The Future of Macroeconomic Performance in UAE

I. UAE Economic Background

The United Arab Emirates economy is one of the richest and most vibrant economies in the world. The UAE is the Middle East regions commercial hub. Only Saudi Arabias economy is bigger than the UAEs in the Arab world, comprising the countries of the Middle East and North Africa. In 2014, the UAEs economy had a GDP of 570 billion dollars, an equivalent of 2.1 trillion dirham (CIA, 2016). The figure represented a GDP growth of 4.6% from the value recorded in 2013. The International Monetary Fund (IMF) projects that the UAEs economy will achieve an average growth rate of between 4% and 5% over the next seven years (IMF, 2016). During 2014, the UAEs economy had a GDP per capita of 63,181 dollars, which was the seventh largest in the world (Jones, 2016). In the recent years, the consumer price index inflation has been fluctuating between 1% and 2%. However, there are no reliable statistics on the poverty levels; the figures given are highly divergent. Some studies have established that there is no one living below the poverty line in the UAE while others place the percentage as high as 14% (UAE Interact, 2016). In general, the low figures are indicative of the excellent health of the economy.

 
 

One of the core characteristics of the UAEs economy is that it is largely reliant on the oil and mining sector, a thing that the UAEs government is trying to address through increased diversification of revenue sources. Reliance on oil has made the UAEs economy highly susceptible to the high fluctuations of the global oil prices (Mina, 2014). The exposure to volatility did hurt the UAEs economic development during the 2008 financial crisis, and the economy is still recovering. The UAEs government is, thus, strives to make the country less dependent on oil. In 2009, more than 85% of the UAEs GDP came from the oil sector, demonstrating its immense reliance on oil (Lekhraibani, Rutledge, & Forstenlechner, 2015). By 2011, the figure had reduced to 77% and in2015 it had further declined to 69% (Lekhraibani et al., 2015). Currently, only about 30% of the UAEs budget is financed using oil money. The other industries contributing to the economy include the services industry, specifically tourism and financial services, and the trade of machinery and agricultural products, such as dates.

II. Economic Indicators Forecast Overview

The future outlook of the UAEs economy is promising. Most of the economic indicators show favourable projections in the next two to five years. The UAEs GDP is the second largest in the region. By the end of 2014, it had reached 570 billion dollars (IMF, 2016). The IMF estimates that the value will rise to around 600 billion dollars by the end of 2016 having forecasted an average of 4% to 5% growth during the period. The World Bank had a bleaker view projecting that UAE economy will grow by 2.0% in 2016, 2.4% in 2017, and 3% in 2018 as indicated in Table 1 that provides an overview of GDP growth of the Middle East and North African countries (World Bank, 2016).

Table 1

GDP Projections for MENA Countries

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The UAEs labour force is expected to grow by 2.5% in 2016. In 2014, the workforce of the UAE was around 4.7 million people. The number is projected to increase to 5.136 million by the end of 2016 as more people join the private sector (Jones, 2016). Numerous programs have been implemented to equip the locals with the necessary skills to venture into the private sector and reduce the over-reliance on the public sector and government handouts. The labour force by occupation in the UAE is expected to grow at different rates in the different sectors of the economy. There has been an over-representation of Emiratis in the public sector and massive under-representation in the private sphere which is dominated by expatriates. In 2014, a report by the Abu Dhabi Department of Economic Development indicated that Emiratis only comprised 15% of the total workforce in their country (Mina, 2014). According to the estimations, by the end of 2016, the number of locals in the public sector will increase only to 15% and reach 22% growth by 2018 as Emiratisation initiatives gain momentum. The number of the Emiratis in the private sector is lower comparing to public occupations. In 2013, approximately 5% of the UAE citizens worked in a private sphere. The number is projected to reach 5% in 2016 and 10% by 2018 (see Table 2) (Lekhraibani et al., 2015). There is an expected drastic reduction in the number of expatriates.

