Analysis of the Balance of Payment for One GCC Country - Literature review Example

Analysis of the Balance of Payment for One GCC Country Executive Summary The prime intent of this essay was to analyse the concept of balance of payments in relation to one Gulf Cooperation Council (GCC) nations, i.e. United Arab Emirates (UAE). While analysing the above stated aspect, discussion was focused on import and export operations conducted by the selected GCC nation. As the study revealed, the UAE, which is regarded as one of the fast developing nations of the world, has attained proper balance of payments with the assistance of its exports, imports and capital markets. The study findings also suggested that it was primarily owing to the prevalence of flexible laws and infrastructure, the commercial trade activities performed by the nation have been enhanced to a considerable extent. Table of Contents Executive Summary 2 A Brief Understanding about Balance of Payment 5 Capital Account Balance of the UAE 6 Exports of UAE by Region 7 Imports of UAE by Region 8 Overview of the Policy of the Government to Promote Exports 9 Protectionist Trade Policy in the UAE 10 Development Programs for Export 10 Substitutes for Imports 11 Policies to Increase FDI 11 Conclusion 12 Recommendations 12 References 14 Appendices 16 Appendix 1: GDP of the UAE 16 Appendix 2: Balance of Trade of the UAE 16 Appendix 3: Current Account of the UAE 17 Introduction Development of economies is one of the prime objectives for the governments of the respective countries in this present day scenario. There are various key factors based on which, the development of a particular nation can be determined. This could be in the form of greater economic development along with growth, cross-border trade and infrastructural development among others. More importantly, the above discussed factors also determine the actual positioning of a particular country in the global world (Arize, 2000). In this regard, one of such factors, i.e. balance of payment (BoP), has been taken into account for discussion. This particular indicator takes into consideration almost all sorts of transactions that take place between two individuals belonging to two separate nations. These transactions mainly occur in two forms of accounts, i.e. the current account and capital account. Transferring gifts amid two individuals in two different nations is also considered as an important facet of balance of payment, which holds considerable value for international accounts and trades (Arize, 2000). In this particular essay, focus will be on understanding the conceptual framework of balance of payment with respect to UAE. The country is fundamentally viewed as one of the fastest developing nations in terms of GDP. The GDP of the nation in 2013 was around 383.8, i.e. one of the highest when compared to other nations of the world. Notably, is extensively involved in export and import of goods those include petroleum, oil, gold, cars and others (Trading Economics, 2015). A Brief Understanding about Balance of Payment Various factors influence the development of UAE in the global domain wherein the concept of balance of payment is considered one of such factors, which cover almost every trade aspect to measure economic performances. Economic development has been one of the prime concerns for the nations in the present day scenario owing to the aspect that it directly impacts their wellbeing. In this context, it can be determined that balance of payment has made significant contributions with regards to the development of economic structure of any particular nation (Abed et. al., 2004). Apparently, the perception of balance of payment helps in enhancing the trading activities of a particular nation, which further strengthens the overall financial sector at large. It is in this context that the absence of proper balance within the financial sector may give rise to various problems such as lack of elevation in the trade sector. The need for ensuring proper balance of payment in a particular sector can also be judged from the notion that imbalances within the resource expenditure dimension might result in inadequate flow of capital (Abed & et. al., 2004). Theoretically, balance of payment intends to drive and control the transactions of a particular nation with other countries of the world. It mainly functions in three different arenas including Current Account, Financial Account and Foreign Direct Invest (FDI) among others. In current account balance of payment, transactions are evaluated based on the exchange of goods and services amid different nations in terms of trade and commercial business. However, it must be mentioned that the transactions recorded in terms of balance of payment for current accounts are assessed on monetary terms (Abed & et. al., 2004). Similarly, the concept of balance of payment is identified as involved in the sphere of financial accounting for controlling the transactions relating to securities. This has been one of the core phenomena of balance of payment in the present day scenario. However, at the root level, balance of payment principally intends to align the operations of exports conducted within the current account transactions of the nations and thus, helps in measuring economic effectiveness with greater insight (Abed & et. al., 2004). Capital Account Balance of the UAE UAE is one of the most developed nations of the world when its economic and infrastructural growths are taken into consideration. The country has experienced an ever developing growth rate owing to its rapid advancement towards using innovative technologies and establishing attractive infrastructure. The inflow of Foreign Direct Investment (FDI) is also quite apparent in the nation over the years, which further contributed towards its unprecedented development (Knoema, 2015). Notably, the transactions involved within the capital investment account have direct association with FDI inflow within the UAE. Drawing inference from the theoretical underpinnings related with balance of payment, the concept, for any particular country, including UAE, comprises short and long-term capital along with the earnings acquired from investments. Applying the same into evaluating UAE’s economic performances, it can be observed that the capital and financial accounts of UAE, in the year 2013, correspondingly amounted to nearly 10,487,950,987 AED, which is considerably less as compared