Both the United Arab Emirates economic and political systems make the country anomalous in the Gulf. Politically, the United Arab Emirates (UAE) is structured as a federation of seven Emirates located on the Arabian Peninsula. The seven Emirates are Abu Dhabi, Dubai, Sharjah, Umm Al Qaiwain, Ajman, Fujairah, and Ras Al Khaimah. Each emirate is ruled by a Sheikh, who maintains a high degree of autonomy as well as control over natural resources, including oil, and commercial activity. This means that there is uneven distribution of wealth, with Abu Dhabi and Dubai, the Emirates’s possessing the greatest hydrocarbon reserves, taking the lion’s share.
The UAE economically differentiates itself from its neighbors through diversified economic base. While oil has been the main factor driving the country to having the region’s second largest economy – an estimated $46 billion GDP in 1998 – it has taken much greater steps to wean itself from oil dependency. The country’s economic health compared with its neighbors became evident during the 1998 oil-price crisis, when the country’s oil revenue dropped 31 percent. The private sector, however, compensated with non-oil sector GDP growing 4.7 percent. This allowed the government to even increase expenditures by 7.1 percent, unlike all of its Gulf neighbors that are implementing austere spending measures to soften the blow of their lost oil revenue.
There are other positive signs indicating a healthy and growing economy. The country is close to launching a stock market; it has kept unemployment in check; and it has passed progressive privatization legislation that has received praise from outside the country.
The country has kept in place its extensive cradle-to-the grave welfare system for UAE nationals. The system includes subsidies, grants, loans and free services. Many subsidized services are also provided for foreigners, who comprise roughly 80 percent of the 2.6 million population. Unemployment among nationals may in the future become a problem and Emiratization of the country’s economy.
Before the exploitation of petroleum deposits in the 1960s, the UAE had a subsistence economy, consisting mostly of fishing, date farming, camel husbandry, trading, and pearling. Today, the UAE is a prosperous country of global economic significance.
The UAE’s GDP, which is dependent on oil prices, has followed a roller coaster pattern, soaring during the 1970s and declining precipitously throughout the 1980s. These swings in income have caused the authorities to look for ways to diversify the economy, particularly in Dubai, where oil production is declining. The search for diversification has been only partially successful. Oil revenues remain as the engine that powers the economy.
Continued low oil prices during 1998 decreased UAE’s GDP by nearly 6 percent. Still, a closer look at the data reveals the government’s success in protecting its economy from such fluctuations through economic diversification. In 1997, it was officially reported that the oil sector of the economy accounted for 30 percent of GDP, the lowest in the GCC.
In 1998, oil revenues declined by 31 percent, from $14.6 billion to $10.1 billion. The depressed oil-price caused oil's portion of GDP to drop to 21.7 percent in 1998.
Most of the country’s budget is provided by Abu Dhabi, the wealthiest emirate. The proposed 1999-2000 budget reflects the positive impact the UAE’s diversified economy has compared to its Gulf neighbors. Rather than announcing spending cutbacks, the UAE government announced it is increasing spending to $6.24 billion from the $5.829 billion predicted in 1998. The budget deficit is predicted at $676.294 million compared to $479 million in 1998. Revenues are expected to reach $5.566 billion in the coming year compared with 5.35 billion in the 1998-1999 fiscal year. The increased government spending is earmarked for housing projects for UAE nationals and for higher education and social welfare programs.
The government sector includes the accounts for the federal government as well as the accounts of the seven individual emirate governments. Only the federal budget, a small percentage, is published.
GDP growth estimates for 1998-1999 range between 6 and 8 percent and greatly depend on oil prices. But even if the amount reaches the lower end, it would still offset the 5.8 GDP decrease from the previous year.
Besides the diversification, the economic strength is attributed to various characteristics such as an open and free economy, substantial oil and gas reserves, stronger cooperation among emirates and considerable net overseas assets. The Abu Dhabi Investment Authority, for example, may have more than $150 billion invested abroad which can generate returns of up to $10 billion annually, roughly equal to oil export revenues.
Another important step in economic diversification is expected to occur this year with the opening of a stock exchange, which will be the second largest GCC bourse after Saudi Arabia’s. This development will also help the country by promoting market regulation and transparency.
The country is also pushing forward its privatization program, preparing the way for the private sector to assume control of power and water facilities. The country recently introduced legislation for this move that has been hailed for its transparency and goals.
While the country’s economic health continues to improve, there remain aspects that need to be addressed such as poor transparency in national accounts, over-dependency of the federal budget on oil, chronic fiscal imbalances, heavy reliance on an expatriate workforce and delayed restructuring in the public sector.
