from Follow the Money

Hmmm - maybe imported labor can not keep a lid on inflation in the Gulf

July 16, 2007 8:19 am (EST)

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One of the standard arguments why the GCC currencies' depreciation – they, after all, generally peg to the dollar – won’t lead to high rates of inflation is that the GCC countries are open to both imported goods and imported labor.    The ready availability of Chinese goods and imported Indian (and Pakistani) labor will contain cost pressures, allowing the GCC countries to have their version of what seems like an impossible trinity: rising domestic spending and investment financed by the oil windfall, an ongoing peg to the depreciating dollar and low inflation. 

Or perhaps not.   It turns out that Indian labor isn’t thrilled to be paid in depreciating dinars --particularly when the cost of living in the Gulf is going up.   The rupee, after all has appreciated substantially against the dinar, the riyal and all other currencies pegged to dollar.


Rob Corder of

In March 2006, every dirham earned in the UAE was worth 12.7 rupees back home. Today, the interbank rate slumped to below 11 rupees to the dirham as the weakness of the US dollar drags down the value of Gulf currencies to which it is pegged. And the fast growing Indian economy strengthens the rupee.

The 15% plunge in the value of dollar-pegged currencies against the rupee has coincided with at least 10% inflation in the UAE, and probably as high as 15% inflation in the emirate of Dubai. The wages of Indians in the UAE are therefore worth as much as 30% less than a year ago in rupee terms.All of this comes at a time when wages are growing in India, particularly in the construction industry.

None of this is news to the hundreds of thousands of Indians living and working in the GCC. What is new is that the subject is bursting into the open, not because the construction labourers have suddenly been given a voice, but because construction companies are facing a labour crisis as Indians turn their back on the region in droves. 

Sounds to me like dinar wages for construction workers – not just the dinar revenues of sheiks and others who can dip into the oil revenue stream -- will have to go up.   Nothing wrong with that.   

I suspect high-end expat labor in Dubai also is not thrilled by the dinar’s fall against the pound either.  They weren’t happy last November and, well, the dinar was stronger then than it is now .. 

Alternatively -- as Serhan Cevik suggests -- the GCC countries could unpeg from the dollar.   It doesn’t really make sense for them to be pegged to a currency setting record lows when oil is almost as high as it has been in a very long time.     But if all Kuwait can do is a series of tiny revaluations – the latest move was only 0.4% (for a total move of 0.77% this year)-- and the others insist that they aren’t open to any change, well, then other variables need to adjust.

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