Economic Activity in the UAE - Case Study Example

Name: Affiliate Institution: Date: Introduction The economy is a driving force for any nation. The external trading and international trade give a country its mileage. However, the responsible personnel should ensure that all the economic policies are put in place to achieve the best out of the interaction between states. United Arab Emirates (UAE) is not left behind. The national government is initiating appropriate monetary and fiscal policies to improve the value of the national currency; the Dirham. The government of United Arab Emirates employs an expansionary monetary policy to control its economy. The Central Bank of UAE is the agency responsible for appropriate monetary policy that should be applied to stabilize prices and take care of any form of inflation. However, it stresses on lifting bans and trade barriers to allow free trade with the rest of the world. Unsanctioned trade is crucial for economic growth of any nation. Dubai is geared towards letting out more and more bonds so as to fund its comprehensive economic strategy. Economic pillars that need to be checked are the monetary and fiscal policies. Also, national accounts are crucial when one ones to understand in depth the economic development of a country. UAE is the choice country because of the richness of resources and its fast economic growth. It might mean that the government with the central bank to facilitate such economic policies while stressing on the need of finances and revenue from the thriving private sectors and investments in the economy. Results and Discussion 1. National Accounting in UAE National accounts deal with the implementation of appropriate accounting techniques so as to measure economic activity in a country. However, it involves consideration of international trade based on the existing economic policy of such a country. The United Arab Emirates has been coming up with evolving national accounting that seeks to strengthen its economic growth from the word go. International Monetary Fund has ranked UAE among the countries. Also, National accounting deals with double-entries accounts whereby transactions, especially among nations, are recorded on both sides of books of account. It would then lead to appropriate balance of payment. In this case, if the exports are more than the imports, it is a balance of payment surplus. On the other hand, if the imports are more than exports, it is an indication of the balance of payment deficit. The latter is discouraging in that it means that the country’s economy is facing some turmoil because it is more dependable on other country’s production. A country needs to produce more of its goods than importing more from foreign countries (Al-Qahtani, 2005). In a bid to understand the situation of the individual country. Economic data, derived from national accounts, would be useful in carrying out an empirical analysis to comprehend the economic development and growth of a state. Also, auditors are well-educated so as to perform their auditing and ensure clean financial statements devoid of fraud or corruption. The level of transparency in UAE is appalling as compared to other countries like Nigeria and other African states. For an economy to do its best there is a need to do away with corruption. National income accounting helps one to define economic activity level of any country, in this case, United Arab Emirates. One can use two methods to calculate national income. Such approaches are expenditure and income approach. In 2015, the national accounts of UAE rose significantly from the previous year. It is attributed to the economic level that rose drastically in that year. However, exploitation of resources in UAE is promising hence need complex national accounts. The government has put in place competent accountants to take care of various attributes in the state. It also requires a serious manager to come up with different implementations that are geared towards a healthy economic growth rate (Al-Qahtani, 2005). 2. UAE Balance of Payment and trade To understand the economy of a country and the impacts of various policies on macroeconomic performance. However, the current account is one of the factors of international trade that a country can use to measure its economic growth about the imports and exports that the government deals with over a particular period. Current Account refers to the aggregate of the balance of trade (that is, exports subtracting the imports of commodities), net transfer payments (that is, foreign aid and grants), and net factor income (dividends and interest). Below is a chart that shows updated current account as obtained from www.trendingeconomics.com. However, this chart shows the fluctuations of the balance of payments in the form of Current Accounts from 2006 to 2014. In 2006, the current account stood at 140000 units. It saw a decline in 2007 to 7000. It also rose at 2008 to 7500 million units. In the next two years, the current account was recorded at its lowest point; that is, 4000 units and 3500 units respectively. From 2010 to 2012, there was a recorded rise of up to 260000 units. It was significant as far as the economic growth was concerned. However, this would also signal how the economic policies are working in achieving sustainable growth and trading with foreign countries. It also means that there were limited borrowing and dependability on foreign borrowing and transfer payments. (Fig 1. Current Accounts) 3. UAE Monetary Policy and Financial Markets As seen earlier in this discussion, monetary policy is the work of Central Bank of a country. However, in the United Arab Emirates, there is an active