Complex Made Simple

Get ready for 300% rise in inflation in 2018

There is great apprehension about the arrival of VAT in 2018 but it will help springboard growth in the UAE and the GCC.

In 2018, 5 per cent VAT will go into effect in both the UAE and KSA. The official Saudi Value Added Tax (VAT) Twitter account said recently that VAT would not be applicable on housing rents or governmental services in the Kingdom. The same goes for the UAE. As far as almost everything else, including fuel, the tax does apply.

If you’re looking for good news, here it is.

Read: Inflation peaked as Egypt grows at 4.9 per cent

Healthy growth

ICAEW, which supports more than 147,000 chartered accountants worldwide, issued a report in which it expected overall GDP growth to reach 2.4 per cent in 2018 and rise to four per cent in 2019.

The report, produced by Oxford Economics, a global advisory firm, says that local and regional business entities should not look for oil markets to make a quick recovery to pre-crisis levels and that OPEC would likely extend the March 2018 production cuts’ deadline just to keep prices around the $45-$50 range.

“In this case, governments would come under further pressure to prioritise public spending in growth-enhancing areas and find new revenue sources in order to stop public debt from accelerating,” said the report.

Must read: Is lower global inflation temporary?

Growth in the non-oil sector in the UAE accelerated to a two-and-a-half year high in August, according to the survey-based Emirates Bank Purchasing Managers Index. Growth remains well above the long-run average.

However, in less-diversified Saudi Arabia, the same metric has picked up through the year, but remains well below the historical norm.

Squeeze in income

The upcoming GCC Value-Added Tax is expected to increase the cost of living in impacted economies by approximately 2.5 per cent in 2018 and 0.5 per cent in each year from 2019-2022, according to ICAEW.

But it’s not just the VAT squeezing households.

Fuel prices were raised by six per cent in the UAE in 2017, and Saudi has postponed tariff increases until early 2018.

Together with the impact of a weaker dollar on import costs, these pressures are expected to drive consumer price inflation at the GCC level from just 1.2 per cent in 2017 to 4.7 per cent in 2018 and 3.5% in 2019.

With ongoing restraint in government spending on wages and welfare, households are becoming ever-more reliant on increasing their income from other sources to fund consumer spending.

As such, the report estimates that consumer spending is also expected to grow 2.5 per cent in 2018 and 2019 – compared to an average of 4.2 per cent per annum from 2010-2016.

No oil spoils, but non-oil relief

Governments are unlikely to find any solace in the oil market, which might require an extension of OPEC’s production cut deal merely to stabilise prices around $45-50.

There has been a short-term improvement in the oil sector, but the longer-term picture is little changed, said the report.

“It remains possible that a second extension of OPEC’s supply cuts will be required to try and keep prices within a $45-50 range for the coming few years – less than half their 2010-2014 average. In this case, governments would come under further pressure to prioritise public spending in growth-enhancing areas, find new revenue sources, or allow public debt to accelerate.”

Non-oil GDP is forecast to rebound by four per cent in 2018, rising to a growth of 4.7 per cent in 2019.