Omicron aside, global markets are in a recovery mode putting inflationary pressures not only on the GCC economies but also on the most developed markets.
Inflation rates have risen in most major countries after the spread of the Covid-19 wave and the rise in international oil prices and shipment prices, at a time when most investments are still cautious, specifically in the Arab Gulf countries.
Economic recovery comes with its own set of troubles, and inflation is one of the necessary evils that manifests across economies in an unusual manner owing to the global economic connectivity.
The main reason for high inflation rates in the GCC is a rebound in prices in the sectors that were hit the hardest during the Covid-19 crisis, as Chief Economist at Oxford Economics Middle East, Scott Livermore, told TRENDS.
“We are seeing stronger inflation in sectors such as transport and recreation and leisure activities. We have also seen a pick-up in food prices that will feed through into inflation too,” he said.
Qatar is currently topping the list with above four percent in October, “though that might still be topped by Kuwait, which have been slow in publishing data and have presented only data through July this year (3.2 percent) given that inflation in Kuwait is expected to accelerate in the second half of 2021”, according to what Economics & Country Risk Team Lead at IHS Markit, Ralf Wiegert told TRENDS.
GCC inflation rates in details
Qatar witnessed the highest inflation rate among the Gulf countries, as process rose by 4.28 percent in October 2021 compared to October 2020, and recorded a monthly gain of 1.34 percent compared to September 2021.
Kuwait came in second, as data from the Central Administration of Statistics showed an annual inflation rate by 3.36 percent in June 2021. On a monthly basis, inflation rose slightly by 0.5 percent in June, compared to May 2021.
Oman recorded a 2.45 percent inflation in September 2021, coming third among the GCC countries.
Saudi Arabia came in at number four compared to other GCC countries. In October 2021, the consumer price index expanded by 0.8 percent compared to October 2020, while the increase from the previous month, September 2021, was 0.2 percent.
Mazen Al-Sudairi, the head of Research at Al-Rajhi Capital Company, cited several reasons for Saudi Arabia’s inflation, such as an increase in the shortage of electrical segments in response to the high demand for electronic chips and semiconductors.
He also pointed out to TRENDS factors like a 45 percent increase in the cost of car production and the augmented demand for raw materials as a result of the high electricity usage.
In the United Arab Emirates, the Federal Competitiveness and Statistics Authority data showed that annual inflation was in the positive in August 2021 for the first time since January 2019, or after 32 months, recording a rate of 0.55 percent.
For 31 months, the authority’s monthly report stated that inflation remained in the negative range.
The VAT connection
Global consulting firm PwC in its recent report on Middle East economy said the flip side of a strong recovery and the rebound in oil is rising consumer prices.
“There are concerns globally about inflation, which has reached the highest since the 2007 spike in both the United Sates (5.3 percent) and Eurozone (3.4 percent),” it said, adding that there are a wide range of factors at play including the cascading impacts of temporary pandemic-related supply chain constraints, from lumber to semiconductors, and staffing shortages as people are unable or unwilling to return to their previous sectors of employment.
Economists and policymakers remain divided as to whether the current global inflationary pulse will ease in 2022 — as the US Fed currently believes — or could become more long-lasting.
However, economies in the Middle East are exposed to these global price fluctuations because of heavy import dependence. Cuts in subsides since 2016 also mean that most now have domestic fuel indexed to global prices, said the PwC report.
“There are also localized factors at play in each country, such as high population growth in Egypt and long-running rental deflation across the GCC, which pre-dates COVID-19 but has been exacerbated by expat departures. While there have been some short-term labor constraints in the region, contributing to wage inflation, Gulf states should be able to adjust easily through important new migrant workers now that COVID-19 constrains are easing.
“Most countries have rebounded from the COVID-19 deflationary trend, but inflation has so far remained relatively constrained relative to historic levels in each country. Barring Lebanon, where a currency crisis is causing hyperinflation (138 percent in August 2021), Iraq has the highest inflation in the region at 7.4 percent, the most since 2012. However, other countries are only seeing their highest levels in two to five years.
