With the calls to revalue the dirham against the US dollar increasing, experts say raising the dirham’s value by three to five per cent would only have a marginal impact on inflation in the country.
Economists are of the opinion that a three to five per cent increase would reduce inflation by just one per cent. The UAE’s official rate of inflation was 9.3 per cent in 2006, rising to an estimated 10 per cent last year. Recent reports predict the rate will surge to about 12 per cent in 2008.
Jamal Saleh, Director of Risk Management at Commercial Bank of Dubai, said: “A revaluation of the dirham will be limited to around five per cent while the dollar’s value has already dropped by 30 per cent. Revaluation will have a limited impact on prices of commodities or rents. Its only impact will be on current accounts among countries, not our daily lives.
“The revaluation will reduce inflation by around one per cent but the level of inflation is expected to reach 12 per cent soon, so the impact will be marginal. All commodities in the market were bought at their current prices, so the impact of a re-valuation will appear next year, not in 2008.”
Walid Shihabi, head of Research at Shuaa Capital, said: “We expect inflation levels to fall to 7.5 per cent in case of a five per cent appreciation in the dirham’s value. Inflation is a negative side effect of the booming economic growth in the country and it is difficult to avoid it.”
Alfred Rayek, researcher at EFG-Hermes, also agreed that inflation will continue to increase this year and may hit 12 per cent despite expectations of the dirham’s appreciation. “Domestic factors driving inflation are very strong and the revaluation of the dirham will stop inflation from increasing, but the rates are already at their highest in 20 years. The purchasing power of the dirham is depleting very fast.”
Ziad Dabbas, consultant at the National Bank of Abu Dhabi, was more pessimistic about inflation, predicting the rate will touch 14 per cent this year. “We saw the government increase salaries by 70 per cent. The main problem will appear in the private sector, where the number of employees is far more than in government institutions. We have a very complicated cycle of inflation. As we saw, prices of commodities surged even before government employees received their pay rise. Correspondingly, the purchasing power of a majority of private sector employees decreased.”
He expects the US Federal Reserve to cut interest rates again this year, bringing them to one per cent. “This will lead to a major depreciation in the dollar’s value, dragging the dirham to lower rates. In this scenario, the country will see imported inflation and most people living here will suffer.”
Interest rate cuts will be another factor in increasing inflation, as this will reduce the cost of borrowing money. Shihabi said: “When interest rates drop to three per cent, while the country is suffering from at least nine per cent inflation, this means that the country is losing six per cent of the total value of its liquidity.”
Rents are unlikely to soften this year, as several real estate projects are expected to witness delivery delays.
With fewer new properties coming into the market than expected, property prices and rents will continue on an upward spiral.
“As soon as Abu Dhabi and Dubai lowered the rent cap, the majority of real estate management companies took to other methods to increase rents,” said Saleh.
Inflation will remain high