Catching inflation by the tail

The move is very late, but is far better than ignoring the phenomenon that hits people in the country. The deliberations next month will, hopefully, come up with effective solutions that can be used by the government to tackle the problem.

Based on its constitutional rights and the role it has been playing in the decision making process in the past, the FNC will most probably, in its next session, replay the discussions of the phenomenon that has been discussed publicly by the media and citizens over the past two years.

The impact of inflation was very strong on social and economic aspects of life that became a source of irritation for the nation.

I am not optimistic, nor are the members of the FNC, about the results of the discussions at the council, unless both the government and business community in the UAE implement policies that aim at safeguarding economic growth while ensuring the interests of all components of the nation.

It doesn't mean that the FNC move to discuss the phenomenon is irrelevant or has no value in solving the problem. On the contrary, the long awaited step from the people's representatives is very important as it will enlighten the government and businesses on the hardships that people are facing.

Government efforts have failed to control inflation or reduce its impact on the people. The FNC move might come up with some magic. Since the launch of the current government, Shaikha Lubna Al Qasimi, Minister of Economy, has been warning businesses of tough penalties against arbitrary price increases.

She has affirmed, more than once, that the ministry will not tolerate hikes in prices unless they are supported by strong justification.

Unfortunately, the price of almost every commodity and service offered in the country has been increasing since then and the situation seems to be out of control. Local business cartels have managed to increase prices with the approval of the ministry in the past six months to the levels they have requested.

Whether they are justified or not, price increases are harmful to the economy and will eventually have a negative impact on the growth and the competitiveness of the country.

Cartel manipulation

A clear example of how the business cartels were so successful in pushing up the prices is the cartel of dairy products' manufacturers. The prices of different brands of yoghurt and milk have increased by almost 50 per cent after rounds of talks with the ministry.

The bakery cartel is another example of how the ministry has failed to control the price of a traditionally controlled food product like bread. The price of bread has increased by more than 20 per cent and other food products, services and commodities followed suit, registering similar increases.

The past two years have been financially very tough on families in the UAE. The overall inflation was about 10 per cent in 2006 and this year the inflation might touch another high. The situation, in general, is beyond the capacity of ordinary people and businesses to absorb.

Tackling the problem of inflation is a delicate subject because of two aspects, which seem contradictory.

The first aspect: the UAE has embraced a free economic system since the country was established in 1971. The prosperity and development which was achieved in the past 36 years are just manifestations of the success of free market policies.

Nobody can ignore that the mechanism of the market has worked wonderfully in the past three decades. Abandoning such policies for the sake of controlling inflation now is quite dangerous because it means that the economy will never be able to maintain its balance based on its internal forces in the future, and it will rely on the government to correct economic disturbances. This is quite risky and unwanted at this time.

The second approach to address inflation by imposing controls over the prices of basic products at critical periods such as during two-digit inflation periods is an option, but requires pumping of government subsidies which might be misused and the government does not seem ready to do so at this stage.

Economists, who defend government interference, believe that the UAE government has enforced some control over the basic products which was quite useful to the economy.

Controlling the prices of petrol, electricity and water, in addition to some basic food items like bread, in the past was helpful in controlling inflation. The recent wave, however, was beyond government's control.

The business community and players in different economic sectors, like real estate, should understand that inflation will not spare them in the end and if they are able to force the public to pay more for prices of goods and services they are providing, the country will suffer because it will lose its competitive edge to other countries and consequently they will lose too.

Irresponsible acts by some sectors put at risk the prosperity and growth achieved in the past 30 years. The chambers of commerce and economic department should educate businesses that inflation will not be in their favour in the long run even if they extract more profits now.

The government, on the other hand, should discuss its decisions and their impact on inflation. Hiking governmental fees and introducing additional ones is quite dangerous at this stage and should be considered carefully.

Fighting inflation is a general responsibility and we will not win against it unless businesses support the government and the society to achieve their goals.