monetary policy that the government has put in place in collaboration with its Central Bank. Based on data from www.centralbank.ae, a monetary policy implemented in 2015 had a variety of impacts on the economy of the UAE. According to the survey, Money supply (M1) which comprised of cash at banks, currency issued and currency in circulation outside the country faced an unprecedented increase from AED 455.7 to AED 457.3 billion by November the same year. Also, Money supply (M2), which includes quasi-monetary deposits, decreased to AED 1,182.9 billion in the month of October from AED 1,185.1 billion which was recorded at the end of October. Monetary policy involves the use of changes in interest rates, Open Market Operations (OMO), and reserve money. In this case, changes in interest rates, especially for lending to individuals from banks, helps in stabilizing the currency and prices of commodities. It helps keep at bay inflation so that the economy strives at its best (Starr, 2004). Fig 2. Based on the data above, the United Arab Emirate government in conjunction with the Central Bank raised the benchmark interest rate by a whopping 25 basis points. It led to a promising percent of 1.25 on December 17th, 2015. However, the same trend was evident from December 2008 to 2015. It shows that the monetary policy applied has some impact. Also, there is a need to review and research further to understand how such policies contribute to the economy of UAE. In some cases, it might just be coincidental that the economy performs well even without factoring in the policy that the Central Bank has put into practice. Using Excel as a statistical software, it is easier to capture the fluctuations that arise from the use of monetary policy by the Central Bank of United Arab Emirates. The data was obtained from the central bank’s website which then ran through the software to generate possible results. Results of Monetary Policy (M1, M2, and M2) for data from 2006 to 2014. Mean 2010 Mean 441.5 Mean 1827.889 Mean 601.3333 Standard Error 0.912870929 Standard Error 3.807886553 Standard Error 34.73089 Standard Error 71.40223 Median 2010 Median 446 Median 1865 Median 652 Mode #N/A Mode #N/A Mode #N/A Mode #N/A Standard Deviation 2.738612788 Standard Deviation 11.42365966 Standard Deviation 104.1927 Standard Deviation 214.2067 Sample Variance 7.5 Sample Variance 130.5 Sample Variance 10856.11 Sample Variance 45884.5 Kurtosis -1.2 Kurtosis 0.461813223 Kurtosis 5.208345 Kurtosis -1.32014 Skewness 0 Skewness -0.918336493 Skewness -2.1959 Skewness -0.19944 Range 8 Range 37 Range 330 Range 614 Minimum 2006 Minimum 420 Minimum 1573 Minimum 285 Maximum 2014 Maximum 457 Maximum 1903 Maximum 899 Sum 18090 Sum 3973.5 Sum 16451 Sum 5412 Count 9 Count 9 Count 9 Count 9 The primary goals of monetary policy: stabilize prices in a globally. Prevention of prices from shooting up (Inflation), is preferred to be minimal and on controllable limits. Sometimes, the prices may go down real fast (deflation). It is up to the national government through central bank to initiate appropriate monetary policies such as the use of OMO (Open Market Operations), interest rates, and reserve money. Reserve money is whereby the Central Bank control the money supply. The money multiplier is an indication of a mechanism whereby reserve money comes up with appropriate money supply in the economy. From the data generated from Excel above, the skewness is -0.918336493, meaning that the data is negatively skewed. It is skewed to the left. However, there is no much deviation from the data obtained from the central bank’s database. Moreover, monetary policy is an economic policy that determines how the financial markets would prevail at a particular time. A good monetary policy should stabilize financial markets from the word go. Dubai Financial Markets and Abu Dhabi Securities Exchange are dependent on monetary policies that the central bank together with the government in place implement. In a real sense, if there are no effective economic policies, such markets would crush, while rendering the economy of UAE to be useless and baseless (Darrat &Sowaidi, 2009). UAE Fiscal policy Monetary policy is usually an attempt to manipulate government expenditure and the accruing taxation so as to affect the aggregate demand. It is an economic policy that many governments, if not all, apply to keep on track as far as economic growth and development is concerned. It also controls aggregate supply so as to achieve various macroeconomic goals. Moreover, the macroeconomic goals being talked about include; economic growth, external balance, full employment, economic efficiency, and price level stability. In some cases, it works hand in hand with monetary policies that the central bank initiated to attain those goals in the shortest time possible. Fiscal policy, just like monetary policy, is termed as discretionary because the UAE’s government must intervene in effecting it so as to achieve the best. The fiscal policy deals with the use of taxation and sanctions. The government puts up strict laws that are geared towards stabilizing the economic growth rate of a country. UAE’s government has been instrumental in coming up with consistent rules that govern revenue collection. A country’s fiscal policy plays a significant role in taking care of investments, in particular for the locals. Licensing is also part of the fiscal policies that UAE’s government has been manipulating to remain competitive globally. Financial markets include Stock exchanges and foreign trading avenues. However, the fiscal and monetary policies that a government puts in place would determine the functioning of such financial