The United Arab Emirates, as an economy with an open capital account and pegged foreign exchange rate regime, has limited scope for exerting an independent monetary policy. More specifically, given that it’s key policy objective is to maintain a stable peg with the US dollar, domestic short-term interest rates generally follow US interest rates, and therefore, the Central Bank of the UAE (CBUAE) does not anchor the inflation target.
Moreover, inflation in the UAE moves for the most part in response to other forces that are not under the direct control of the central bank. Specifically, non-tradable account for 63% of the CPI basket, of which housing accounts for 39% of the total. Further, inflation of tradable (37% of the CPI basket) moves with developments in the nominal effective exchange rate (NEER) largely attributed to bilateral movements in the US dollar concerning major trading partners.
The inflation rate in the Arab countries is expected to rise to approximately 7.5 percent in 2022, compared to 5.7 percent in 2021, reflecting the impact of international supply chain challenges and the rise in the prices of agricultural and industrial commodities as well as energy products due to current global developments. Dubai’s consumer inflation rose to 4.6 percent in April, when compared on a year-on-year basis. This was the highest reading since May 2015, according to a report from Emirates NBD. For the month-on-month figure, consumer prices rose 1.2 percent, the biggest monthly increase since January 2018, according to new data from the Dubai Statistics Center.
The 16th edition of the Arab Economic Outlook Report released by the Arab Monetary Fund (AMF) added that some inflationary pressures are expected to emerge over the forecast horizon due to the anticipated increase in aggregate demand levels; the rise in consumption tax rates in some Arab countries, the depreciation of some Arab currencies against major currencies, and the impact of other inflationary factors that vary from one Arab country to another. “Food prices (8.6 percent higher year-on-year) were the second biggest driver of inflation in April, followed by recreation and culture costs and restaurant and hotel prices.”
CPI is calculated by using a Young index, which assumes expenditure weights are constant over time.
The CBUAE has developed a collection of other operational and regulatory policy tools, such as liquidity management and macro prudential measures, to complement the traditional monetary policy tools in the absence of independence to set the policy interest rate. These tools play a significant role in better monitoring monetary conditions (including inflation) and safeguarding overall economic and financial stability in the UAE.
The Young index differs from the Lowe index, where quantities are constant over time and expenditure shares are price-updated every month. In general, the Young index tends to underestimate price movements relative to the Lower index.
In the first quarter of this year, the UAE’s inflation increased by 3.35 percent amid higher prices in 11 main sectors. The country’s Consumer Price Index (CPI) jumped to 102.70 points in Q1-22, compared to 99.37 points in the year-ago period. The UAE Minister of Economy Abdullah bin Touq Al Marri said the country is doing all it can to limit the impact of global price rises and inflation. He said commodity price hikes are a worldwide challenge and that the ministry has “well-studied policies and plans” to contain unjustified increases in the country’s markets.
The economy of the United Arab Emirates (or UAE) is the 5th largest in the Middle East (after Iran, Saudi Arabia, Turkey, and Egypt), with a gross domestic product (GDP) of US$501 billion (AED 1.84 trillion) in 2022. The UAE economy is heavily reliant on revenues from petroleum and natural gas, especially in Abu Dhabi. In 2009, more than 85% of the UAE’s economy was based on oil exports. In 2011, oil exports accounted for 77% of the UAE’s state budget. In recent years, there has been some economic diversification, particularly in Dubai. Abu Dhabi and other UAE emirates have remained relatively conservative in their approach to diversification. Dubai has far smaller oil reserves than its counterparts.
The UAE’s economy shrank by 6.1% in 2020. The country’s account balance dropped to six percent of GDP in 2020 from 8.5 percent in 2019 due to the underperformance of both hydrocarbon and non-hydrocarbon exports mitigated by lower imports. In late 2021, it was announced that UAE’s banking assets are expected to grow by between 8 percent and 10 percent in 2022 as the second-biggest Arab economy continues to recover from the covid-19 pandemic. It was also announced the UAE’s economy might grow at a faster than projected rate, reaching 4.6% in 2022.
In an interview with the Emirates News Agency (WAM), Michael Bolliger, Chief Investment Officer Emerging Markets at UBS Global Wealth Management, has stated that the UAE’s economy expanded by 3.8 percent in 2021 as a result of appropriate government initiatives and plans as well as the immunization of all residents and citizens. Bolliger also noted that the expansion of the non-oil sector also contributed significantly to this economic recovery. Bolliger noted that the UAE’s economic diversification is demonstrated by the swift recovery from the Covid-19 pandemic and the significant contributions of non-oil sectors. The transportation, tourism, and hospitality sectors also made solid recoveries in the recent period, as evidenced by the rise in visitor numbers and hotel occupancy rates. In 2022 and 2023, respectively, the GCC economies will rise by 6.4% and 3.4%, he insisted. The US’s GDP fell by 0.9 percent in the second quarter of 2022, and worries of a recession in Europe are growing, he observed, which has caused the global economy to trend downward.
