20 November 2007
Abu Dhabi: The Ministry of Economy acknowledged yesterday the seriousness of rising inflation, relating it to the currency peg in the context of the declining dollar, surging oil revenues and the money supply, and soaring housing and fuel prices.
With the dirham artificially devalued against major currencies due to its peg to the dollar, the ministry said the UAE's ability to use monetary policy tools to curb the problem is limited.
Despite the fact that the Opec Summit refrained from including any reference to the dollar in its final communique, the mere fact that the greenback's weight can be under consideration drove it down yesterday to even lower levels.
"Since January 2001 and until September 2007, the dollar lost around 32 per cent of its value against the euro and 27 per cent of its value against the British pound. Imports from these countries constitute around a third of our total imports. Since the dirham is pegged at a fixed rate to the dollar, the prices of imports from these countries have risen in dirhams, leading to imported inflation," the ministry revealed in a report yesterday.
Another aspect adding to the problem is the increasing money supply at an unmatched average annual rate of 15 per cent, resulting in abundant liquidity and further complicating the problem by supporting the demand side.
Abundant liquidity
"The increase in money supply [for the strictest definition of money supply, or what is referred to as M1] was not less than 15 per cent every year since 2001. This is an extremely high growth rate, by all standards, and simply means that more and more money was chasing fewer goods and services, leading to inflation," it said in a statement.
Increasing rents are also considered by the ministry to be among the leading factors pushing inflation rates even higher.
"According to the existing consumer price index [CPI] weights, rent constitutes around 36 per cent of the average household expenditure in the UAE. This is, once again, a critical issue that will not be resolved until the residential and non-residential units, currently under construction, are ready for occupancy," the ministry said.
Some experts suggest that an ideal solution for the escalating rent levels is to extend the mortgage duration from the existing average of 15 years to 25 or 30 years as is the case in many developed markets. "The increase of the duration will result in less monthly debt burdens and accordingly less rents, and on the other hand, the practice will also support the real estate market by providing for a wider buyer base," said Obaid Al Ka'abi, a general manager at Das Holding.
"The UAE government is serious about containing inflation. Inflationary pressures are likely to subside primarily when the residential and non-residential units are occupied, and if the dollar stops declining vis-a-vis other international currencies or if a change in the exchange rate regime is contemplated. Until then, everyone will simply have no option but to weather the storm," said the report.
By Ahmed A. Elewa
Gulf News 2007. All rights reserved.
