ECONOMY: Labour exodus takes the edge off expansion

06 December 1996

SULTAN Nasser al-Suwaidi readily admitted that his views 'may be a bit conservative,' but in an address to a Jebel Ali business gathering in mid-October, the governor of the UAE central bank had a surprise for his audience. 'As I am sure you are aware, the UAE economy grew by approximately 1 per cent in real terms last year,' he said in his introduction. 'Given events that have recently impacted on our economy, I believe that we may experience a similar, to slightly lower rate of real growth during 1996 and 1997. These are a slight downward revision to figures that I would have forecast six months ago.'

The surprise was to hear the governor talk of a downturn when oil prices have been at their highest for five years. It is estimated that the $3 a barrel rise in oil prices should give the government AED 9,000 million in extra revenues this year. That alone would be enough to give the federation a nominal increase in gross domestic product (GDP) of 6.2 per cent.

Al-Suwaidi recognised the continued contribution that oil makes to GDP but cautioned against over-reliance on the oil sector. 'We should expect incremental decreases over the long term as was the trend earlier this decade,' he warned. Specific areas of the economy that are continuing to flourish include tourism and banking. The governor noted that bank profits had risen by 6 per cent in the first six months of 1996, compared with the first half of 1995.

Later in his presentation al-Suwaidi tackled the negative economic implications of the 'events' that have been the talk of the UAE this autumn. 'Now, for the part you didn't expect me to discuss today,' he said. 'All this talk about the economic impact of amnesty seekers leaving the UAE.'

Al-Suwaidi said that the economic consequences of the sudden departure of 167,000 illegal immigrants by the 31 October deadline would be limited. 'Businesses may be squeezed until replacement workers are hired,' he said. Another point to note was that nearly all those leaving were at the lower end of the salary scale which would limit the direct economic impact of their departure. Nevertheless, the governor acknowledged that there would be an economic price to pay for the official campaign to regulate the labour market.

The exodus has affected the UAE economy on several counts, not least because the resident population has fallen by about 7 per cent, at a stroke. The vast majority of the departees would have usually remitted a high proportion of their wages but their local expenditure on clothing, food, accommodation and transport was significant. Indeed, meeting the needs of the immigrant population accounts for a large part of the activity of many local service companies.

Inflation danger

The sudden exodus will have consequences for inflation as labour costs are expected to rise significantly. Companies will have to recruit new staff legally and pay higher fees to regularise their presence. The cost of hiring domestic staff has already risen by up to 40 per cent as the employer, rather than the employee, is now obliged to pay the AED 5,000- a-year sponsorship fee.

Just how much pressure there will be on the current inflation rate of about 4 per cent is a matter of conjecture. Prior to the amnesty deadline, contractors and hoteliers were warning that their costs, which could increase by 10-20 per cent, would inevitably be passed onto the customer. However, by late November, there was little evidence of this. 'It may just be too soon after the event for the costs to have worked their way through the system,' says one western diplomat in Abu Dhabi. 'Alternatively, it could simply be that competition is so great that companies cannot afford to risk offending their customers.'

The amnesty came amid other signs that the economy was already starting to slow after three years of hectic activity. In Abu Dhabi, investment in new projects by government departments and state agencies has fallen over the past year. 'It has been very quiet over the last six months,' says one general manager at an international contracting company. 'We had been expecting numerous projects to come out from Abu Dhabi National Oil Company, the Khalifa committee and the Public Works Department, but they simply haven't materialised. It doesn't appear to be for lack of funds, but rather that they are each taking time out to assess their priorities.' In Dubai, property rents have been falling due to over supply.

It is clear that the mass departure of a significant portion of the labour force will put the whole economy through a period of adjustment. Yet, the changes that are due to recent developments do not seem to amount to anything more than a correction and there is no talk of a sharp downturn. As the UAE has proved repeatedly in the 1990s, its economy is one of the more broadly-based in the region and resilient enough to recover from the occasional shock.

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