It should be no surprise that Arab nations have received huge windfalls as a result of the spiralling price of oil. The GCC’s (Gulf Cooperation Council) top oil exporter Saudi Arabia will witness GDP growth of 30.8% this year, up from 6.7% last year, according to a note by Dutch financial group ING.
The United Arab Emirates, already prosperous with its luxury tourism industry and the world’s tallest building under constructuon, is expected to witness GDP growth of 32.3%, while Kuwait’s economy will hulk out to 50.6%, the fastest growth rate in the region.
If the price of oil remains above $135 a barrel, Gulf countries are expected to gain an export surplus of $1bn, reports Gulf News. But while the flow of income should aid liquidity in the short to medium term, it raises inflation fears and pushes up asset costs, possibly creating asset bubbles in the medium term.
The biggest concern should be inflation, which crippled Japan’s economy in the early 90′s and is still haunting the island nation. As well as the influx of money, many gulf currencies are pegged to the US dollar, whose weakness makes imports more expensive and further increases prices. According to this Reuters article, inflation in the UAE hit a 20 year high of 11.1%. That was with growth rates of just 7.6%, when growth almost quadruples, and the dollar is even weaker, inflation could destroy gains in national quality of life.
Comparing inflation for other countires is difficult because, and this is the second major concern, government statistics are scarce and unreliable. In a UAE report last October, the International Monetary Fund reported that “The national accounts compilation system suffers from a number of deficiencies, including lack of a comprehensive data collection program.”
The UAE is the only oil producer to release yearly inflation estimates and Qatar, Bahrain, Kuwait and Oman have yet to release constant price GDP estimates for 2007. Released figures are susceptible to change, in late June Qatar revised its current price GDP growth rate figure for 2007 to 25% from a 12% rate released in March. Similarly, the UAE revised its 2007 GDP growth rate to 5.2% from an earlier 7.6% and then issued a statement denying the revision. With such unreliable data, many economists instead rely on microeconomic factors like bond yields to gauge the health of gulf economies.
These issues are being addresed, if slowly. To combat inflation, in May 2007 Kuwait severed the link between its dinars and the US dollar, tracking instead to a basket of currencies. A new center for national statistics has opened in the UAE to compile and release economic data.
With so much money flowing in, an infrastructure must be created to efficiently allocate it. The alternative is corruption and destruction, as witnessed in oil rich yet undevelopd nations like Nigeria. The World Bank estimates that between $100-200bn of Nigeria’s oil revenues have been stolen by corrupt officials. An interview at Alternet with Michael Watts, author of Curse of the Black Gold, compares the exploitation and corruption in the oil trade to trade in blood diamonds. Watts puts it bluntly, ”If oil is inserted into a corrupt federal system, then the combination of non-transparent Big Oil and authoritarian Big Government produces a perfect storm of violence, corruption, ecological destruction and poverty.”
