Levels of consumer debt in the UAE are reaching extreme levels, with research showing it at US$95,000 per household. Periods of high growth in consumer lending, as we are seeing now, will almost always lead to temporary expansions (or inflation) but, as with any other demand shock, this is typically not sustainable.
If the expansion in household borrowing is driven by a combination of poor financial literacy and lack of regulation, then the new level of spending is not sustainable and households will find themselves needing to scale back their debt and/or default on loans. This not only causes a loss in private welfare for those households, but it also will lead to a reduction in aggregate demand and therefore in overall GDP growth.
If the government then has to intervene and bail out troubled households, banks or businesses, this will have its own additional cost on the economy.
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