Stock Dirhams ATM cash currency
A strong dirham is mitigating some of the inflationary pressures coming in from higher import costs. Image Credit: Shutterstock

Dubai: The UAE is on track to achieve the 4.2 per cent growth forecast for 2022 while inflationary pressures are rising, according to the latest quarterly economic review of the UAE Central Bank. It estimates that real GDP grew by 2.3 per cent in 2021, up from an earlier forecast of 2.1 per cent.

For 2022, CBUAE kept its projections at 4.2 per cent for real GDP growth, with the non-oil real GDP and real oil GDP forecast to grow by 3.9 per cent and 5 per cent, respectively. The central bank attributed the strong economic recovery to effective containment of the coronavirus, strong gains in the oil prices and improved oil output. Oil production increased by 9.3 per cent year-on-year in Q4-2021.

“High oil and gas prices were beneficial for the UAE external position and budget revenue, albeit raising the cost of transportation, and putting pressure on domestic inflation,” the CBUAE said. Total non-oil exports of the UAE increased year-on-year by 29 per cent in Q4-2021 and imports by 26.6 per cent.

The central bank noted that key non-oil sectors of the economy such as travel, tourism and hospitality, real estate and telecommunications are on a strong recovery path.

Inflationary pressures

The latest assessment points to rising inflationary pressures in the economy, largely transmitted from rising global inflation. The consumer price inflation (CPI) accelerated in the fourth quarter of 2021, reaching 2.3 per cent year on year on average, compared to 0.6 per cent increase in Q3 2021. “The increase in import prices was heavily impacted by the pass-through of global inflation, yet mitigated by the appreciation of the US dollar and consequently the dirham,” said the central bank review.

The main drivers of price increase would be the pick up in energy prices; imported inflation that is expected to be record high globally; rising wages; and the continuation of the declining trend of rents. “The upward risks remain significant due to the war in Ukraine, with potential disruption in the oil markets and supply chains, in addition to higher food prices,” the central bank said.

Due to oil price increase, the price of the transportation category recorded 17 per cent. The bank projects the average CPI inflation for 2022 to be around 2.7 per cent while being at 3.3 per in Q1-2022.

Exchange rate impact

Despite the spurt in global inflation, the UAE central bank observed that the pass-through of global inflation is slow in the UAE because of the rising nominal effective exchange rate (NEER) of the dirham because of rising value of dollar. The NEER - which takes into account the bilateral exchange rates of the UAE’s trading partners - gained 1.6 per cent in the fourth quarter of 2021, after an appreciation of 1.1 per cent in the third quarter, in line with the trends of the dollar.

The rising effective exchange rate of the dirham against a basket of currencies of major import destinations of the UAE significantly mitigates the transmission of global inflation to the domestic market.

Employment growth

Employment growth is picking up momentum in the country, according to the new central bank assessment. The strengthening of private and public investment supported domestic employment, which increased by 3.1 per cent in December 2021. Average salary also increased by 7.8 per cent based on CBUAE’s Wage Protection System (WPS) data.