Recovery may make UAE costlier

On the back of economic recovery, the UAE is expected to become a costlier place to live in, as per the findings of Economic Intelligence Unit (EIU).

According to EIU, as the economy recovers, and oil and international commodity prices increase, it expects inflationary pressures to re-emerge gradually, especially in light of the projected expansion in infrastructure development.

“We expect inflation in 2011 to average 2.5 per cent owing to an increase in prices of grains, sugar and other basic items. However, low housing costs will keep inflation at a manageable level, at an average of 2.2 per cent in 2011-15.”

However, many cities in the Middle East and North Africa remain some of the cheapest locations in the world to live in, according to a new survey, Worldwide Cost of Living 2011, released by Economic Intelligence Unit (EIU).
Cities like Algiers (Algeria), Tehran (Iran) Tunis (Tunisia) and Jeddah (Saudi Arabia) all feature in the bottom ten, as per the survey.

“The low cost of living in these locations is driven by a mix of weakened currencies, low levels of development and, in some cases, price controls and subsidies on staple goods,” said the survey.

At the bottom of the survey, the ten cheapest cities have a strong presence in the Indian subcontinent.

The survey reveals, that despite the rise of India as a growing emerging-market economy, the low cost of living in cities continues to reflect the fact that the subcontinent remains a comparatively cheap place to live and work. Karachi in Pakistan is the cheapest location surveyed, with a cost of living level at less than one-half of that of New York and one-third of that of Tokyo.

It is joined in the bottom ten by Dhaka (Bangladesh) and the Indian cities of Mumbai and New Delhi. Colombo (Sri Lanka), the only other city surveyed on the Indian subcontinent, is one of the 20 cheapest cities in 114th place.

On the other hand, the most expensive city in the world continues to be Tokyo.  Until 2006, Tokyo had been at the top of the global cost-of-living ranking for 14 uninterrupted years before low inflation, weak consumer confidence and a declining Japanese yen reduced the cost of living.

Between 2006 and 2009 Oslo and then Paris were the costliest cities in the survey, with Tokyo pushed down to fifth place in the ranking. Low inflation and poor consumer confidence have persisted in Japan, but the yen has strengthened significantly over the last two years, pushing Tokyo back to the top of the ranking last year, the survey puts it.

The survey also states that most other cities in the top ten have a familiar European flavour. Oslo, Paris, Geneva, Zurichand Frankfurt have all long been regarded as traditionally expensive places to visit. This is despite economic weakness in the euro zone, with the high-profile problems in Greece, Ireland, Portugal and Spain depressing demand elsewhere in Europe and pegging back the strength of the single currency.

Also among the top ten, Osaka in Japan shares Tokyo’s inherent costliness and Singapore’s role as a global financial centre sets it apart from other Asian cities.

Of particular note is the rapid growth in the relative cost of living of Australian cities. Sydney and Melbourne are ranked sixth and seventh respectively and are closely followed by Perth and Brisbane in 13th and 14th place in the ranking.

The dollar effect

The EIU believes that the purchasing power of the dirham will decline in the future, making things more expensive.

“The UAE dirham’s peg to the US dollar (at Dh3.673:US$1) is expected to remain in place in the forecast period. However, questions about its effectiveness will re-emerge, as the Central Bank has established a panel of international experts to advise it on future policy. The Central Bank remains committed to the existing system. The peg has provided stability for decades, and, having ridden out the problems that a fixed currency brings for this long, the authorities seem keen not to change the system.

"The UAE’s withdrawal from the GCC monetary union project has no immediate implications for the exchange rate over the forecast period. Critics of the currency peg have argued that it restricts monetary policymaking by tying domestic interest rates to US rates. Despite the peg, the cost of living in the UAE will increase substantially in 2011-15, as the purchasing power of the dirham declines.”

Moreover, the merchandise trade surplus widened in 2010 owing to strong growth in exports. “We forecast that the surplus will continue to widen in 2011 as both oil prices and production increase and growth in non-oil exports picks up. The value of exports will grow robustly in 2011-15, reflecting the increasing importance of non-oil exports as a result of the UAE’s diversification programme.

"However, the rapid growth in the value of imports, especially in the second half of the forecast period, will restrict the increase in the trade surplus. The trade surplus will average a healthy 13.3 per cent of GDP in 2011-15, although this is lower than in the historical period (2006-10).”

The report also states that the UAE will benefit from the unrest in Bahrain as banks move foreign staff into offices in the UAE, and, in some cases, relocate offices to the UAE. Services credits (mainly from tourism, business and financial services) are set to increase substantially. Income credits (mainly returns on the government’s foreign assets) will also grow strongly, but growth will be below the average in 2006-10.

Economic diversification will also result in a strong increase in services imports. The growth in remittance outflows will remain modest in 2011 but will increase steadily over the remainder of the forecast period. The current account surplus widened to 3.8 per cent of GDP in 2010 and EIU expects it to remain in surplus in the forecast period. The surplus will average 5 per cent of GDP in 2011-15.
 

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