Governments in the Gulf Co-operation Council will allocate about 25 per cent more cash this year for public spending as their oil revenues cross $600 billion (Dh2,204bn), Gulf Finance House said yesterday.

Total government expenditures in Saudi Arabia and five other regional oil producers should hit about $300bn this year, compared with an estimated $240bn last year, Gulf Finance said in a research note. About $2 trillion worth of private sector projects are also under construction or planned in the oil-producing region, the Bahraini Islamic investment bank said.

"Gulf states remain firmly on course for strong, broad-based economic growth for the medium term," it said.

The combined size of Gulf states' nominal gross domestic product will surge past $1 trillion this year on an oil price windfall, a Reuters poll showed this week. The region's total crude export revenues, including Qatar's natural gas exports, will surge 65 per cent to $660 billion this year, the poll of 14 economists showed.

But expansionary state spending in the Gulf is one of the factors stoking inflation at record and near-record peaks, and currency pegs to the dollar in most Gulf states have constrained their ability to fight it. Dollar pegs have forced Gulf states to track US interest rate cuts.

"Gulf states will have to live with the paradox of low single-digit interest rates and high double-digit inflation rates," said Gulf Finance Chief Economist Ala'a Al Yousuf.

As the governments rake in oil revenues, meanwhile, the populations are also getting wealthier.

Per-capita income in Qatar, the world's top exporter of liquefied natural gas, is forecast to surge 23 per cent this year to $96,484 before touching $110,632 next year – second only to Luxembourg – Gulf Finance said. The IMF projects Luxembourg's per-capita income at $117,231 this year and $122,394 next year, it added.

The bank said Gulf states may revalue their currencies or drop their pegs to the dollar to combat imported inflation. Increasing import costs and a delay in the formation of a Gulf single currency may lead the states to change their currency regimes in the "medium term", said Al Yousuf.

Gulf Finance joins CFC Seymour, which last week predicted the UAE dirham would gain five per cent against the dollar in 2009 after the state abandons the dollar peg. Contracts to buy UAE dirhams in 12 months' time fell to 3.6355 yesterday, a 0.2 per cent decline since July 22, indicating the two reports have had little impact on market speculation.

Gulf central bank governors have repeatedly denied they have any plans to drop their dollar pegs.