markets. To avoid mix up in such markets, economic advisers should be on form to direct and advise the government to initiate appropriate fiscal policies to take care of a particular situation (Al-Tamimi, 2006). Domestic Output and Demand However, the economy of UAE expanded very fast in the year 2014. It can be attributed to the use of various fiscal and monetary policies by the government in conjunction with the central bank. According to International Monetary Fund data recently, there was a Gross Domestic Product growth of 3.6%. Moreover, the same institution reports that it is a much slower pace as compared to the one of the previous year, 2013. In this case, use of an example of oil production will elicit the said perception. Also, the oil business seemed to expand by a small margin of 0.1% in 2014. However, Gross Domestic Product is crucial in analyzing the growth of an economy. GDP can be found out by adding up all expenditures; Personal consumption (C), gross private domestic spending (Ig), Government expenditure or purchases (G), and more so, the net exports (Xn). GDP= C+Ig+G+Xn According to the data obtained from trending economics website, there is an increase in GDP of UAE in 2014 by 4.6 percent. It is as compared with previous year, 2013. The growth rate of the GDP in UAE averaged 4.82 percent as from the year 2000 to 2014. The highest point was 2006, which was at a whopping 9.80 percent. In 2009, there was a recent low of -5.20. In that year, the central bank in conjunction with other commercial banks had increased their interest rates, especially for lending. Since many investors are dependent on loans from banks to expand their businesses and to increase productivity, it seems that they were shying away during the year 2009, as per the GDP growth rate that was negative. In return, the government responded by quickly checking what went wrong hence adjusting the GDP growth rate to the new standard. In this case, there is an evidence of the impact of economic policy on economic growth of a particular country. Regression Statistics Multiple R 0.08992 R Square 0.008086 Adjusted R Square -0.13362 Standard Error 2.91584 Observations 9 ANOVA   Df SS MS F Significance F Regression 1 0.485133 0.485133 0.05706 0.818047 Residual 7 59.51487 8.502124 Total 8 60         Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept 2009.769 1.371671 1465.197 1.82E-20 2006.525 2013.012 2006.525 2013.012 X Variable 1 0.05845 0.24469 0.238873 0.818047 -0.52015 0.63705 -0.52015 0.63705 RESIDUAL OUTPUT PROBABILITY OUTPUT Observation Predicted Y Residuals Percentile Y 1 2010.342 -4.34161 5.555556 2006 2 2009.956 -2.95584 16.66667 2007 3 2009.956 -1.95584 27.77778 2008 4 2009.465 -0.46486 38.88889 2009 5 2009.862 0.137682 50 2010 6 2010.073 0.927262 61.11111 2011 7 2010.172 1.827898 72.22222 2012 8 2010.02 2.979867 83.33333 2013 9 2010.155 3.845433 94.44444 2014 The R-square from the data generated by Excel above stands for how well the data fits the regression line. However, being 0.08992, it is a positive one. Hence, it means there are strong relations between the two variables; a year and the GDP growth rate. Anova: Single Factor SUMMARY Groups Count Sum Average Variance Column 1 9 18090 2010 7.5 Column 2 9 35.6 3.955556 17.75028 ANOVA Source of Variation SS Df MS F P-value F crit Between Groups 18108964 1 18108964 1434358 4.71E-41 4.493998 Within Groups 202.0022 16 12.62514 Total 18109166 17         The F-critical is 4.493 hence it is less than the p-value. It would lead to the conclusion that there is a significance relationship between the data sets. Summary and Conclusions The United Arab Emirates has put in place the expansionary monetary policy in conjunction with the Central Bank located in Dubai. However, the spell of economic prosperity in Dubai can be attributed to blossoming international trade and government expenditure. Foreigners invest in UAE hence increasing the Gross National Product (GDP). However, it is evident that GDP of a country, that is, UAE, depends on the monetary and other related policies that the banks together with the central bank of such a country initiate. Based on the analyzed data of monetary policy, it can be seen that there is an increase in monetary policy implementations from the year 2006 to 2014. Such a constant increase is an indication of the zeal of the government to attain short-term and long-term macroeconomic goals such as price stability, dwindling inflation, achieving full employment and also economic freedom. There are fluctuations in some sectors in UAE economy that can be attributed to inconsistency in the economic policies, such as monetary and fiscal policies. Finally, it is evident from the data derived from various websites that the economic policy; monetary and fiscal policies impact on the economic growth of United Arab Emirates. References Abdih, Y., Lopez-Murphy, P., Roitman, A., & Sahay, R. (2010). The Cyclicality of Fiscal Policy in the Middle East and Central Asia: Is the Current Crisis Different? IMF Working Papers, 1-26. Al-Tamimi, H. A. H. (2006). Factors influencing individual investor behavior: an empirical study of the UAE financial markets. The Business Review, 5(2), 225-233. Al-Qahtani, A. K. (2005). The development of accounting regulation in the GCC: Western hegemony or recognition of peculiarity? Managerial Auditing Journal, 20(3), 217-226. Darrat, A. F., & Al-Sowaidi, S. S. (2009). Financial progress and the stability of long-run money demand: Implications for the conduct of monetary policy in emerging economies. Review of Financial Economics, 18(3), 124-131. Starr, M. A. (2004). Monetary Policy in Post-Conflict Countries: Restoring Credibility. Read More