Inflation in the UAE jumped to a record 14 per cent last year as a result of high fuel and food prices, a surge in rents and strong domestic demand due to the booming economy, according to a semi-official report.
The report by Abu Dhabi Chamber of Commerce and Industry, citing government estimates, said hikes in fuel prices by local refiners over the past two years was the root cause of the problem as it boosted construction costs and forced landlords to increase rents.
"The phenomenon has become one of the most debated issues in the UAE because of accelerating inflation rates," the report said. "Inflation has steadily risen over the past three years to reach an alarming level in 2007, when it was estimated at as high as 15 per cent. One of the root causes of this problem is the wave of hikes in petrol and diesel prices in the country, as such increases have led to higher construction costs, slashed the profit margin of the contractors and prompted house owners to raise rents sharply."
The UAE has not yet officially released inflation figures for 2007 but the rate was put at about 9.5 per cent in 2006 and nearly four per cent in 2005.
At 14 per cent, the UAE could be suffering from one of the highest inflation rates in the world along with neighbouring Qatar. Inflation in Saudi Arabia, the world's largest oil exporter, stood at 4.1 per cent in 2007, less than half the rate in the UAE or Qatar. Oman, Kuwait and Bahrain also reported lower rates.
"Although the surge in rents was a major contributor to inflation in the UAE, the fuel price increases should not be ignored as they play a key part in pushing up rents to such an alarming level given their direct impact on various economic sectors, including construction and transport," the chamber said. "The increases in fuel prices, which were justified by the suppliers due to the fact that they were suffering losses because of subsidies on fuel sales, turned the UAE into the most expensive country in the Gulf in terms of petrol use."
From about Dh6.25 in 2005, diesel price leaped to Dh13.7 per gallon in the first quarter of 2008, an increase of 119 per cent. After a series of hikes, petrol price also peaked at Dh6.25 per gallon, the highest in the Gulf Co-operation Council region.
"Such increases have hit the construction sector hard. the profit margin of the contractors is expected to decline by a further 15-20 per cent in the coming years and this could affect their ability to meet their financial obligations to the banks. Higher costs will also force more landlords to increase rents although they have reached alarmingly high levels."
According to the report, fuel suppliers had repeatedly hiked prices because of the surge in crude prices over the past two years as many of them import part of their needs because of a steady rise in domestic demand and a drop in local output.
Although the UAE is one of the world's top-five oil exporters, its refining capacity has remained relatively low, diving by nearly 40 per cent to 332,000 barrels per day in 2006 from a peak of 544,000 bpd in 2001.
"At the same time, domestic consumption of refined products surged by 38 per cent to 312,000 bpd from 226,000 bpd during that period as a result of the economic and construction boom," the chamber said.
"The economic boom is another key factor for inflation, as it has led to a surge in domestic demand and this is normal in any country passing through a boom period. Growth rates over the past five years exceeded 15 per cent in current prices and the pace is expected to be maintained in the coming years."
Independent estimates showed the UAE gross domestic product jumped by 19.3 per cent to Dh714.8 billion in 2007 and is projected to accelerate by 20.3 per cent to Dh859.8 billion this year. It will then slip to 13.9 per cent to Dh979 billion in 2009 and 11.8 per cent to cross Dh1 trillion in 2010 for the first time.