Table 2

The UAE Labour Market Composition

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The unemployment rate is expected to reduce as the government continues to diversify its sources of revenue and creates a favourable business environment. In 2014, the unemployment rate stood at 4.6% (CIA, 2016). The number is projected to have a marginal reduction to 3.9% in 2016 (IMF, 2016). The consumer price index is approximately 126 index points (see Figure 1). Till the end of 2016, the inflation rate is projected to reach 1.8% and the interest rate 2% (Trading Economics, n.d).

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Figure 1: The United Arab Emirates consumer price index

With the economy in the recovery, the budget is expected to grow and the public debt to shrink as the government finds more money to finance its budgetary allocations. The 2016 budget was projected to reach 14.1 billion dollars, an increase of more than 0.74 billion dollars from 13.36 dollars (approximately 49.1 billion dirham) recorded in 2015 (Jones, 2016). According to the UAEs government, it was projected that 49% of the 2016 budget will be financed using public debt representing a 1% reduction from the 2015 figure as indicated in Figure 2 below (Jones, 2016).

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Figure2: The UAE public debt projections for 2016

Industrial production for the financial year 2015-2016 was also expected to increase. The IMF projected an industrial production growth rate of 2.8%, the same rate that was observed in 2015 (IMF, 2016). The household composition as a percentage of the GDP was estimated to rise to 55.4% from 52.1% in 2015 while the government consumption will comprise 8.7% of the GDP (IMF, 2016). Just like in the previous years, the bulk of the GDP by sector contribution will consist of the industries sector with 49.4% of the GDP. These spheres include manufacturing, petroleum, mining, cement, and textile industries among others. The services sector will constitute 49.8% while the rest 0.7% will come from the agriculture sector (CIA, 2016). The export and import values are also projected to increase. According to the UAE Trade (n.d.), the exports value for 2016 is forecasted to reach 408 billion dollars with a complementing import of 290 billion dollars. Thus, the UAE will maintain a positive balance of trade, which is crucial for the growth of the economy.

III. Major Economic Challenges Facing UAE

Economic Diversification

Economic diversification is probably the primary challenge facing the UAE. Despite its effort to decentralise its sources of revenues, the UAE is still heavily reliant on the oil industry. However, the future outlook is promising as the level of dependency progressively decreases. In 2009, 85% of the UAEs budget was financed by oil money (Lekhraibani et al., 2015). In 2015, the percentage has reduced to 30% and the figure is projected to decrease over the next ten years. As a result, by 2030, the country should not be reliant at all on the oil sector (Lekhraibani et al., 2015). The concentration of its revenue sources in the oil sphere has subjected the UAE to economic turmoil due to the volatility and uncertainty in the global oil market. Establishing a non-oil economy will hedge against these adverse effects in the future and ensure prosperity even as the oil reserves deplete.

Falling Oil Prices and effect on Government Budget and Sovereign Fund

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The falling oil prices have also had an adverse effect on the government budget and the sovereign fund, substantially reducing them both. Low oil prices reduce the revenues collected and necessitate an increase in public debt to finance the budget deficit, which is not ideal (Mina, 2014). The government has to pay interests on these public debts. The significant decrease of the oil prices also reduces the sovereign fund. For instance, due to the fluctuations in oil prices experienced in 2013, the UAEs government had to appropriate nearly two tons of its gold reserves stored as a sovereign fund to facilitate the revival of the economy. Consequently, the volume of the gold reserves reduced from seven tons to five tons.

Population, Local Skilled Labour, and Emiratisation

The UAE has always experienced a shortage of local, skilled workforce, especially in the private sector. The UN estimates that the UAE population in 2016 stands at 9.3 million people (CIA, 2016). However, immigrants make up nearly 90% of the population, making it even harder to find local skilled labour. A survey conducted in 2014 established that the percentage of local skilled labour in the private sector was below 0.34%, but the locals made up nearly 15% of the public sector workforce (DED, 2016). The real problem, though, has been the apathy exhibited by the Emiratis when it comes to occupations that require skilled workers. Most of them do not strive to become competitive; they look for opportunities in the government sector and rely on the government handouts, which are substantial. To reduce the over-reliance in the public sector and to increase their competitiveness in the global workforce share the UAEs government started the various Emiratisation initiatives. The government hopes that the empowering of the locals through education and similar programs will enhance the competitiveness of the locals and provide them with more employment opportunities both in the public and private sectors. Ultimately, the number of expatriates in the country will be reduced. Successful Emiratisation will decrease the outflow of resources by expatriates and ensure that the value created in the country is reinvested in the economy for the benefit of the UAE and the locals.

