Economy of United Arab Emirates

Macroeconomic Final Project

It is a dream of every country to have a prosperous economy that enhances the lives of its citizens. Most nations always take advantages of certain opportunities that emerge in the world economy from time to time, in making their economies more attractive for investment by others. However, there are also other external forces that make countries lose economically, and it is only those countries that are prepared for such situations can survive. These external factors include oil crisis, falling oil prices, financial crisis, among others.

Currently, the major external factor faced by oil exporting countries is the fall prices of oil (Department of Economic Development, 2016). Some countries have continued to struggle in their economies as oil prices remain low, but others have managed to withstand the situation. This paper will focus on the economy of United Arab Emirates with regards to the effect caused by falling oil prices. The major focus will be on addressing the issue of diversity in the country’s economy.

UAE “Brief” Country Economic Background

The United Arab Emirates is known for one of the fastest growing economies in the world today. However, this was not the case in the years of the 20th century. After gaining its independence from the British colonialists, the country had no significant economic activity except for fishing. The whole country is arid, and, thus, agriculture was not possible. All the dwellers of the seven emirates in the country relied on fishing and poor pearl industry as their only source of income (Department of Economic Development, 2016). Besides, the state population was minuscule, which is why the nation attracted little attention from international investors and trades.

In the mid-20th century, oil was discovered in the country, which brought more hope to the country economy. The oil exportation started in the year of 1962, and that lead to the total transformation of the country economic prospect. Since then, all the seven Emirates relies heavy on the petroleum and natural gas income to fund their national budget. Some emirates like the Abu Dhabi record the highest oil dependence on over 80% in its budgeting with other emirates having fewer percentages (Department of Economic Development, 2016). Oil has thus been key to the country economy, making it the second-largest economy in the gulf corporations’ countries after Saudi Arabia.

Apart from oil, the state has increased its diversification into other non-oil economic activities, which have made it even more attractive to external investors and trades. With the realisation that its oil reserves are limited, especially in the Emirates of Dubai, the country has increased its economic activities to manufacturing and construction industries (Department of Economic Development, 2016). These industries have attracted millions of people from all over the world both for tourism and for immigration into the country. The country is also a travel hub in the world, and it presents the best commercial sector in the entire Gulf region. Its current steady growing industry is the service sector, which has attracted a lot of foreign investors and is still on the rise. Lastly, companies in the country have also invested heavily in the external market, creating more stability to their future.

Economic Indicators Forecast Overview

GDP/GDP Per Capita

With the current turbulences of falling oil prices in the world, the gross domestic product of the UAE has been profoundly affected. The country GDP was at its best in the year 2014 just before the prices of oil and natural gas drastically reduced. On that year, the state recorded its highest ever GDP of $ 399.45 billion (IMF, 2016). However, this GDP decreased to $343.5 billion in 2015 and $325.1 billion projects for the year 2016. Figure 1 below shows how the GDP of the country has changed in the last four years.

The country gross domestic product per capita has also been reduced within the same period. The state population has continued to increase but at the same time, the GDP has declined. This has thus lead to the overall reduction in the GPD per capita. It was highest in the year 2014 at $42,943, which was the highest value ever recorded in the country (IMF, 2016). However, the amount reduced to $36,060 in the years 2015 and is projected to decline further to $32,989 in the current year.

Figure 1. Change of the GDP in UAE over time (2013-2016).

Labor Force / Labor Force by Occupation / Labor Force Participation

The labor force is currently adequate in the UAE because there has been a massive immigration of skilled individuals to the country in the last decade. These people have helped power the development of service, construction and manufacturing industry based on their countries of origin experience. By the end of the year 2015, it was reported that the expatriated formed the highest percentages of the labour force in the country of around 85% with local having only 15% contribution of the 5.53 million labor force (ILO, 2016). This data is presented on figure 2 below.

The country also has an advanced level of labor force participation as the majority of individuals are well educated. According to the 2016 data on labor force by occupation, only 7% work in the agricultural sector, while other 14% and 78% work in the industry and service sector respectively (ILO, 2016). On labor force participation, the number of men remains extremely high compared to that of women, though there has been a noted improvement. The 2016 data on labor participation indicates that women represent 43% of the workforce in the country. In the senior position, women are also well represented with a turnout of 30% (ILO, 2016).

Figure 2. Labour force distribution with respect to the country of origin.