Changes in fiscal policy have also been a factor in some countries, according to the PwC report released for November 2021. “The tripling of the Saudi VAT rate to 15 percent in July 2020 sharply boosted inflation for a year, peaking at 6.2 percent in June 2021, the highest since 2009. However, it does not appear to have had a persistent impact, as inflation dropped sharply to just 0.4 percent in July 2021, roughly where it had been before the hike. The introduction of five percent VAT in Oman in April also had an inflationary impact, although slightly less pronounced in relative terms as inflation only increased by two percentage points that month (to 1.6 percent from -0.4 percent in March), partly because Oman implemented its VAT with a larger range of zero-rated items than Saudi Arabia did, to mitigate social hardship.”
Other fiscal policy changes likely had an impact on inflation but are more difficult to attribute, added the report saying that Oman has been phasing in higher electricity and water prices this year and also reducing subsidies in other areas. Saudi Arabia increased a range of tariffs in July 2020, and then in July 2021, suddenly tightened its criteria for tariff-free imports from the GCC, which now excludes exports from free zones and requiring that exporting companies had a minimum of 25 percent GCC national employees, a difficult requirement to meet in states where expats staff over 90 percent of the private sector.
Looking ahead, Bahrain recently announced plans to double its VAT rate to 10 percent, which could come as soon as January 2022 if parliament approves the plan and will add 2pp or so to its inflation. Meanwhile, Qatar and Kuwait are still considering whether to introduce VAT, but neither is likely to do so during 2022, partly because of concerns about the inflationary impact. The IMF forecasts only modest inflation in 2022, averaging 2.4 percent across the GCC, and then a steady 2.2 percent in 2023-26, close to the long-term average, according to the PwC report.
Affected sectors: Food & beverages lead
While food and beverages in Kuwait accounted for a whopping increase in prices, education costs saw a decrease of 15.46 percent.
Prices in the F&B sector rose 10.1 percent year on year. Most sub-indices had price increases, but the highest rates were in the categories of fruits (+25 percent), vegetables (+9.7 percent), and meat (+15.3 percent).
However, prices in the residential services sector – primarily rents – grew only 0.2 percent year on year.
The sectors most affected by inflation in Qatar were entertainment and culture (25.3 percent), transportation (9.6 percent), and food and beverage (4.2 percent).
It should be noted that the housing, water, electricity, gas, and other types of fuel saw costs drop 3.58 percent, and the health sector saw prices fall 1.39 percent.
Even though the UAE’s overall inflation rate did not rise significantly, the costs of food and beverages in Dubai grew 3.5 percent, and those in the leisure and culture sector increased by 5.7 percent, while the prices in the transportation sector jumped 16.8 percent.
Livermore said the UAE was an open economy that “imports a lot of food and manufactured goods.” He explained that, therefore, “the supply chain disruptions that are pushing up global inflation will also impact the UAE and the rest of the GCC.”
Transportation and recreation are the main sectors affected by the high prices, he said, clarifying that “inflation rates are still low in the UAE, especially when compared to the US and Europe.”
As reported by Saudi Arabia’s General Authority for Statistics, the annual inflation increase was due to a 6.4 percent growth in transportation — fueled by a 47.9 percent rise in gas prices — and a 1.4 percent rise in food and beverage prices.
Inflation in Saudi Arabia has primarily affected construction and the real-estate sectors due to the lack of workers. It also affected the food sector due to the high prices of importing goods, said Al-Sudairi.
2022 expectations
It is difficult to predict inflation rates in the coming period due to the variety of its causes.
However, according to Al-Sudairi and Wiegert, inflation will continue in 2022 before slowing to sustainable levels, whereas Livermore expected inflation to average around 2 percent in 2022.
Wiegert also anticipated that global supply chain issues would continue for another 12-18 months before being resolved.
Solutions
Addressing inflation includes a deep understanding of the underlying causes. For example, if the economy is experiencing overheating activity, central banks can pursue deflationary policies, which often involve raising interest rates.
According to Wiegert, there is little the governments can do. “In the short term, delaying planned fuel price hikes could be an option. For example, the government in Saudi Arabia might lower the VAT rate, and therefore bring down inflation, which is not too high anyway.”
Al-Sudairi believes that the private sector in Saudi Arabia can play a critical role in cost restructuring and production expansion.
Moreover, when things appear to be getting beyond what citizens can endure, the government may set prices directly.
Unfortunately, these price-fixing methods frequently result in the accumulation of financial responsibilities on the government.