Most governments of the Gulf Cooperation Council (GCC) have imposed price controls on basic commodities or rent caps.
Many of them have also announced large salary hikes for public sector workers. The UAE raised federal government employees by 70 per cent in November 2007.
Many other Gulf governments have since passed similar, albeit less dramatic, public sector wage increases. Besides, most governments in the region are widening their subsidy nets.
Commenting on the situation, Moody's report covering the whole of the Middle East says that although Gulf oil-exporters can currently afford to raise rates of government expenditure in order to cushion the social cost of inflation for its citizens, such actions are gradually making governments reliant on higher and higher oil prices in order to balance their budgets.
This may constrain their ability to adjust to a potential future downturn in oil prices, warns the rating agency.
Of all the IMF's regional groupings, the West Asia experienced the highest average inflation rate in 2007, at 10.4 percent and this is expected to accelerate in 2008, says the Moody's report.
