UAE: Economic Analysis - Research Paper Example

Economics Table of Contents Table of Contents 2 Executive summary 3 Introduction 4 Budget Analysis 5 UAE strategic plan 11 Economic analysis 14 Fiscal Analysis 16 Labor Analysis 17 Conclusion and Recommendations 20 Oxford Business Group. The Report: Dubai 2008. London: Oxford Business Group, 2008. 22 Appendix 24 Executive summary UAE is one such nation that occupies a strategic position in the world economy. From 1960 onward, UAE had started exporting oil to different parts of the world and from there onwards a new era was scripted. However, the government has been trying hard to diversify the economy in different sectors like tourism and retail. At present oil and gas sector contributes to 25-35percent of the total GDP. The onset of recession was a major shock to UAE. Dubai was adversely affected by the recession because of its close links with real estate prices whereas Abu Dhabi suffered due to the fall in crude oil prices and also because of declining demand for crude oil in the developed countries like US and UK. The given project provides recommendation so as to improve the economic condition of UAE with the help of vital economic indicators like real GDP, inflation, balance of current account, trade account, population, unemployment, etc. To have a better insight, the government budgets for the last 5 years were analyzed. The performance of different industries such as finance & banking, oil & gas, tourism and trade was evaluated. Fiscal analysis was also conducted to understand the manner in which the government is assisting these vital sectors to boost the economy of UAE. Finally, on the basis of the analysis, the future economic condition of UAE was forecasted. Introduction The United Arab Emirates (UAE), a federation of seven Arab emirates is one of the richest oil reserves in the world. It is situated in southeast of Arabian Peninsula in the Southeast Asia. Oman and Saudi Arab are its neighboring country. The UAE includes seven emirates countries; they are Dubai, Abu Dhabi, Sharjah, Ajman, Ras al-Khaimah, Fujairah and Umm al-Quwain. The Abu Dhabi is the largest emirates state followed by Dubai. The total area of UAE is around 82,880 sq. km. and the Abu-Dhabi is the capital and the largest city (U.S. Department of State, “Profile”). The geographical location of Abu-Dhabi (along the coast) proved to be its greatest advantage with traders visiting this place since time immemorial. During the sixteenth century, the Portuguese started trading and established a strong hold in this region. However the increase in trade also resulted in increased piracy that affected the trade and business of this region. Despite the potential threat, the place did not lose its charm as an attractive business destination and in the eighteenth century the British laid their foot on this land. The British were responsible for ending the piracy for which they received extra privilege from this region. Earlier, during nineteenth century, it was called Trucial states. Truce was an agreement signed between the British and the Arab Sheikhdoms in the mid nineteenth century. According to it, the British were given unlimited access over the Persian Gulf to control the shipping industry without any political interference. Eventually, the British started controlling the Trucial region. After the great depression of 1930’s, UAE decided to explore oil to alleviate the poverty. Initially, Abu-Dhabi, Dubai and Sharjah started exploring oil later Ajman, Ras al-Khaimah, Umm al-Qaiwain joined the queue. This scripted the success story of the economy of UAE. “Change was happening quickly throughout the entire Middle East in the 1950s and 1960s. In addition to the economic boom beginning in the UAE, pan-Arabism- a movement for greater cooperation among Arab or Islamic nation- was flourishing” (Romano. 42). In 1971, the agreement between the British and the Arab Sheikhdoms ended and British lost its power over the UAE. With the expiry of the British-Trucial Sheikhdoms on 1 December, all seven became fully independent. On 2 December 1971 six of them joined to form a union called the United Arab Emirates. Ras al Khaimah was the seventh to join the union in early 1972 (Terterov. 6). After UAE got their independence, the Federation of Emirates formed provisional constitution and currently it is the only governing body of UAE. The seven members ‘Supreme Council of Rulers’ elects the president and the vice president. Though it is not a democratic country yet it is politically very stable. There are four levels of governing bodies that take care of each Emirate. These are High Council, Federal National Council, President and Local Emirs. The official religion is Islam and the language is Arabic. Economically it is a very rich and stable country as it is the seventh largest oil preserver. The country earns huge profit through export of natural gas and oil in the many foreign countries. Climatic conditions are not very favorable for agriculture but it compensated by the flourishing trade. Dirham (AED) is the currency of this country. Budget Analysis After Saudi Arabia, United Arab Emirates (UAE) is the second largest economy in the Middle East. UAE has the seventh largest oil reserve and it is the major exporter of oil and natural gas. The entire economy relies heavily on oil