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Dubai: The recent economic performance of the Gulf Cooperation Council (GCC) countries has been impressive while the rising prices will accompany the strong performance of the regional economies, according to latest regional outlook of the International Monetary Fund (IMF).
Over the past five years, the GCC countries grew at an annual rate of about 7 per cent, owing to record-high oil prices and a rapidly growing non-oil sector.
However, the expansion has been accompanied by a general increase in consumer prices. Headline inflation averaged about 6 per cent in 2007, with core inflation tracking closely behind at 5 per cent. Both domestic and external factors have contributed to the rising inflation.
For the whole of GCC, the IMF estimates that inflation will average at 7.1 per cent this year compared to 6.1 per cent last year. In the UAE, the inflation estimate was revised to 11 per cent last year against an earlier estimate of 9 per cent.
The IMF estimates the inflation to be about 9 per cent in 2008. However, said that factors such as hosing shortages and supply bottlenecks could result in higher inflation.
"Rent and food prices are a continuing worry. That essentially means our estimate of 9 per cent inflation for the UAE will be a floor level estimate which could be higher by the year end," said Mohsin Khan, regional director of IMF's Middle East and Central Asia Department.
On the domestic front, aggregate demand has been growing rapidly. Gross capital formation, including public and private investment, increased from about 35 per cent of non-oil GDP in 2003 to about 48 per cent in 2007.
Since 2003, government current spending has risen cumulatively by 58 per cent, mainly reflecting increases in wages and subsidies.
The private sector has contributed significantly to the spending boom, supported by inflows of foreign direct investment and increasing external and domestic debt.
In particular, domestic credit has expanded rapidly, growing at about 30 per cent a year since 2004, and reaching an estimated 56 per cent of GDP in 2007.
According to the IMF's estimates, supply constraints have contributed significantly to inflationary pressures in a number of non-tradable sectors, especially construction. Specifically, shortages of residential and commercial housing units have led to higher rents.
"The depreciation of the US dollar - to which GCC countries' currencies, except that of Kuwait, are pegged - vis-a-vis other major currencies has also contributed to inflationary pressures, but to a lesser extent," the IMF report said.
Over the medium term, substantial domestic investments will continue to drive economic growth. Aggregate demand is expected to remain strong, fuelled by high oil prices and robust growth in the non-oil sector.
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