By NNN-KUNA
Kuwait : The National Bank of Kuwait (NBK), in its latest economic brief, reports that since the start of the recent oil windfall, the economic performance of GCC countries has been impressive almost across the broad, including record growth rates, significant budget and current account surpluses, and sizeable foreign assets accumulation.
These achievements however came in tandem with inflationary pressures that started to mount, especially over the last two years, the bank’s report said.
Factors causing higher inflation in GCC countries vary from country to country. In Qatar and UAE, for example, rising rent is being blamed, while in Saudi Arabia it was mainly inflation in foodstuffs. Furthermore, the magnitude of inflation varies considerably among GCC members, ranging in 2006 between 2.1 per cent in Bahrain and 11.8 per cent in Qatar.
In Kuwait, the latest date released by the Ministry of Planning shows that consumer price inflation has accelerated during 2007 after having declined to 3 per cent in 2006 from its record high of 4.1 per cent in 2005. Inflation ended the month of May at 5.3 per cent year-on-year, slightly below the all time high of 5.4 per cent registered in the previous month.
Inflation rates during the last three months were the highest in the revised consumer price index going back to 2000. Accordingly, inflation during the first five months of 2007 averaged 4.8 per cent relative to the corresponding period of the previous year and 3.4 per cent above the 2006 average.
According to the Central Bank of Kuwait (CBK), the depreciation of the KD against the major non-dollar currencies has been a key factor behind rising inflation, as prices of imports have risen. In a move to contain these inflationary pressures, and given the expectation of further weakening of the US dollar, the CBK abandoned the dinar’s peg to the US dollar on May 20 of 2007, switching back to the regime in place before 2003. This policy change has allowed the CBK to revalue the KD since then by as much as 2.5 per cent against the US dollar, though its impact on inflation is not yet apparent.
The NBK noted that since the adoption of the KD peg against the US dollar in January 2003 through the end of March 2007, the KD lost 17 per cent and 14 per cent of its value against the euro and the sterling pound respectively, though it appreciated by 2.5 per cent against the Japanese yen. During the same period, its value against the US dollar rose by only 3.5 per cent.
While the precise inflationary impact of such movements in the exchange rate depend on several factors, including the degree of import substitution between Kuwait’s various trading partners and on the extent that exporters have reduced their profit margins to maintain their market share in Kuwait, there is no doubt that the large change in the KD’s value in such a short span of time has had a notable impact on import prices for Kuwait.
While exchange rate changes are likely to have been a large contributor to inflation, other domestic factors are expected to have played a role as well. One such factor is the large increase in private consumption in recent years, having grown by an average of 11.1 per annum since the end of 2004 in comparison with 6.8 per cent over the previous two years.
Strong growth in personal lending, which rose by 23 per cent and 17.8 per cent over the last two years, respectively which by far exceeds the average growth of the non-oil sector during the same period, can be seen as a factor fuelling consumption and, thus, inflation.
Rising public sector wages in recent years, as well as increasing transfers to households including the two Emiri grants, are also factors. Meanwhile, the generous government subsidies of a number of consumer commodities and services is likely to be understating the problem of inflation as subsidized products in the consumer price index have seen little or no rise in recent years.
According to NBK, inflation data reveals that foodstuff were the major contribotor to consumer price inflation in Kuwait over the last two years. After having fallen to 3.9 per cent in 2006 from its record of 8.6 per cent in the pervious year, average inflation of food accelerated again to 5.6 per cent in May 2007 averaging 5.7 per cent during the first five months of 2007.
Food prices alone were responsible for almost one third of the recorded consumer price inflation during the last two years, and for 22 per cent of the general increase in prices during the first five months of 2007. April and May 2007 saw some easing in the price rise.
Higher inflation in foodstuffs appears to be a global phenmenon in recent years. The International Monetary Fund (IMF) estimates that average world food prices rose by 14.3 per cent in 2004 and by 9.9 per cent in 2006. Such an above average inflation is bound to find its way into Kuwait, especially as Kuwait imports the bulk of its foodstuffs, though the weakening dollar no doubt also played a role.
Other goods mainly recreational and personal care-work were the second major contributor to consumer price inflation and responsible on average for 17.8 per cent of the increase in prices during 2005 and 2006, though a smaller 9 per cent of the inflation rate in the first five months of 2007.
Household goods and services, such as textiles, appliances, furniture, and household domestic services were also subject to significant price inceases in recent years. Inflation in household goods and services averaged 3.2 per cent per annum over the last two years, and 3.3 per cent during the five months of 2007. Hence, this group contributed 13.1 per cent and 10.2 per cent to consumer price inflation recorded in the previous two years and the five months of 2007, respectively.
The rise in this group may reflect both higher import prices in light of rising oil and metal prices globally, and the indirect effect of increased rental rates in Kuwait. The IMF estimated metal’s prices increasing by 26.4 per cent in 2005 and 56.5 per cent in 2006 globally.
Also according to NBK, clothing and footwear, housing services (mostly housing rent), and transport and communications all saw notable price increases, and contributed 12 per cent and 6.2 per cent to cumulative consumer price inflation in 2006 and 2006 combined, respectively. Yet, the transport and communications sector was the leading source of inflation in 2007, responsible for 31.6 per cent rise in prices during the five months of 2007.
Such a development may be due to rising costs of imports of automobile and auto parts of European origin following the significant appreciation of the euro and sterling pound against the US dollar, as well as the rising costs of airline fares in tandem with rising oil prices and the rising penetration rate of the communication sector.
In contrast inflation in transport and communication prices was relatively constant in the years since November 2006.
Meanwhile, rent prices were mainly affected by the rising demand on residential units following the significant growth in the population, and by the indirect effect of the surge in prices of construction materials.