Inflation likely to hit UAE manufacturers

Dubai: Soaring inflation rates are putting UAE manufacturers at a disadvantage in the local market, and could deflate exports to the benefit of manufacturers in neighbouring countries.

The Ministry of Economy has issued public warnings in recent weeks against attempts by suppliers of essential goods to increase prices. It said it acted to protect consumers against "unjustified price increases."

There have been moves by the local dairy companies to raise prices of their products in unison. They argued their production costs have risen and an increase in prices would be justified.

The cost of imported cow feed has gone up by 40 per cent in one year and staff hiring cost has increased by 25 per cent, said Shukri Salem Al Muhairi, general manager of Dubai Investments Industries, a listed holding firm that operates Dubai dairy company Marmum.

Supermarkets are also charging more for shelf space they provide to dairy companies and have demanded bigger discounts, Al Muhairi said. Retailers also cite increased cost of doing business as a justification for their higher charges.

The groaning local dairy industry's case is a classic example of how the cycle of inflation could hit competitiveness of the growing UAE manufacturing sector.

Currency peg

The problem of domestic inflation is partly blamed on the UAE dirham's peg to the US dollar. The US currency's declining value makes imports from places like Europe and Australia more expensive.

Consumers, on their part, say they are able to get Saudi Arabian and Omani products at cheaper prices at UAE stores and see no reason why should they pay more for locally produced dairy items.

Unlike Saudi Arabian dairy farms, which raise their own cattle, UAE companies import their cows. Following the mad cow crisis, there have been restrictions on cattle imports from Europe as per a GCC agreement, and the UAE firms rely on buying herds from Australia, Al Muhairi said.

"When inflation streng-thens, it gets tougher for UAE manufactured goods to compete abroad and at home," said Simon Williams, an economist with HSBC.

"I can see the appeal of price controls. But regulating prices does not get to the root of the problem. It is a short-term relief. But for producers, there is no room to pass increased costs to their consumers. It squeezes their profit margins," he said, adding this also discourages investment in manufacturing.

The UAE is keen to develop a manufacturing base in its efforts to diversify the economic base, relying less on oil.

"Dubai needs to ensure that it does not allow its productive sectors to be priced out of export markets by high inflation," Williams said.

As a shortage of goods due to inadequate output capacity drives up inflation, increase in intra-GCC trade can help countries like the UAE in dealing with the soaring aggregate demand for goods.

"We need to encourage more active intra-regional trade and competition. The less regulation and the less control there is on goods coming into Dubai, the better it is for UAE consumers and, ultimately, UAE producers too," Williams said.

High house and office rents have contributed most to the rise in cost of living in the country. Businesses have been forced to pay more for premises and in staff salaries.

Williams believes the UAE economy will take time to adjust to the demand for goods and real estate while new supplies come onstream. In the meantime, those are producing goods and selling services will remain in a difficult position.