The rate last year meant the UAE had the second highest inflation level in the six-nation Gulf Co-operation Council (GCC) after Qatar, which recorded higher than 13 per cent. The UAE rate was also nearly triple that of Saudi Arabia’s inflation of around 4.1 per cent.
Last year’s figure was far higher than the inflation rate of 9.4 per cent recorded in the UAE in 2006 and nearly double the rate in 2005.
Economists expect inflation to remain high this year as rents are rising steadily, food prices are expected to increase further, and the UAE remains heavily reliant on imports, which have sharply grown in value and quantity because of a regional business upsurge and the peg between the UAE dirham and the ailing US dollar.
The Ministry of Economy’s annual consumer price index (CPI) for 2007, released yesterday, showed the surge in rents was the main cause of high inflation in the UAE as they soared by nearly 17.5 per cent last year.
Furniture and related items surged by around eight per cent while there was an increase of seven per cent in clothes and textiles, and 5.5 per cent in food and beverage prices.
The transport and communication index grew by 4.1 per cent while there was a growth of 2.9 per cent in recreational and educational services and a surge by 16.8 per cent in other goods and services. The health service was the only sector to record a decline, with its index slipping by around three per cent in 2007.
“Considering the pace of economic activity in the UAE this year, high public and private investment, the global food crisis and the unrelenting rises in rents, I don’t see any let up in the inflation problem for the time being,” said an economic adviser at a UAE bank.
“My expectation is that the inflation rate will be higher this year because of those factors and the fact that liquidity is still very high and there are no signs that the UAE will depeg its dirham from the dollar, which makes its imports costlier. Any way, it is not only the UAE which is suffering the inflation problem.”
In a recent study, the Abu Dhabi Department of Planning and Economy said soaring rents and food prices along with the dollar peg are stoking inflation in the UAE and other GCC members. It said the peg had left the UAE and its GCC partners with little policy options to stem inflation as they had to join the US in slashing interest rates when they are supposed to hike rates because of a continued upsurge in their economies.
“During the past year, the country witnessed consecutive increases in housing rents, cost of production and prices of goods and services.
“With the continued rise in oil revenues for a long time, the increasing wages on the local scene, and the high level of liquidity in the domestic economy, in addition to increased government spending, especially in infrastructure projects, it is inevitable that all these variables would exacerbate the level inflation during the coming period.”
It said the UAE’s 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 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 US Federal Reserve policy, whereas at the same time, UAE economic indicators require an opposite path.”