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ME struggles to check record inflation surge

Dubai, June 10, 2008

Gulf Arab states launched emergency efforts to control soaring prices while inflation in Egypt hit a 19-year peak on Tuesday as spiralling costs for food and fuel threaten to damage economic growth and stir discontent.

Qatar is to freeze the price of steel and cement for three years and extend a diesel subsidy while Kuwait prepared to unveil an action plan to battle inflation, which hit 10.14 per cent in the latest measure, driven by housing and food costs.

Record inflation poses huge challenges to the Middle East as governments struggle to manage creaky or overstretched economies and head off the type of deep discontent that has partially paralysed Europe this week with strikes and protests.

In the Gulf, inflation threatens to damage rapid economic growth and derail plans to forge a currency union, while in Egypt, rising prices for food could see hunger on the rise. Iran this week reported that inflation hit 25 per cent, which could undermine support for its populist government.

In no small irony, those benefiting most from the energy boom - the oil-exporting countries of the Arab Gulf - suffer from inflation as they import most foodstuffs and as roaring economic growth drives up costs for concrete, steel and housing.

'Inflation remains a problem for macroeconomic stability and a problem that needs to be addressed,' said Marios Maratheftis, regional head of research at bank Standard Chartered in Dubai.

'On the positive side, it is now widely acknowledged now by all the authorities that this is indeed a problem.'

Gulf states are hampered in their fight against inflation by currency pegs to the ailing dollar, which have driven up import costs and forced them to track US interest rate cuts even as their economies boom.

Inflation in Gulf oil-producing countries will probably rise to at least 9 percent this year as rents and global commodity prices surge and falling interest rates spur lending, the latest Reuters poll showed.

High prices, especially of food, have been Egypt's government's biggest headache throughout the year, helping to ignite riots in April in the Nile Delta town of Mahalla, a centre for the textile industry.


Consumer prices in urban parts of Egypt rose 19.7 percent in the year to May, a 19-year high, according to official data. Food inflation in Egypt, the most-populous country in the Middle East, has hit the poor especially hard because many of them spend more than half of their income on food.

Egypt has responded with a ration-card system. 'This isn't just a Gulf problem,' said Simon Williams, an economist at HSBC.

'We are seeing mounting inflationary pressure across all emerging markets and the drivers are similar across the board - a sustained period of rapid domestic demand growth coupled by a sharp pickup of the prices of basic commodities.'

In wealthy Kuwait, inflation has rapidly become the first true test of the country's government to cope with demands by parliament, since the nation's ruler dissolved the assembly earlier this year to end a legislative blockade.

Kuwait's Islamic Constitutional Movement has called on the government to increase subsidies for basic products, include expatriates in state aid schemes, cancel import duties for food products and work out a national food supply strategy.

Consumer prices in Iran, the world's fourth-largest oil producer, have risen steadily, fuelled by profligate spending of an influx of petrodollars combined with interest rates well below inflation.

The year-on-year rate reached 25.3 per cent in the year to May 20, up from 16.6 per cent one year ago, 2007, according to the latest central bank data.

President Mahmoud Ahmadinejad, who faces an election next year, came to power in 2005 on a pledge to share Iran's oil wealth more fairly but has come under fire from many lawmakers, media and the public over failure to rein<


Tags: Middle East | Food | check | inflation surge | struggle |

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