Budget spend on development to curb inflation

This year’s 40 per cent budget allocation for Dubai’s developmental projects – Dh10.6 billion of the Dh26.5bn budget – is a marked increase over previous years and was viewed as a promising step towards accomplishing the 2015 Dubai Strategic Plan and dealing with the inflation the city is facing, leading economists said.

According to a decree issued by His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, the metropolis will double its budget surplus this year to Dh11.4bn, while increasing spending by 30.9 per cent.

John Sfakianakis, Chief Economist at SABB, Saudi Arabia’s HSBC affiliate, was not surprised by the growing surplus, and expects the trend to continue. “There will definitely be surpluses for economies in the region that could be envisioned until at least 2010,” he told Emirates Business.

He also viewed the planning, and the heavy allocation of capital for infrastructure as a positive development. “It is good for them to be planning and looking ahead,” Sfakianakis said, adding there are more challenges in the future that should be examined – inflation topping that list.

 

Mary Nicola, economist at Standard Chartered in Dubai, believes the new breakdown in spending is a good start. “Dubai is growing and has a great strategic plan, but inflation is its Achilles’ heel at this point,” said Nicola.

The main cause for inflation in Dubai, and most of the region, is a severe shortage of housing and the subsequent rise in rents. But Nicola said while 50 per cent of the inflation is due to the rental cost of property, the rapid money supply growth is also causing pressure and “has long-term implications on the overall performance of the economy”.

The increase in government spending is in line with the need for projects and accomplishing the vision of Dubai by 2015. This rise in money supply, according to Nicola, adds “fuel to the inflationary fire that already exists here”.

Inflation reached 9.3 per cent in 2006 and Standard Chartered had forecast the 2007 rates would hit 11.5 per cent “largely because money supply is rising at record high levels – in 2006 it reached 23 per cent”.

For Sfakianakis, rents remain one of the major obstacles to growth and one that increased spending in certain sectors can overcome.

According to the strategic plan, Dubai is expected to attract about 800,000 new workers by 2015. “If they expect all these people to come in and work, then they need to meet the housing demands, and housing and rents are the biggest concern of domestic inflation in the UAE and the region,” said Sfakianakis.

But he added if much of the growth in spending goes towards real estate (and the infrastructure surrounding it), inflationary pressures would decrease as the demand for housing decreases.

The budget breakdown was hailed as a good sign of increased transparency, however the need for even more specific data was a common criticism received.

Eckart Woertz, economics programme manager at the Dubai-based Gulf Research Centre, said it would be helpful to know where exactly Dubai generates its income from.

“There will be profits and rents from government- owned companies and real estate, some revenue from Dubai’s oil [four per cent in 2007], Salik, municipality fees… but how much are these worth and what about the rest?” asked Woertz?

 

Yet even without the extra information, economists perceived the new data as an overall positive development. Woertz said: “The Dh11.4bn surplus gives the outside world a signal the financing of Dubai is sustainable – that there’s enough money coming in.”