UAEs Government Structure, Internal Growth and the Opportunities of Import and Export - Case Study Example

 Content 1.0 Executive Summary 01 2.0 Country Overview 01 2.1 Historical Over View 02 2.2 Geographic & Demographic Overview 03 2.3 Government / Political Structure Overview 03 2.4 Economic Strategies and Country Reforms 04 3.0 UAE’s Path to Globalization 04 4.0 Exports of UAE 05 5.0 Imports to UAE 05 5.1 Trade Balance 06 6.0 Direction of Trade 06 7.0 Balance of Payments 06 8.0 Foreign Direct Investment in UAE 07 9.0 UAE and its GDP 08 10.0 UAE’s change in Trade Policy 10 11.0 Conclusion 11 Bibliography 13 1.0 Executive Summary This is a detailed analysis about United Arab Emirates (UAE) which is located in South East of the Arabian Peninsula in the South West Asia. The purpose of this report is to analyse how UAE has been progressing in terms of trade with other countries, their government structure, their internal growth and the opportunities of import and export related to UAE. We will highlight their economic behaviour and how they have changed their policies in last few decades to be where they are today. Also the demographic and geographic location will be discussed as that also helps in the development of any country. Then we’ll also look at the government structure of UAE and how they encourage foreign policies. The trade index of UAE and their financial standings will also be looked at in this report. Furthermore their GDP of 23% and growth rate will be discussed to see exactly how stable the economy of UAE is. It was seen that the abundance of crude oil and natural gas reserves, their free port zones and the sudden construction boom in UAE are the main reasons for their economic progress and financial growth. We will also look at the imports and exports of UAE and discuss how they’ve been encouraging foreign direct investments. With GDP of $54,607 / capita at minimum as per IMF, UAE is among the top 20 growing economies in the world. 2.0 Country Overview As per the estimate of 2009, UAE has the population of around 6 million which makes it the 120th largest country by population and its area is 32,278 sq mile which makes it 116th largest country by area. The population can be further discussed by the following chart Emirati 19% Other Arabs 15% Iranian 8% South Asians 50% Westerners & East Asians 8% UAE is an Arab country with the national language as Arabic, currency as Dirham, National animal is Arabian horse, National flower is Tribulus Omanese, National Bird is Peregrine Falcon, National tree is Ghaf Trees, Sport is Camel Race Drink is Camel Milk, and national Dress is Khandura 2.1 Historical Overview United Arab Emirates has a history from 5500 BC from the times of Neolithic. In 630 the arrivals of Islamic envoys started and Ridda war was fought here when the Non-Muslims were defeated and this area went under Muslim rule. UAE went in Portuguese control in the 16th century when Portuguese started their expansion in the Indian Ocean and they ruled this area for about 150 years. Later this area got famous with the name of “Pirate Coast” from the 17th to 19th Century as it was under Ottoman Empire. British started their expeditions in order to protect their trade of India from the raiders at Ras Al-Khaimah. That further led to British taking control of all of this area. United Arab Emirates got its independence from United Kingdom on 02 December, 1971. It was the efforts of Sheikh Zayed bin Sultan Al Nahyan who at that time was ruler of Abu Dhabi who urged all the Sheikhs of UAE to gather under one umbrella and took a stand against the British Empire. 2.2 Geographic & Demographic Overview United Arab Emirates is situated in South West of Asia. It is between Saudia Arabia and Oman at the Gulf of Oman and Persian Gulf. UAE is a very important transit hub for crude oil. There are seven states called emirates, named Dubai, Sharjah, Ajman, Abu Dhabi, Ras Al-Khaimah, Umm Al-Quwain and Fujairah. The capital emirate of UAE is Abu Dhabi which is also the second largest city of UAE after Dubai. The smallest Emirate is Ras Al-Khaymah. There are people from all parts of world living in UAE, mostly people from India, Pakistan, Bangladesh, China, Philippines, Thailand & Iran are living in UAE which are more in number than the Emirati people of UAE. The coast of UAE is more than 650 kilometres which is along with Persian Gulf. The largest harbour is of Dubai along with other ports in Abu Dhabi, Sharjah and Ajman. UAE has a hot & dry climate in general. There has been snowfall recorded in the mountain of Jebel Jais near Ras al-Khaimah since the recorded history. 