The first decade of the 21st century will be remembered for its soaring inflation, with TV images from around the globe of people queuing for bread or demonstrating violently against high food prices. In the MENA region, inflation originates from both external and internal factors. While external factors are similar across the region — and essentially imported from the West — internal factors vary between oil producing and non-oil producing nations.
Economists agree that the weak dollar is one of the main reasons fueling MENA inflation; its effect, however, varies from one country to another.
Lebanon’s heavily dollarized economy is obviously adversely affected by the ailing greenback, but its neighbor Jordan is suffering as well. According to Dr. Rasha Manna, head of research at Jordinvest, the Jordanian dinar’s dollar peg and the rising exchange rates have reflected on the country’s debt, estimated at about 70% of GDP. “We have been significantly affected by the weakening dollar due to our particular debt structure of which 30% remains in dollars while, the rest is comprised of various international currencies. Our debt burden is estimated to have increased by 4% in 2007 due to the depreciation of the dollar against the euro,”she said. The current debt structure in Jordan is primarily divided up into Euro (up to 23%),Yen (18%), and the Kuwaiti dinar (14%), with the latter appreciating since Kuwait abandoned its dollar peg. Approximately 10% of Jordan’s debt is held in British pounds.
With the Hashemite currency’s peg to the weak dollar, imports to Jordan are becoming more expensive. Only 5% of Jordan’s imports originate in the US. And while dollar-denominated imports by far exceed this figure — one has to add the 20% of imports made up by oil — the 30% of imports which come from the EU and 40% from Japan are burning holes into the kingdom’s bourses.
In the UAE, SHUAA’s chief economist and strategist Dr. Mahdi Mattar estimates inflation from imports may account for 3% of the total 11% national inflation level.
Among other external factors contributing to inflation are higher commodity prices, especially food. Many countries in the region rely on imports of essential food items such as wheat, rice or sugar. “The demand for food is certainly fueled by the growing needs of large economies such as India and China,” underlined Dr. Louis Hobeika, professor of economics at the American University in Beirut. The high Euro is partly to blame for high inflation in Lebanon, which imports many of its products from Europe. “Lebanese traders have also been used to work for decades with European countries, and it is somewhat difficult for them to adjust their purchasing behavior as they also tend to feel that US products are not much cheaper when transport expenses are taken into consideration,” he adds. This state of affair equally reflects on the UAE markets, where growth in global prices has risen considerably, according to Mattar.
Fuel for rising costs
In Egypt, inflation is taking a cost-push form that relies mostly on internal factors, such as decreasing government subsidies, according to economist Dr. Heba Nasser, Vice President of Cairo University.
Oil prices, which have reached unprecedented levels of $140 a barrel, have strained economies around the world. The MENA region has been affected differently by higher oil prices, as many countries throughout the region boast large natural reserves of ‘black gold’. “Oil producing countries also experience inflation, but high energy prices allow them to subsidize their industries heavily and offset any potential negative effect of the trend, which is therefore less felt by the population,” said Hobeika, who estimates the contribution of oil to price increases in Lebanon to at least 25% of total inflation levels.
The lifting of fuel subsidies in Jordan has been absorbed with difficulty. “The government had been progressively phasing out oil subsidies for some time, before it abolished them completely in February 2008,” Manna reckoned. A recent study by the Jordanian Ministry of Industry and Trade found that fuel prices accounted for only 10% of total production cost in about 90% of Jordanian plants. This figure varies evidently from one industry to another, a typical counter example being cement industries where 40% of expenses can be attributed to oil.
On the local level, internal factors ingrained in the economy are also conducive to higher inflation levels. Hobeika believes that Lebanon’s monopolistic economy weighs heavily on its current health. “Exclusive agencies, which restrict imports of certain brands to a few players, are something of a common sight in our country and consequently hike up inflation,” he underlined, while also pointing out that Lebanon needs to cancel exclusivity contracts in order to join the WTO.
