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ECONOMIC BAROMETER

TIPPING THE

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SALARY RISES VERSUS INFLATION IN THE GULF While many employees and public sector workers in the Middle East have recently celebrating the few extra dollars they received on their latest payrise and salary increases, what has not been considered is the possible consequences on the inflation and their everyday spending. Karim Nakhle looks at the pros and cons this growing trend of pay increase in the region’s economies and more essentially where it could all lead.


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THE MIDDLE EAST’S PAY RISE CRAZE ,Qà DWLRQLVDULVHLQWKHJHQHUDOOHYHORI prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer of these goods and services. Consequently, LQà DWLRQDOVRUHà HFWVHURVLRQLQWKHSXUFKDVLQJ power of money – a loss of real value in the internal medium of exchange and unit of account in the economy. Recent global macroeconomic events appear to have affected the Gulf Cooperation &RXQFLO *&& DQGWKHEURDGHU0LGGOH(DVW less than other parts of the world, when looking at expected salary rises, which may be due to the Arab Spring revolution. According to the latest pay data Survey (analysed from 406 subsidiaries of multinational organisations and approximately 1400 companies participating across the 0LGGOH(DVW FRPSDQLHVLQWKHUHJLRQKDYH implemented widespread executive pay rises, averaging 5.7 percent in 2011. Employees in managerial roles have received higher pay rises than those in executive positions. Broadly, with consumer spending picking up, salary increases were higher among the retail sector, which saw the highest pay rise at 6.4 percent, followed by companies in the service, consumer and high-technology industries DQGORZHUDPRQJVWWKHÀQDQFLDOVHUYLFHVDQG energy organisations, while education had the smallest increase at 3.8 percent. However, an estimated 55 percent of professionals did not receive any pay increase at all. 7KHDYHUDJHSD\LQFUHDVHVLQWKH0LGGOH East remains far higher than those received by executives in Western Europe averaging 2.5 percent. Qatari executives received pay rises of four percent, followed by executives LQ.XZDLW SHUFHQW 6DXGL$UDELD ÀYH SHUFHQW DQGWKH8QLWHG$UDE(PLUDWHV ÀYH percent). Executives in Bahrain received the highest average pay rise at six percent. Companies in the GCC are projecting average salary increases in 2012 of 5.4 SHUFHQW$FURVVWKHEURDGHU0LGGOH(DVW region, companies in Egypt, Yemen, Jordan and Lebanon anticipates the highest rises in 2012, with Egypt projecting salary increases of 10 percent, nearly double the average of 5.4 percent in the GCC.

Average pay increases in the Middle East remains far higher than those received by executives in Western Europe, averaging 5.7 to 2.5 percent respectively. THAT’S THE GOOD NEWS, BUT WHERE’S THE CATCH? The catch is in the basic cause of LQà DWLRQ5LVLQJODERXUFRVWVFDXVHGE\ZDJH increases, which exceed any improvement in productivity. This cause is important in various industries as we rely heavily on human capital. Firms may decide not to pass these higher costs onto their customers but in the ORQJUXQZDJHLQà DWLRQWHQGVWRPRYHFORVHO\ ZLWKSULFHLQà DWLRQEHFDXVHWKHUHDUHOLPLWVWR the extent to which any business can absorb higher wage expenses. Higher salaries mean an increase in SHRSOH¡VSXUFKDVLQJSRZHUVLQFH0LGGOH(DVW nationals lack a culture of saving. As people get more money, this may result in price hikes on everyday consumer prices, commodities, goods, food prices, cars, clothing, rent, transport, fuel and more. Some prices will increase immediately, but others are staggered and will take more time. CASE STUDY: LEBANON The minimum wage in Lebanon has twice been increased since the end of the 1975 to 1990 civil war, most recently in 2008. In October this year, Lebanon’s cabinet increased the minimum wage by 40 percent from LL500,000 to LL700,000 (QR1212 to QR1700). The government also ordered a wage increase of LL300,000 (QR728) on all salaries between one and LL1.8 million (QR4,368), and raised the daily transportation allowance to LL10,000 from LL8,000 (QR25 from QR18) while the education allowance for children jumped to a maximum of LL1.5 million (QR3,640). Ostensibly this was all in a last minute bid to avert a strike that was planned by a handful of partisans of the General Labour

Confederation, and to please a few potential voters in the next elections along the way – while ignoring the crippling effect it could have on the Lebanese economy. In addition to it being unfair for those earning more than LL1.8 million (QR4368) per month and who will not receive a raise, the decision is set to dislocate the pay scale and lead to serious economic issues. However, the uncalculated, unprecedented, and random decision was immediately rejected by the Shura Council, the Economic Council, the Traders Association and the Private sector HPSOR\HUVZDUQLQJLWFRXOGOHDGWRLQà DWLRQ (which currently stands at 5.5 percent), refusing to implement the measures until they are reassessed. The Lebanese minimum wage could GHÀQLWHO\KDYHGRQHZLWKDERRVW+RZHYHU rather than taking the easy way out by just raising the minimum wage, and putting more burdens on the economy and increasing the public debt, the government should embark on numerous measures to sew the torn pockets of the minimum wage holders, without triggering the risks of unemployment that is now looming on the horizon. Arguably, the government should have looked at improving the competitiveness of the Lebanese economy by reducing the operating costs of companies. Indeed, the government should strive for success by stimulating growth, attracting foreign direct investment and capital, creating jobs, lowering unemployment, strengthening its industries, supporting the private sector, implementing tax reforms, offering subsidized loans, lowering trade barriers and barriers to entry, stopping monopolies, privatising public entities that are incurring losses, encouraging small business start ups and entrepreneurship TheEDGE

