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New report on inflation in Abu Dhabi

posted on 15/06/2008: 1809 views

During the past year, the United Arab Emirates witnessed consecutive increases in housing rents, cost of production and prices of goods and services pushing the overall inflation rate in Abu Dhabi to 10.9% at the end of 2007 and to 11.5% in the first quarter of 2008, according to the recent Weekly Report by the Abu Dhabi Department of Planning and Economy.

"The interest rates prevailing in the UAE domestic market merely demonstrate a response to external conditions, but do not do not reflect the real internal situation," it says.

It is evident that comparing price levels in the Emirate of Abu Dhabi during the first quarter of 2007 to the same period this year, reflects a significant rise in the inflation rate from 10.7% last year to 11.5% during the first quarter of this year. This period, it adds, was characterized by substantial increase in prices which affected many goods and basic products, while spiralling high prices continue to gain momentum to unacceptable levels, in view of the successively mounting prices of raw material, rents, cost of setting up business and expansion in government spending, which constitutes one of the main drivers of inflation in the state.

There is a consensus that escalating rents is the main reason behind the rise of inflation rate the current level, in the Emirate of Abu Dhabi and the UAE, where the impact of rising rents have engulfed all vital sectors of production and consumption, thus causing the rise in prices of other goods and services, also the increase shed its immediate repercussions on the overall level of prices throughout the state, and thus impacted the cost of goods and services Within the halted mechanisms of monetary policy, and the connection with the dollar-dirham peg, rents and fuel prices represent key factors in contingent solutions available for combating or suppressing inflation problem in the State.

However, there are inflationary waves that materialize through cyclic successive increase in prices of fuel. Diesel went up by 52% during the past four months.

High rents, escalating fuel prices and the volume of liquidity in the domestic market were cited by the report as major factors behind the high levels of inflation in the domestic market.

Among other factors is the drop in the dollar in the multifaceted inflationary shocks resulting from the depreciation of dirham and the high prices of goods imported from countries outside the influence of the dollar, as well as the hike in oil prices due to inflationary pressures.

"The new veracity of inflation in the Emirate of Abu Dhabi and the UAE, which has become a chain of complex internal and external factors, that requires non-traditional solutions, collective coordination amongst stakeholders, accurate comprehensive statistics to effectively address local market conditions, and dissemination of the culture of saving and increased consumer awareness through consumer and community-oriented guidance programs."

The report calls for developing "an appropriately tailored legislation to monitor markets and maintain balance, as well as establishing a fixed and proportionate relation between percentage of consumer products purchased and salaries and wages." "In competitive markets inflation is either the result of an increase in costs of factors of production, or a rise in demand for goods and services," it says adding that in Abu Dhabi Emirate and the UAE, inflation is caused by a combination of both.

The Price Index in UAE, it notes, still depends on the results of the Family Income and Expenditure Survey of 1997, although the weights have changed significantly due to the changing consumption patterns.

The report says no general consumer price index is available, so far, for UAE and expatriate families, although the pattern of living, levels of expenditure and expenditure items vary greatly among them.

The persistence of high rates of inflation in UAE may reflect negatively on the domestic business environment, and undermines the attractiveness and competitiveness of the state for business, trade and tourism; in view of the high cost of setting up projects, the report predicts.

"The domestic monetary policy, which is one of the mechanisms to curtail inflation, is contingent on external determinants and factors, based on priorities that greatly differ from the requisites of the booming local economy." The Dirham, it says, faces increasing pressure with the influx of liquidity from oil exports. "It is not reasonable that domestic interest rates increase or decrease due to external causes, one of which is the U.S. Federal Reserve policy, whereas at the same time, UAE economic indicators require an opposite path." It noted that any rise in fuel price leads to wide spread effects on the general price level in the UAE, being a vital material for all economic activities.

Rising prices of fuel often weakens the purchasing power of consumers, and adversely affects competitiveness of all non-oil sectors, especially tourism, hotels, and retail trading sectors. The general increase in price levels makes the UAE a high cost destination. Internal freight rates and costs in the State set a record high of 120% during the first quarter of this year.

In this sense, balancing the equilibrium of fuel prices must be among the priorities of policy to combat inflation. If oil derivatives distribution companies in the State, justify the prices of their products, by incurring financial losses year after year, to an extent that would no longer be tolerated in view of the unprecedented current rise of international oil prices, then fears would continue and even deepen as they are linked to international oil market prices, which in turn are taking an upward trend, that has already resulted in doubling the average price per barrel of crude oil, more than four times since 2003.

Due to the increasing global demand for oil, the declining capacity of producing countries to raise production ceilings and the dollar deterioration, oil prices would continue upward.

Soaring oil prices in world markets and the effects on the domestic markets raise fears in the local economic arena that those developments would lead to unsustainable levels of inflation in the State, to unsustainable levels. This requires a package of options to meet the significant potential increase in oil prices in international markets.

The first of these options would be to ensure and accentuate efficiency of local distribution companies, and their ability to control other cost elements and reduce them to a minimum, prior to burdening consumers with any unjustified additional costs. As these companies do not operate in a competitive environment that necessitates rationalizing cost of all items, those companies are required to consider the question of profit and loss in a more comprehensive and inclusive approach, in view of the diversity and multiplicity of their products.

Some "non-physical" support and privileges to the distribution companies is recommended, after some trials have shown that the "material support" prompted the poor use of oil derivatives and thus led to inefficient utilization of economic resources. As for the consumer to waive some of the attributes of fuel consumed, the knowledge and supervision of stakeholders, including reducing production costs.

The report cites initial measures to address the root causes. It calls for providing

financial information, and complex, precise economic and commercial quantitative indicators are that not available for the UAE at present. It necessitates developing a methodology for calculating the precise indications concerning the official high prices at the state level, and disseminating these indicators quarterly, at least. It presents some unconventional treatments among which are:

•Reconsider the objectives of macro-economic policy to take into account the achievement of high rates of growth with low inflation rates, in order to maintain the competitiveness of the state, through an alternative policy based on selecting investments that give high value added and maintain the current rates.

•Reconsider the laws and regulations governing the real estate market, real estate investment and encourage interest in sectors of real estate directly meet the requirements of employers and low average incomes and productive economic slide.

•Reconsider the price of fuels in the domestic market, and propose mechanisms and appropriate federal and local support prices for oil derivatives involved in a number of vital industries.

•In light of the difficulty of deciding on monetary policy, at the present time, the tools of fiscal policy must be activated to counter inflation, by controlling the levels of cash and guarantee a high demand for the granting of personal consumer loans, and rationalizing the level of public spending at the local and federal.

•Reconsider the number of secondary issues, including the role of cooperative societies, government fees, the removal of monopoly in all its forms, especially in the area of essential goods, and dissemination of a culture of saving and rationalization of consumption. – Emirates News Agency, WAM


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