UAE: Wage Hike to Boost Consumption Further

UAE President Sheikh Khalifa bin Zayed al-Nahayan ordered a 25% salary hike for UAE nationals and 15% for expatriates working in the Federal and Abu Dhabi governments. This is the third statutory salary rise since 1971. Dubai and Sharjah, the other two large emirates in the UAE, have announced that they will match the proposed pay rises for their staff. We estimate that the total cost could run as large as AED 3.4bn, equivalent to USD 900m or 1.1% of GDP.

This is a significant sum but is affordable in the current environment of high oil prices. The UAE has traditionally run a consolidated budget surplus of 10% of GDP and last year we estimate that it ran a surplus of 16% of GDP, or USD 13bn. That said, the wage hike removes a large amount of budget flexibility if oil prices were to fall. It is worth noting that the UAE ran a deficit in 1999. Moreover looking solely at the consolidated number overstates the financial strength of some of the emirates. Abu Dhabi dominates the UAE's accounts, representing about 75% of all government revenues in the UAE. It will be much harder for the less oil endowed Emirates, such as Dubai and Sharjah to match Abu Dhabi's example. Wages account for less than 10% of Abu Dhabi's revenues compared to 30% of Dubai's.

The implications for the UAE economy are also mixed. While the rise is clearly good news for living standards and private consumption the other macro implications are less clear cut. In particular the net impact on inflation is uncertain. The rising cost of living in the Emirates, the prime reason given for the hike in salaries, could be compounded by the move. If the wage increases are spent rather than saved, or invested, this will translate into a substantial increase in consumer spending, the extra demand alone could push prices higher.

Key will be to what extent private companies, who account for 90% of civilian employment, respond to the move. Wage pressures are already evident and many companies are complaining about the difficulty, and increasing cost, of recruiting and retaining skilled staff. This is particularly true of Emirati staff. An economy-wide set of salary hikes would increase costs, lead to further price rises and entrench inflationary pressures.

That said, wage demands are likely to be partially contained by the country's relatively liberal employment laws and access to competitive imported labour. As we have written elsewhere, tackling inflation has become one of the UAE's chief macro challenges. This is a topic, which we will return to next week.