Soaring costs could drive foreign firms from Dubai

DUBAI - Industry sources have told Khaleej Times that BMW is considering relocating some of its operations to elsewhere in the Middle East as a result of the soaring cost environment in Dubai.

By Lucia Dore (Senior Correspondent)

Published: Tue 8 Nov 2005, 9:35 AM

Last updated: Tue 27 Aug 2024, 2:30 PM

BMW's operations, which are not in the free zone, comprise showrooms, a sales and service centre and a training facility for all personnel of the 15 BMW importers in the Middle East.

Although no one from BMW was available for comment, indications are that rising costs, and labour costs in particular, are of mounting concern to many companies in Dubai. These costs are hard to control and if employers want to retain key workers they have little choice but to increase salaries. If they don't, people will leave. This presents employers with another dilemma — how to source skilled labour if the main advantage of living and working in Dubai is eroded?

These rumours should cause alarm bells for policymakers, government officials and investors — in fact, everyone who lives and works in Dubai. The current discussion about rising costs also suggests that inflation is higher than official statistics suggest. Dubai Municipality has only recently started to calculate inflation and as a consequence it is difficult to estimate what the inflation rate is.

Empirical evidence suggests that people living and working in Dubai are facing some of the highest increases in the region. In particular, property rents are considered to be excessive with demand continuing to outstrip supply.

The inflation forecast (consumer price index) from the UAE Central Bank, predicted to be between 5.5 per cent and 6.5 per cent this year, seems significantly understated. As one analyst, who was quoted anonymously in a Reuters' survey, said: "We are looking at hyperinflation. It is between 20 and 30 per cent this year in the UAE." If foreign firms and expatriates no longer have an affordable standard of living, and companies continue to be confronted with such price hikes, it will become increasingly necessary to consider relocation. To a large extent, the current bout of inflation is demand driven and if traditional laws of supply and demand are applied it should eventually be rectified. However, in a country where many goods are imported, from clothing to food, how much of this inflation is cost-push?

For businesses to determine the real cost of operating, a wholesale price index is essential. While the compilation of the consumer price index in Dubai is a step in the right direction, a core wholesale price index would enable companies to gain accurate and useful information on the cost of inputs, such as labour. Industry sources also confirmed to Khaleej Times that if foreign companies continue to see increasing costs they will find it too high and not encouraging to continue here any more.