and nature gas and it is expected to make more money out of it in near future. It contributes to almost one third of GDP, over two thirds of exports, and a large part of government revenue (Australian Government, Department of Foreign Affairs and Trade, “United Arab Emirates country brief”). Abu-Dhabi is the major player among all Emirates that contributes to nearly 93% of UAE’s total output. It has further diversified its trading and industrialization and has now become a leading trading entry point to the Gulf and the Middle East (Australian Government, Austrade, “Economic climate”). UAE economy is mainly dependent on export trade and other sectors including agriculture in not much developed. The economy of UAE enjoys a strong position as their balance of payment projects a positive report. Figure 1 shows that from 2004 till 2008, UAE’s current account balance was in surplus. However after the global melt down of 2008, UAE’s current balance account fell and in 2009 its deficit became -3.1. Figure 1 (Source: International Monetary Fund, World Economic Outlook. 175) Figure 2 represents its trade balance in billions of U.S. dollars. It is seen that from 2004 till 2008 it had an upward trend but there is nearly 60% fall in its trade balance in 2009. The main importing countries of UAE were undergoing depression during recession as a result of which the export was adversely affected. In 2010, it is expected to show increased trade balance as the world economy is likely to recuperate. Figure 2 (Source: International Monetary Fund, 32) Figure 3 shows the total revenue of the country from the consolidated government finances. The economy has earned high revenues since 2005 and has grown at a very high rate but the sudden fall of market in 2009 has reduced its revenue income. Figure 4 reveals its consolidated overall balance after adjusting the total expenses and it shows a huge decrease. However, 2010 projection is indicating a decent recovery. Figure 3 (Source: International Monetary Fund, 33) Figure 4 (Source: International Monetary Fund, 33) Figure 5 and 6 portrays the real GDP and per capita income. Both of them are having the same trend line where in 2006 it reached its zenith. After 2008, it fell dramatically and now it is showing a negative growth. Figure 5 Figure 6 (Source: CIA, “United Arab Emirates”) Figure 7 is displaying the inflation rate for the last 5 years. The infation rate was quite high during 2007 and 2008 but in 2009 it became quite stable. After recession, the low inflation rate is an assuring sign. Figure 7 (Source: International Monetary Fund, 33) UAE strategic plan The strategic plan of a country reflects the vision of the nation i.e. what the nation desires to achieve in the coming future. Before making a forecast for UAE, it is quite important to analyze the strategic plans of UAE from the next few years. On 20th May 2008, Department of Finance (DoF) presented the strategic plan for 2008-2012. This 5 year plan introduced revived strategies to leverage the resources in private and public sector. The main message in the plan was strategic use of efficient utilization of financial resources to introduce advanced technology and best international practices for future growth of Abu Dhabi. In the plan it was mentioned that public-private partnerships (PPP) will be targeted for value addition of the wealth of the society. Some of the vital components of the plan are discussed below: Implementation of latest technology for efficient allocation of financial technology. Enhancing the skills of the employees in the Department of Finance. Introducing world class financial and accounting system. Demonstrating a fiscal policy to the government of UAE regarding proactive participation to ensure financial stability of the country. Aligning the strategy as per financial planning and budgeting. (UAE Interact, “DoF unveils Strategic Plan for 2008-2012”). The UAE government strategy 2008-2010 was introduced for achieving sustainable and balanced development, for providing the best possible standards of living to the nationals of UAE and finally for developing a federal government mechanism that enhances the performance level in all the sectors of federal entities. With the help of these strategies, the government of UAE plans to become the leader in the field of public administration as well as government services among all the Arab nations (U.A.E. Cabinet, “General objectives of the UAE Federal Strategy”). The strategy plan 2008-2010 provided by the government of UAE is based on certain principles; few of the principles are discussed below: There must be continuous cooperation between the local authorities and the federal government. Activating organizational aspects, defining policies for ministers and improving the decision making process. Increasing the efficiency of different government bodies and simultaneously improving the customer service standards. Development of civil service regulations as well as human resource policy to enhance competency level and leadership style. Empowering the ministers so that they can take decisions on the basis of public as well as joint policies. Constant revision and improvement of legislation and the resultant regulations. (U.A.E. Cabinet, “General principles of the UAE Federal Strategy”) For planned development of Dubai, “Dubai Strategic