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Soaring inflation undermines sustainability of Persian Gulf region

States scramble to protect themselves from skyrocketing energy costs, but measures such as government subsidies are proving ineffective.

By Liam StackCorrespondent of The Christian Science Monitor / July 18, 2008

Food shortages: In May, women tried to catch a share of bread that fell to the ground outside a government-subsidized bread kiosk in Usim, Egypt, as inflation hit a 19-year high.

Holly Pickett/Rapport/Newscom

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Just as Persian Gulf cities such as Dubai and Abu Dhabi were becoming synonymous with excess and success, the Gulf boom is in danger of going bust. Instead of conjuring images of towering skyscrapers and indoor ski slopes, they are struggling with soaring inflation rates. Indeed, the Gulf region may want to position itself at the center of global capitalism, but it will first have to contend with the impact that skyrocketing energy costs and a cooling global economy are having on the local economy and the impoverished migrant labor force that bears the brunt of rising oil and food costs.

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High inflation is causing concern among policymakers in the Gulf Cooperation Council (GCC), a regional organization that includes Saudi Arabia, Kuwait, Bahrain, Qatar, Oman, and the United Arab Emirates (UAE).

In June, inflation in Egypt, the most populous Arab country, hit a 19-year high of 20.2 percent. Saudi Arabia also saw a 30-year inflation high of 9 percent in May. Meanwhile, inflation in Bahrain rose from 4.07 to 6.2 percent between December 2007 and April.

To make matters worse, five of the six GCC members, with the exception of Kuwait, peg their currencies to the US dollar. As its values drops, their inflationary woes grow, and the sustainability of economic growth in the Gulf is brought into question.

Previously, the prosperity of Gulf states such as Bahrain and Qatar has come from the soaring price of oil, which has reached record highs over the past 12 months. But now, rising oil prices are spurring further inflation.

According to Rasheed Mohamed Al Maraj, the chairman of the Central Bank of Bahrain, 50 percent of the world's proven oil reserves can be found in the GCC countries. Over the last 12 months, the price of oil has risen dramatically, with a barrel costing $147 at the end of last week. As a result, Gulf-region economies have been growing at a rate of 5 to 7 percent a year for the last several years.

But as Mr. Al Maraj explains, this price hike is exacerbating the region's inflation woes. "[The price of oil] creates pressure on the economy and is bound to create inflation," he says. "It is like running a machine for a long time – eventually it overheats."

The region's poor are the worst affected. Gulf states are trying to spend their way out of the problem by increasing public assistance to the poor and raising subsidies on food, fuel, and housing.

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