Increasing housing supply will ease inflation in UAE

Dubai: Inflationary pressures are expected to remain at about the same level in the Gulf in 2008 as last year, averaging about six per cent, according to a senior official of the International Monetary Fund (IMF).

Based on updated statistsics, the IMF has noted that inflation in the UAE in 2006 was 9.3 per cent and 10.4 per cent last year. It has not forecast a figure for 2008.

The main driver of inflation in the country has been soaring rents, followed by price increases in food and beverages.

"As housing pressures ease, so will inflation in Qatar and the UAE," said Gene Leon, deputy chief of the GCC Division of the IMF.

"Domestic demand is expected to remain strong over the medium term, fuelled by high oil prices and substantial investments. High oil prices are expected to sustain high public investments."

In a scenario of the declining dollar and reduced interest rates, much of the debate on tackling inflation - at least among the common man - has been whether the appreciation of the exchange rate would have an impact.

With specific reference to the UAE, Leon said on the sidelines of GCC Inflation Challenges conference organised yesterday by Datamatix: "We don't think that the only way to tackle inflation is through revaluation. It depends on the sources of inflation.

"One of the things we said was that there is a lot more on the supply side that is generating inflation and maybe therefore the more appropriate way of looking at it is to put in place policies that will alleviate those supply constraints."

It is well known that given the pegged exchange rates in most GCC countries, including the UAE, in terms of monetary policy in controlling inflation, there is not much leverage. The only way is to have an effective fiscal policy.

And in that regard, Leon believes that the government has been following a prudent fiscal policy and there is no room for a major shift.