Excerts from today's Gulf News article "Is Dubai still good value"
(You make your own conclusion!)
http://www.gulfnews.com/Articles/Bus...ticleID=177945
Rising costs
But is it true that Dubai has become expensive as some claim? The answer is yes, but no. There is no disputing that the cost of living has risen.
Gulf News (8/8/05) itself reported the Business Monitor's findings showing inflation running at 4.7 per cent last year.
Prices in the UAE are growing over twice as fast as they are in the UK, US or the Euro zone whose central banks maintain a target 2 per cent threshold target.
This is not surprising given the economy is booming inflation is the flip side of any rapidly growing economy. Yet excess liquidity is a concern when money is not chasing goods, products and services evenly.
Rents have increased between 20 per cent and 40 per cent this year. Fuel prices and costs of some services are also rising directly affecting people's living standards, and the costs of running a business.
The Big Mac index
Measuring the purchasing power parity
Dubai's price rises have been fuelled by the increasing liquidity of an economy buoyed by higher oil prices, a liberalisation of property ownership laws, and the arrival of a stock market. These have been exacerbated by the under valuation of the local currency.
The Big Mac Index, developed by The Economist, is a light-hearted, though ultimately valuable measure of whether a country's currency is valued correctly. The over or under valuation of a currency is a reflection of its Purchasing Power Parity (PPP) the theory that a dollar in one country should buy the same value, one dollar, of goods in another.
The Big Mac index compares the cost of buying a Big Mac around the world, anchoring itself to the price of the home of the Big Mac, the US. According to the latest figures the UAE's dirham is undervalued by 20 cents. In simple terms this means that for the same cost, you get more value in the UAE for your dirham. This under valuation of the currency helps explain foreign and internal investment into the UAE to use an American expression investors are getting good bang for their buck in the UAE.
According to PPP economists, in a free exchange of currencies, the UAE exchange rate should rise as a result of this that is the currency would revalue itself upwards towards its true value. Should it do so it would make the cost of borrowing more expensive, saving your money more attractive, raise the value of locally held assets, make imported goods cheaper, your money go further internationally and generally slow down the domestic economy. However, this is not happening because the UAE dirham cannot move on its own accord. It is tied to the US dollar. This "peg" has become part cause of the present appreciation in prices.
Tackling this will be distinctly problematic. The US is raising its interest rates, which should raise the value of the dollar and therefore dirham against other currencies. Good news for the UAE's overheating economy. However, it remains the case that the currency is undervalued against the dollar itself and only a revaluation of the dirham/dollar rate upwards can rectify this.
My opinion is 25% payrise would mitigate this!
Airvlad