The State of the Local Economy of the UAE - Case Study Example

LОСАL ЕСОNОMY UАЕ University Student Id Course Date Introduction The United Arab Emirates has been experiencing some improvements in its economy where it has been considered to be a source of inspiration to many countries. The government of UAE has been committed to creating a business environment that is attractive to many business investors. The oil industry in UAE has proved to be important in the economic development where it has been contributing around 29% of the country GDP. However, the government has been focusing on diversifying the economy of the country from oil to service industry such as tourism and trade. The GDP contribution of the non-oil sector is around 71% with manufacturing being the highest contributor to the non-oil sector GDP with 16.2% followed by construction with 10.7% (De, 2004). The government has been greatly involved in the process of providing services to the public where the government has been providing more than 8% of the public service an indication that the government of UAE has been participating highly in the provision of the basic services the public. However, UAE has experienced some significant inflation early 2014 where the inflation rate was said to increase by 2.3% reaching around 3.1% by the end of 2014 (Jomaa, 2010). In this paper, the current economic indicators are used in the process of assessing the state of the local economy of UAE. Besides, current data has been used to forecast short-term performance of the economy of UAE where the data has been analyzed to assess the possible changes in monetary and fiscal policy and their effects on the economic performance. The state of the local economy of UAE The UAE has been fairly resilient in the current economic challenges that are being driven by weak demand globally and low price of oil. It has been diversified better than the many other Islamic countries like Gulf countries. The lower revenues from oil exports have been affecting the GDP of the country leading to pressure on the public finances and increased need for adjustment of the fiscal and monetary policy. The government has been working toward achieving stability in its economy where it has been committed to in ensuring the development of the local industry. For instance, the government has been providing a subsidy to the local industries aiming at increasing their output (Jomaa, 2010). However, the prices of oil have shown some signs of stabilizing creating high chances of increase in the revenues associated with oil exports. The investments in UAE are expected to continue growing up to the year 2020 as the government has been putting efforts towards ensuring economic diversification. This is because of the current disagreements taking place among the oil producing states that have failed to control market prices of oil leading to decrease in the oil price globally. As a result, UAE is planning to diversify its economy by developing other industries like service industry to contribute a large portion to the GDP. The GDP is expected to grow by 2.7% by the year 2017 as increased investments are accelerating the growth rate (De, 2004). Domestic output and demand The expansion of economy within the UAE has occurred at a very fast pace in the year of 2014, where the estimations of the gross domestic product growth for that year was, 3.6%. This rate of growth was low as compared to the growth rate in the year of 2013, where the growth of gross domestic product was 5.2% (Jomaa, 2010). This drop in the rate of oil production was as result of the reduction of the output in the hydrocarbon sector, which was a clear indication in the market estimations of UAE production of oil. However, the activities in the hydrocarbon sector usually contributed more than 40% towards the growth of the gross domestic product of UAE. Moreover, the gross domestic product plays a significant role in the process of recovering the economic situations in the UAE. The primary facilitators of growth had diverted towards various sectors which include; trade, construction, and tourism too (De, 2004). The enlargement of these sectors continued throughout the year of 2014, thus marking diversions in the economic activities. These diversions in the economy were used as the clear indications of the economy in UAE (Balian, 2010). Tourism and hospitality The data for the both tourism and hospitality clearly shows that this sector is still going on with its process of contributing positively to the economy of UAE throughout the year of 2014. This was seen following the arrivals at the airport, where the airports of Dubai and Abu Dhabi airports experienced an influx of a high number of passengers who were traveling. The total arrivals which were made by passengers in the Dubai airport were 7.5% in the year of 2014. In the same year, the arrivals which were made by passengers at the airport of Abu Dhabi was around 22.5% (Bani, 2010). Balance of payment and international trade The balance between the export trade and import trade in the UAE became much soft in the year of 2014. However, there was a reduction of the amount of hydrocarbon which was exported in the same year. On the other side, there was a rise of the total value of imports. This increase was as a result of government services which expanded in the year 2014, thus caused the value of total imports to increase. As per the financial account, the deficit between the export and the imports became wide in the year 2014 to AED 194.6 Billion (Bani, 2010). Accounting for this widening was due to the rise in the net capital outflow in the private sector to AED 74.9 Billion, whereas the public sector capital outflows went up to AED 119.8 Billion (De, 2004). Domestic monetary developments UAE has experienced monetary conditions that have proved to be accommodating with low interests rates and ample liquidity. Corporates and consumers have been supportive of the economic growth of the country where the monetary base of United Arab Emirates has experienced an increase of around 10.7% in the year 2014. The increased monetary base can be attributed to the growth of the reserve requirement by 18.6 % due to the expansion of the banking deposits and increased circulation of currency. The wholesale funding costs have decreased an indication that there has been an increase in the risks associated with the banking sector in UAE (Bani, 2010). This can be attributed to the low credit swap rates that have remained at low levels for quite sometimes. Besides, the robust capital adequacy and improved profitability have led to a reduction in the rate of CDS on the banking system of UAE. Changes in fiscal and monetary policy and their impacts The UAE government has adopted an expansionary monetary policy that has been active aiming at achieving economic growth and achieving the set economic objectives. The economic objectives of UAE can include low unemployment rates, stable prices and sustainable economic growth (Balian, 2010). UAE has been increasing the real GDP through increasing the spending rate of the government through things like investments and infrastructure. Analysis of the implications Economic growth: UAE sells bonds believing that through acquiring the cash and ensuring issuance of bonds to the buyers ta particular interest rate can create the necessary funds for investing in development projects (Jomaa, 2010). However, the plan has been facing some challenges in the process of improving the ability of UAE of taking full advantages through putting the necessary cash for working in ways that can be considered most efficient. Low unemployment