Thursday, June 26, 2008

Inflation continues to accelerate in Oman.

The problem with using any single number to describe inflation is that is a simplification of a hugely complex problem. In this case, the ‘official’ Oman consumer price index annual inflation is at a record high of 12.4%, according to Reuters earlier this month.

But that March increase of 1.2% for the month represents an annual rate of 15.4%. Wow. I know I didn't get a 15% payrise this year. Did you?

The impact of this inflation on people is highly variable. It essentially depends on what your personal pattern of income and consumption is. If a year ago you spent 70% of your disposable income on food, and you only got a 5% pay rise, then due to inflation you have experienced a drop in disposable income of more than 33%. Equally, if you are a landlord who successfully put up your rents, and you only spend 10% of your income on food, you’re in much better shape.

If you used to send all your disposable income to relatives abroad, they will experience inflation and exchange rates as a real double hit: the sender has less disposable income due to inflation, and what little is left is worth even less due to the drop in the value of the US dollar, and hence the rial. Plus the same inflation is occuring back home, so the smaller amount that you send is worth even less! That’s why the second story below is of real interest to Oman – its not just about the headline inflation rate, but the effective drop in remittable funds that counts as the real driver in NRIs value proposition. And that has been a much, much higher drop than just 12%. In may cases, there is no longer any effective income to send back.

Its hard to imagine that the recent price inflation will be sustained: food prices must eventually peak, and then the inflation (which is a rate of increase) will decrease. Hopefully the fall in the dollar too will stabilize. Here’s hoping…

But Oman needs to look carefully at maintaining a relative incentive to keep the mid-level expats here, because the whole local economy is still almost totally dependent on those semi-skilled foreign workers.

And if you haven’t given your maid a pay rise this year, I urge you to do so this month. It should be a minimum of around 25%, and depending on how long since she last got a rise, perhaps over 50%.

Food spurs Oman inflation to fresh record in April
Reuters Jun 16 2008 14:8
Inflation in Oman accelerated to a record 12.4 percent in April as soaring global food prices and rents intensify price pressures across the world's biggest oil-exporting region.

Food, beverage and tobacco costs -- which account for almost a third of the consumer price index -- jumped 21.6 percent in the year to April 30, the Omani Ministry of National Economy said on its website on Monday.

Rents also underpinned the index's 11th straight monthly rise, surging 16.2 percent in April. Oman's consumer price index hit 122.1 points on April 30 compared with 108.6 points a year earlier, the data showed. Prices rose 1.2 percent over March.

Inflation is accelerating across the Gulf Arab region, where most countries, including Oman, peg their currencies to the ailing dollar, which is driving up import costs. But currency weakness is only part of the problem, accounting for about a fifth of inflation guided largely by high global commodity prices, Oman's central bank chief, Hamood Sangour al-Zadjali, said in February.

Prices for cereals jumped 36.7 percent and milk and milk products 30.4 percent in April, the data showed.

"What happens next depends very much on global food prices and the U.S. dollar," said Monica Malik, a regional economist at EFG-Hermes investment bank.

"Inflation in Oman and the wider Gulf will remain elevated going forward as strong economic growth increases demand, particularly for housing," she said.

Zadjali has repeatedly said Oman is committed to keeping a dollar peg that has helped it attract foreign investments. But forward rates show investors betting the Oman rial could rise 2.7 percent in a year.
The impact...
FEATURE-Rising Gulf inflation could push foreign workers home
DUBAI, June 18 (Reuters) - Lured by tax-free jobs and cheap living, foreign workers have long gravitated to wealthy Gulf Arab states to earn a better living, but rising costs are now forcing many to go home.

Inflation has soared to record or near-record levels across the Gulf Arab region, where migrants ranging from high-paid Western executives to low-wage Asian labourers have formed the backbone of oil-fuelled development since the 1970s.

Already pinched by rising rents and salaries, firms are finding it increasingly hard to recruit staff to countries like the United Arab Emirates, the Gulf trade hub where wages paid in the dollar-pegged dirham have eroded the value of remittances.

Inflation helped drive Indian journalist Stanley Carvalho to end a 10-year sojourn in the UAE this year to rejoin his family.

"The cost of living in the UAE, particularly Abu Dhabi, has been rising steadily, led by soaring house rents... Salaries haven't risen commensurately. So... if I had to move my family from India to the UAE, my savings would be meagre," he said.

"Also, as in the case of most Indians, we are hit by the rising Indian rupee against the U.S. dollar. Given the dirham's peg to the dollar, our remittances to India are now lower by at least 8 to 10 percent in value. A double whammy so to speak."

With economic growth of 9 percent, India now creates more jobs at better pay, prompting skilled workers to stay home.

While Gulf Arab economies are reaping a windfall from a near seven-fold surge in oil prices since 2002, analysts say soaring inflation could undercut rapid economic growth.

"The pace of growth of the economy is going to be limited by inflation ... Qatar and the UAE have difficulty bringing in workers from India because their salaries will be eaten away by high inflation and high rent and they won't be able to send money home," said one Middle East consultant.

In the UAE, foreigners comprise over 80 percent of the population, which includes 1.5 million Indians alone. Migrant workers dominate the population in Qatar and Kuwait too.

Manual labourers are feeling the pinch most acutely, their wages now scarcely enough to feed families back home. Last year, the mainly Indian and Pakistani labourers building the sky-scrapers of Dubai rioted to demand more cash.

Yet inflation, particularly in rents, is making life harder even for Western white-collar workers who came to Dubai to save.

"The price I am paying I could live in central London," said Henry Charles, a Dubai-based British business consultant. "It's eroded the financial incentives to move here. I've had to dip into savings at various times to meet rent cheques."

"It works out for people who get a housing allowance that reflects the rental market but in my case my housing allowance doesn't cover the cost of renting a room in a shared villa," he said.

Expatriate parents say school fees are rising fast too and Middle East employment portal found almost two-thirds of employees in the Middle East and North Africa think their salaries are not rising fast enough to keep up with inflation.

Rental increases have forced Qatar, Oman and the UAE to impose rent caps. The UAE government has also agreed with some supermarket chains to freeze prices on a range of foodstuffs. Expatriates worry that plans to introduce value added tax across the Gulf by 2012, and talk of a tax on luxury goods ranging from yachts to cigarettes, could tip the balance.

The saving grace for Gulf countries, say expatriates, is that inflation is biting just as hard elsewhere. Even after the credit crunch, British property prices and taxes are daunting to many Britons who enjoy the sun and glamour of Dubai.

"It is getting more expensive. You are not saving any extra money. I pretty much live hand to mouth," said Tariq Ali, a British car salesman who moved to Dubai in 2004.

"On the other hand I could not afford a big flat with a pool and gym in central London like I can here."

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