Gulf Inflation, Iran in a Corner

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A study by an associate professor in Economics at a Saudi university has warned of the possible disappearance of the Saudi ‘middle class’, and the increase in poverty. The study attributes the trend to continued high inflation which seems uncontrollable and its impact on living conditions and on society in general. It claims that the endangered middle class represents 90% of Saudi society, an assertion which I strongly doubt, for everyone who lives in a country is part of its society at least in an economic sense, be he a native or an expatriate. This unchecked hyper-inflation, the study warns, will lead to higher unemployment and increased crime. The study partly attributes the trend in higher inflation to the system of ‘exclusive agencies’ that dominates the Saudi import sector. It notes that Saudi membership in WTO ‘might’ require dismantling this monopolistic system of trade.
In fact, in all the Gulf oil states, because of a system of dealerships for imported goods, prices are upward-biased. Increased oil revenues are automatically reflected in higher prices for consumer goods, both luxury items and staples. There is a normal economic reason for an inflow of foreign exchange to push domestic prices up through its impact on liquidity, unless this is sterilized by the monetary authorities. In the Gulf, the foreign exchange surplus (oil income) flows to the public sector, which then pumps it into the private sector through the budgetary process. Apparently the mechanism is speeded up by merchants, presumably monopolistic importers, who anticipate increased public expenditures by the state that controls oil income. Hence prices are raised automatically because of the lack of competition.
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Looks like the regime in Iran is stuck with a new crisis it cannot handle. Regardless of where the British sailors were when taken, whether inside Iraq or inside Iran- the exact location is still debatable- the wise course would have been to release them quickly. It is not likely that the Americans, for example, will release any Iranians they have in Iraq or elsewhere, before they are ready, in exchange for these hapless sailor/soldiers.
Saudi media report that King Abdullah had warned Iranian President Ahmadinejad of underestimating American resolve and the dangers to his country. This is very likely true.
On the other hand, Syrian media, all government-controlled, seem surprisingly pleased with the results of the Riyadh Summit. They must know something we don’t.
Cheers
Mohammed