Abu Dhabi's drive to invest its oil revenues in infrastructure and economic development is being stymied by rising inflation caused by both internal and external factors, according to a weekly report by the emirate's Department of Planning and Economy.
The spiralling increase in the prices of commodities and services has created major challenges on both local and external fronts, the report said.
In competitive markets, inflation is caused either by an increase in the cost of production or in the level of demand for commodities and services. In Abu Dhabi's case, the report found, both reasons apply.
The declining dollar – and its impact on the value of the dirham against other currencies – has led to the increase in the price of imports from outside the dollar zone ,where there is already inflationary pressure, due to the surge in oil prices.
Internally, higher oil prices have increased the liquidity in the local market, increasing the money supply.
The department is setting up a basket of commodities and services to act as a benchmark price indicator.
This is being done to circumvent the problem of a lack of accurate statistics about the extent of inflation.
All statistics show soaring rents to be at the root of the problem. According to studies conducted by the department, Abu Dhabi's low and middle-income groups were the hardest hit by soaring rents, spending more than 50 per cent of their salaries on accommodation. High-income groups spent only 23 per cent of their income on rents, which was close to the 19 per cent that high-income classes in advanced countries spent. The main reason for rising rents was the shortage in residential and commercial units to meet the rising demand, particularly for low and middle-income classes.
In the first quarter of this year, rents increased by 17 per cent over last year.
Also, the transformation of residential property into commercial units was pushing up rents. As three-bedroom apartments were too expensive to rent, landlords opted to transform them into commercial units, which cut the overall supply of residential units, pushing rents up further.
Also, most new residential property developments in the emirate catered to the high-income segment, where the demand was limited.
As 85 per cent of the workforce in Abu Dhabi was from the middle-class, luxury homes were unaffordable to this huge majority.
The report said the long-term solution was to encourage developers to concentrate on the middle-class sector. The property market needs to be re-activated by moving new investments to where the demand is, it said.
This could balance the demand and supply of residential units, bringing down prices and ensuring long-term investment revenues.
If the soaring rents are allowed to continue for long, it will constitute a genuine economic crisis, the report warned. (Wam)
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