2.3 Government / Political Structure Overview UAE has the framework of presidential elective monarchy. The President is the head of state and the prime minister is head of government. There are three parts of the government namely executive, legislature and judiciary. Executive branch has president, vice president, prime minister and the cabinet. The emir of Abu Dhabi is the president and the emir of Dubai is the prime minister. Sheikh Zayed bin Sultan Al Nahyan was first president of UAE from the time of its independence from British in 1971 till his death on November 02, 2004. Right after his death, his son Sheikh Khalifa bin Zayed Al Nahyan was elected as the president of UAE. The Federal National Council is the legislature which consists of 40 members drawn from all the Emirates. Unlike other Arab countries, UAE has liberal laws as compared to rest of Arab world. They have a civil judiciary system however Islamic laws are applied for family law, issues of inheritance and certain criminal laws. 2.4 Economic Strategies and Country Reforms United Arab Emirates stands among the world’s most developed countries based on a range of indicators such as energy consumption, GDP & HDI. As per CIA world factbook, the GDP of UAE is currently the 14th in the world and after Qatar and Kuwait; it is the 3rd in the Middle East however as per IMF it is 17th in the world at $168 Billion. All the various estimated indicators point at one thing. According to a recent report by Ministry of Finance and Industry, UAE at present is among the fasted growing economies of world with real GDP rose by 35% in 2006 to $175 billion compared to $130 in 2005. United Arab Emirates is getting less dependent on natural resources for revenue generation but still export of petroleum and natural gas has a key role in the economy. With the recent study of 2008, GDP of UAE was recorded as 7.4% 3.0 UAE’s Path to Globalization UAE is a comparatively small area with relatively smaller population. With the help of globalization, oil & gas reserves of UAE became available to the world resulting in a poor desert area of UAE to turn into one of the richest countries in the world. There has been a sudden construction roar in UAE in the recent years and a lot of Mega Projects are under construction in this region. Projects like Burj Dubai which is stated to become World’s tallest building, Dubai World Central International Airport will be the world’s most expensive airport built ever. Largest artificial Islands of the world called Palm Tree Island, World Largest shopping Mall known as Dubai Mall, and a theme park twice the size of Disney Land will be called Dubailand. Now not only UAE is dependent on natural resources. Real Estate sale and purchase is also playing a vital role in the economy. 4.0 Exports of UAE UAE is a large exporter of natural resources such as crude petroleum and natural gas. But there are other items as well which include dried fish and dates. And these exports are to the countries like Japan (25.8%), South Korea (9.6%), Thailand (5.9%) and India (4.5%) and 45% is oil exported to rest of the world. 5.0 Imports to UAE UAE is an importer of machinery and transportation equipment, chemicals and food. Imports of UAE for last year were around $101.6 billion. Leading Importing countries into the UAE are United States (11.5%), China (11%), India (9.8%), Germany (6.2%), Japan (5.8%), United Kingdom (5.5%), France (4.1%) and Italy (4%) 5.1 Trade Balance The Central Bank data indicates that for two consecutive years, the trade balance is surplus, which reached Dh 11.6 Billion in 1998 as compared to Dh 27.2 Billion in 1997. (-57%) the decline was due to the decrease in oil exports but after that time it started growing due to the construction boom as well as the establishment of free port helped in great deal. In 2008, the trade balance was around Dh 236.15 Billion. There is a significant growth after 2002 which is the time when the entire construction boom in UAE took place. From 1998 to 2008 the trade balance increased from Dh 11.6 billion to Dh 236.15 Billion in last 10 years.(Data – Central Bank of UAE) 6.0 Direction of Trade With the setup of free port in UAE, the re-exports are providing a great support to the economy of UAE. UAE is the third largest re-export centre of world after Hong Kong and Singapore. The re-export provides one third to the total trade of the country. There are 35 main countries which the re-export trade is done where Iran and India stand prominently among them. 7.0 Balance of Payments The statement of Balance of Payments (BOP) is used for the recording of the international transactions of a country in a given period of time. Oil & gas reserves have always provided UAE with a trade surplus for many years but recently prices widely fluctuated as a result of the sudden increase in the crude oil prices. The three main part of Balance of payments as per International Monitory Fund (IMF) are Current Account, Capital Account and Financial Account. (McRae D, UAE Balance of Payments) Current Account is the net charge in current assets from the trade in goods & services. As per UAE Central Bank, net foreign assets in 2004 were around -9.0 billion dirham balance. Now UAE is the fastest growing GDP but still they don’t have enough resources to fund all the projects and that is why UAE seeks help from other sources, such as foreign trade, money markets & currency markets. Capital Accounts are the international flows of transfer of payments relating to capital