Unemployment Rate Forecast 2016

The level of unemployment has remained relatively low in the country despite the current economic situation. The above trend has occurred due to the diversity experienced in the economy, which offers employment in sectors other than the oil and nature gas industries. According to World Bank data, the level of unemployment in the country reduced from 4.1% in the year 2012 to 3.8% in the years 2014 (ILO, 2016). However, the unemployment has increased by a small margin as oil income declines.

According to the year 2016 projection on the countries unemployment rate, the state is expected to have a 4.2% unemployment. The first quarter of the year had a 4.2% of the unemployment, which is estimated to raise to 4.3% in the second quarters of the year (ILO, 2016). However, this trend will be reversed in the third and the fourth quarter, where it has been estimated that the country unemployment rate will be 4.25% and 4.11% respectively. Figure 3 below shows the level of unemployment.

Figure 3. Change of unemployment rate by year quarters (2016).

Consumer Price Index Forecast 2016

The consumer price index in the country has increased steadily with time, even though it remains relatively low compared to most developed nations. The state consumer index change was moderate between the years 2012 and 2014 as it increased from 117 index points to 119 index points respectively (IMF, 2016). However, since 2015, the index has changed with much higher points.

In the current year, it is projected that the average index points will be at 130. The projection of the quarters indicates that the index will increase steadily over the year, hitting its highest point ever by the end of the year. Within the first three months, the index points were 124 points, which will increase to 130 index points in the second quarter, and later to 132 and 134 in the third and the fourth quarters respectively (Trading Economics, 2016). Figure 4 below presents the above data.

Figure 4. Predicted change of consumer price index by year quarters (2016).

Gross Investment/Budget/Public Debt/Income Distribution

The investments in the Emirates remain high, especially in the construction industry. A report by World Bank shows that in 2016 only, there was $316 billion worth of construction investment as work in progress in the country. Other investments are also channelled towards other industries like the manufacturing sector, with a current commitment of over 20% investment by government in these areas (CIA, 2016). However, investments have not been easy in the country in the recent past, as the revenue have drastically reduced.

In 2012, the state income exceeded the budgeted expenses by $31 billion, and public debt was low at 40.4% of GDP. However, that has changed as per the end of the last year, with expenses exceeding revenue by $9.7 billion, and a public debt of 52.1% (CIA, 2016). Figure 5 shows the changes in government debt in the country. Lastly, income distribution remains as a source of concern in the country. Despite that individuals and mostly the locals are paid extremely well, the expatriates, especially the non-educated ones, are poorly paid, with some receiving merely $360 per month (CIA, 2016). The poverty line as per the end of 2015 stood at 20%; on the other hand, it was estimated that 0.2% of the country’s population owns 90% of the nation’s wealth.

Figure 5. Change of the government debt over time (2012-2015).

Industrial Production, Electricity Production /Consumption

The industrial production in the United Arab Emirates has continued to be productive to the country despite the rise of the services industry. Mostly composed of petroleum and natural gas sector, the industrial production accounted for 49.4% of the GDP in 2015, which means that the industry is still competitive (CIA, 2016). The country is also a mega energy holder in the world, currently ranked in the six place on proven oil deposited in the world. Such a large amount of oil and gas in the country has helped the nation to power its industries with adequate electricity from thermal power stations cheaply. The country’s energy production as per 2015 data was quite high at 132.7 million kWh; however, its consumption was low at 119.17 million kWh (CIA, 2016).

Export /Import Volume/Exchange Rate

The country’s main exports are petroleum and natural gas, which are performing poorly at the moment. The trend has thus influenced the total earnings that the state has been receiving from its export significantly. By the years 2014, the total export was calculated to be $370.9billons, but this reduced further to $323.8 and $320.1 billion in the years 2015 and projected 2016 respectively (Department of Economic Development, 2016).

On the other hand, the value of importation has not been affected, as the country has continued to increase total value of imports with time. The imports as at the year 2014 stood at $ 239.8 billion a value that has grown to $248.2 billion and projected $254.2 billion in the year 2015 and 2016 respectively (Department of Economic Development, 2016). Figure 6 below presents the above data. Lastly, the country currency has remained stable as compared to major currencies in the country, which is an indication of a real exchange rate. With comparison to the United States dollar, the United Arab Emirate dirham has consistently traded at between 3.66-3.67 per USD in the last four years.

Figure 6. The monetary value of import and export over time.

