Macroeconomic Analysis of the United Arab Emirates Economy - Literature review Example

Macroeconomic Analysis of the United Arab Emirates Economy Executive summary The economy of UAE is made up of various macroeconomic indicators which play a role in financial stability of the state. The economy of IAE has been evident with an increase of the GDP value which had already doubled compared to other years. The paper discusses a few among the many macroeconomics of the economy of UAE. It discusses the reasons behind unemployment in UAE and what it does on the economy of UAE. It also looks at the inflation rate of the country, the reason behind it and its effects on the economic growth of UAE. It also involves a discussion of the advantages and disadvantages of the already existing fiscal and monetary policies on the economy of UAE. Balance of payment of UAE and its effects on the exchange rates of foreign traders. The reforms of improving the economy of UAE are discussed along with their effectiveness on the economy. Introduction The economic growth of UAE has been steady but has been lagged behind by various issues such as unemployment and inflation rates. Unemployment is an issue in the United Arabs Emirates because many people are not employed. The reason behind unemployment in the UAE is the high population that cannot be met by the available works in the country. The major sectors of employment in the UAE are the oil industries, transportation and construction sectors. However, a majority of the country’s population is employed with around 30% not being employed. This includes women who are not allowed to work because of their religion. Only 11% of women in the UAE are employed and the rest 89% are not employed. Unemployment in the country has its negative effects to the economy of the country. A majority of unemployed people are likely to look up to rations of food and most of the money budgeted for development purposes may be distributed for the needy in the society. Unemployment can also increase crime and violence in the society because a majority of people would kill and steal to meet their basic needs. To reduce the high rates of unemployment, the government of UAE should encourage people to open up businesses for employment opportunities. The government should also encourage people to employ themselves in various ways by teaching them how to make money. The government should also create more job opportunities to fill the gap of unemployment (Abdulaziz, Sarah & Natasha, 2007). Looking at the inflation rate of the economy of the UAE, studies show that the rate is creepy (Gillman, Harris& Matyas, 2001). The inflation rate of the country was 6.2% in the year 2005. This was healthy for the economy of UAE because of the high economic expansion that it experienced that year. However, the inflation rate varied in various sectors because the inflation rate in the housing sector was 9.4% in 2005. The main contributor to increased inflation in UAE is Dubai because of the high costs of living that increased by 6.5 percent in 2005 (Judson & Orphanides, 2007). The inflation rates of the country are also influenced by the hiked prices of domestic products which cannot meet the budget set aside for the country’s economy. The purchasing power of money is lower in the domestic market. Much credit is also given to the private market which leads to large amounts of money supply from the UAE budget to other countries. The major effect of inflation in UAE is the degradation of the economy which may increase life in the country. To solve the problem of increased inflation rate, the credit given to private marketers should be limited to reduce the money supply so as to increase the power of money. The government of UAE should also come up with policies that would limit the hiking of domestic products (Khan and Senhadji, 2000). Monetary and Fiscal policies of UAE UAE has various monetary policies that have helped in the economic growth of the country. The monetary policies in UAE control the economy of the country and have the power to release the amount of money needed by the government depending on the conditions and standards set aside. Much of the success UAE is because of the banking systems it has and the monetary policies that have been enforced. One of the monetary policies in UAE is the interest rate which affirms that the linkage between UAE dirham-US dollar indicates that crude oil produced in the country is sold in terms of US dollars (IMF, 2006). It also adds that the rates of the domestic market are rated together with the interest rates of the US. In the monetary policies, the government of UAE has put clear policies that guide the conduction of private businesses. The policy states that the profits earned by the income of individuals and corporations are not directly taxed. However, this rule applies to all economic sectors excluding oil companies and foreign banks. According to the monetary policy of UAE, foreign businesses can move the profits and capital they earn while in the country to the home countries without any payment. The custom duties are low and are accompanied with liberal visa policies which allow the quick and convenient hiring of qualified migratory workers. Monetary policies also play a role in controlling inflation rates, unemployment, investments, productivity and international trade (Ibrahim, 2011). The policy also allows external auditing and assessment to be done on the banks of UAE to verify the practices and standards applied. The body that conducts this assessment is the International Monetary Fund (IMF). Although the IMF stated that the monetary policy of UAE is transparent, the policy has its own weaknesses (IMF, 2012). The policy does not give a public disclosure of the ways in which the annual net profits are arrived at. The reporting methods of the policy are not clear especially when it comes to the operations and decisions made in banks. If the monetary policy is not controlled in the future when the economy of UAE will be mature, things may get out of hand and a lot of money may be lost. Fiscal policies UAE has a fiscal policy that is concerned with the growth of the country’s GDP. The country’s fiscal policy is also aimed at