Plan 2015” was launched which presents the views of the government for upcoming future. This plan can be segregated into certain specific parts; some of them are discussed below: Economic development: Through free market principles, speedy project execution and unique relation in private and public sector. Social development: By preserving the national and cultural identity, by developing proper human resource and promoting social justice and equality. Security, Justice & safety: By ensuring equality for all. It should also guarantee security, stability and protection of human rights. Infrastructure, Land & Environment: Introduction of world class infrastructure that suits the requirements of the users and preservation of environment as per international standards. Public sector excellence: By maintaining higher degree of transparency, higher financial efficiency, excellent customer service and competence in federal framework (UAE, p.12-13). Economic analysis Export of oil and gas were the major components in the GDP of UAE from many years, but the government is attempting to diversify its oil based economy. At present oil and gas contributes approximately to 25% in the GDP of UAE. To attract foreign investors, UAE offers 100% foreign ownership as well as zero tax structure. During the recent economic crisis, sharp fall in oil prices and deflation in the asset prices had adversely affected the GDP of the country and it dropped to 4%. The government took many precautionary steps to reduce the effect of recession. The government of UAE injected liquidity in the banking sector and increased public spending. Dubai suffered more than other parts of UAE because of high exposure to real estate prices (CIA, “Economy – overview”). To have a better insight of government’s participation in uplifting the different sectors, the performance of these sectors were analyzed. Oil & gas industry: UAE ranks 8th in oil production (3,046,000bbl/day), whereas in terms of oil consumption UAE holds the 33th rank (463,000bbl/day). At present it is the 3rd largest exporter of oil and it exports 2.7 million bbl/day to many developed as well as developing nations. The country also has a healthy reserve of natural gas. UAE ranks 18th with 50.24 billion cu m gas production and on the same side it ranks 13th in terms of oil consumption (59.42 billion cu m). Due to high dependency on natural gas as source of energy, the export of natural gas is lower than its import (CIA, “Economy – overview”). The government of UAE has increased public spending in oil sector in the new budget, since in 2009 this sector performed quite well. The total revenue in 2009 was expected to be more than Dhs138bn, 4% more than the last year (2008). In 2009, the total government spending was Dhs135bn which was 11% more than what the government invested in 2008 (AME, “2009 budget reaffirms Dubais commitment to sectors facing challenges amid global constraints”). It can be expected that in the coming years the government might not further increase its expenditure in oil sector because the US economy is recovering at a slow rate and many European nations are under the fear of double dip recession. Tourism industry: In 2009 budget, UAE government allocated Dhs5.311bn that is 14% of the total government spending in the economic and service sector that comprises tourism, civil aviation and emergency aids. In the past the tourism industry in UAE was performing quite well, but the effect of recession was clearly visible in 2009. The harsh impact of recession has delayed a $64bn project. However the government has plans to speed up these projects as soon as possible. As soon as the economic condition revives in developed nations, the tourism industry is also expected to follow the suit (AME-a, “Dubai tourism faces challenges in 2009”). Ports & Trade: In the budget 2009, the government of UAE has allotted 45% of the budget that is Dhs17.054bn for port authority, roads and transportation. Infrastructure is an important part of economic development of the nation, so the government is paying extra attention to that sector. In 2009, the export declined by 4.2% and import was low by 3% as compared to y-o-y. It is expected that trade will increase by 8.1% in the coming years. Hence government is spending heavily on infrastructure development. Financial sector: The UAE government made heavy investments to insert liquidity in the bank; hence at present the banking sector of UAE is highly leveraged (Report Linker, “United Arab Emirates Shipping Report Q3 2009”). In the government strategy it has been clearly mentioned that government is making investment for upgrading the financial sector by introducing more sophisticated technology in this sector. Fiscal Analysis The future demand for infrastructure in UAE is expected to increase since the nation is trying to focus its attention towards investment rather than merely depending upon oil and natural gas as its sources of revenue. As per the latest data, the nation has poured in US$ 1 trillion in infrastructure, to be completely available from 2030. UAE is one of the largest oil producing nations in the world, but the truth is that even the domestic authorities are worried about the fast deterioration of its oil reserves. In the past, much of the nation’s export revenues had been accounted for crude oil products, with