to the figures in 2012. Export of oil to other nations has also been one of the prime reasons to its stable but steeply up-climbing performance. Notably, UAE was involved with the export of oil trade amounting to 1,390,630 AED for the year 2014. The overall balance of payment for the country as of 2014 was also accounted at around 500,000 AED million. A decline in the figures can be witnessed subsequently from the year 2013 within the nation (Knoema, 2015; Trading Economic, 2015). The FDI flow of the UAE in recent years has also significantly contributed towards making considerable growth with respect to balance of payment. It has been ascertained that FDI has made major contributions towards balancing the economy and the trade sector of the nation in an efficient manner. Justifiably, the nation experienced increased level of FDI in the last two years of operations i.e. 2012-2013. Subsequently, for the FYs 2012-2013, the FDI figure of the nation reached up to the level of 7,679, 9,602 and 10,488, which further depicts a constant rise in the volume of its trade and capital inflow. In terms of FDI, stock of the nation towards assuring proper balance of payment, the figures for the last two years i.e. 2012 and 2013 have been recorded as 24.8 and 6.6 respectively in terms of percentage (Banco Santander, 2015). This aspect further depicts the growth of the nation in this particular regard. Exports of UAE by Region Exports have been one of the most important operations of the UAE when concerning its economic policies to maintain a proper balance of payment in recent years. The company is regarded as one of the biggest exporters of oil and other products over the years in the worldwide market. Trade and exports have also been the other major arenas that contributed in developing the economy of the nation at large. It is thus perceived that the Gulf nations including the UAE are mainly associated with the operations of exporting oil products to others nations of the world. However, there are certain other products those have been involved within the trade operations of the nation (Observatory of Economic Complexity, n.d.). Notably, a few of the topmost export products of the country include crude oil, petroleum, gold, jewellery as well as petroleum among others. Exports of crude petroleum accounts for 46% of the trade products with the next best refined petroleum, which accounted nearly about 13% of the overall export trade of the nation. Correspondingly, the other export products including gold, jewellery and petroleum gas accounted for 9.2%, 3.5 % and 7.4 % respectively as for the year 2014. It will be vital to mention in this regard that Japan, India as well as China are amongst the regions wherein the above discussed products are being exported by UAE. Notably, countries such as Japan, India and China account for 24%, 21% and 5.9% of the overall exports of UAE respectively as for the year 2014. Hence, it can be affirmed that these nations involved in conducting trade have certainly influenced the overall balance of payment of the UAE since the past few years. It is strongly believed that with the increase in transactions within the export sector of the nations, positive impacts are likely to be witnessed within the overall balance of payment in the long run (Observatory of Economic Complexity, n.d.). Imports of UAE by Region Similar to that of export operations, the UAE is also widely known for conducting activities in importing products in bulks. The country imports several products to meet changing demands of its domestic market. In this context, a few of the most commonly imported products of the nation include cars, refined petroleum products, jewellery, gold as well as broadcasting materials among others (Observatory of Economic Complexity, n.d.). It has been further noted that jewellery accounts for maximum sales in the UAE with 11% of the overall exports, while for cars, the figure is around 5.2%. The import of broadcasting materials within the nation is also accounted at around 3.8%, which is quite impressive in nature. It will therefore be vital to mention that countries such as India, Japan and Germany are amongst the most admirable importers of the UAE. In this context, for the year 2014, Japan and Germany accounted for 18% and 7.1% of the overall import of the region (Observatory of Economic Complexity, n.d.). Hence, the contribution of these countries towards ensuring appropriate balance of payment in the UAE is quite apparent. Overview of the Policy of the Government to Promote Exports From the above analysis, it is apparent that exports of a nation play a decisive role towards ensuring utmost balance of payment in the present day scenario. With substantial increase in the flow of exports of a nation, a parity could be gained by UAE with regards to the inflow of foreign money. Correspondingly, for overall betterment of the economy and developing the other operational domains of the nations, it is crucial for the respective government of such countries to promote export within the commercial business sector, which is again observably aligned within the export policies of UAE. To be mentioned in this regard, the government of the nation ensures fewer restrictions and flexible policies in its export trade affairs, which is quite appreciative to boost capital inflow within the country. A better understanding in this context can be gained with the help of ascertaining the prevailing policies with regards to exports in the UAE (Sambidge, 2010). Protectionist Trade Policy in the UAE Protectionist policies are a set of approaches adopted by countries with the intention of restricting approaches of trade activities for the betterment of the community as a whole. It is worth mentioning that the trade minister of the country i.e. the UAE has sought for introducing better set of trade policies, which can promote the exports domain as per the desired level. In this circumstance, the foreign trade minister of the UAE inferred that in order to deal with the global economic downfall, countries must need to introduce as well as implement flexible trade policies so that better commercial business relation can be developed. Thus, promoting the exporting sector of the nation is deemed quite crucial as per the knowledge of the foreign trade minister of the UAE. Correspondingly, the minister proposed for introducing ‘multilateral trade rules’ amid the nations so that trade between countries