items. As per IMF reports, in 2004, imports of UAE for electric, medical, machinery and miscellaneous capital was around 79 million dirham. Exports in the same year were above 610 million dirham. Financial Account refers to stock & bonds trading, transactions in currency and bank deposits. In 2005, net direct investments were around 26.3 billion dirham as per IMF records. UAE has around 400 commercial banks with deposits of around 500,000 million dirham. (McRae D, UAE Balance of Payments) 8.0 Foreign Direct Investment in UAE After looking at the economic expansion process taking place with considerable pace in United Arab Emirates (UAE), now the main focus is on attracting foreign direct investment (FDI). Policymakers of UAE are of the opinion that the inflow of FDI as an index should be a big reason for the success of their international business administration. The FDI in UAE is controlled by this. It is considered that this procedure of economic incorporation leads to a customs union in 2003 in the Gulf Co-operation Council (GCC) countries which creates external pressures to supplement competitiveness. It is considered to be in interest of UAE to have this kind of pressure as it actually helps UAE to compete in international markets. This paper focuses to identify the importance of FDI in the UAE. The contents of this paper are identified as in best interest of conventional wisdom and earlier research studies; it is hoped that their importance is going to play a major role. (Anwar, A. Syed, J. for International Business and Entrepreneurship Development 2003 - Vol. 1, No.1 pp. 75 – 79) As per the World Bank database, FDI of UAE can be seen in the figure below UAE jumped to 8th poison in 2007 from 22nd position in 2005 in the Foreign Direct Investment confidence Index. Also now UAE stands on 4th number after India, China and Brazil with the increase of 29% in terms of investor optimism globally. UAE ranks among the top 10 countries for investments in service industry as well as primary & heavy manufacturing. UAE stands 5th among the Asian investors and 10th among the European investors; however it did not get in the top 15 countries for the interest of North American investors. (Walker M, UAE rises to 8 on A.T. Kearney FDI Conference Index, Gulf States debut at 17) 9.0 UAE and its GDP The Economy of UAE reached Dh 934 billion in 2008 with the increase of 23% from the previous year in 2007 which was around Dh 758 billion. The race was in both oil and non-oil sectors. Abu Dhabi & Dubai are the two leading emirates among the seven emirates of UAE and they hold around 87% of the total domestic product share. This made UAE the 2nd largest economy in Arab world after Saudia Arabia. This is all due to the increase of oil prices & heavy foreign investments in public sector (mostly real estate). This is recorded as the highest increase in the last 38 years history of UAE. Furthermore, oil sector still takes the largest share in the GDP accounting for around 345.8 billion dirham in 2008, then was the construction sector at almost 148.4 billion dirham followed by manufacturing sector at around 113.2 billion dirham. The growth was again highest in oil sector by 35.6% which was the result of the increase of prices of crude oil by 35%. The booming construction sector of 2007 and 2008 was recorded second at a growth rate of 26.1% while 18.7% was the growth in trade & repairing sector. It can further be explained by the following Oil sector 35.6% Construction 26.1% Trade & Repairing 18.7% Electricity and Water 17.4% Manufacturing Sector 17.2% Hotels & Restaurants 15.1% Social Services 14.9% Real Estate 14.3% 10.0 UAE’s change in Trade Policy The MFN (Most Favoured Nation Award) tariff rate of UAE was 5.1% in 2005, there are 420 tax-free zones covering mostly food and pharmaceuticals. Exemptions are of the CET spirits (50%), and tobacco (Around 100%). Except tobacco, all tariffs are ad valorem. On an average 6.2% MFN is applied on agricultural products (WTO definition), and on non-agricultural products 4.8% is applied. For manufacturing activities they apply 5.3% on average, mining and quarrying is charged at 5%, while 3.3% is for agriculture. The final average of 15% is calculated for all the tariffs of UAE. About 33 tariff lines carry MFN tariff rates at the HS eight-digit level which are expected to go beyond the final rate by April 2006. The export policy of UAE mostly relies on free zones for general goods, Most of the non-oil exports take place over there. A special exemption from the licensing agency is offered to these free zones (which were about 22 in late 2005) however other obligations, such as emiratization, and national majority-ownership may apply in the domestic economy. The UAE doesn’t need other guarantees of finance or insurance when dealing with exports under their promotion programmes. WTO is not informed of any other subsidies offered to the exporters. A lot of foreign partnerships in the public sector take place to bring technology accessible and other state-owned organizations have also progressed