Boomtown: managing UAE growth

Gulf economies moving ahead but must control development

The Gulf economies have moved ahead in the currentdecade. The extent of change is apparent when we rememberthat only eight years ago, the price of a barrel of OPECcrude went as low as $9, and vast Arab investment went tothe US or Europe compared to the money put into business athome. In sharp contrast, today’s oil prices are nudging $70a barrel; all GCC states have now joined the WTO and areliberalizing their economies; and Gulf investment in theWest has slowed while capital accumulation soars regionally.This has been especially true of the UAE, where growth hasoutpaced the rest of the GCC.

Among the emirates, glitzy Dubai, of course, is the mostfamous example of growth, due in large part to the abilityto diversify away from oil. However, other parts of the UAEhave moved in the same direction.

Sharjah is a case in point: Dubai’s northern neighbor hadlagged behind the rest of the country a few years ago butSharjah’s double-digit growth rate surpasses that of the UAEtoday, partly due to success in diversification. Analyzingthe economy of Sharjah, the share of agriculture,hydrocarbons, and government in GDP fell from just over 29%in 2001 to about 23% today, while the combined total for thepower, banking, manufacturing, trade, tourism, andconstruction sectors has risen from 47% to around 53%.

Some of Sharjah’s success comes from targeting people andbusinesses that in the past would only have consideredDubai. However, higher costs have driven investors andcustomers away from the latter.

Benefiting from this trend, Sharjah has, for example,notable success with free zones that offer lower prices thanthose of Dubai and so have seen business boom in the lastfew years. For instance, the Sharjah Airport InternationalFree (SAIF) Zone had less than 100 companies in 2000; today,it hosts around 2,900. At less than $3 a square meter,office space in SAIF is over 40% cheaper than in Jebel Ali.The cost of obtaining trade licenses in SAIF is also muchlower – a small start-up there, including a trade licenseand a year’s rent, costs around $6,800; Dubai is about fourtimes that.

However, the negative side effects of the boom may alsostart to trouble Sharjah. Inflationary pressures there havealso been increasing due to rent rises and high liquidity.As in Dubai, a main factor behind rising prices has beeninfrastructure that has not been able to keep up with strongeconomic growth, and increases in the inflow of people whilehousing supply rises more slowly, thus leading to rises inrent. In Sharjah, rents went up as people relocated fromDubai. This resulted in Sharjah rents increasing by close to32% in 2006; that in turn led to rises in other areas,including education costs, which jumped by about 28% inSharjah last year; and wage demands have also escalatedbecause of higher rents and education bills.

High inflation hampers economic diversification away fromoil by repelling foreign investment. Areas ofdiversification, such as tourism and financial services, arebecoming less competitive in Dubai, but there is now adanger of that happening in Sharjah as well. So, the optionfor some businesses has resulted in looking outside the UAE.

New housing in Dubai and Sharjah will have some impact oninflationary pressure by dampening rent rises. Nationally,ending the peg of the UAE currency to a weak dollar wouldalso help keep inflation down.

Meanwhile, the country as a whole as well as individualemirates have to take measures to make the effect ofinflation less severe in the short-term. For example, theSharjah government decreed a 30% rise in salaries for publicsector employees a few weeks ago. That is fine for

The lucky recipients of the raise, but of course, it onlydeals with the impact of price rises, not their causes.

The IMF reckons that inflation is currently at an annualrate of above 10% in the emirates as a whole. That is upfrom an estimated 8% last year, though the official numbergiven by the UAE Central Bank is somewhat lower. However,this is the national figure – for Dubai, and maybe Sharjah,the inflation rate could be much higher.

The UAE boom does not look like it will stop, and may noteven slow for the next few years, so the question thenbecomes how to manage strong GDP growth and at the same timehold down prices. If that problem is not resolved, the UAEeconomy could see a slowdown, and not just in overheated Dubai.

Riad El Khouri is Director, MEBA Amman and a Senior Associate, BNI Inc New York City

 

Riad Al-Khouri is Middle East director of GeoEconomica GmbH

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