, according to Wyss.

"I think what has to be done is to keep growth under control. You want to make sure that there are occupants for all the buildings that are being built, that the building doesn't get too far ahead of the demand and that the demand remains sustainable," he said.

The IMF is certainly advising Gulf governments to try to guard against inflation and despite talk of managing growth, their options are limited given that most of them have currencies pegged to the weak U.S. dollar. E-mail to a friend E-mail to a friend

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