reducing the rate of unemployment, increasing economic growth and stabilizing the prices of products. There are two major fiscal policies that the UAE government is using; the hands-on and the hands-off fiscal policy. The hands-on policy is applied in the country by not allowing private investors to take the lead in business activities the government has ensured that public firms or firms under the government take lead in the market share of the country to ensure that the economic growth of the country is sustained (Ghali & Al-Shams 2009). The economy of every sector has been merged with the state government. The fiscal policy of UAE gives food products a priority before other discretionary products. Due to this, a high rate of consumption is created which open doors for more investments and employment opportunities. The fiscal policy also has a multiplier factor which enables the widening and expansion of businesses in UEA whenever there is a need or opportunity in the market. One of the disadvantages of the fiscal policy is the multiplier effect that it has. The unlimited opportunities of business expansion may lead to inflation. This occurs when the business activities are as high as the demands of consumers. In UAE, the fiscal policy charges high rates for corporations and low rates for government bonds. Due to this, the private sector may be flooded with investments which can lead to the high living standards and thus a low economy. This may also slow down the economic growth rate of the nation. UAE Balance of Payment A balance of payment is the record kept for all the dealings that take place between one and more countries. The report shows the distinction between the value of exports and imports made in a country. It also shows the fiscal transactions of trade of goods and services in form of dollars. The report also includes a trade balance, investments made by foreigners in a country and the foreign investments made by the country to other countries. Balance of payment (BOP) involves international trade and is calculated after a period of one year. Every state has its own policies governing BOP and how it is done. A BOP affects exchange rates either positively or negatively depending on the level of imports and exports. The more a country makes exports the higher its exchange rates. If a country makes many imports, the exchange rate is lowered. The BOP also determines the financial condition of a country. UAEs economy is mostly controlled by construction, tourism, the oil industry and real estates. For a country with a diverse economy, three major accounts need to be addressed. The accounts include: the current account, the capital account and the financial account. The current account keeps track of all the assets that UAE has. In 2004, UAE had a balance of -9 billion. The capital account deals with all the transactions of capital items such as electricity, medical bills and machinery. The financial account on the other hand takes care of the bonds and stocks of trade transactions. The BOP of UAE in 2009 was reported to be 22.9% which was a slight increase from the previous year. This led to the increase of exchange rates because UAE was having more imports than exports. The large percentage of imports reduces the power of the country’s money and increases the money power of the correspondent trading country. UAE manages its foreign debts by signing trade treaties or contracts with the foreigners. With a contract, UAE is given a certain period of time to complete the debts in foreign countries. Sometimes the debt is managed by making imports from the countries they are indebted to. Additionally, a financial budget is made and the payment of foreign debt is allocated a slot (Levene & Renelt, 2011). Economic reforms One of the major reforms that were put in place in 2009 so as to improve the economic growth of UAE is the reduction of dependence on the oil industry. The oil industry is the major income making sector in UAE and is mostly dependent on by the government in terms of employment and exports. However in 2009, the government made reforms of coming up with other ways of improving its economy. Tourism is one of the areas of the business sector that have been advanced in the country and has been a many money maker in the country. The tourism sector has positively influenced the economic growth of the country. Real estate’s have also been a project that has taken part in the growth of UAEs economy. The diversity of income generating activities has been a major reform that has helped in growing the economy of the nation. Another reform made five years ago is the reduction of the rate of unemployment by increasing businesses in the area. This has been effective in the nation because Dubai has been a major employer thousands of people. The expansion of the construction industry has been effective in helping the growth of the economy by increasing employment opportunities and also increasing the income and profits made by UAE. Conclusion From the discussion above, we have seen the macroeconomic factors that influence the growth of economy of a nation. The fiscal and monetary policies of UAE should be revised and changes made to them. This is due to the weaknesses they seem to have and if they are not corrected early enough, they may negatively affect the growth of the economy. Every element of economics either directly or indirectly affects the financial status of a nation. Bibliography Abdulaziz, I., Sarah. H & Natasha H., 2007. Macroeconomics Report Series: UAE Macroeconomic Report. Dubai: Data management & Business research Department publishers. Ghali H. & Al-Shams, F. 2009. Fiscal policy and economic growth: A study relating to the United Arab Emirates. Journal of international economics, 50(4): 519-533. Gillman M., Harris. M & Matyas L., 2001. Inflation and growth: some theory and evidence. CEU-Economics working paper No. 1, Budapest. Ibrahim A., 2011. The UAE Dirham, currency politics and monetary policy. [Online] (Updated January 6, 2011) Available at http://imranwritesblogspot.com/2011/01/uaw-dirham-currency-politics-and.html [Accessed June 10, 2014] International Monetary Fund (IMF) 2012. 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