GCC MIGHT NOT ADOPT US FED POLICY IN ORDER TO PREVENT "STIFLING" NON-OIL GROWTH

  • 13/10/2022

Kuwait City: According to the Economist Intelligence Unit, some of the richest nations in the Gulf Cooperation Council may decide not to follow the US Federal Reserve's decision to raise interest rates. Kuwait was singled out because it doesn't want to stifle Kuwait's non-oil growth. In general, the EIU emphasised that the region's anticipated tightening of interest rates will pose a barrier to its growth and that Bahrain is not able to pursue this option due to financial pressures. 


According to EIU sources, linking the currencies of the Gulf Cooperation Council nations to the dollar was advantageous because it gave them a solid foundation on which to base their monetary policies. They also noted that this link forced the Gulf nations to adopt the US Federal Reserve's interest rate policy, whereas the Kuwaiti dinar exchange rate is tied to a basket of currencies with the dollar as the dominant currency. 

The unit made clear that most GCC nations increased interest rates in a way that is fully consistent with US increases, which have so far totaled 225 basis points, with the expectation of additional increases in the context of the Federal Reserve's efforts to reduce the inflation rate from its current rate of 8.3% to 2%. The total US increases are predicted to be between 375 and 400 basis points in 2022 and 2023. 

The EIU cautioned, however, that the monetary policies of the Gulf countries could result in the implementation of a faster and stricter monetary policy than is necessary, particularly since inflation rates in these nations range between 2 and 5 percent compared to an average of 8 percent or higher in the United States. The EIU also noted that the Gulf currencies are experiencing an increase in the exchange rate as a result of the strengthening of the dollar, which will adversely affect competitiveness. 

The unit added, “The rise in interest rates will also mean an increase in borrowing costs for families and businesses, which will lead to a slowdown in the activity of the non-oil sector and growth in general in these countries next year.” Those companies that were hoping to take advantage of the various measures to facilitate the loans that were applied during the “Corona” and which were extended in a number of countries until 2022. The Economist Intelligence indicated that despite the improvement in economic activity in the UAE, credit growth in the private sector during the first half of this year was only about 3.7 percent, a reflection of banks’ caution against repeated defaults in recent years by the sector’s borrowers.

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