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The United Arab Emirates and Saudi Arabia: Low Inflation Amid Global Turmoil

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In contrast to the global trend, the United Arab Emirates (UAE) and Saudi Arabia (KSA) have demonstrated remarkable resilience and stability in managing inflation rates, primarily through strong government policies. In recent years, the global economic landscape has been characterised by tumultuous fluctuations and uncertainty. One of the most prevalent concerns has been escalating inflation rates in most global economies, fuelled by unprecedented expansionary monetary policies, fiscal deficits and shocks on supply, which has caused energy and commodities price surges and disrupted global supply chains.

However, through sound government efforts in curbing inflation and maintaining stability, the UAE and the KSA continue to draw and encourage investment and development in the region. For this reason, businesses should take note.

Low inflation relative to other economies

According to Euromonitor International, the inflation rates for the United Arab Emirates and Saudi Arabia in 2022 were 5% and 2.5%, respectively

Source: Euromonitor International

These rates were considerably below the global averages, reflecting the effectiveness of the economic strategies pursued by these markets. Both the United Arab Emirates and Saudi Arabia have been relatively successful in managing the pandemic, ranking second, and fifth (out of 53) respectively, in 2022 Bloomberg's “Covid Resilience Ranking”. This effective management allowed them to quickly resume their economic and social activities, and keep inflation under control more effectively than many other countries worldwide.Low Inflation Amid Global Turmoil chart1.svg

Government-imposed price control and social policies

A significant facet of the approach by the United Arab Emirates and Saudi Arabia to inflationary stability is linked to government-imposed price control policies.

Governments in the United Arab Emirates and Saudi Arabia have been proactive in regulating prices of essential goods and services - pivotal in preventing cost-induced inflation

Source: Euromonitor International

Strategies for regulating prices of essential goods and services include Saudi Arabia's Consumer Protection Association, which monitors price movements and ensures that consumers are not exploited through unwarranted price hikes. Similarly, the United Arab Emirates has implemented price caps on certain essential commodities, mitigating the risk of sudden inflationary spikes.

In addition to price control policies, both the United Arab Emirates and Saudi Arabia have invested in strong social policies for their citizens. These policies are tailored to ensure the welfare of consumers by providing subsidies on basic goods, housing, education, and healthcare. The government in Saudi Arabia, for instance, runs the Citizen Account Program, which provides cash transfers to low- and mid-income families to offset the impact of the increasing cost of living. Such measures alleviate the pressure on consumers and contribute to a more stable inflationary environment.

Currency peg and the role of oil

Both the United Arab Emirates and Saudi Arabia maintain currency peg with the US dollar.

Maintaining currency peg with the US dollar has been an anchor for economic stability, as it instills confidence in the financial markets and mitigates exchange rate volatility

Source: Euromonitor International

This alignment has played a crucial role in sustaining low inflation rates as it eliminates the inflationary pressure that could arise from currency depreciation. The strong dollar has allowed both markets to keep costs of their imported goods low and alleviate pressure on shrinking retailers’ margins observed in many other countries.

Furthermore, both the United Arab Emirates and Saudi Arabia are large oil exporters and are benefiting from the increase in oil prices, which, after dipping to a decades low in March 2020, have since increased substantially. While raising the price of oil is usually associated with higher inflation, in the case of large exporters such as the United Arab Emirates and Saudi Arabia, this has been offset by increased fiscal revenues and has led to increased economic activity, as well as rising consumer and business confidence.

The growth of discounters, hypermarkets and e-commerce

In addition to government social and economic policies, the retail industry in these two markets has played an integral role in curbing inflation. For example, among the myriad retail players, VIVA, a leading discounter in the United Arab Emirates, has seen a rapid increase in its share. With its growing penetration and competitively-priced goods, VIVA is influencing other retailers to maintain competitive prices, which, in turn, exerts downward pressure on the inflation rate.Low Inflation Amid Global Turmoil chart2.svgIn Saudi Arabia, hypermarkets play a similar role. The top five hypermarket chains control approximately 80% of this channel. They continually engage in promotional strategies, not only to outperform each other, but also to seize a larger share of sales from other grocery outlets, particularly supermarkets. Although the share of hypermarkets in Saudi Arabia exceeds that of Middle East and Africa, there is still potential for expansion when compared to neighbouring United Arab Emirates and other regions worldwide.Low Inflation Amid Global Turmoil chart3.svgFurthermore, the accelerated growth of e-commerce within retail is highly significant in both the United Arab Emirates and Saudi Arabia. Their young, technologically-adept populations and substantial e-commerce investments are key in fuelling this growth. Consequently, the retail landscape is becoming increasingly competitive. This enhanced competition allows consumers to find and purchase the most cost-effective deals more easily.

Low Inflation Amid Global Turmoil chart4.svg

An economic haven

The United Arab Emirates and Saudi Arabia have set exemplary standards in maintaining inflationary stability amid the prevailing global economic headwinds. Through a combination of retail competition, government-imposed price controls, robust social policies, and a strategic currency peg to the US dollar, these nations have successfully mitigated the inflationary pressures that have beleaguered other economies. These policies are not just strategies for economic stability, but also reflect a commitment to ensuring the welfare and prosperity of their citizens as the global economy continues to navigate uncertainty.

Read our article Global Inflation Tracker Q2 2023 for further analysis on the drivers of global inflation.

Learn more about Retailing in our reports: Retail in the United Arab Emirates and Retail in Saudi Arabia

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