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and creating the economic conditions in which wages can start to rise, and the economic situation can improve. Although the country witnessed record growth rates in recent years, the projections for 2011 have dropped following a protracted government crisis earlier this year and amid political unrest in neighbouring Syria. Salary increases were not keeping pace with the rising FRVWRIOLYLQJDQGHPSOR\HHVDUHÀQGLQJLW GLIÀFXOWDV\HWDJDLQWKHHFRQRPLFVLWXDWLRQLV still volatile so organisations are being cautious ZLWKWKHLUÀ[HGFRVWVVXFKDVVDODULHV Consequently, prices in Lebanese consumer markets have greatly increased amid speculation that the government may soon reach a consensus on raising wages nationally. All markets are naturally responsive to public policy, but in Lebanon’s poorly regulated economy, businesses exploit HYHU\RSSRUWXQLW\WRLQFUHDVHWKHLUSURÀWV The wage increases have been overtaken before they were even implemented. 7KHHQVXLQJLQà DWLRQLVDUHVXOWRISRRU regulation, the absence of market controls, and the prevalence of monopolies in all market sectors. The new measure could lead to a rise in tuition fees, as if rises in price of consumer goods was not enough. Current statistics indicate that for every dollar increase in wages, the market responds with a two-dollar increase in prices, leaving the consumer as the major loser. QATAR’S QR30 BILLION PUBLIC SECTOR SALARY HIKES As of September 1st, Qatari government announced a 60 percent increase in the salaries of Qatari nationals working within state departments, a 120 percent rise in WKHEDVLFVDODU\RIPLOLWDU\RIÀFHUVDQGD 50 percent increase in the basic salary and social allowance of military personnel of other ranks. ,QWRWDOWKHQHZVDODULHVDQGEHQHÀWVZLOO cost Qatar some U$8.2 billion (QR30 billion). Although the move was seen by some as an attempt to help preserve stability in the wealthy Gulf state, Qatar has been spared by the unrest brought elsewhere by the Arab Spring. The closest Qatar has come to a protest movement in recent months has been

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a modest, one-hour boycott of Qatar Telecom organised on social media website, Twitter. Whatever the reason, this measure obviously pleased Qatari citizens, and the EHQHÀWVKDYHEHHQZLGHO\IHOWDPRQJWKHP – less than 10 percent of whom work in the private sector. Qataris constitute about 20 percent of the population of 1.7 million, and only about six percent of the workforce. ,Qà DWLRQUHWXUQHGWRWKHZRUOG¡VWRSOLTXHÀHG natural gas exporter in December 2010 after a long period of falling prices. Qatar has the lowest rate of unemployment of the GCC – by some estimates it is as low as 0.7 percent. The country’s gross domestic product (GDP) per capita for 2011 is forecasted at US$109,881 (QR400,000) – and wealth is fairly evenly spread among the citizens. 1RWZLWKVWDQGLQJKXJHLQIUDVWUXFWXUH projects in the pipeline, Qatar is expected to generate double-digit gross domestic product (GDP) growth and a budget surplus of 10.3 percent in 2011/12 before the additional spending measures were announced. Export revenues from energy alone are expected to total $80 billion (QR291 billion). :KLOH4DWDU¡VFXUUHQWLQà DWLRQUDWHURVH from 2.1 percent in August to 2.2 percent in

September, it is still much lower than many neighbouring countries, with Saudi Arabia and Kuwait for example facing rates as high DVÀYHSHUFHQW 1HYHUWKHOHVVWKHJHQHURXVGHFUHH SURPSWHGLQà DWLRQIHDUVDQGKDGWKHEXVLQHVV community concerned about the rising cost of living in Qatar, many feeling the private sector is bound to suffer as prices shoot up further due to the state’s salary raise move. Therefore the private sector will either have WRUDLVHVDODULHVSXVKLQJLQà DWLRQHYHQKLJKHU or maintain the status quo, which could foment discontent. Recent research has shown that new SD\RXWVPLJKWEULQJDYHUDJHLQà DWLRQWR around 2.5 percent in 2011 and just above three percent next year. 7RWDFNOHWKHSURVSHFWRIULVLQJLQà DWLRQ 4DWDUVHWXSLQHDUO\1RYHPEHUDVSHFLDO FRPPLWWHHDWWKH0LQLVWU\RI%XVLQHVVDQG Trade, to monitor prices of commodities and services. The move is part of efforts being exerted by the Emirate to control prices of goods and services, which have witnessed a rise IROORZLQJWKHVLJQLÀFDQWLQFUHDVHLQVDODU\ SHQVLRQDQGVRFLDOEHQHÀWVIRUJRYHUQPHQW and military employees.

How the recent statewide salary hikes in Qatar’s public sector will affect the economy, and in especially formal and informal retail prices – either negatively or positively, particularly in locations such as Souq Waqif, pictured – remains to be seen. (Image Corbis)

The Edge Dec 2011 Economic Barometer Salary Rise Vs Inflation  

The Edge Dec 2011 Economic Barometer Latest Salary Rise & Pay increase Vs Inflation in the Middle East