Gulf states were alerted on Tuesday to take action over rising inflation and of the need to boost the solvency of their financial units. The warning came from Kuwait central bank chief Sheikh Salem Abdulaziz Al-Sabah, who was speaking at a one-day meeting of the Gulf Cooperation Council (GCC) which accounts for one fifth of world oil production. “We have to be cautious at present, particularly with the indications of a global rise in food prices,” Sheikh Salem told the meeting. The global economic crisis, the governor added, had “created a new banking and financial reality that requires more efforts to develop supervisory and monitoring frameworks. “The coming period requires intensive efforts to strengthen the solvency of active units and institutions in the financial system,” said Sheikh Salem. Inflation in five of the GCC's six states soared to double-digit figures before the global financial crisis, but then eased with Qatar, for example, posting inflation of 15 percent before the crisis and deflation during it. But in recent months, prices have begun to rise again, with Saudi Arabia hitting an inflation rate of more than five percent and Kuwait recording four percent in July. The National Commercial Bank (NCB) said on Monday that inflation in Saudi Arabia will likely remain above 5 percent until the first half of 2011 due mainly to a chronic shortage in low- to medium-level housing. Consumer price growth in the world's top oil exporter and the biggest Arab economy climbed to an 18-month high of 6.1 year-on-year in August, far above levels seen in the fellow Gulf oil producers but still below 2008 record double-digit peaks, data showed. “Rental costs have been the main factor behind recent inflationary pressure as the young population increases its demand for affordable low-to medium-level housing while real estate developers focus on expensive commercial office and luxury housing,” NCB said. “(This) widens the gap between (housing) demand and supply,” it added. The implementation of a long-awaited mortgage law may help to reduce pressure on rental prices by easing financing and boosting supplies, but it also could stimulate demand, it also noted. “We anticipate that the inflation rate will continue to be above 5 percent in 2010 and the fist half of 2011,” NCB said. Muhammad Al-Jasser, governor of the Saudi central bank, said on Sunday inflation was worrying but that he did not plan to change interest rates as it is driven by factors outside the bank's reach such as a surge in food prices. Sheikh Salem said he expects Kuwait's inflation rate to come in at between 4.0 and 4.5 percent in 2010, from the four percent recorded last year and 10.6 percent in 2008. Speaking to reporters afterwards, he said GCC central bank chiefs reviewed measures and cooperation among their countries in combating money laundering and terrorism funding. They also expressed satisfaction for the strong financial position of the banking units in member states. Mohammed Al-Mazroui, the GCC's assistant secretary general for economic affairs, said the meeting also reviewed developments on the planned Gulf common currency from which the United Arab Emirates and Oman have pulled out. The remaining four states - Bahrain, Kuwait, Qatar and Saudi Arabia - have signed the monetary council pact and set up the monetary council in Riyadh. The United Arab Emirates withdrew from the pact over a dispute on where the future central bank should be located, while Oman said it cannot meet the monetary conditions. Sheikh Salem said efforts were still being made to convince the Emirates to join the monetary council, adding however that “it's their decision.” Central bank governors of the four states that have signed up to the union decided in May to study the impact of the euro zone crisis on their plan for a common currency. At their summit in Kuwait in December, the four Gulf Cooperation Council members officially launched the monetary union and later set up a monetary council, a precursor for a future GCC central bank.