Major Economic Challenges Facing Country

Economic Diversification

Despite the fact that United Arab Emirates is among the most economically diverse nations among the Gulf Cooperation Countries and in the region, it remains dependent on oil exports. With only the exemption of Dubai, other emirates are less diverse in their economy and have continued to use oil money in funding government and other developments (IMF, 2016). The use of oil and gas money to over 70% in the budget thus still places UAE as an oil-dependent country. There is, therefore, an urgent need for all Emirates with the nation to develop strategies in which non-oil sectors should be developed to give the country’s economy a broader base.

Falling Oil Prices & Effect on Government Budget and Sovereign Fund

The current trend in the petroleum and natural gas market has also adversely affected the income that the country gets from abroad. As stated earlier, most of the government spending in the Emirates are funded by oil money with some emirates like Abu Dhabi supporting their budget with 80% of oil money (Department of Economic Development, 2016). From the year 2015 to date, the country has had more expenditure than the revenue, as income from the oil has drastically reduced. The trend has forced the leaders in the emirates to borrow funds either internally or externally so that they can finance their massive expenditures.

Financing Budget Deficit in Times of Falling Oil Prices

The financing of the country budget has been a headache to the country in the current period, and the oil income has significantly reduced. It is estimated that the budget in the court which does not include Abu Dhabi, and Dubai had a deficit of $9.7 billion (Focus Economics, 2016).

These funds had to be borrowed from within sources, for example, and from external sources. The government has also cut down its expenditure by 9.9% in the year 2016 to ensure that it can meet the expected income (Focus Economics, 2016). In this year budget, some funds were sourced from the international bodies like the IMF and the Asian bank.

Population, Local Skilled Labor, Emiratization

United Arab Emirates still faces many problems in its labor market, as the country’s population remains small. The current demographic data of the country states that around ten million people are living in the Emirates, of which only 11.32% are of UAE origin (Conference Board, 2016). This means that most of the labor in the country is offered by expatriates from other nations, who are not reliable. The local skill labor remains weak, as only few of local citizens are educated and others are reluctant to take jobs of higher responsibility. The above trend has led to the introduction of Emiratization, where companies are compelled to hire the locals. However, despite the fact that most businesses have accepted the call, there is a fear of reduced labor skills as locals are mostly unskilled.

Unemployment

Unemployment is not a real problem on the reality in the Emirates as companies in this country always keep on looking for works even in the offshore labor market. The current unemployment rate of the country stands at 4.2%, which is much lower than that of USA at 7% of most European nation at 6%, an indication of a healthy economy (ILO, 2016). However, the government of UAE faces a problem of locals unemployment. As stated earlier, the locals are mostly unskilled, and they are reluctant to take busy jobs in private companies as they are mostly offered flexible well-paying employment in the governments sectors. Still, the government jobs are not enough to fully employ all locals, and that has led to their increased unemployment rate. 2016 reports indicate that more that 11.6% of local are now unemployed, which is a major concern to the country (ILO, 2016).

Slow Economic Growth

With the reduction in the government spending in the country, the economy of UAE has also slowed down with the last few years. The state economy had a constant growth of around 4.8% between the years 2000 to the year 2013. The GDP growth, however, started to reduce from the year 2014, with a 4.6% increase in the current growth of 2.4% (World Bank, 2016). The first quarter of the year recorded a 2.8% growth in GDP, but that is expected to reduce to 2.5%, 2.5%, and 2.4% in the second third and the fourth quarter respectively. Figure 7 below shows the year 2016 projected growth.

Figure 7. Projected growth of the GDP in UAE by year quarters.

Income Distribution / Education

Wealth is poorly distributed in the UAE as only the minority of few indigenous people hold most of the country riches. A report on the country inequality shows that 0.2% of population as per 2016 owns 90% of the country’s wealth. The middle class, on the other hand, owns 8% of the country’s wealth at 30% of the population, while the rest owns only 2% (Conference Board, 2016). However, despite this disparity in wealth, incomes remain moderately high in the country and mostly for local and skilled expatriates. The high income thus helps a lot in improving the life of many dwellers. However, non-skilled foreigners are still paid poorly, which has contributed to people leaving below the poverty line to increase to 20%. Education to the locals is still a problem as most of them are less educated compared to the expatriates; therefore, the former cannot outmatch the latter in the labor market.

