In this column and on our program we are busy exploring the efforts by Middle Eastern governments and businessmen to build a sustainable model for economic growth. It has been quite fashionable to talk about building the “software” or the people skills to leverage the “hardware” that is being constructed throughout the region.
Unfortunately, as governments are finding out now, it is not so easy. I have an image of my children erecting a Lego set in their playroom. They put the pieces together, somewhat unevenly, with many different colors. If they don’t like what was pieced together, they simply tear it down and start all over again. The leaders in this hyper belt of economic growth are realizing that on the front lines that it is not that simple.
When one looks at the headlines, Qatar’s economic growth looks impressive on its own. In five short years, the economy has expanded from a gross domestic product of $16 billion to $60 billion today. And that is not the end of it. Expect more of the same as construction begins to rev up. The problem is, the Emirate is also facing the fastest growing rate of inflation in the region -- as high as 14 percent.
During an interview this week Daniel Hanna, a visiting fellow at Chatham House (home of the Royal Institute of International Affairs) in London, outlined the challenges. We often talk about the impact of the dollar peg on the Gulf countries. With the dollar hitting new lows, the cost of imports to the region is surging. In five years, imports have gone from $150 billion to $370 billion, as they pay for goods from Europe, Japan and other non-dollar denominated economies.
Secondly, Gulf central bankers have lowered interest rates in lock step with the U.S. Federal Reserve to match economic policies due to the dollar link. The problem is, the U.S. is slowing down and the Gulf is surging. The lower rates are leading to a liquidity boom -- too much money chasing too few goods -- leading to record inflation.
In central bank parlance, policymakers talk about “calibrating” economies to keep growth moving forward, while keeping a lid on prices. This is not the time for calibration in the region. Outside of revaluing their currencies against the dollar or moving to a basket of currencies to buffer the dollar’s fall these banks, according to Hanna, have not developed other tools to tackle modern day challenges. With the exception to Saudi Arabia, these countries don’t issue short term bonds, for example, to absorb the flood of money on the market today.
This all sounds esoteric -- if you will -- but don’t say that to the flood of expatriate workers from India, Pakistan or Bangladesh who have seen their buying power eroded. In Egypt, civil servants have joined the ranks of protestors seeking pay rises to combat a 50 percent surge in prices for staples over the past year. Egyptian President Hosni Mubarak sent orders to the army and police to use their bakeries to supply bread to the market. We have witnessed long queues with people scrambling for basics.
The pressure will mount in the months ahead and governments will use short term measures to cope. Egypt for example is paying an extra $3 billion this year to subsidize bread, rice, cooking oil and petrol for cars. If you are awash with cash like Saudi Arabia that may be okay, if you are trying to create sustained growth like Jordan, Algeria and Egypt it is more challenging.
The problem, as Hanna notes, is that “you may be storing up problems for the future”. While $100 plus oil is lifting the boat for all at this moment in time, if the global economic slowdown reaches the Middle East, governments will have to deal with much more than just inflation.
What do you think? Email us at mme@cnn.com, or click on "add a comment" below.
Add a comment
