Inflationary pressures are reducing the appeal of the UAE as a lucrative labour market, causing the inflow of expatriate workers to slow down, according to a report by Dubai Chamber of Commerce and Industry (DCCI).
The report, based on recent research by DZ Bank, says the country is facing "an inflation problem of increasing magnitude", which could damage the economy in the medium term. The DCCI also expects the UAE economy to become less competitive in the world market in the next few years.
"In the medium term, inflationary pressures could result in negative developments," said the report.
"First, the cost of living for the expatriate labor force has risen significantly, which is reducing the appeal of the emirates as a lucrative labor market.
"The inflow of expatriates has slowed down lately due to the inflationary pressures.
"Second, high inflation coupled with fixed exchange rates is equivalent to the real appre ciation of the currency. Thus high inflation means that even if productivity growth is significant, the competitiveness of the UAE economy is expected to decrease." However, the ongoing revision of local laws and close monitoring of economic performance by the UAE Government will help prevent serious long-term damage to the economy, according to the report.
It also said that the UAE is facing stiff competition from Bahrain, Kuwait and Qatar to maintain its position as one of the region's main business hubs. "It is expect ed that not all of these financial hubs will survive as the region is not large enough to support the existence of all of them.
"Therefore, the UAE is faced with the continuous challenge of ensuring its leading role and longevity." The UAE also faces the problem of a manufacturing sector that lacks an adequate home-grown labor force.
Another obstacle to building a strong manufacturing base is the fact that the UAE currency is pegged to the US dollar, which reduces the potential for favourable exchange rate development.
By Anthony Richardson
© Emirates Today 2007