Inflation /Exchange Rate

The United Arab Emirates has had a stable inflation and a real exchange rate for many years. Its current situation is not bad as compared to another nation, as it has maintained relatively low inflation and constant exchange rate despite the current turbulence in the oil industry. The countrys inflation has remained relatively low falling from 4.6 in January 2015 to the current pace of around 1.6% (Department of Economic Development, 2016). On the other hand, the exchange rate of Emirates dirham has remained relatively constant at 3.67 per 1 USD. However, the biggest problem that the country faces is abrupt fluctuation that can happen to these two factors causing a shock in the economy as it occurred in 2008-2009 during the financial crisis.

Foreign Direct Investment

The foreign direct investment in the country of United Arab Emirates is at its highest level now. The country is enjoying the second largest share of the external investment in the entire North African and Middle East after the state of Turkey.

In the year 2015, the countrys FDI was at $13 billion, thereby being an indication of high trust by investors (Department of Economic Development, 2016). Investors state that they prefer the country because of its political stability and local people who are welcoming. However, the future of foreign direct investment remains uncertain in the country mostly due to the higher level of radicalization and extremism that has been experienced in the country’s neighbors.

Infrastructure

UAE has a world-class infrastructure that has helped it to increase its GDP immensely. The infrastructure in the nation ranges from roads, airports, seaports, buildings, electricity lines, among others, which all have to help the country to connect all emirates together and connect with the neighboring countries. However, the infrastructure is still limited in some emirates like Dubai and Abu Dhabi as the population increase always strains the current resources (Prospect Group, 2015). In the past, there has been a lot of traffic and congestion in these emirates, which hides economic development. Although such congestions have been eased in the recent past, there is still a fear that more congestion may be experienced in the future, as more expansion in infrastructure does not occur.

Volume of Trade with China, India South East Asia, Japan and Other Arab Countries Compared To the Rest of the World

The trade value that UAE trades with China, India, South East Asia, Japan and other Arab countries remains relatively high as compared to other nations in the world. The latest official data, which was released at the end of the year 2014, indicates that in this region and countries, the UAE exports over 65% of all its exports to them. In specific, it exported 16.3% to South East Asia, 15% to Japan, 13.4% to India, 10.7% to Iran, and 9.6% to other nations in the states region (UAE Trade & Commercial Offices, 2016). However, in the same period, the country only exported 35% to the rest of the world. This means that the stated nations are critical in foreign income in the United Arab Emirates.

The importation into the Emirates from China, India, South East Asia, Japan and other Arab countries remain high, but not as high as exports. The latest data indicates that the importation from these regions amounts to 54.1% of the total Emirates imports. The Republic of China was leading in import at 15.1%, followed by India in 7.5% and Japan at 4.7% (UAE Trade & Commercial Offices, 2016). However, the rest of countries in the world are also major importers to UAE with the United States contributing 8%, Germany 4.7% and the United Kingdom at 3.1%.

Recommendations for Macroeconomic Policies in Times of Falling Oil Prices

In the time when the price of oil falls, oil exporting countries like the United Arab Emirates need to re-evaluate their macroeconomic policies to ensure that the state economy remains stable. First, the state should focus on the fiscal policy as this will make sure that sectors within the country that depend on oil are not affected. The petroleum and natural gas companies may be given tax holidays and incentives during the time of low prices to ensure that they remain productive (Weale, 2015). These will make sure that no unemployment occurs and enhance the continuity of UAE industries. The government should also increase its spending in the economy to compensate for the money that the country loses from the low oil prices.

As for the monetary policy, the governments should enhance the supply of money to its citizen. The government should also lower the banks interest rate thus increasing the amount of money borrowed from the commercial banks. That will consequently result in the growth of money in supply hence the citizens will not feel the effect of the fall oil prices (Weale, 2015). The governments can also reduce the necessary depository amount to enhance more supply to the economy.

Conclusion

In conclusion, this documentation has presented the current situation of the economy of the United Arab Emirates with regards to the effect caused by falling oil prices. The primary focus of the paper has been on the diversification that the country has in its economy, which has helped it cope with the current situation. It has been revealed that the country is still not properly diversified as its economy has been negatively affected by the oil prices resulting in the reduction in the growth of the GDP as well as the reduction of government income. Although the country remains stable in most of its economic indicates, there is a strong need to diversify its economy in ensuring that the country is not dependent on oil.