Fatter checks promise little boost for UAE economy

Economists say civil servant pay hike will hurt drive to expand private sector employment.

Dubai skyline 311 (photo credit: Reuters)
Dubai skyline 311
(photo credit: Reuters)
As the United Arab Emirates (UAE) marks its 40th anniversary with air shows, poetry readings and concerts, and a parade of taxis formed into the confederation’s flag, civil servants have an extra reason to celebrate: They are due to get whopping pay raises and bonuses of up to 100% of their salaries.
But economists said that the largesse is unlikely to give much lift to the economy or its struggling banks. On the other hand, it may undermine programs aimed at getting Emiratis out of government jobs and into the private sector by making it even harder than before for business to compete on wages.
RELATED:UAE's mission impossible: Cooling the desertUS offers 'bunker busters' to UAE over Iran threat
“It’s not clear it will increase the gap, but it definitely won’t help,” Nael Shehadeh, an economics researcher at the Gulf Research Center Foundation in Geneva, told The Media Line. “It’s a political move, not necessarily an economic one… It’s a gesture to show that country is aware of social difficulties.” 
Sheikh Khalifa bin Zayed Al-Nahyan, the ruler of the UAE’s Abu Dhabi and president of the confederation, announced the wage hikes and other financial assistance on Wednesday as the confederation was gearing up for National Day celebrations. Civil servants will get raises of between 35% and 45% starting in January while those working for the judicial authority and Health and Education Ministries will receive bonuses of 100%.
The generosity didn’t end there. Sheikh Khalifa launched a 10 billion-dirham ($2.7 billion) fund to help low-income household repay loans and said he would allocate 2,500 lots to build on to nationals living in the capital emirate of Abu Dhabi. Welfare recipients will see their allowances go up by a fifth.
Although it has come almost a year into the Arab Spring, the largesse echoes similar steps that were taken around the Arab world as nervous rulers have sought to ensure political quiet. In the Gulf, Saudi Arabia pledged to spend a whopping $130 billion, equal to 36% of gross domestic product, while Qatar announced in September pay rises of up to120% for public sector employees.
The UAE has never proposed anything as generous. Earlier in the year, the confederation boosted subsidies on bread and rice, promised a 70% increase in military pensions and pledged $1.9 billion in housing loans. The latest announcement adds to that, but a report released on Wednesday by London-based Capital Economics estimated that the wage hikes are probably worth less than 2% of the UAE’s GDP and won’t do much to stimulate the economy.
While civil servants may go out and buy more consumer goods, nearly all of those are imported, diminishing what economists call the multiplier effect from the extra spending percolating through the economy.
The $2.7 billion in aid promised poorer households may give a small boost to UAE banks, which have seen the number of problem loans grow in recent months, by enabling borrowers to repay debts, Said Hirsch, Capital’s Middle East economist, said in a report. But, on the whole, it will do little to help the overall economy.
“While the announcement sounds impressive, and even if government spending on other areas is not slashed to pay for these commitments, the fiscal package is unlikely to increase GDP growth by more than half a percentage point next year,” Capital’s Hirsh wrote in the report. “{But] given the growing risks of a recession in the developed world, we will not be changing our forecast.”
The UAE’s National Bureau of Statistics says robust oil prices will boost growth by 4.2% in real terms this year, but a poll by the Reuters news agency in September forecast a more modest pace of 3.8% annually in 2011 and 2012. Capital said it is sticking to its forecast for 3% GDP growth in the UAE next year.
A stimulus package isn’t critical anyhow. While the economy of Dubai -- the second-biggest and flashiest of the seven emirates’ -- sunk under the weight of a real estate market gone bust in 2009, the confederation’s economies as a whole have benefitted from the rise in oil prices this year. Emiratis themselves are a small minority in a population comprised mainly of expatriates.
Both wealth and a big expat population have served to tamp down any stirrings of unrest, but officials have wielded a carrot-and-stick policy just to be sure.
On Sunday, the state security court sentenced five activists who had campaigned for political reform to prison terms of up to three years in one of the few cases of opposition protest to emerge this year in the UAE. But the five were quickly pardoned as part of a wider amnesty announced shortly afterward ahead of National Day.
And, in another gesture aimed at addressing popular grievances, Sheikh Khalifa on Wednesday announced that children of Emirati women married to foreigners would qualify for citizenship at age 18, a right previously given only to the offspring of men in mixed marriages.
While the pay raises and subsidies are on the whole neutral for the economy, Shehadeh of the Gulf Research Center warned that they exacerbated the longer-term problem of getting Emiratis to work, and in particular to work in the private sector, where they can make a more serious contribution to the economy.
Emiratis enjoy a comprehensive social-welfare system and account for less than 1% of private sector payrolls. But as they have become more educated, so have their expectations, which include more challenging employment and taking a more active role in society, Shehadeh said. The government has responded with a decade-old program of “Emiratization” aimed at boosting private sector employment, but he said the latest pay raises will discourage Emiratis from leaving government service by exacerbating wage differentials.
A World Bank report showed that Emiratis in the public sector make the highest monthly wages, averaging 15,600 dirhams ($4,247) a month. Emiratis in the private sector follow, averaging 10,450 dirhams, while expatriate workers average 4,500 dirhams.