The UAE: Its Today Economic Situation

It is not news that the countries of the Persian Gulf view the oil sector as one of the main sources of income for their economies. The shocks of 1973 and 1979 had dire consequences for non-oil developing countries and those already set. However, exporters of this fossil fuel experienced a large surplus on their current account balances.

The oil business has brought wealth, influence, and attention to a large part of the states of the Arabian peninsula. Qatar, the United Arab Emirates (UAE), and Saudi Arabia are highly relevant in their voluminous oil reserves and their effective exploitation.

However, we must zoom in on our lens and ask ourselves: “Have all the countries of the Arabian Peninsula managed this sector and the wealth it provides the same?” The answer is overwhelming: 

Oil is a fossil fuel that runs out no matter how abundant it may be in each State. Such shortages have led the Gulf monarchies to seek alternative plans to diversify their economies.

For this reason, today, practically all the States in this region are launching alternative economic programs in search of new sectors that allow them to reduce dependence on the oil sector.

UAE could be taken as a good reference of “know-how” in this regard. This country comprises seven emirates: Abu Dhabi, Ajman, Dubai, Fujairah, Ras al Khaima, Sarja, and Um el Kaiwain.

An emir governs each, and the emir of Abu Dhabi is also the one who acts as the country’s president. The State has the fifth largest oil reserves on the planet discovered to date, and the hydrocarbon sector accounts for 30% of its GDP.

It is the fourth-largest exporter of crude oil, representing 20% of the surplus in its current account balance. Despite being such an important activity, it does not enjoy the same relevance throughout the national territory since only Dubai and Abu Dhabi concentrate on the large oil reserves.

In some countries, such as China, significant restrictions are placed on foreign investment in certain sectors.

The Chinese government decides which foreign companies can invest and which cannot, being quite jealous of those economic activities that sustain the country’s progress.

Applying the Unholy Trinity of Robert Mundell, UAE allows freedom of capital movements, simply with certain controls on direct investment, specifically on real state transactions and for credit and investment institutions.

The capital movements are applied to many sectors with strengthening in the management sector, such as HRMS software in UAE.

This characteristic and a conventional Peg exchange rate regime place it far from an independent monetary policy. Taking Rodri’s Unholy Trinity as an optics, the UAE is in a golden straitjacket as it moves within globalization and the Nation-State framework.

Due to the above, this country is in a favorable situation to make its economic transition to other sectors: the freedom of capital movements facilitates foreign investment in the country, and international actors capable of forging this change towards new ones participate in its future.

For example, when the Vice President of the State, H.H. Sheikh Mohammed bin Rashid Al Maktoum presented the UAE Vision 2021 plan to diversify the sectors that gave surpluses in their balance of payments, this served as an incentive for several hotel chains to open new establishments in the country. This openness has made Dubai one of the summits of tourism in Asia.

The plan was indeed presented in that year, but the Public Administration had previously been preparing this gigantic sector shift. Compared to Saudi Arabia, the UAE’s diversification has not come late.

For the first, in 2019, oil accounted for 80% of the country’s exports, almost 70% of the State’s income, and more than 40% of GDP. Even though the Saudi economy owes its surplus to the oil sector more than the UAE to its own, Saudi Arabia took longer to present its diversification plan.

And referring to the present, their attempts at diversification seem not to be going well due to a lack of investors, who consider that Saudi institutions are obeying the will of their monarch and not the legal certainty they find in other neighboring countries such as the UAE. In monetary terms, the Emirati dirham is pegged to the US dollar, bringing confidence to its stakeholders.

Practically all the oil-exporting countries of the Persian Gulf have opted for this type of exchange, as has also been the case of Oman and Qatar. All this, however, does not imply the dollarization of its economy.

This post was last modified on July 31, 2021 7:30 pm

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