DUBAI, UAE – The year 2022 was a turbulent year for the global economy with runaway inflation and the cost-of living crisis being dominant issues facing the bulk of the countries globally.
The GCC economies were no exception as they faced the challenges of higher prices that worsened due to excessive reliance on imported products. However, proactive policies by the governments in the region and subsidies on food and energy items helped in keeping inflation in the region at relatively low levels.
According to a new report by Kamco invest, inflation in the GCC averaged at around the 4 percent mark and showed a downward trend for most countries in the region during the second half of 2022.
GCC rate hikes and inflation
In its latest response at the start of February-2023, Saudi Arabia’s Central Bank increased its repo rate by 0.25 percent to 5.25 percent while the UAE Central Bank lifted its base rate for overnight deposit facility from 4.4 percent to 4.65 percent.
Similarly, Kuwait’s Central Bank has raised its discount rate by 50 bps from 3.5 percent to 4 percent whereas the Central Bank of Bahrain raised its one-week deposits rate by 25 basis points to 5.5 percent.
On the other hand, the Central Bank of Qatar kept its rates intact; its repo rate at 5.25 percent, its deposit rate at 5 percent and its lending rate at 5.5 percent.
GCC central banks follow the US Federal Reserve’s rate changes since their local currencies are pegged to the US Dollar barring Kuwait which has its currency pegged to a basket of currencies.
Inflation in the MENA region is expected to affect economic growth despite being low when compared to global economies. Efforts such as price controls and consumption subsidies in some countries in the MENA region helped to control prices. However, these measures are expected to result in additional costs to oil importing countries in the region.
According to the World Bank, developing oil importing countries in the region might need to find new revenues, increase deficit, debt, or even cut government spending in other areas of the economy to fund costs of the inflation mitigation programs. In contrast, there is no such fiscal pressure for the GCC and other oil-exporting countries in the region as state revenue growth mainly from higher oil prices is expected to more than compensate for additional inflation mitigation costs incurred by governments.
In the GCC region, inflation is expected to diminish in 2023 led by higher interest rates and slowing global growth. According to PWC, inflation in the region is expected to average of 2.7 percent in 2023. The GCC region is also expected to gain from its relative stability in its financial covers thanks to higher oil prices and higher energy exports in 2022.
Kuwait
Consumer inflation in Kuwait witnessed a declining trend in 2022 after peaking in April-2022 at 4.7 percent mainly reflecting a fall in the Food & Beverages and Clothing & Footwear groups. The y-o-y growth in the index was the smallest during the last two months of the year at 3.2 percent. The latest inflation reading for January-2023 showed a small uptick of 10 bps to reach 3.3 percent. The increase was led by a 7.4 percent growth in the Food & Beverages index followed by the Clothing & Footwear price index which registered 6 percent y-o-y growth. Inflation in the Housing Services group, the largest weighted group, witnessed a y-o-y increase of 1.4 percent.
Saudi Arabia
Annual consumer price index for the Kingdom rose by 3.35 percent during January-2023 mainly driven by an increase in Housing Water, Gas and Electricity sector index which witnessed 6.6 percent growth and the Restaurants index which registered 6.5 percent growth during the month. Saudi Arabia’s y-o-y inflation growth in January-2023 has been its highest monthly y-o-y rate change since June-2021, according to the Kingdom’s General Authority of Statistics.
Food & Beverages index which has about 18.8 percent weight (second largest weight in the index) in the Kingdom’s CPI index was another key driver behind the CPI uptick recording a growth of 4.2 percent. In terms of m-o-m change, the Kingdom’s CPI witnessed a marginal growth of 0.2 percent during January-2023 as compared to a 0.3 percent monthly rise in December-2022.
The IMF expects Saudi Arabia’s economy to expand by 2.6 percent (lower than the Kingdom’s own estimates of 3.1 percent) in 2023 and 3.4 percent in 2024. On the other hand, the Saudi government expects inflation in the Kingdom to average at 2.1 percent in 2023 down from an annual average of 3.3 percent in 2022.
The UAE
Inflation in the UAE reached 5.2 percent during December-2022 up from 4.7 percent in November-2022 according to the UAE’ Minister of Economy. The rise in inflation was mainly driven by stronger increases in prices for housing, water, electricity, gas, and other fuels. Moreover, prices for transport in the city witnessed a 10 percent m-o-m growth during the period.
According to the Emirates government, UAE inflation is estimated to reach around 5.6 percent in 2022 the highest rate in the last six years. However, the Emirates inflation rate is forecasted to fall in 2023 thanks to careful fiscal control and the local issuance of currency debt by the UAE government among other measures.
The surge in inflation in the UAE is mainly attributed to the same underlying global drivers such as the turbulent economic conditions caused by the Russia-Ukraine war and China’s zero Covid policy which disrupted global supply chains.
In its latest IMF staff article, the IMF highlighted the UAE’s positive economic outlook in 2022 and in 2023 underpinned by higher oil prices and strong domestic economic activity combined with the gradual moderation of inflationary pressures in the country in 2023 backed by prudent fiscal management.
Qatar
Qatar’s inflation growth was the highest in the GCC region during 2022 but significantly lower than global levels. Qatar’s inflation rate surged to 4.2 percent y-o-y growth in January-2023, the second lowest mark since February-2022 after it increased to 4 percent .
The country witnessed increased domestic demand such as growing energy consumption led by the successful FIFA World Cup it hosted, which strengthened existing inflationary pressures in the country.
Inflation during the year was mainly driven by rise in prices in the Recreation & Culture group that saw an increase of 12.5 percent y-o-y in January-2023 followed by Housing & Utilities and the Restaurant & Hotels groups with y-o-y increases of 11.1 percent and 6.9 percent, respectively. In terms of monthly trend, Qatar’s inflation rate declined by 2.6 percent during January-2023 as compared to the 1.2 percent m-o-m growth in December-2022.