Inflation rates grew substantially in several countries in 2020 due to the Covid-19 pandemic, altering individual social behavior. As public expenditures, such as providing support for families, exacerbated inflation, economists expressed significant concerns that it would harm a country’s overall economic activity and the citizens’ standard of living.
The annual inflation rate in the OECD countries increased to 3.3 percent in April 2021, up from 2.4 percent in March 2021, according to the Paris-based Organization for Economic Cooperation and Development.
By June 2021, it was expected that prices would rise around the world, with food and energy costs excluded from this calculation.
For example, in the United States, trillions of dollars in government spending helped keep the economy afloat during the Covid-19 waves.
Still, experts fear that additional cash and pent-up demand will result in problematic inflation once the pandemic subsides.
According to data released by the US Department of Labor, consumer prices increased by 4.2 percent in the 12 months to April. Canada’s inflation rate rose to 3.4 percent from 2.2 percent. In April, inflation in the United Kingdom increased to 1.6 percent, Germany to 2 percent, France to 1.2 percent, and Italy to 1.1 percent.
GCC governments also spent significant sums to assist the most impoverished families in dealing with the consequences of Covid-19, but what is the rate of inflation in those countries, and what are the future expectations?
Saudi Arabia: Stable inflation rates
Saudi Arabia’s inflation rate increased to 3.4 percent in 2020 due to the value-added tax increase. The General Authority for Statistics stated in June 2021 that the primary reasons for the rise were a 9 percent increase in food and beverage prices and a 3.8 percent increase in transportation prices.
On the other hand, economist Mazen Al-Sudairy expressed great optimism, arguing that Saudi Arabia is attempting to rationalize rather than increase spending, and that increasing support for families will come at the expense of other areas of spending, such as the cost of public debt.
He told TRENDS he believes Saudi Arabia’s average inflation rate is higher than the International Monetary Fund’s estimate (3.2 percent) due to added value, which increased the prices of homes, cars, equipment, and food commodities — the four indicators that account for approximately 45 percent of the inflation balance.
Al-Sudairy expects the Saudi deficit to decrease from $37.5 billion to $16.5 billion due to the increase in international oil prices. Government spending on families is likely to increase by approximately $4.5 billion to $4.7 billion.
It is worth noting that Saudi Arabia has implemented measures and worked on significant improvements as part of its Vision 2030 to diversify sources of revenue.
Thus, Al-Sudairy believes that the state has become more keenly aware of the plight of individuals and families. He also emphasized the importance of women entering the labor force, which increased from 9 percent to 30 percent in just four years, which reflects well on the Saudi society and economy.
Meanwhile, all expectations point to improved budgets for Gulf countries due to increased global demand for oil and a price increase to more than $70 a barrel. Still, each country has its income, budget, and society, according to Al-Sudairy.
In March 2021, the Bahraini Ministry of Finance and Economy announced an increase of approximately $151 million in social welfare provision for fiscal years 2021 and 2022, as well as confirmation that electricity and water subsidies would remain within the state’s general budget for fiscal years 2021 and 2022, announcing a $9.5-billion budget for 2021. The deficit is expected to be $3.2 billion.
In comparison, the IMF estimates that Bahrain’s economy will contract by 5.4 percent in 2020 due to the country’s massive debt accumulation following the 2014 and 2015 oil price shocks.
It received a $10-billion financial assistance package from Gulf allies in 2018, which helped it avert a credit squeeze.
Nevertheless, IMF reported that Bahrain’s public debt increased to 133 percent of the GDP last year, up from 102 percent in 2019, and warned that the country’s debt must be reduced once the economic recovery from the Covid-19 crisis takes hold.
To prevent the onset of the Covid-19 virus, the Kuwaiti Cabinet in March 2021raised a bill to authorize $1.99 billion in extra budget spending for the 2020-2021 fiscal year.
On top of spending nearly $185 billion in the five fiscal years from 2020-21 to 2024-2025 to combat the Covid-19 pandemic, the cumulative deficit also increased, which prompted Kuwaiti Finance Minister Khalifa Hamada to forecast that $183.3 billion would be spent from 2020-21 to 2024-2025 on funding to care for people affected by the pandemic.
Other predictions say total expenditures are expected to come to approximately $377 billion, of which $267 billion is slated for employee compensation and subsidies.
United Arab Emirates
From April 2021 until the end of 2022, the Central Bank of the United Arab Emirates is expected to implement some monetary stimulus measures amounting to $13.6 billion, to help banks in assisting both corporations and individuals dealing with the fallout of the Covid-19 pandemic.
Furthermore, to support the national economy, the Central Bank introduced a comprehensive plan last year to cut the financial consequences of the Covid-19 virus by $27.2 billion.
The Emirates’ GDP shrunk by 5.9 percent in 2020 due to strict policies put in place to contain the spread of Covid-19, and is anticipated to grow by 3.1 percent in 2021, according to the IMF.
In April 2021, Oman increased subsidies for fuel, electricity, and water consumption, in addition to expanding the exemption of essential food commodities from value-added tax from 93 to 488 products.
This came after Sultan Haitham bin Tariq approved the development of the social protection system intending to combat the Covid-19 pandemic at the cost of up to $270 million.
The economic hardships caused by the pandemic are the focus of these measures, including granting financial relief to low-income citizens by canceling their debts to the Ministry of Housing.
In Oman, the total cost of financing the budget for 2021 came to $1.56 billion from the country’s sovereign fund, the Oman Investment Authority, and $4.6 billion from the domestic and foreign sectors.
The country’s economy contracted by 10 percent in 2020 due to the pandemic and the drop in oil prices, among other factors, according to IMF.