It’s more than half way through 2008 and there is still no sign of Gulf inflation abating. The official estimate is that it’s running at about 15 per cent a year in Doha and Dubai and not much less than that everywhere else in the GCC.
The truth is that household costs are rising by about 20 per cent a year in Gulf hotspots. Business expenses in some sectors, notably construction, could well be increasing by even more.
Revaluation, seen as both a panacea and an inevitability by many commentators at the end of 2007, has been indefinitely deferred by GCC leaders.
They have decided that they are going to stick with the dollar and America, at least until it is clearer what the next US administration plans to do in the Middle East.
Oil income quintupled
But inflation is inevitable in economies that are the most dynamic producers of money in history.
Even if the UAE did not have negative real interest rates, there would still be inflationary pressures. Its oil income has quintupled in less than five years. Earnings are flowing from government foreign assets now worth more than $500bn, and growing by almost $50bn a year. Globalisation is boosting the emirates’ ports and airports.
Similar factors operate in Kuwait and Qatar and, to a lesser extent, in Bahrain, Oman and Saudi Arabia.
Double revenue per employee
Some of the burden of fighting inflation, therefore, must fall on the shoulders of business, but what can it do?
At the industry or even national level, more could be done to purchase key commodities on a bulk basis. If Dubai or Doha had a single steel or cement procurement office, it could use its purchasing power to trim a couple of percentage points of costs. Co-ordination of projects would do a lot to prevent unnecessary competition for limited resources.
But the strategic priority for Gulf business is simple: aim to double revenue per employee in the next five years. If this can be achieved, much of the cost increases coming to the Gulf could be offset or even neutralised.
Sceptics say that is easier said than done, but that is true about every challenge.
The first area for attention should be processes such as IT, finance and payroll maintenance. All can be outsourced, often to people based outside the Gulf. This may involve some upfront costs, but the benefits over a five-year period will more than offset the initial investment.
Employees released from process work will enter a market where skills shortages are endemic and pay is rising. Alternatively, they could be retrained to bring in revenue, the area where there is greatest scope for improvement.
Most European companies, shaped by the demands of low-growth economies, have developed large and costly management superstructures.
Even in markets where cost control is more important than revenue acquisition, they are inefficient and unproductive. In the Gulf, where most markets are growing by 40 per cent annually, European style pyramid management is a luxury that can no longer be afforded.
The best approach for companies struggling to satisfy the demands of employees who can prove inflation is at 20 per cent is to stop hiring, raise the pay of the people they have and work to ensure they bring in more revenue.
And only exceptionally should senior managers escape the burden of working with customers, or selling to them.
The rewards of such an approach were highlighted in a recent conversation with the Middle East head of one of the world’s biggest management consultants.
He said that he employed about 50 consultants, who were based in the Gulf or in Europe. I estimated they generate total fee income of at least $150m a year, but the regional manager said that he still managed to spend 80 per cent of his time on customer relationships.
Pay twice as much
In another example of efficient management, the Middle East head of one of the world’s leading law firms, which employs more than 50 professionals in the region, said that, as a matter of policy, he was required to spend six hours a day on customer work.
These may be extreme examples, but it is a model that seems to work. Minimising process employees and maximising the time a firm spends dealing with customers is always good policy. In the Gulf in 2008, it could be the difference between success and failure.
So the message for the summer is double your productivity, even if it means paying your people twice as much. This is good business and good for the economy too.
The fewer people living and working in Gulf cities, the lower the demand for subsidised utilities and on limited housing stock and even space on roads and in car parks.
This is something to think about during your summer break, brief though I am sure it will be.