Salaries fail to track rise in cost of living

Published in MEED, 29 October 2017

From 1 October, the cost of tobacco and sugary drinks in the UAE spiked upwards, with the introduction of excise tariffs of up to 100 per cent. That was merely a precursor to a more wide-ranging value-added tax (VAT), which will be introduced in early 2018 and comes in the wake of a wave of other additional costs over recent years, including subsidies being lifted on fuel, charges levied on airport passengers and paid-for parking.

Such measures are being introduced by the federal government and individual emirates in response to the drop in oil prices, which has cut income and necessitated a renewed push to diversify the economy and develop new revenue streams. The IMF says government tax revenues are expected to rise from AED113bn ($31bn) in 2016 to AED130bn in 2017 and AED147bn in 2018. For UAE residents, the new taxes and charges mean higher costs when they fill up their car or go to the supermarket. Inflation is starting to creep up, from 1.8 per cent in 2016 to an expected 2.2 per cent this year, according to the IMF. It is expected to continue climbing in 2018 to 2.9 per cent.

That is still a fairly comfortable rate of increase, but it may contribute to a shift in some people’s perceptions about the UAE being a low-cost environment.

Whether the changes are sufficient to make people re-evaluate their presence in the country remains to be seen, but there is little doubt the UAE is becoming a more expensive place to live. The latest expatriate Cost of Living Survey conducted by US consultancy Mercer, for example, saw Dubai and Abu Dhabi rise in the global ranking, to 19 and 22 respectively. That makes them the two most expensive Gulf cities. On a global basis, they are pricier than the likes of Los Angeles or Sao Paulo, although still cheaper than Shanghai, Tokyo or New York.

Rob Thissen, a talent mobility consultant at Mercer, says people will be affected differently by the introduction of costs such as VAT. “There is a big divide between those at the low and high ends of the spectrum,” he says. “White-collar staff are typically very well off in the UAE and won’t really notice it, but it will have an impact on people in blue-collar jobs because there is no minimum wage.”

Only 3.6 per cent of firms increased headcount in September and 95.4 per cent reported no change

There are some consolations for those worried about rising costs. The UAE remains a cheap place for transport, notwithstanding the increase in fuel prices, and the cost of some outgoings has been falling. US real estate consultancy JLL says rental costs and sales prices for residential properties in most areas of Dubai and Abu Dhabi fell by between 1 and 11 per cent in 2016, and the market has remained subdued so far this year.

“Accommodation is probably as expensive as London and the moderate end of New York, and that’s a big factor for most people moving here,” says Trefor Murphy, CEO of Dubai-based human resources advisory firm Cooper Fitch. “But rents have softened quite significantly, so, even with 5 per cent VAT, the overall cost of living is probably coming down.”

Of course, the property market in the UAE is notoriously volatile and the recent price falls have come after several years of steep rises. Rents could easily start increasing again and, unlike in the past, most overseas executives who come to the UAE these days do not enjoy the sort of expatriate package that covered their accommodation costs, along with their car and children’s school fees.

In Dubai, nearly 40 per cent of private school places cost about AED10,000 ($2,722) a year in fees, but some schools charge as much as AED98,649 a year, according to the local Alpen Capital. The Dubai authorities have capped school fee increases in a range of 5-7 per cent a year, but that easily outstrips the average rise in salaries, which Murphy says is “between 0 and 1 per cent, and probably closer to 0”.

Those miserly salary increases are a symptom of wider trends. Economic growth is running at a low level, with the UAE’s GDP projected to expand by just 1.3 per cent this year, according to the IMF, and recent years have seen companies in the oil and gas, financial services and other sectors laying off staff. While the job losses have now largely stopped, the recruitment market remains fairly well supplied and few companies are taking on more employees at the moment. According to the Dubai Economy Tracker Index compiled by local bank Emirates NBD, only 3.6 per cent of firms increased headcount in September and 95.4 per cent reported no change.

“The vast pool of available candidates in the region means competition for roles is high and salaries are very much dictated by employers, who will always have a ready supply of talent willing to work for them,” says Chris Greaves, Gulf managing director at UK recruitment firm Hays. “Where pay rises do take place, we are noticing a growing trend with these being offered on an individual performance-related basis rather than company-wide, an approach that typically results in lower costs overall for employers.”

Despite those labour market trends, for some young businesses the costs of setting up in the UAE can still be a challenge, particularly the price of office space in the more popular free zones. “The costs of setting up are still quite high,” says one European entrepreneur who recently ventured into the UAE. “Dubai in particular is pretty much a real estate project. Any corporate set-up is linked to buying real estate space, which in almost all instances is quite expensive because you need to be in free zones.”

There are still reasons why companies and individuals want to be based in the UAE, not least the business opportunities, the ease of travel to nearby markets and the more vibrant leisure options compared with other Gulf cities. That means that although some people may decide the rise in costs is too much, most will find a way of dealing with them. “It’s not the tax-free haven it was any more, but it is still a very attractive place,” says Thissen.