Unemployment

The unemployment rate in the UAE is fast reducing but remains an economic challenge. With such a big economy, the UAE can sustain a zero unemployment rate because of the vast amounts of opportunities it creates. In 2015, the unemployment rate was 4.6% comparing to 3.6% recorded in 2013, which has become a worrying trend (CIA, 2016). To effectively address the unemployment, though, the government should focus on empowering the locals with skills and knowledge so that they can venture into the private sector and create more opportunities for themselves instead of relying on the government sector salaries and government handouts.

Slow Economic Growth

The UAEs economic growth rate has increased during the past three years but it still slow. Currently, the economic growth averages at 4.5% (Mina, 2014). However, the economic projections by the World Bank indicate that the UAEs economy can sustain an average of 7% growth for the next five years (World Bank, 2016). The slow economic growth stagnates the GDP per capita and other indicators that signify an improvement in the welfare and quality of life of the UAEs residents.

Income Distribution/Education

Similarly to other countries, there is a huge income disparity between the educated and skilled workers and the uneducated and unskilled ones. The wealthy class enjoys the GDP per capita of 102,320 dollars while the low-income class earners average 15,000 dollars bringing the average GDP per capita to around 60,000 dollars, the seventh highest in the world (Lekhraibani et al., 2015). However, the high GDP per capita does not signify equitable income distribution. The Emiratis are well-educated. However, the majority cannot be considered to be competitive, at least at the global levels. It is one of the core reasons why there is such a high level of influx of expatriates into the UAE. Some of the Emiratisation programs are addressing the education issues to adequately equip Emiratis with the necessary knowledge and skills to optimize their competence levels.

Inflation/Exchange Rate

Despite the high growth levels and the vibrancy of the economy, the inflation rate is still high. In 2016, the inflation rate (CPI) for 2016 is 2.3% representing an increase of 0.9% comparing to the rates of 2012 (CIA, 2016). The average interest rates are also high averaging between 2% and 3% making it unsuitable for some businesses. The high-interest levels are one of the core reasons that despite having one of the best and free economies in the world, the UAE still ranks low in the ease of doing business ladder at 26th position

Foreign Direct Investment

Curiously, the UAEs foreign direct investment is not one of its major economic problems. It has a positive FDI index meaning that the FDI inflows are more than the FDI outflows. In 2014, the FDI inflows amounted to 116.4 billion dollars while the outflows were recorded at 81.6 billion dollars (CIA, 2016). The net flow was even better in 2015 as it recorded the FDI inflow of 126.4 billion dollars and the outflow of 86.1 billion dollars (CIA, 2016). Despite these seemingly large amounts, the inward FDI only amounts to 2.7% as a percentage of the GDP, which is low (CIA, 2016). To achieve a balanced and sustainable development, the FDI inflow has to increase, at least to comprise 5% of the GDP.

Infrastructure

The UAEs economy has roundly centred on oil at the expense of other infrastructural developments. However, the government has already started addressing the problem through the construction of the state-of-the-art roads, factories, health facilities, schools, and hotels to boost the other industries and augment the diversification away from oil.

