Playing policy instruments to curb flying inflation

Statistics and economic indicators have become very important in assessing the performance of every public and private institution in the country, and to give the public an idea about the trend of specific activities. Figures and comparative statistics have been also used to demonstrate the achievements of governmental institutions, and to inform consumers of the growth in services and businesses in different economic areas.

Early this year, for instance, airports released the traffic movements in 2006 compared to the previous year, to show the growth in the UAE's prosperous tourism sector. Figures of occupancy rates in hotels and restaurants have been used to invite more investments to the hospitality sector.

Statistics can be released to the public to raise their awareness of an unwanted phenomenon. For example, figures of traffic accidents were released by police departments of different emirates in order to draw the attention to the causes of accidents, and how to avoid them. In the meantime, traffic statistics are quite useful for the insurance industry to plan its marketing strategy.

Delay

But till today and forty-three days after the closure of 2006 books, no official announcement has been made on the rate of inflation in the last year.

The reasons for such a serious delay in informing the public may be either the lack of information or officials in-charge are not willing to share their knowledge with the public and the business community just to avoid its negative impact on the investments and wages.

Apart from miming confused figures by officials in the previous year, no one seems to be confident enough to expose the performance of the economy and the inflation rate in 2006. This would not mean that people will forget about inflation, but it will stir speculation from everyone. Inflation is no longer an indicator which the government has the right to hide or not. It is a very important factor which is used by businesses and individuals to make serious decisions .

On June 26, 2006, Sultan Nasser Al Suwaidi, Governor of the UAE Central Bank, said the inflation would decline to four per cent by the end of 2006 from the seven per cent in 2005. The governor attributed the rate of inflation to the increased demand for new residential apartments which, he said, would be offset by thousands of new houses to enter the market by the end of 2006.

Two months prior to Al Suwaidi's statement, Shaikha Lubna Al Qasimi, Minister of Economy, said the economy had been suffering from heavy pressure which was stirring inflation. She predicted that the pressure would die off slowly by the end of the year, and the inflation rate in 2006 would maintain its seven per cent level recorded in 2005.

She said the inflation in the UAE was a result of a worldwide pressure on prices of building materials which the local construction sector badly required. She added that the flow of foreign investments had resulted in an unprecedented growth on property sector.

Bank studies, however, did not share the official optimism over the future trend of inflation, nor did they agree with rates being mulled officially. One study showed that the inflation in the country was running at between 12 and 15 per cent in 2006, double the rate estimated by the Ministry of Economy, and triple the estimated rate of the central bank.

"Despite the central bank's repeated rhetoric of containing inflation at below four per cent, we are yet to see any indication of a decline in the price level - especially rentals," said a study conducted by the National Bank of Dubai.

Higher

Residential rents, which contribute 36.14 per cent to the UAE consumer price index, had increased by at least 15 per cent in 2006 and had exerted strong upward pressure on inflation, according to the NBD study.

Inflation is the number one challenge facing the UAE's economy according to a warning issued by the International Monetary Fund (IMF).

It deserves prompt interference from local monetary and economic authorities. It is not enough anymore for the UAE central bank to adjust its interest rates as per those in the US when the economy is strong enough to enforce proactive action to correct the situation.

Managing the interest rates or pegging the dirham to a basket of foreign currencies instead of tying it solely the US dollar are among the tools available to the central bank to fight inflation.

Taking no action against inflation means that banks would continue to eat up the money of their customers by offering them negative interest on their savings.

It is also means that employers are paying less for the same work they are getting from their employees.

In brief, such a policy allows the rich to get richer and the poor to become poorer, which is very dangerous for the economy and the society.