'New taxation not suitable with skyrocketing prices'

Abu Dhabi: The robust economic growth of the UAE in general and Abu Dhabi in particular is facing serious challenges from rising inflation as a result of the growth itself, as well as the imported aspect generated by the weak dollar to which the dirham is pegged and the increasing prices of commodities.

Gulf News spoke to Khalfan Al Ka'abi, chairman of the Abu Dhabi Chamber of Commerce and Industry's construction committee, who is also chairman of Ascorp Holdings, the Abu Dhabi real estate developer dedicated to the development of labour cities.

Gulf News sought Al Ka'abi's views on economic growth and inflation in general and the growth of the construction sector in particular. Excerpts:

Gulf News: The central bank and the Ministry of Economy have recently singled out inflation as the most challenging hurdle for regional economic integration and development. How do you assess the impact of inflation on business in Abu Dhabi and the UAE?

khalfan Al Ka'abi: Inflation is a natural phenomenon that accompanies robust economic growth in any country as we have seen in the Asia-Pacific region. The UAE is no exception.

About 34 per cent of the UAE's population resides in Abu Dhabi. The emirate accounts for 95 per cent of the country's oil reserves. These human and natural resources make the place attractive for investments in the years to come, given the ambitious economic diversification program adopted by the leadership.

Nevertheless, imported inflation is contributing an additional aspect to the rising prices, especially in food stuffs, which recorded 30 to 50 and even 60 per cent hikes in some cases.

The need to allocate substantial investments in the domestic and foreign agricultural sector to provide for food safety is very clear now, and the accumulation of strategic food reserves is already underway, whether in Abu Dhabi or at the federal level.

This, in fact, is not a solution to the problem, but rather a safety valve to prevent severe and sudden fluctuations in food prices. Investing more in agriculture, on the other hand, is one of the key solutions.

The federal government is planning to introduce taxation as a means of raising more revenues in the federal budget, with a value added tax (VAT) scheduled in 2009. What effect will this new approach have on businesses?

Given the rising prices of commodities that are reflected through the higher than average inflation rates, the introduction of new taxes is not the most suitable move at this stage.

If we take into account that the tax-free environment in the UAE is among the most attractive aspects for foreigners to work and invest here, we can understand the need to think thoroughly before taking that step. Several sectors can tolerate the introduction of taxes, and that has already happened in the tourist sector at the local levels, while others can prove quite sensitive to the subsequent rising costs.

Evaluation

Hence, the regulator must carefully evaluate the move, given that we are running a balanced federal budget, adopting a gradual approach rather than the sudden impact of full implementation.

If tourists are to redeem a value added at departure, the necessary infrastructure must be secured first allowing for ease and speed, while the regulator needs to take into account other factors such as striking the balance between protecting the local industries on one hand and conforming to regional and international obligations on the other.

How does the foreign exchange policy of pegging the local currency to the dollar affect real incomes? Can that be a deterrent for people seeking to work in the UAE?

Maintaining skilled labour represents a great challenge for businesses in the UAE given the rising inflation and improving living standards. However, the ongoing economic growth can help curb this concern, where we find private investors hiking the salaries of their staff not only for preventing them from fleeing their business, but also to cultivate a culture of belonging and loyalty.

Innovation and modernisation have a dear cost, and investors know that, as it helps in reducing the time factor, which is everything for a businessman, while maintaining the quality of the outcome.

Real incomes in the UAE did not decline as many are claiming they did, as the country recorded the highest rate of salary increase in the region last year, amounting to 18 per cent. Accordingly, remittances are still on the rise, and will continue to be in the years to come given the continuation of growth.

Nevertheless, some currencies have depreciated against the dollar instead of appreciating along with the general trend, which negatively affected the income of the workers coming from these countries.

Abu Dhabi will introduce new regulations enforcing a green buildings code for developers and contractors. Will this add to the cost of construction?

In this age, green buildings are not a luxury anymore, and the fact that the strategy of the government in Abu Dhabi has been carefully drawn to take the element of protecting the environment into account reflects pioneering efforts within the context of the growing global concerns.

Striking the balance between developing the economy and protecting the environment is a very difficult task facing the most developed countries such as the USA.

In terms of cost, the construction of an environment friendly building can cost as little as 2 per cent more than a traditional one, while the returns are beyond calculation in many fields such as public health, productivity, resources conservation and so forth.

Besides, the running costs of operating and maintaining the buildings will fall substantially, which means that the policy will result in saving rather than increasing costs.

As the chairman of Ascorp Holdings, you have allocated substantial investments for labour housing projects. Which are the most recent projects for the group?

The expansion in building labour cities in Abu Dhabi reflects the leadership's genuine concern about the living conditions of those who participate in the economic development of the emirate.

Providing workers with the appropriate living conditions and housing yields higher productivity and more commitment, and this has been clearly realised in Abu Dhabi.

Ascorp Holdings has been selected to construct and develop the first labour housing complex at the Industrial City of Abu Dhabi (ICAD), and right now we are working on the expansion of the project through its second phase, taking up the investment cost to Dh1.45 billion.

It is indeed an obligation for us to meet the growing needs in Abu Dhabi for housing its productive labour force, as we will always remain part and parcel of the ambitious economic development plan in the emirate.