Inflation in the GCC not going away soon


Al-Monitor Pro Members


Dr. Robert Mogielnicki  

Senior Resident Scholar, Arab Gulf States Institute in Washington, DC


Oct. 25, 2022

Bottom Line:

Inflation rates in Gulf Cooperation Council (GCC) countries remain below regional and global levels. Inflation in the GCC is unlikely to dissipate over the short term; however, rising prices are very unlikely to spiral out of control. Much of the inflation story in the GCC concerns food and beverage prices. Fuel prices in the UAE and real estate prices across the region pose some additional challenges for policymakers seeking to mitigate the negative impacts of inflation over the short and medium terms.

Background Facts:
  • The IMF predicts that global inflation will rise from 4.7% to 8.8% in 2022 before falling to 6.5% in 2023.
  • Headline inflation in the Middle East and North Africa region is projected at 14.2% for 2022 and expected to remain elevated in 2023, according to the IMF. Inflation rates in GCC countries remain much lower.
  • Saudi Arabia’s annual inflation rate accelerated to a 15-month high of 3.1% in September, up from 3% in August.
  • Food and beverage prices were the main drivers of inflation in Saudi Arabia in September (meat prices increased +6.5%), according to the General Authority for Statistics.
  • The UAE’s central bank indicated that inflation reached 3.4% in the first quarter of 2022 and has projected a 5.6% inflation rate for the year.
  • Unlike other GCC countries, fuel prices in the UAE are adjusted based on market costs, heightening inflationary pressure during periods of high energy prices.
  • Inflation in Dubai reached 7.1% in July, which was the emirate’s fastest increase in prices since 2016, according to Bloomberg.
  • Emirates NBD, Dubai’s biggest bank, gave employees pay raises of up to 8% to help address rising costs.
  • Oman reported an inflation rate of 2.4% in September of this year, according to the country’s National Center for Statistics and Information.
  • The relatively small populations of GCC countries combined with “effectively an inexhaustible supply of labor at the prevailing wage” from countries like India and Pakistan help GCC businesses resist price rises.
Alternative Scenarios:

Scenario 1: Inflation decreases substantially and no longer becomes a concern for regional governments.

There is a broad consensus that the global economy is no longer in the low-inflation, low-interest-rate equilibrium that existed before 2020. Unprecedented shocks and geopolitical uncertainty will continue to place upward pressure on prices. GCC states import as much as 85% of their food, leaving these countries vulnerable to supply disruptions. New or higher taxes — such as when Saudi Arabia and Bahrain increased the standard rate of their value-added tax — also result in short-term spikes in prices. Similarly, any progress on subsidy reforms will likewise impact prices in GCC countries.

Scenario 2: Inflation increases rapidly across the GCC region, significantly impacting the economic well-being of both national and expatriate residents.

As recently as 2019 and 2020, many GCC states experienced deflationary conditions. Currency pegs to a strong US dollar make imports cheaper. GCC governments have set aside billions of dollars from oil and gas proceeds to stockpile commodities and insulate vulnerable citizens, and these governments have been investing for years to improve food security. GCC government officials are especially sensitive to any links between rising prices and socioeconomic grievances in their countries.

Conclusion - Most Likely Scenario:

Inflation rates in GCC countries have increased at a steady but modest pace over the past year. For example, inflation in Saudi Arabia increased from 0.6% in September 2021 to 3.1% in September 2022. Yet prices have, for the most part, risen gradually and stayed within manageable levels. This dynamic is unlikely to change over the short term. Rising prices will negatively impact the economic welfare of many lower-income migrant laborers — many of whom already operate on a shoestring budget. GCC governments, which are enjoying budget surpluses stemming from high oil and gas prices, remain in a strong position to insulate their national populations from future inflationary pressures.

Contributor Background:

Dr. Robert Mogielnicki’s professional affiliations span top-tier research institutes, academic institutions, NGOs and consultancies. He is a Senior Resident Scholar at the Arab Gulf States Institute as well as an Adjunct Assistant Professor at Georgetown University and a Professorial Lecturer at George Washington University. He serves as an Adviser with Freedom House and an External Consultant with Eurasia Group. Dr. Mogielnicki is the author of "A Political Economy of Free Zones in Gulf Arab States" (Palgrave Macmillan 2021), and he is currently working on an edited volume about the political economy of sovereign wealth funds in the Middle East and Asia. He is a Term Member at the Council on Foreign Relations and a member of the Board of Advisers at Henley & Partners, an investment migration firm. The Middle East Policy Council listed Dr. Mogielnicki in their inaugural 40 Under 40 awards for influential Middle East experts. He holds a DPhil from Magdalen College, University of Oxford.

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