Towering real estate
In the UAE and Jordan, elevated real estate prices have projected inflation to new levels. “The supply bottleneck witnessed in the UAE is one of the main contributors to high inflation,” said Mattar. He said within 18 months, the Dubai real estate sector will stabilize at new levels as new real estate projects are placed on the market for sale, while in Abu Dhabi the supply of residential and office spaces will grow tremendously by 2010. However, he added “the rent caps imposed by the UAE government might be detrimental to the real estate sector as it might discourage or slow investments on the long run.”
In Jordan, housing prices have also increased significantly, growing by some 300% over the past two to three years. The introduction in 2010 of a new rental law will allow for new contracts to undergo yearly appraisals, which will also further exacerbate inflation, of which housing expenses account for about 26%. Dr. Sabra acknowledged that the price of land and real estate development has definitely fueled inflationary trends in Egypt, where official figures reached 12.5 % in May 2008. “Our situation is somehow comparable to Jordan, the only major difference residing in the fact that our wages are much lower than in the Hashemite kingdom,” she added.
Mattar emphasized that high oil prices have certainly generated unprecedented wealth and an excess of liquidity and placed inflationary pressures on Gulf economies.
So how can regional countries cure inflation? Hobeika believes that the global nature of inflation renders the problem quite difficult to solve in light of external factors, which have a trickle-down effect on local economies. “We are faced with two choices on the global level, either increasing supply or lowering demand in sectors contributing to price spikes,” the Lebanese economist admitted. When this is applied to the oil market, increasing supply beyond a certain level may be a daunting, if not impossible, task for oil-producing countries. On the other hand, lowering demand by investing in new technologies might be a viable solution. “One has to keep in mind that if the world economy was in better shape, instead of being plagued down by successive crises — such as the subprime and the more recent Freddie Mac and Fannie Mae debacles — the price of oil would have certainly reached higher levels,” Hobeika said.
When it comes to food shortages, Hobeika believes that much can be done in this regard with the possibility of doubling production levels through improving management of agricultural land and proper irrigation, dovetailed with a sound development of rural areas. “Demand for food items can’t be realistically expected to drop and the new billionaires of this world should maybe start investing in the agro-industrial sector,” he added. He also estimated that raising wages without increasing productivity will only contribute further to inflation.
On the national level, each country in the region has different weapons at its disposal to combat inflation. In Lebanon among the solutions envisioned are moving away from the dollar peg and liberalizing the sector by issuing new regulations and removing exclusive agencies. Encouraging people to invest in Lebanon would allow to increase productivity and reduce the long-term impact of inflation by improving growth levels, and it can be accomplished by improving the political environment and privatizing the economy. “While dollarization was used in the eighties as a powerful tool to master inflation, now it undoubtedly contributes to it. In the next few years, we should maybe envision a system based on a flexible exchange rate. But this, however, needs to be underlined by a restrictive fiscal policy,” said Hobeika.
Measures adopted by the Jordanian government include decreasing interest rates by less than what the U.S. Federal Reserve recommends. “Local interest rates were lowered by 75 basis points instead of the 325 basis points that is imposed in the USA,” Manna explained. She identified other measures, such as increasing foreign currency reserves, which also, in her opinion, need to be more diversified, as well as controlling fiscal spending. She pointed out that, “An appraisal of the dinar against the dollar could be also feasible. However, lowering inflation without slowing growth is a tricky problem.”
For Mattar, inflation in the UAE could be fought by increasing reserve requirements in order to reduce the national money supply. “This has been already implemented by the government in Saudi Arabia that has moved up reserve requirements of banks from 7% to 9%, and then from 9% to 12 % again last April, after they had remained unchanged for over 23 years,” he added. The UAE has also tackled the international food crisis by buying farms in Pakistan, although such measures aim essentially at securing sources of food and do not actually fight inflation, according to Mattar. He estimated that in order to reign in inflation the UAE will eventually also need to move away from the dollar peg.
Nasser said Egypt needs to encourage industry to increase productivity to fight inflation. Such encouragement must be done while simultaneously attempting to curb demand by modifying people’s purchasing behavior; this effort is currently being undertaken by the local media as well as NGOs. “This effort, when dovetailed with the establishment of a consumer protection authority, can be efficient on the long run,” she noted.