can be enhanced in an efficient way. This particular aspect can further enhance the exports related operations of UAE with other nations, further ensuring proper balance of payments within the nation (Sambidge, 2010). Development Programs for Export Political interferences in UAE remained flexible with regard to its trade policies in the present day scenario. For instance, the country has been concentrated on implementing tax free trading strategies to encourage free flow of capital within the nation that has further acted as a major leap towards its better balance of payment performance. However, there exists the prevalence of indirect tax in the nation, which is but marginal, influencing only the exporting sector. UAE has also been involved in performing various activities that directly or indirectly resulted in the promotion of exports domain within the nation. Notably, in the year 2010, the government proposed promotion of exports with the help of the creation of an export bank, which will further control the overall trade of the nation. The government of the nation is however not advocating the prevalence of unfair financing to the exports with this particular approach; rather it is expecting to lift the limit of exports that were applicable previously during commercial export business (Arnold, 2010). Substitutes for Imports UAE is also witnessed to enhance its performances when concerning gold and jewellery exports to the Middle East nations. However, it must be mentioned that the government of the nation also has been involved in exporting these products, adding to its ability of attracting higher capital inflow. Hence, it is appreciative that the country has been able to enhance its capacity in producing gold and jewellery, which might further act as an important alternative for the imported items (Crown, n.d.). This will also act as a positive influence in the domain of ensuring proper balance of payment within the nation. Policies to Increase FDI In order to increase the FDI, the concerned authorities in the UAE have emerged with several key policies that can impact the overall balance of payment in the nation. In this regard, the respective government of the country has ensured introduction of fair policies relating to investment along with trade relaxation to encourage increased inflow of FDI. It is projected that an effective utilisation of the above discussed policies aiming towards increasing FDI would certainly aid the nation to develop its economy at large as compared to others (Arnold, 2010). Conclusion Based on the above discussion, certain facts relevant to the study have been presented, which further assure fulfilment of the objectives of the study. The operations relating to export, import and capital market impose significant impact towards assuring proper balance of payment. This aspect is also prevalent in the UAE, which is regarded as one of the rapidly growing nations of the world. Notably, owing to the prevalence of flexible and effective laws, the trade facilities as well as relationships have been developed in this nation with the neighbouring nations over the years. This also contributed in positively balancing transactions. Hence, it can be concluded that balance of payment is indeed quite crucial for the overall success of the nations such as the UAE in economic terms. Recommendations From the overall analysis, it has been ascertained that balance of payment is an important part of the operations of the nations in the present day scenario. Notably, there are various factors that have direct or indirect impact on the balance of payment of a particular nation. Similarly, the UAE is largely influenced by its exports, imports and capital markets towards gaining the desired level of balance of payment. In this context, it can be recommended that effective policies need to be framed towards promoting imports and exports in the UAE. Apart from this, the government of the nation must also need to transform its tax policies on a continuous basis, so that it can beneficial or easy for the trade domain to conduct operations in an effective manner altogether. Hence, collectively, it can be affirmed that reducing or limiting the laws regarding trade in the present day scenario will certainly help in attaining better balance of payment as per the desired needs. References Arize, A. C., 2000. Balance of Payments Adjustment: Macro Facets of International Finance Revisited. Greenwood Publishing Group. Abed, I. A. & et. al., 2004. The United Arab Emirates Yearbook 2005. Trident Press Ltd. Arnold, T., 2010. Abu Dhabi to Set Up New Export Agency. The National Business. [Online] Available at: http://www.thenational.ae/business/economy/abu-dhabi-to-set-up-new-export-agency [Accessed February 26, 2015]. Banco Santander, 2015. United Arab Emirates: Foreign Investment. Home. [Online] Available at: https://en.santandertrade.com/establish-overseas/united-arab-emirates/foreign-investment [Accessed February 26, 2015]. Crown, No Date. Exporting to the United Arab Emirates. Home. [Online] Available at: https://www.gov.uk/government/publications/exporting-to-the-united-arab-emirates/exporting-to-the-united-arab-emirates#tax-and-customs-considerations [Accessed February 26, 2015]. Knoema, 2015. United Arab Emirates - Balance of Payments Capital & Financial Account - Foreign Direct Investment, Net Inflows (BoP, current US$). Home. [Online] Available at: http://knoema.com/atlas/United-Arab-Emirates/topics/Economy/Balance-of-Payments-Capital-and-financial-account/Foreign-direct-investment-net-inflows-BoP-current-USdollar [Accessed February 26, 2015]. Observatory of Economic Complexity, No Date. Learn More About Trade in The United Arab Emirates. Home. [Online] Available at: http://atlas.media.mit.edu/profile/country/are/ [Accessed February 26, 2015]. Sambidge, A., 2010. UAE Trade Minister Urges Action against Protectionism. Arabian Business. [Online] Available at: http://www.arabianbusiness.com/uae-trade-minister-urges-action-against-protectionism-304322.html [Accessed February 26, 2015]. Trading Economics, 2015. United Arab Emirates Data. Home. [Online] Available at: http://www.tradingeconomics.com/united-arab-emirates/gdp [Accessed February 26, 2015]. Appendices Appendix 1: GDP of the UAE Source: (Trading Economics, 2015) Appendix 2: Balance of Trade of the UAE Source: (Trading Economics, 2015) Appendix 3: Current Account of the UAE Source: (Trading Economics, 2015) Read More