export revenues comprising of a significant proportion of the national income. But, the nation is more attentive towards improving its infrastructural position to attract external investors and convert the nation into a business and tourism hub (Singh, 2010). However, one possible problem in this case is that the national authorities in order to finance its infrastructural attempts have turned towards short term external debts which they mean to repay soon after the nation develops a strong business arena. This is the reason why the national administration has focused its attention towards factors other than oil in its fiscal policy measures. The recent global financial meltdown has diminished the aggregate demand for oil in various Western nations which otherwise had been the largest oil exporters from UAE. This has compelled the nation of UAE to shift its focus from oil processing techniques and promoting its other non-oil businesses instead. The nation has even implemented free trade and tax relief benefits for the investors in order to attract them (Oxford Business Group, 2007). Labor Analysis UAE is a developed economy and as the job opportunity is quite high, many migrants have settled here. Currently its population including the settled migrants is nearly 4,975,593 (CIA, “Population”). Though initially it was not so high but migration from Pakistan, India, Arab etc has resulted in increased population. Figure 8 is representing the past and projected population of UAE. There has been a constant increase in the population growth over the years and it will keep increasing at same rate in future till 2020. Figure 8 The unemployment rate in 2004 was too high but with increasing job opportunity the unemployment rate has decreased significantly. Dubai and Abu-Dhabi are the prominent cities where job opportunities are abundant and most of the migrants are settled there. Figure 9 According to the CIA, people belonging to the age group of 15-64 years cover 78.7% of the total population and 73.9% of this age group are non-national population. Most of these groups are working people from different parts of world, mostly from South Asian countries. UAE receives maximum number of migrants every year. Out of 1000 population nearly 21.71 are migrants. The country’s population comprises mostly of Muslims. Around 96% are Muslims and rests of 4% include Christian and Hindu. Apart from Arabic which is the official languages; English, Hindi, Persian and Urdu are also spoken. Most of the UAE has been urbanized and 78% of the total population resides in the urban areas. The male to female ratio is quite high; for every 2.2 men there is a woman. However, the literacy rate among women is quite high as compared to males. 76.1% of total male are literate whereas 80.7% of total female are literate. In UAE, most of the employees are engaged in oil and natural gas trade. As the country is a major exporter of oil and gas it requires huge labor force. Apart from this import and export business, tourism and hostility sector also offer large opportunities for employment. Conclusion and Recommendations The paper aimed at discussing the gradual shift in the nation’s strategy from oil and gas towards infrastructure so as to ensure a stable economic growth as well as to guarantee a constant supply of employment opportunities. The quality of the paper could however be improved or rather enhanced, had there been any further analysis about the expectations from the government activities based on expert opinion. Nonetheless, the purpose of the paper could be claimed as one which is attained given the robust conclusion being drawn about the turnaround of the economy of UAE from its traditional oil business. Reference AME. 2009 budget reaffirms Dubais commitment to sectors facing challenges amid global constraints. January 11, 2009. May 26, 2010. . AME-a. Dubai tourism faces challenges in 2009. January 05, 2009. May 26, 2010 . Australian Government, Austrade. United Arab Emirates profile. 17 Jun 2009. 26 May 2010. . Australian Government, Department of Foreign Affairs and Trade. United Arab Emirates country brief. February 2010. 26 May 2010. . CIA. United Arab Emirates. The World Fact Book. No date. May 26, 2010 . International Monetary Fund. World Economic Outlook. April 2010. May 26, 2010. . Oxford Business Group. The Report: Dubai 2008. London: Oxford Business Group, 2008. Report Linker. United Arab Emirates Shipping Report Q3 2009. July 2009. May 26, 2010 . Romano, A. A Historical Atlas of the United Arab Emirates. The Rosen Publishing Group, 2004. Singh, T. Abu Dhabi - top GCC infrastructure spender. February 11, 2010. May 26, 2010 Terterov, M. Doing Business with the United Arab Emirates. 2nd ed. GMB Publishing Ltd, 2006. U.A.E. Cabinet. General objectives of the UAE Federal Strategy. No date. May 26, 2010 . UAE. Highlights Dubai Strategic Plan (2015). No date. May 26, 2010 . UAE Interact. DoF unveils Strategic Plan for 2008-2012. May 20, 2008. Today’s News Stories. May 26, 2010 . U.S. Department of State. Background Note: United Arab Emirates. June 22, 2007. 23 May 2006. . Appendix (Source: International Monetary Fund, p.6) (Source: International Monetary Fund, p.10) (Source: International Monetary Fund, p.10) (Source: International Monetary Fund, p.10) (Source: International Monetary Fund, p.20) Read More