Rising Inflation: UAE economy remains very strong
Rising Inflation: UAE economy remains very strong
Despite rising inflation, the UAE economy has been registering strong growth. The rapid economic performance of the country is strengthened by an outward-oriented development strategy adopted by its government, a favorable business climate, and high energy prices. According to an IMF study on Consumer Price Inflation in the Middle East, strong demand growth coupled with shortages of housing, have resulted in sharp rises in rents, putting upward pressure on prices of commodities in the UAE.
Consumer Price Inflation in the Middle East
The Consumer Price Index Division of the UAE Ministry of Economy attributes inflation to a spurt in consumer prices among all expenditure groups at varying levels. The "House Rent and Related House Items" category has recorded the highest increase with a growth rate of 17.5 per cent, followed by "Other Goods and Services" at 16.8 per cent. The increase in average prices of other expenditure groups ranged from 3 to 8 per cent. UAE recorded 11.1 per cent inflation rate in 2007.
(Source: IMF)
"House Rent and Related House Items" contributed 6.5% towards the total inflation figure of 11.1%, or about 58.6% of the total figure. The "Other Goods and Services" group followed (1.4% towards the total inflation figure of 11.1%, or about 12.8%). The contribution of each of the other expenditure groups to total inflation was less than 1%.
It may be safely concluded that the increase in the prices
of rent and related house items was the main cause of inflation in 2007. This
increase has been driven by two basic factors: the large increase in rental
prices in 2007 and the appreciable percentage that this group constitutes in
household expenditure. We reiterate that the ongoing inflation in the UAE is
not a sign of an under-performing economy. 
As per the figures released by the UAE Central Bank recently, the commercial banks in the country upped lending to residents by 42 per cent in 2007 to Dh626.7 billion, fuelling record inflation. Money supply growth increased an annual 51 per cent in December 2007, up from 15 per cent in 2006.
According to Central Bank, the UAE population grew 6.1 per cent in 2007 to 4.49 million people, ascribed mostly to an influx of new residents into Dubai due to strong growth in the construction sector. Dubai posted a 7.7 per cent growth in population to 1.48 million people last year. Total employees in the UAE grew 7.9 per cent to 3.1 million, the bank stated. The construction sector accounted for a fifth of employees last year, with its total workforce growing 7.9 per cent over 2006.
Contrary to global trends, the UAE economy has been growing from strength to strength. The report by Merrill Lynch is in line with the UAE's Ministry of Economy's predictions that the country would post a fiscal balance of 35 per cent of GDP this year compared to 29.2 per cent in the previous year. The UAE's account balance is likely to jump from last year's 19.5 per cent to 34 per cent of GDP this year.
Despite the recent easing in fiscal policy to fight inflation through unorthodox policies - such a higher wages and subsidies, and lower import tariffs, the GCC countries are prudent in their fiscal spending, saving 70 per cent of their oil windfall. Merrill Lynch points out that regional countries have accumulated $750 billion over the past five years in current account surpluses and with oil prices around $140 per barrel; they are likely to receive another $360 billion in 2008 in their external surpluses - which is around $1billion a day.
Cautious government spending at the federal and emirate levels has resulted in a decline in the non-oil fiscal deficit (excluding investment income). At the same time, however, a number of large investment projects are being undertaken by public and quasi-public entities outside the budget in the energy, infrastructure, real estate, and tourism sectors. External borrowing to fund the investment projects has also gone up significantly.
From the afore-mentioned factors, it may be surmised that the UAE economy is strong enough to weather negating trends, both current and expectant.
(Source: UAE Ministry of Economy; Merrill Lynch; IMF; Gowealthy Research Team, Leading Dailies)
