Monday, January 28, 2008

Getting to grips with inflation

I've been banging on about the effects of inflation on business, and the economy in general, for a while, so it's good to see that important people are now going public with their concerns.

And it's very good to see the media actually reporting it.

They've previously taken the tabloid approach, even in the business pages - how inflation is affecting the 'common man' (how I hate that phrase) as the price of consumer items rises. It's been the same with the dirham/dollar peg, the stories almost all about the value of salaries dropping.

That's a real populist simplistic discussion. The real problem is the disastrous effect of inflation on the economy, on growth, on the very future of Dubai which is based entirely on our commercial success.

Without that success there won't be the jobs, the opportunities for people.

Today there's a report from Merrill Lynch, basically saying the Gulf states are getting it wrong, particularly the insistence on keeping the dollar peg, which is made worse by the refusal to revalue local currencies.

The peg means we don't have our own monetary policy, we slavishly follow American policies even though the economies are going at express speed in opposite directions.

The recent interest rate cut is a classic example of the problem. The US economy is plummeting south and they need to get more money moving around. Our economy is booming but in danger of overheating so we need to increase interest rates to slow the flow of money.

But we have to follow the US move and cut rates, throwing petrol on the fire.

There are worrying reports again today that as further interest rate cuts are probable in the US they'll be cut here again.

Contrary to the view expressed in the region, Merrill Lynch say that the pegs have become the main source of inflation.

Yesterday Abdul Aziz Al Ghurair, speaker of the UAE Federal National Council and CEO of Mashraq, was quoted in an interview with Reuters as pointing out that: "Inflation is our enemy No. 1...We really need to manage our control over inflation."

Other bankers have been warning of the dangers of inflation too, so it seems the seriousness of the situation is at last being discussed openly. And that can only be a good thing.

Refusal to allow price rises - even though raw material prices are increasing - and caps on things like cinema tickets are not addressing the problem. We really have to get to grips with the major causes of the problem, we need to take control of our own destiny. We're becoming an increasinly important business centre and we need to take control of our own economy.

Here's more detailed information:

Inflation a major policy challenge.

Inflation UAE's biggest enemy.


LDU said...

Your post reminds me of the fractional reserve system of banking in the US and the chaos it's created.

In the emirates, can people get bank loans for houses and stuff, or do they have some sort of Islamic finance regulation prohibiting interest?

Seabee said...

There's a fast-expanding mortgage company sector and banks also offer mortgages. The difference here is that it tends to be one or two financial institutions which offer mortgages exclusively on each specific development, so if you need a mortgage to buy there you have to go to them.

There are both western-style and Islamic finance systems available.