Inflationary pressures are tightening their grip on the economy again as food and housing costs nudge consumer prices up in the capital.
Prices in Abu Dhabi at 21-month high
Inflationary pressures are tightening their grip on the economy again as food and housing costs nudged consumer prices close to a two-year-high in Abu Dhabi.
Annualised inflation in the capital rose to 3.8 per cent last month, according to figures released by the Statistics Centre Abu Dhabi (SCAD) yesterday. It rose to 3.6 per cent in August from August last year.
Shoppers in the capital complained that the costs of everyday food items such as meat and eggs were rising.
"Life is getting more and more expensive every day," said Abu Dhabi resident Yousef Khamdan, 41, who was shopping at LuLu Centre
Hamid Bakar, 39, an Egyptian shopping for food with his family at Al Wahda Mall, shared a similar sentiment.
"Lately we have had to compromise a lot in buying preferred brands because we can no longer afford it," Mr Bakar said.
In a further sign that inflation may be starting to emerge, M3 money supply, an indicator of future inflation, rose 1.7 per cent in the third quarter compared with the same period last year, UAE Central Bank data released yesterday showed.
The IMF used a trip to the region to warn that one of the important challenges in the medium term for oil exporters in the region was managing fresh capital inflows, a potential driver of future inflation.
"Capital inflows will come back to this region more broadly than we are seeing now," said Masood Ahmed, the director of the IMF's Middle East and Central Asia department.
A steady stream of foreign money entering the country's financial markets in 2007 stoked double-digit inflation and a housing bubble as investors brought in funds on the expectation that the dirham's peg to the US dollar would be revalued.
The revaluation did not happen and the financial crisis sparked a sudden outflow of money, causing property prices to collapse and inflation to tumble to a low of 1.2 per cent last year.
Food, along with housing, has been the biggest driver of the recent rise in consumer prices in the capital. Prices of sugar, jam, honey, chocolate and sweets surged 32.5 per cent in the first nine months of this year compared with the same period last year.
Globally, concerns have increased about supplies of vital food staples in recent months as consumer demand builds after the downturn.
Supply pressures have been worse than expected because of poor harvests following bad weather conditions in Pakistan, the US, Russia, Canada and Europe.
The UAE imports about 85 per cent of its food, leaving it particularly vulnerable to supply problems.
Further swings downwards in the value of the dollar are expected to aggravate food costs. The greenback's weakening in recent months has already contributed to higher food prices for importers.
Nevertheless, one of the drivers of inflation in previous years, private sector credit growth, is expected to remain sluggish.
Bank loans and advances increased only 1.7 per cent in one year, from Dh1.02 trillion (US$277.72 billion) in September last year to Dh1.04tn last month, Central Bank data showed.
"Normalising the relationship between banks and the private sector to how it was before the financial crisis is an important challenge to the region," said Mr Ahmed.
The IMF this month upgraded its forecast for UAE growth to 2.4 per cent, growing to 3.2 per cent next year because of the virtual completion of Dubai World's $24.9bn debt restructuring and a pickup in economic growth in Asia, an important trading and investment partner.
"The rebalancing from public to private demand that needs to take place in advanced economies in some ways also needs to take place in the oil exporters of the GCC, as at this stage the recovery is still driven through fiscal spending," Mr Ahmed said.