News that the UAE is set to overhaul its end-of-service and gratuity benefits system has come at an opportune time amid many structural reforms the country is undertaking to sustain its growth trajectory.
Broadly speaking, it addresses the needs and security of employees and aims to channel savings into assets and facilitating capital formation, which has been a topic that I have been writing about for months now.
Crucially, the role of asset prices and its impact on subsequent growth has always been a topic for economists as well as regulators.
And with increased “financialization”, the relation between asset prices and economic growth has always been a symbiotic one. More specific to the UAE, a country that is dominated by an expatriate population, a reformed pension fund scheme allows for resource allocation at the private sector level that aids in smoothening the volatility of asset prices and economic growth, while making the country an attractive destination for living post-employment, especially as retirement ages keep extending.
There are a number of different proposals that could be adopted, from a centralised fund (which is something that the World Bank has recommended) to a more decentralised “individual retirement account”.
Either of these approaches, as well as a spectrum of possibilities in between, can achieve the objective of increasing investment levels in the country, as opposed to these funds being channelled abroad.
There is no dearth of asset classes in the country.
However, these asset classes (predominantly real estate and equities) are dominated by retail investment flows, and accordingly are subject to more volatile movements, which deters hard-earned savings to be allocated towards these asset classes.
It is important to note that any reformation of current laws will go hand in hand with a more liberalised mechanism for small companies being allowed to list on local equity markets, which is what the major part of the economy is governed by.
It is these small companies that will also find the transition to a new pension scheme the hardest, given the fact that they are most in need of capital to begin with.
Here, a funambulistic act is required on the part of the regulatory authorities that allows for breathing room, a fact that has already been recognised.
Perhaps in the initial stages, the reforms will extend to the larger companies, with an adoption by smaller companies over time.
Reforms
Regardless of the pace of such reforms, what is clear is that the goal of channelling savings towards capital formation in the country will be achieved, with productivity levels rising as a result. It would be similar to the experience in more developed countries.
Regardless of the pace of such reforms, what is clear is that the goal of channelling savings towards capital formation in the country will be achieved, with productivity levels rising as a result. It would be similar to the experience in more developed countries.
These structural reforms have always been more resource-efficient than shorter term measures such as artificially constraining the supply of real estate, a popular opinion that has been voiced in recent months.
This way it addresses fundamental economic cause-and-effect relationships rather than reacting to economic output outcomes that arise due to financial liberalisation (in this case freehold ownership).
It is no secret that we are living in an age of reforms, both economic and legal. The UAE’s ambitious agenda is known to all; however its desire to meet the challenges of growing pains is critical as it paves the way for a sustainable growth trajectory.
Reforms are currently underway across sectors, from technology to information dissemination. What we do know is that at the centre of all this is the challenge of optimal resource allocation at the grass roots level, a mechanism that allows for stable capital formation with internally generated savings.
It is therefore no surprise that the end-of-service payments system is being put under the microscope at this stage. Its overhaul will have a cascading effect on all spheres of economic activity and determine the volatility of economic and asset price growth.
These are the test of our times for regulators the world over. In the UAE, I believe that we will pass this with flying colours.
Nasser Malalla Ghanem is Senior Partner at NM Associates, which has a joint venture with GCP.