rate: the government has been working towards altering the supply of money through increased selling of government bonds aiming at increasing the output of GDP. The selling of bond has led to improvements in GDP that has assisted in creating more employment opportunities. The government has been investing in development projects that have been proving jobs for its citizens and increasing the GDP (Balian, 2009). Stable prices: the increase of supply of money by the government has been a problem that has led to inflation. This can result in an unstable economic situation as money supply can make the prices go higher than normal. However, other factors can result in inflation other than increasing money supply like an increase in wages (Jomaa, 2010). UAE proved to be successful in the process of implementing its fiscal and monetary policy where the head of all the states in UAE has shown commitment to achieving the set economic objectives. This has contributed to ensuring that the standards of living in UAE are on par with many Western European countries (De, 2004). Short-term forecast of the economic performance UAE has managed to maintain a free market economy as it has been secure and politically stable. The economic growth that has been experienced in UAE has played a crucial role in making the country competitive and commercial hub due to the healthy business environment that it has been creating for the investors both locally and international. The economic growth experienced in UAE has been steady due to the recovery of oil prices, improved trade and increase in expenditure of the government. Besides, restructuring debt, accommodative monetary policies and fiscal policies adopted have been crucial in ensuring the stability of the economy of UAE (Balian, 2009). By the year 2010, the GDP of UAE has reached $419 billion where the annual growth of UAE has been predicted to be approximately 5% for the next seven to eight years. However, despite the high performance of the economy the rate of inflation is expected to be around 3% in the future. The federal budget is expected to keep increasing by around 9% where the government has been investing in devolvement projects aimed at diversifying the economy. Many of the funded projects are service related as the government has been aiming at diversifying the economy from oil over-reliance. The investments in the non-oil sectors are predicted to increase where by the year 2017 the non-oil sector will be contributing more than 70% of the GDP. In the process of diversifying the economy of UAE, tourism has proved to be a potential sector that has been assisting in the diversification process. The number of visitors in UAE has increased due to the development of infrastructure and security making UAE a destination of choice for most tourists and business people. The tourism industry in UAE is expected to continue expanding due to the increased investment in development projects that do assist in ensuring the development of the tourism industry. Besides, aviation infrastructure has been facing many upgrading that is crucial in developing tourism industry that will be a key contributor to the GDP of UAE (Balian, 2009). By the year 2020, Dubai in particular, the tourism sector is expected to contribute more than 32% of the GDP. Besides, the number visitors are expected to increase to around 25 million due to increase in hotels and development in the infrastructure. This will assist in eliminating unemployment as many jobs will be created due to the increased demand for services and new facilities to cater for the increased visitors. Conclusion The economy of UAE is integrated with the other Arab economies. The economic system adopted by the government has been enhancing the friendliness of the business environment facilitating trade and ensuring attraction of more foreign direct investments. The business environment that has been created by the government has been facilitating improvement in business that has assisted in achieving sustainable development. The foreign investor have been increasing due to continuing efforts of the government to ensure that the business environment is right where foreign investors have invested more than $36.2 billion. UAE has been considered to be developed where it has ensured that the necessary services are provided to the citizens such as health care. Besides, the government has invested enough funds in the education systems where it has been aligning the education system with the labor market to ensure employability of the learners. In the process developing the economy, the government has ensured that the local industries are protected from global companies that are competitive hence assisting in the growth of the local industries. Besides, UAE has ensured free trade agreements with different states globally geared towards liberalizing the country trade regime. According to the UAE, the economic headwinds which are recent have been caused by the low prices of oil, and global demand which is very weak, because of the diversions of the economy. Moreover, the growth of gross domestic product is relatively going down, since the oil revenues are low. However, the UAE has introduced a system of transferring related governmental entities and also it came up with other subsidy reform in this year. Investments which are usually done on large scale way, are expected to begin the idea of coming up with the necessary materials in this year, which will assist the investors in their process of expanding the economy. Recommendations The UAE government need to ensure that there is an unrestricted flow of services and goods between different blocks. Ensuring free movement can be important in the process of improving the performance of various sectors such as tourism, professional services, and distribution. However, UAE has signed a free trade agreement with New Zealand aiming at liberating trade hence promoting mutual investments and trade between the two countries, but there is the need for more trade agreements. Through the trade agreements, UAE will be in a position to access large market for its services and products where more investors can be attracted to venture in the country. UAE need to adopt a banking system that can assist in cushioning the adverse impacts of economic turndowns. This can entail coming up with economic strategies geared towards achieving economic stability and ensure enough liquidity. Besides, the monetary and fiscal policies need to be able to guarantee economic stability through controlling the supply of money supply and interest rates. Besides, the government should ensure sustainability of the economy through adopting industrial policies geared towards long-term economic growth. References Balian, O. (2010). Institutional Framework for Industrial Policy. Web version in www. scribd.com. Balian, O. (2009). The Secret of Dubai’s Long-Term Economic Success: COUNTERINTUITION. Published by Lambert Academic Publishers (LAP). Bani Malhem, Ahmad Q. (2010). Inflation Expectations in the UAE 2010- 2011. Department of Statistical Methodologies, Statistical and Economic Analysis Division (SEAD), National Bureau of Statistics, Abu Dhabi, UAE. De Silva, K. M. (2004). The Political Economy of Windfalls: The Dutch Disease –Theory and Evidence. Center in Political Economy, Washington University, St. Louis, MO. Jomaa, Abdalafu (2010). CPI Estimates in the United Arab Emirates for 2010-2011 using DEMETRA Time-Series Analysis. Department of Economic Statistics, Prices and Indices Division, National Bureau of Statistics, Abu Dhabi, UAE. 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