Inflation feeds debt trap



Soaring inflation is pushing residents into a debt trap as people resort to borrowing to bridge the widening gap between their low income and growing expenses, according to official figures.

The massive rise in personal loans in the UAE shows banks have emerged as the main beneficiaries.

Inflation is also having a huge impact on expatriate remittances.

During the first nine months of 2007, the country’s 23 national banks and 28 foreign ones provided a record Dh11 billion in personal loans for consumption purposes compared to only around Dh2bn through all of 2006, Central Bank figures show.

Personal loans for business purposes also surged to Dh25bn from nearly Dh10bn through 2006.

Soaring rents, one of the main factors for high inflation rates, also sent thousands of people to seek  mortgage loans.

Real estate loans doubled to nearly Dh20bn in the first nine months of 2007 from Dh10bn in the same period of 2006.

Bankers expect the trend to continue through 2008 as inflation is projected to pick up while incomes remain fixed.

“There is very strong demand for personal loans and this is expected because of the recent sharp rise in rents, food prices, cars and many other consumer items,” said a senior bank economist.

“We expect this demand to stay high or even pick up this year and probably next year because of expectations inflation rates will rise higher,” he added.

“This is also affecting expatriates’ remittances to their home countries. We do not have figures yet for 2007 but I think the annual average transfer was lower and will be much less this year as many low-income expatriates are sending less money back home now.”

 UAE banks, who are heavily reliant on loans in their business, made record profits of more than Dh24bn last year and the earnings are projected to swell by at least 10 per cent in 2008.

Total bank credits soared to Dh578bn during the first nine months of 2007. In a recent report, the Abu Dhabi Chamber of Commerce and Industry (ADCCI)  said inflation has sharply increased household spending and prompted families to seek loans from banks and other financial institutions.

It said many families are now spending more than they earn.

“Despite the steady growth in the economy and the profits of companies, the individual’s income is still low compared to the soaring prices of goods and services,” it said.

“In Abu Dhabi, rising rents and the price of food and other consumer items have become a serious problem for families, who are forced to seek loans from banks, funds and charity societies.”

Its figures for 2005 showed national families spent an average Dh367,000 while they earned Dh362,000 during the year.

Expatriate families also suffered from a deficit, spending an average Dh136,000 and earning an average Dh118,000, the report said.

Inflation in the UAE climbed to a record 9.5 per cent in 2007 from nearly 6.5 per cent in 2006 and is projected to reach double-digit figures this year.