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As the cost of living increases and savings potential decreases, expatriates are pondering their future, says Srinivasan Iyer

The weakening of the dollar against all major currencies, including the Indian rupee, has made life more difficult for everyone in the last few months. Expatriates in particular have faced the brunt with not only the cost of living increasing considerably, but also their savings component taking a serious hit due to the weakening greenback. Other factors that are compounding the problem for expatriates are the steep rise in rents, which in some cases have been as high as 30 to 40 per cent. Part of the problems stem from the rial being pegged to the dollar. According to data from the Ministry of National Economy, the annual rate of inflation was at a 16-year high in August at 6.47 per cent compared to 5.98 per cent in July. The consumer price index rose to 111.9 points at the end of August, compared with 105.1 points a year ago. Says H F Bilimoria, group general manager of NaranjeeHirjee, a major commodities importer, "All currencies have appreciated against the dollar, be it the euro, pound, yuan or the rupee, thereby making imports dearer not only from Europe but also from China and India as well." There are other factors to blame for the general increase in prices. Commodity prices have risen purely due to the supply and demand scenario. The continued drought conditions for the last four years in major grain-producing areas like Australia, California and Europe has resulted in severe shortages in the production of corn, wheat and oats, nearly doubling their prices. Subsidies to farmers have been withdrawn in Europe; freight charges have shot up as a result of the increase in the cost of crude oil. "As a result of these factors, the landed costs of all commodities and products have gone up which reflects on the prices of milk powder, flour, bread and cooking oil, to give you some examples."

"NaranjeeHirjee as a corporate entity has certain social responsibilities. We cannot pass on the full burden to the consumers. We try and absorb as much as possible by forward booking certain commodities at the opportune time. Most people will point out that our top line is rising, but they do not realise the squeeze on our bottom line.Ó
Unlike the phenomenal increase in the prices of commodities, the effect has been smaller in the case of FMCGs. Says Dominic Myers, general manager of Matrah Cold Stores, "The weakening dollar is not a recent phenomenon. The majority of trading houses have been feeling the effect, but the impact has been more significant in recent months. The effect on commodities has been most noticeable, where margins are slim and the consumers feel the impact more immediately. But in the case of FMCG it has been more predictable. For Matrah Cold Stores a majority of its purchases are invoiced in dollars and most of the multinational companies that we deal with show their results in dollars, which reflects on them rather than us."

Myers hastens to add that while they have experienced the inflationary impact of the weaker dollar and rising costs, "We have been successful in increasing efficiencies and achieving accelerated rates of higher volumes and increasing market share, which has helped in generating greater gross profits." Traders say the phenomenon of increasing commodity prices is here to stay for some time and may not come down for at least six to eight months and that it may plateau later.

Cost of living

The weakening dollar is affecting expatriates much more than its impact on the cost of living. That scenario is very much evident as there is serious disillusionment among the middle-class Indian expatriates who have had to pay the price in terms of a sudden surge in rents and lower savings as a result of the strengthening Indian unit, which is at a nine-year peak and shows no signs of slowing down. Many professionals are debating if it is worth their while here when the going is so good back in India, which is growing at a scorching pace and salaries are comparable to the Gulf. Companies are finding it difficult to find replacements or fill in positions for middle and lower level categories like accountants and salesmen.

According to recent figures from online recruitment firm GulfTalent.com, Oman registered the biggest salary jump, rising from 5.6 per cent last year to 11 per cent this year, driven in part by a 15 per cent pay hike for public sector employees. The government's decision earlier this year to allow expatriates to change employers has dramatically increased staff attrition rates, further adding to the pressure on firms to increase salaries. The continuing depreciation of dollar-pegged currencies was diminishing the value of Gulf compensation packages for European expatriates, putting further upward pressure on salaries. Kuwait's decision earlier this year to drop the dollar peg and the subsequent three per cent appreciation of its currency are increasing the competitiveness of Kuwaiti salaries and may intensify the pressure on other GCC countries to follow suit.

HR measures

Says Ajay Bhati, managing consultant of Lighthouse, "There is a serious manpower crunch. People are not willing to come at earlier salary levels. This is perhaps the first time companies are faced with such a situation, and they are finding it difficult to retain employees especially in fields that require technical orientation like engineering, IT and finance. The main motivation for people coming to work here is savings. They are asking themselves if its worth leaving friends and family to live abroad. Moreover, they are aware their career graph could stagnate in the Gulf unlike back home."Says Sankar Kailasam, vice president - research, Gulf Investment Services, "If the skills shortage situation continues to linger, it will limit the ability to grow."

Realising the manpower crunch, Bhati points out that several companies are revisiting their HR systems and following a two-pronged approach - grooming nationals and revising salary structures to realistic market levels. Tonny George Alexander, country head of Oman UAE Exchange, says that it's the employees who have the upper hand now. "With the restrictions on changing jobs relaxed, it is now a challenge to retain employees. Jobs have become easier to find and the bargaining power of the candidates has increased."

As the supply of skilled staff from traditional markets such as India and Egypt is declining, many are now tapping new sources such as Sri Lanka, China, Eastern Europe and Latin America. Says Bilimoria, "With better salaries and perks in India and rising cost of living in the Gulf, Indians are increasingly hesitant to come here. Therefore we are looking at newer places like Sri Lanka. Even Indians who have come from Dubai are finding it difficult here."

De-linking currency

The general consensus on dealing with the currency imbalance is to review the monetary policy. Most people feel that the government should shift away from the dollar peg and instead link it to a basket of currencies. "In the last one year the greenback has depreciated nearly 17 per cent against major currencies, and with problems in the US housing sector, there is a possibility of interest rates coming down, and possibly settle between 3.5 to 3.75 per cent by the end of 2008. This will lead to a further depreciation of the dollar," says Kailasam.

Says Billimoria, "As a layman I think it would help if Oman and the rest of the GCC members de-link their currencies from the dollar. They could follow Kuwait's example and link it to a basket of currencies." Myers echoes the sentiment. Kailasam feels a revaluation can control imported inflation. "Probably the best way to go about it is to stagger it over a period of time. Although this may hurt the revenue potential, but it will certainly help control inflation," says Kailasam.

Money comes, money goes

On the repatriation front, things have steadily going downhill. A year ago, the rial bought around Rs118, and today hovers around the Rs103 level. Alexander says that while the NRI community is definitely getting fewer rupees per rial that has not reduced the queues at the money exchange. "We Indians have a tendency to crib. While we complain about the exchange rates, people don't realise that they are getting higher interest rates on their deposits back home compared to a year ago or that the value of their stock portfolio may have skyrocketed on the back of a rising market."

According to a recent UBS research report, the rupee may break the Rs38 barrier in the near future and possibly even reach Rs37. When that happens, the rial will fetch Rs96 and that will leave a lot of Indians disappointed however true Alexander's words.