Economic Figures
1999 1998 1997 1996
GDP (current prices, DH bn)185.1 170.1 180.6 175.8
GDP Growth (percent) 5.2 -5.85 2.76 12.03
GDP Per Capita (DH 1,000) 63.0 62.5 59.2 62.3
Balance of Payments (DH bn) 2.76 1.20 2.28
Trade Balance (DH bn) 25.0 10.01 27.16 26.99
Exports & Re-exports (DH bn) 112.85 124.86 121.82
Oil Exports (DH bn) 35.31 35.70 49.10 52.00
Imports (DH bn) 100.0 102.84 97.7 94.83
Average Inflation rate (estimates, %) 1.5-2 2-3 3-4
Unemployment 2.7 2.6
Current Account (US$ bn) 1.78 6.31
* Forecast
Oil Sector
The UAE has nearly 98 billion barrels of proven oil reserves, equaling about 9.8 percent of total proven world oil reserves. It also holds 5.8 trillion cubic meters of proven natural gas reserves, approximately 4.6 percent of the total world proven reserves. This places the UAE as the fourth largest holder of gas reserves. A majority of these resources are located in Abu Dhabi, which has 94 percent of the oil and 92 percent of the gas.
In 1998, oil price deflation caused the country’s value of oil exports to decline 27.3 percent, gas exports, 23.5 percent, and petroleum derivatives by 14 percent. This price drop caused the OPEC countries to cut production. The UAE’s production at the end of 1999 is near its quota of 2 million barrels per day, still significantly below capacity.
Dubai produces at maximum capacity. Abu Dhabi is completing a $5 billion program that will extend its capacity to 2.6 million barrels per day, and the emirate is considering further expansion.
The country is now preparing for two major downstream projects, petrochemicals and refinery expansion believing that Abu Dhabi needs to add value to its basic product to increase income from it. Abu Dhabi is also working to generate more revenues from its gas reserves.
Non-Oil Sector
Several factors have contributed to the growth of the non-oil sector in recent years including government investments in electricity, water, and other infrastructure, development of financial services, and strong demand for re-exports. An open economic system, free movement of capital and financial stability have also contributed. The government has played an important and supportive role by providing incentives and subsidies, along with a high level of government expenditure in housing.
The largest contributors, as a percentage of GNP, after oil (21.7 percent in 1998) are, in descending order, wholesale and retail services (12 percent), government services (11.6 percent), business (10.7 percent) and construction (9.6 percent).
The Dubai Port Authority's container traffic increased by over 10 percent recent years. Trans-shipment business also expanded significantly. Local and re-export business now accounts for 50 percent of the total container volume handled by the DPA.
Most of the incoming traffic is destined for re-export, although Dubai's growing population, expanding consumer market and construction booms are taking an increasing share of imports.
The attractive Jebel Ali Free Zone has significantly reduced the UAE's dependence on trans-shipment. Over 1,200 companies from over seventy countries and major corporations such as Sony, Aiwa, Black & Decker, Nissan, Honda and Coleman are present in the zone. Recent investor includes the US-based Mars.
To attract even more investment, major upgrades are underway. By the year 2003, the DPA expects its two ports, Jebel Ali and Mina Rashid, will have thirty ship-to-shore cranes.
Agriculture
The main growth sectors in agriculture are vegetable oils, beverages bases, breakfast cereals, poultry parts, fresh apples and pears, honey, frozen vegetables and snack foods.
The local food processing industry continues to expand offering export opportunities for semi-processed agricultural products. Major growth sectors are beverages (juices and soft drinks), dairy products (ice cream and yogurt), snack foods and biscuits.
Public Finance
The UAE has a mixed economy, with the most productive assets owned by the government of the individual Emirates, but considerable scope is given to private enterprise. Its legal regime favors UAE nationals over foreigners. In both Abu Dhabi and Dubai, international oil companies maintain equity interests in their operations.
Some banks are privately owned. They represent one of the principal types of commercial establishment in which stock is sold to the public.
Foreign contractors or service businesses require UAE nationals sponsors, one for each Emirate in which they do business. Foreigners are not allowed to own land in Abu Dhabi or Dubai.
The government sector includes the accounts of the federal government as well as accounts of the seven individual Emirate governments. Only the federal budget, a small part of the total, is published.
As noted above, the UAE enjoys a booming re-export trade. Traditional re-export markets are the Gulf Cooperation Council (GCC) states and Iran, but UAE traders have aggressively sought out new markets in such areas as Russia, the newly independent states of central Asia and in South Africa.
© 2000 Mena Report (www.menareport.com)