effectively in international markets. Foreign organizations play a very important role for the expansion of public sector in the UAE. major projects in particular are a result of these. UAE Offset groups (UOG) carry most of the defence purchase and these expansions are looked at on individual situation, however there are negotiations with the contractors to compensate the responsibility. (WTO Trade Policy Report, United Arab Emirates – 2006) 11.0 Conclusion UAE without a doubt stands among the most developed countries on the globe. With a very high GDP growth rate, less populated small area with very vast natural resources, free ports and a large number of investment opportunities available, UAE holds great investment for the foreign investors. The various trade policies of the country are also a sign of its growth and prosperity. Crude oil reserves of United Arab Emirates stand as sixth largest reserve of crude oil in world and it is one of the most developed economies in the Middle East. UAE dirham is the 36th largest currency of the world in all the major exchange rate markets which makes UAE one of the richest countries in the world. UAE is ranked at 31st country globally for human development and 14th largest country to purchase power per capita. All these factors combined together for UAE to be classified as high income developing economy by International Monitory Fund. Right now UAE has been working hard to build a strong infrastructure for the country. 37% of total projects in UAE are of construction in oil & gas, petrochemical, power and water sectors. Other than that a lot of huge investments are also being made for tourism, real estate and leisure. Government is also providing a lot of incentives for the development in the northern emirates for the developers of residential and commercial properties. By the year 2020 after the completion of Dubai World Central, will create another 900,000 jobs in the facility which will also include world’s largest Airport of that time Al-Makhtoum International Airport. The mobile phone subscribers in UAE are expected to reach 11.9 million by 2012 increasing from 9.2 million of 2008. Internet users are also expected to increase to 2.66 million in 2012 from a number of 1.15 million in 2008. Currently the projects under construction have a worth more than $350 Billion US Dollars, 80% of total imports of UAE are of machinery and transportation equipment. Abu Dhabi investment authority is a very important career of foreign exchange; they have $900 billion of total assets and around $360 billion in overseas investments for they control the investments of the wealthiest emirate. In Dubai free port there’s a 100% duty exemption for transhipment or re-export purposes. Other than the free trade zones, 51% of local citizen own all the local business as the result of the government trying to keep local Emiratis in the leadership positions. This law is however being reviewed and most probably the clause of local ownership will be removed to bring UAE under the regulations of World Trade Organisation. BIBLIOGRAPHY “United Arab Emirates”, Wikipedia Free Encyclopaedia, http://en.wikipedia.org/wiki/UAE “Effects of Globalization on United Arab Emirates Market”, essay-911.com, http://www.essay-911.com/samples/effect-globalization.htm Workman, D., “Top UAE Exports & Imports”, suite101.com, June 25th 2008, http://import-export.suite101.com/article.cfm/top_uae_exports_imports “Trade in UAE”, http://www.uae.gov.ae/Government/trade.htm “UAE Balance of Trade”, http://www.tradingeconomics.com/Economics/Balance-Of-Trade.aspx?Symbol=AED “United Arab Emirates – Balance of Payments”, Encyclopaedia of the Nations, http://www.nationsencyclopedia.com/Asia-and-Oceania/United-Arab-Emirates-BALANCE-OF-PAYMENTS.html McRae, D., “U.A.E., Balance of Payments”, International Business Wiki, http://internationalbusiness.wikia.com/wiki/U.A.E._Balance_of_Payments Anwar, A., S., “Determinants of Foreign Direct Investment in UAE.” J. for International Business and Entrepreneurship Development 2003 - Vol. 1, No.1  pp. 75 – 79, http://www.inderscience.com/search/index.php?action=record&rec_id=7811&prevQuery=&ps=10&m=or “UAE: vital statistics”, FDI Magazine, August 04, 2003, http://www.fdimagazine.com/news/fullstory.php/aid/362/UAE:_vital_statistics.html Sharif, A., “Foreign Direct Investment in UAE hits $18b”, Gulf News, February 28, 2006, http://gulfnews.com/business/investment/foreign-direct-investment-in-uae-hits-18b-1.226972 “United Arab Emirates”, http://www.fdi.net/country/sub_index.cfm?countrynum=204 Walker, M., “UAE rises to 8 on A.T. Kearney FDI Confidence Index, Gulf states debut at 17”, December 11, 2007. http://www.ameinfo.com/141552.html “UAE GDP soars 23% to Dh934 billion in 2008”, UAE Interact, July 28, 2009, http://uaeinteract.com/docs/UAE_GDP_soars_23_to_Dh934_billion_in_2008_/36962.htm WTO Trade Policy Report, United Arab Emirates – 2006 Sambidge, A., “UAE population hits 6m, Emiratis make up 16.5%”, Arabian Business, October 07, 2009, http://www.arabianbusiness.com/569648 Read More