UAE in grip of hyper-inflation??

Dubai: The UAE could face hyperinflation if the country does not use appropriate monetary policy tools to rein in the surging money supply and the liquidity overhang, according to analysts.
Due to the dirham's peg to the dollar, the UAE does not use any active inflation targeting measures; rather it follows the US policies.
While the US monetary policy's current priority is to infuse liquidity to save its economy from a credit squeeze arising out of the subprime crisis, the UAE faces huge surge in money supply.
If the US goes ahead with an interest rate cut and if the UAE central bank follows suit it could further accelerate the inflation in the country.

"A US rate cut leaves the UAE and Qatar with limited choices: They can continue to follow US monetary policy, lower their interest rates and risk an uncontrollable inflationary trend; or they can follow Kuwait's footsteps and free their currencies from dollar," said Reem Mansour, an analyst with Cairo-based HC Securities.
In the UAE vigorous economic growth in the recent years has fuelled a big surge in domestic demand, creating upward pressure on prices.
According to the Ministry of Economy the UAE inflation was at 9.3 per cent last year while independent estimates place the inflation to be above 9 per cent this year.
The UAE money supply (M2) rose 23.2 per cent to Dh399.3 billion in December 2006 against Dh324.1 billion in December 2005. The surge in oil prices from $35.1 per barrel in 2004 to $49.5 per barrel in 2005 and $59.5 per barrel in 2006 boosted liquidity in the market. Moreover, oil prices have continued to increase and reached an average of $67 barrel in August 2007.
Adding fuel to the flaring inflation in the country, the dirham fell 15.4 per cent against the euro from December 2005 to end of August 2007, and a 16.9 per cent against sterling as dollar depreciated against these currencies.
"The currency reforms debate has centred on the fact that credit growth remains strong and inflationary pressures have accelerated sharply in the past 18 months... The lack of policy tools to combat inflation is increasingly coming under scrutiny," said Steve Brice an economist with Standard Chartered in a recent report.
"The unprecedented economic boom driven by the oil revenues and the recycling of regional liquidity has seen the Gulf GDPs racing at close pace with some of the Asian GDP growth rates. But inflation is becoming a major limiting factor," Mohsin S. Khan, Director Middle East and Central Asia Department told Gulf News in May.
Currently, with the exception of Kuwait, Gulf states do not have any active inflation targeting policy. According to a recent report by National Bank of Dubai, GCC countries must make changes in the exchange rate policy and ensure central banks' independence.
Alternatively, variants of a fixed-rate system such as crawling pegs or target zones (like in Kuwait), so that an exchange rate target could coexist with an inflation target and will provide greater exchange rate flexibility.
Source: Gulfnews