DUBAI, Feb 22 (Reuters) - Dubai consumer inflation rose only moderately in January when the United Arab Emirates introduced a 5 percent value-added tax, as authorities look to balance a need to increase state revenues with continued economic growth.
Last month’s imposition of VAT on the UAE’s low-tax economy, designed to strengthen state finances in the face of low oil prices, was one of the biggest policy shifts in years.
Dubai’s annual inflation rate to its highest level since last April, data showed on Thursday, but the rise to 2.7 percent, from 1.5 percent in December, was relatively modest.
Monica Malik, chief economist at Abu Dhabi Commercial Bank, said inflation could rise further on the back of the tax in coming months.
“Historically, the indications from other countries which introduced VAT or raised it are that it takes time for inflation to rise, because demand is particularly weak at first, and retailers and corporates may absorb some of the cost.”
Malik said the UAE was on track to post an average annual inflation rate of 3.4 percent this year, up from about 2.0 percent this year.
She said Dubai’s January inflation was restrained by the fact that the UAE had designed VAT with key parts of the economy, such as some areas of transport, exempted or zero-rated. This limited the impact on overall price levels.
A weak real estate market in Dubai may also have kept down inflation. Housing and utility costs fell 0.7 percent from a year earlier in January.
Abu Dhabi, the other big emirate in the UAE, is expected to announce its January inflation rate in coming days, followed by the UAE as a whole.
Saudi Arabia introduced 5 percent VAT at the same time as the UAE, but its version of the tax contained fewer exemptions, so the boost to inflation is expected to be larger.
The other four wealthy oil exporting countries of the Gulf originally planned to impose VAT simultaneously with Saudi Arabia and the UAE but have not done so, partly because of concern about the effect on inflation and living standards. They may introduce VAT as soon as in 2019. (Reporting by Andrew Torchia; editing by John Stonestreet)