"The new veracity of inflation in the Emirate of Abu Dhabi and the UAE, which has become a chain of complex internal and external factors, that requires non-traditional solutions, collective coordination amongst stakeholders, accurate comprehensive statistics to effectively address local market conditions, and dissemination of the culture of saving and increased consumer awareness through consumer and community-oriented guidance programs." The report called for developing "an appropriately tailored legislation to monitor markets and maintain balance, as well as establishing a fixed and proportionate relation between percentage of consumer products purchased and salaries and wages." "In competitive markets inflation is either the result of an increase in costs of factors of production, or a rise in demand for goods and services," it says adding that in Abu Dhabi Emirate and the UAE, inflation is caused by a combination of both.
The Price Index in UAE, it notes, still depends on the results of the Family Income and Expenditure Survey of 1997, although the weights have changed significantly due to the changing consumption patterns.
The report says no general consumer price index is available, so far, for UAE and expatriate families, although the pattern of living, levels of expenditure and expenditure items vary greatly among them.
The persistence of high rates of inflation in UAE may reflect negatively on the domestic business environment, and undermines the attractiveness and competitiveness of the state for business, trade and tourism; in view of the high cost of setting up projects, the report predicted.
"This diminishes the state's ability to attract global competencies and expertise, thus high inflation would be at the expense of economic successes achieved by the State." "High inflation hinders the movement and flow of domestic and foreign investments in all economic sectors, and reduces the competitiveness of local products, because of high production costs. The persistence of such a situation would, substantiate negative repercussions and limit economic diversification efforts. Thus competitiveness in many important economic sectors in the medium term might be affected.
Inflation resulting from the increase in consumer prices CPI, particularly the high rents, fuel prices, soaring cost of goods and services.
Among inflation main drives in the UAE are:
--The rising domestic demand for goods and services and the increasing government spending, in light of the economic development which streamlines the country.
-- Soaring rents, increasing fuel prices, led to a rise in cost of production, and thus prices of goods and services.
--Increased costs of production (labour, raw materials, fees of government services), which in turn trigger prices up.
--High levels of liquidity surplus in the banking sector and eased terms for granting loans, contributed to increased consumer tendencies and consumption rates.
--Imported inflation in the light of the deteriorating value of the dollar, and rising global inflation, increased transportation costs due to soaring oil prices, high cost of insurance and political upheavals in the region.
The report names many other variables that it says are no less important. Among those are the global inflation which sweeps the world, together with the continuing decline in the value of the dollar, constantly affects the domestic market inflation rates.
"The domestic 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, it says, 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 U.S. Federal Reserve policy, whereas at the same time, UAE economic indicators require an opposite path." It noted that any rise in fuel price leads to wide spread effects on the general price level in the UAE, being a vital material for all economic activities. Rising prices of fuel often weakens the purchasing power of consumers, and adversely affects competitiveness of all non-oil sectors, especially tourism, hotels, and retail trading sectors. The general increase in price levels makes the UAE a high cost destination. Internal freight rates and costs in the State set a record high of 120% during the first quarter of this year.
In this sense, balancing the equilibrium of fuel prices must be among the priorities of policy to combat inflation. If oil derivatives distribution companies in the State, justify the prices of their products, by incurring financial losses year after year, to an extent that would no longer be tolerated in view of the unprecedented current rise of international oil prices, then fears would continue and even deepen as they are linked to international oil market prices, which in turn are taking an upward trend, that has already resulted in doubling the average price per barrel of crude oil, more than four times since 2003. Due to the increasing global demand for oil, the declining capacity of producing countries to raise production ceilings and the dollar deterioration, oil prices would continue upward.
Soaring oil prices in world markets and the effects on the domestic markets raise fears in the local economic arena that those developments would lead to unsustainable levels of inflation in the State, to unsustainable levels. This requires a package of options to meet the significant potential increase in oil prices in international markets.
The first of these options would be to ensure and accentuate efficiency of local distribution companies, and their ability to control other cost elements and reduce them to a minimum, prior to burdening consumers with any unjustified additional costs. As these companies do not operate in a competitive environment that necessitates rationalizing cost of all items, those companies are required to consider the question of profit and loss in a more comprehensive and inclusive approach, in view of the diversity and multiplicity of their products.
Some "non-physical" support and privileges to the distribution companies is recommended, after some trials have shown that the "material support" prompted the poor use of oil derivatives and thus led to inefficient utilization of economic resources. As for the consumer to waive some of the attributes of fuel consumed, the knowledge and supervision of stakeholders, including reducing production costs.
The report cited initial measures to address the root causes. Among these are: In the light of differing views about the official nature, magnitude and causes of the phenomenon of inflation in the state, it becomes a comprehensive and accurate understanding of inflation phenomenon is the first step to take the right decisions and measures to curtail this phenomenon.
Inflation targeting policy at the macro level needs financial information, and complex, precise economic and commercial quantitative indicators are that not available for the UAE at present, it is necessary to develop a methodology for calculating the precise indications concerning the official high prices at the state level, and disseminate these indicators quarterly, at least.
The negative repercussions of high inflation on the economy and society, doubled with hasty hit-and-miss counter-measures could cause economic and social problems that are no less dangerous than the factors of inflation themselves. Therefore there is an imperative need for cautious and comprehensive study and accurate to description of the treatment of inflation.
Inflation is an overall general socio-economic phenomenon, which requires consolidated common efforts at the local and federal levels.
It presented some unconventional treatments among which are: Reconsider the objectives of macro-economic policy to take into account the achievement of high rates of growth with low inflation rates, in order to maintain the competitiveness of the state, through an alternative policy based on selecting investments that give high value added and maintain the current rates.
Reconsider the laws and regulations governing the real estate market, real estate investment and encourage interest in sectors of real estate directly meet the requirements of employers and low average incomes and productive economic slide.
Reconsider the price of fuels in the domestic market, and propose mechanisms and appropriate federal and local support prices for oil derivatives involved in a number of vital industries.
In light of the difficulty of deciding on monetary policy, at the present time, the tools of fiscal policy must be activated to counter inflation, by controlling the levels of cash and guarantee a high demand for the granting of personal consumer loans, and rationalizing the level of public spending at the local and federal.
Reconsider the number of secondary issues, including the role of cooperative societies, government fees, the removal of monopoly in all its forms, especially in the area of essential goods, and dissemination of a culture of saving and rationalization of consumption.
WAM
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