IV. Volume of Trade

Japan, China, India, and the Arab countries are UAEs major trade partners. As their economies improve, the volume of trade between the UAE and these countries is expected to grow. In 2015, the Asia-Pacific region countries were the UAEs primary trade partners. Approximately 43% of its trade was with China and Japan with a total direct trade volume of 106 billion dirham (UAE Interact, 2016). The Middle East and North African region had an exchange of goods worth 35.1 billion dirham, constituting 14% of the total direct trade volume. These two regions combined by far outweighed the volume of trade between the UAE and the rest of the world. The trade volume between the UAE and Europe amounted to 67.2 billion dirham, constituting 27% of the UAEs total trade volume in 2015 (UAE Interact, 2016). The major European trade partners include France, the United Kingdom, and Germany. The United States of America and Caribbean countries exchanged goods worth 24.1 billion dirham, constituting almost 10% of the total trade volume. The West, East, and South African nations were the regions with the lowest trade volumes with the UAE. Collectively, they constituted 7% of the trade volume worth 16.4 billion dirham (UAE Interact, 2016). Figure 3 shows a summary of the UAEs trade volume with its partners around the globe.

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Figure3: The UAE trade volume

V. Recommendations for Macroeconomic Policies in Times of Falling Oil Prices

The UAEs reliance on oil has been detrimental to its economic growth. The reliance on oil has made the UAEs economy susceptible to the volatility and uncertainties of the global oil prices. The volatility has, in its turn, not only adversely impacted the countrys revenues but also chased away investors who seek stability and certainty for their investments. Various initiatives can be implemented to protect the UAEs economy and the residents from the adverse effects of the falling oil prices.

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The first intervention is to diversify the economy to reduce its reliance on oil. That way, the adverse impact of the falling oil prices will be mitigated. The UAEs government should promote export diversification to include items, such as dates, dried fish, textile, and other agricultural goods. It will enable the refusal from crude oil and natural gas exports duopoly (Lekhraibani et al., 2015). Diversifying other sources of income is, however, a daunting undertaking as only a handful of countries including Malaysia, Indonesia, and Mexico have successfully done it.

Additionally, the UAEs government should also intensify the national development programs meant to boost human capital and develop new industries. The UAE has a shortage of skilled workers in the spheres where the locals are concerned (Forstenlechner, Madi, Selim, & Rutledge, 2012). Through the national development programs, the local population, which in most instances have the wherewithal, will be empowered to venture into other industries and take advantages of the existent opportunities. The expansion of the services industry, the financial sector, and the tourism sector will lessen the UAEs economy reliance on the petroleum industry and shield it against the adverse impacts of falling oil prices.

The UAEs government should, especially, focus on improving the education levels to enhance the knowledge and skill levels of the Emiratis. These should, in its turn, enable them to venture into other sectors of the economy and reduce their reliance on the public sector. What is desirable about the move is that it would prompt the residents to become entrepreneurial and make investments in the services and agricultural sectors, effectively diversifying their revenues (Forstenlechner et al., 2012). With multiple revenues, the residents would not be much affected by falling oil prices; it will not pinch as much as when one is overly reliant on oil proceeds.

Lastly, the UAEs government should maintain the inflation and interest rates at desirable levels to encourage more FDI inflows. It should strive to strengthen the business environment to promote an equitable development of all the sectors of the economy. A stable low-inflation and low-interest economy attracts investments which if well directed to the other sectors of the economy will augment the diversification away from oil and the fluctuations of its pricing (Mina, 2014). Crucially, trade and FDI has to be liberalised to encourage more investors.

VI. Conclusion

It is evident that the UAEs economy is one of the best in the world. With the GDP of 570 billion dollars, it ranks as the second best in the MENA region. Similarly to other economies, the UAE faces a host of challenges including high interest and inflation rates, significant unemployment rates, slow economic growth, and low FDI inflows among many others. However, its main challenge is that it is still relatively reliant on the oil sector, which makes it highly susceptible to the volatility and uncertainties of the global oil prices. Despite the governments efforts to limit reliance on oil, the country still has a high level of dependence with almost 30% of its budget financed by oil money. However, if the government intensifies its efforts, the economy would be fully diversified in a few years time. To effectively diversify its economy, the UAEs government should promote export diversification, deepen the financial sector, improve education access and quality to enhance competence, strengthen the business climate, and maintain a stable and low inflation rate to attract more investors in the industries other than oil. Successful diversification of the economy will not only hedge against the harmful effects of oil prices fluctuations but will also ensure sustainable economic growth.

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