UAE talks tough on price rises as pressure mounts

The UAE Ministry of Economy has warned suppliers against raising prices of goods and services in an "unjustified" manner to take advantage of a 70 per cent increase in federal government employee wages next year.
According to the Ministry of Economy, last year inflation hit 9.3 per cent. Prices are expected to remain high this year.
The International Monetary Fund and independent estimates have pegged inflation above nine per cent this year.
As a precaution against traders increasing prices, the Ministry of Economy warned suppliers and traders from "exploiting" the higher wage scheme.
"Any attempt to talk down prices is not going to succeed as we have supply side constraints and peg-ged currencies which are adding to the cost of imports which ultimately finding their way into the prices," said Marios Mara-theftis, regional head of research for the Middle East, North Africa and Pakistan for Standard Chartered Bank.
Economists believe that while the government is using fiscal policy to address key supply issues such as housing shortages, it is high time the exchange rate distortions are addressed by revaluing and or depegging the currency from the dollar.
Apart from the rising prices in the UAE both nationals and expatriates have been losing a significant share of their earnings to exchange rate losses due to the falling value of the dollar to which the dirham is pegged.
The exchange rate losses have already crept into domestic prices through the high cost of imports. According to unofficial estimates the UAE imports close to 70 per cent of its requirements from Asia and the euro zone.
With the escalating cost of living there has been widespread speculation that the UAE is likely to revalue its currency.
In a bind
UAE Central Bank Governor Sultan Bin Nasser Al Suwaidi said last month that the central bank was under growing social and economic pressure to drop the dirham's peg to the US dollar.
Increasingly it is apparent that political compulsions in the GCC are forcing the UAE to stick to the peg. However, lately the Ministry of Economy and some top government officials have admitted that there is a serious issue regarding inflation and the UAE could make a move on its own if there are no appropriate solutions within the GCC framework.
Dubai World Chairman Sultan Ahmad Bin Sulayem has said: "The dirham is definitely weak, I would prefer a balanced dirham."
Financial experts in the region feel that the GCC should arrive at a consensus on the exchange rate policy at the earliest, failing which some countries are likely to take independent decisions.
"Ideally this [currency peg] should be discussed on a GCC-wide level, but if you can't get that, well, you might end up with certain countries taking a stand and others not," said Dr Omar Bin Sulaiman, Governor of the Dubai International Financial Centre.
There are obvious signs of political consensus on the future of the currency.
At a conference in Dubai last month, the speaker of the UAE Federal National Council (FNC), Abdul Aziz Al Ghurair, said that the UAE and other Gulf states must reconsider their pegs to the dollar. "Now is the time to reconsider whether it's viable to continue to peg the local currency to the dollar," Al Ghurair said.
Analysts believe that although political compulsions are prompting the UAE to remain pegged, it will be eventually forced to revalue the currency.
"If the dollar continues to weaken toward the end of 2007 and into early 2008 and the US were to make further interest rate cuts, we believe the likelihood of the UAE moving independently from the GCC will increase," said Monica Malik, an economist with EFG-Hermes. Economists and business leaders see the GCC meeting in Doha to be a turning point in the currency reforms. Many support a big one-time revaluation to offset the lost values.
"The Gulf countries should carry out a one-time big revaluation by 10 to 15 per cent of their currencies to the dollar," Steve Forbes, US entrepreneur, told the Leaders in Dubai conference last month.
Standard Chartered's economists believe there should be a one-time 20 per cent revaluation and the dirham should track a currency basket.