WRAPUP 2-Mideast struggles to contain record inflation surge

(Adds analyst, Kuwaiti lawmakers demands)

By Thomas Atkins

DUBAI, June 10 (Reuters) - Gulf Arab states launched emergency efforts to control soaring prices on Tuesday, while inflation in Egypt hit a 19-year peak as spiralling costs for food and fuel threaten to damage economic growth and stir discontent.

Qatar is to freeze the price of steel and cement for three years and extend a diesel subsidy, while Kuwait prepared to unveil a plan to battle inflation, which hit 10.14 percent in the latest measure, driven by housing and food costs.

Record inflation poses huge challenges to the Middle East as governments struggle to manage creaky or overstretched economies and head off the discontent that has led to strikes and protests in some parts of Europe.

In the Gulf, inflation threatens to damage rapid economic growth and derail plans to forge a currency union, while in Egypt, rising prices for food could see hunger on the rise. Iran this week reported that inflation hit 25 percent, which could undermine support for the government.

Ironically, the oil-exporting countries of the Gulf who are benefiting the most from high oil prices are also suffering from inflation. They import most of their food and roaring economic growth drives up costs for concrete, steel and housing.

"Inflation remains a problem for macroeconomic stability and a problem that needs to be addressed," said Marios Maratheftis, regional head of research at bank Standard Chartered in Dubai.

"On the positive side, it is now widely acknowledged now by all the authorities that this is indeed a problem."

Gulf states are hampered in their fight against inflation by currency pegs to the ailing dollar, which have driven up import costs and forced them to track U.S. interest rate cuts even as their economies boom.

Inflation in Gulf oil-producing countries will probably rise to at least 9 percent this year as rents and global commodity prices surge and falling interest rates spur lending, the latest Reuters poll showed [ID:nSP151028].

Yet even Kuwait, which de-linked from the dollar a year ago, is battling inflation that topped 10 percent in February, highlighting the complexity of the problem policymakers face.

"The Kuwaiti experience has shown that just de-linking the currencies to the U.S. dollar is not sufficient to do away with inflation," said Jasim Ali, a member of the Bahraini parliament's finance and economic committee.

"Currency link is one element. We have to liberalise the economies, possibly curb governmental spending, curb the growth of money supply, think of new measures such as value added tax."

LITTANY

High prices, especially of food, make up the Egyptian government's biggest headache this year, helping ignite riots in April in a textile-producing town of the Nile Delta.

Consumer prices in urban Egypt rose 19.7 percent in the year to May, a 19-year high, according to official data.

Food inflation in the Middle East's most populous country has hit the poor especially hard as many spend over half their income on food. The government has responded with a ration-card system.

"This isn't just a Gulf problem," said Simon Williams, an economist at HSBC. "We are seeing mounting inflationary pressure across all emerging markets and the drivers are similar across the board - a sustained period of rapid domestic demand growth coupled by a sharp pickup of the prices of basic commodities."

In wealthy Kuwait, inflation has rapidly become the first true test of the new government's ability to deal with demands by parliament, since the nation's ruler dissolved the assembly earlier this year to end a legislative impasse.

Kuwait's Islamic Constitutional Movement has called on the government to increase subsidies for basic products, include expatriates in state aid schemes, cancel import duties for food products and work out a national food supply strategy.

The new government hopes to unveil an anti-inflation plan including new food subsidies on Wednesday, but opposition lawmakers are already pushing for more, hoping to force through the second raft of state salary increases this year.

FOOD STOCKPILE

Consumer prices in Iran, the world's fourth-largest oil producer, have risen steadily, fuelled by profligate spending of petrodollars combined with interest rates well below inflation.

The year-on-year rate reached 25.3 percent in the year to May 20, up from 16.6 percent one year ago, 2007, according to the central bank.

President Mahmoud Ahmadinejad, who faces an election next year, came to power in 2005 on a pledge to share Iran's oil wealth more fairly but has come under fire from many lawmakers, media and the public over failure to rein in rising prices.

Bahrain, the smallest oil-producing Gulf state, on Tuesday put a price for the first time on some of its inflation-fighting efforts, saying it spends 500 million dinars ($1.33 billion) a year on subsidies for food and fuel.

Gulf Arab states should cooperate to secure food supplies, Bahrain's state news agency quoted its prime minister as saying.

The rise in food prices has prompted Bahrain's government to explore plans to set up an import company to stockpile food, and newspapers have carried lists of thousands of citizens eligible for state hand-outs.

"The price controls being introduced in the region may have some impact in at least slowing the headline inflation right now but it won't address the underlying causes," said HSBC's Williams. (Additional reporting and writing by Wael Gamal and Jonathan Wright in Cairo, Mohammed Abbas in Bahrain, John Irish and Daliah Merzaban in Dubai, Ulf Laessing in Kuwait, Fredrik Dahl in Tehran and Peter Apps in London)