Overview: In the 40 years since oil was first discovered and exported, the UAE has been transformed from a region of small sheikhdoms subsisting on pearling, fishing, herding, and agriculture to a modern state with a high per capita income and substantial trade surplus. The largest and wealthiest emirate, Abu Dhabi, is the principal petroleum producer and financier of the federation. Dubai, the second largest emirate, thrives on wealth derived from a services-based economy (tourism, construction, telecommunications, media, real estate, and financial services). Together, the two emirates provide more than 80 percent of the UAE’s income, while the northern emirates remain relatively undeveloped. Key economic policy decisions are made at the emirate level with little coordination among the seven emirates.
The UAE economy remains heavily dependent on oil and natural gas; the revenue from oil exports in particular enables the government to finance infrastructure for the non-oil economy. Statistically, however, the oil sector has declined in recent years as a percentage of the gross domestic product. Economists forecast that in 2005–6 the oil sector will account for less than 10 percent of the annual increase in the size of the economy, which is expected to grow at an average annual rate of approximately 6.5 percent. Investment in manufacturing and energy-intensive sectors such as petrochemicals and metals will drive the non-oil sector, aided by exports made more competitive by the weakness of the U.S. dollar. The services sector, primarily tourism, is expected to continue to gain strength.
Sheikh Khalifa ibn Zayid Al Nuhayyan, who succeeded his father as president of the UAE in November 2004, is expected to continue the relatively liberal economic policies of his predecessor: privatization of some government assets; provision of incentives for foreign and domestic private investment; maintenance of no national income or sales tax; and curtailment of both money laundering and the use of the banking system to foster terrorist activities.
Gross Domestic Product (GDP): In 2003 the UAE’s GDP was US$87.6 billion. In 2004 the government reported a real growth rate of 7.8 percent, driven by an increase of almost 10 percent in non-oil GDP. Economists calculate the 2004 real GDP growth rate at 7.4 percent, with GDP exceeding US$103 billion. Per capita GDP for 2004 was high compared with other Arab countries—almost US$24,000. For the period 2005–6, real GDP growth is expected to remain strong, driven not only by high oil earnings but also by sustained expansion in the non-oil sectors. Real GDP is forecast to grow 6.7 percent in 2005, with GDP exceeding US$118 billion.
GOVERNMENT Budget: In mid-2005 the UAE Ministry of Finance and Industry released the 2005 federal budget, which accounts for approximately 25 percent of total federation fiscal transactions; the remainder consists of the fiscal operations of the individual emirates, and the combined expenditures constitute the consolidated accounts. According to UAE government figures, in 2005 the UAE is projected to have a balanced budget, as a result of a 4.5 percent rise in revenue over 2004 coupled with a 4.9 percent decrease in expenditures. This budget is the first in more than 20 years that does not assume a deficit.
Other sources calculate that based on rising global oil prices offset by significant public-sector pay increases and higher capital expenditures, the 2004 budget ran a relatively small deficit of US$233 million (0.2 percent of gross domestic product, as compared with deficits in 2002 and 2003 that were 11 percent and 4.5 percent of gross domestic product, respectively). In 2005, as a result of the rapid rise in oil revenues, the budget is expected to generate an estimated US$5.8 billion surplus (4.7 percent of gross domestic product). However, economists caution that UAE fiscal data inaccurately reflect the actual strength of the government’s finances, for two reasons. First, a significant portion of Abu Dhabi’s oil earnings are not reported as current revenue but rather are paid directly into reserve accounts. Second, the data do not reflect the substantial income generated by the emirates from overseas investments, most of which are held by Abu Dhabi. Both of these revenue streams fund part of the federal deficit, and were they to be factored into the budget equation, the government budget could actually show no deficit in 2004 and a higher surplus in ensuing years.
Inflation: Inflation in the UAE is more marked than in most of the oil-based Gulf economies and has risen sharply in recent years, reaching approximately 4.5 percent in 2004 according to UAE government figures. This rise is attributed to a surge in domestic demand generated by escalating international oil prices, higher government spending, low interest rates, and strong population growth. Economists estimate that the rate of inflation will rise to approximately 6 percent in 2005. They note, however, that UAE government data reflect only costs incurred by UAE nationals, who constitute only one-fifth of the population and are protected by an extensive system of subsidies that restrict price increases on a range of core goods and services. A more realistic measure of the cost of living for all UAE residents (factoring in the weakening of the dirham against major currencies) would result in an inflation rate close to 10 percent.
Agriculture, Forestry, and Fishing: As a result of adverse climatic conditions (nutrient-poor soil, extreme aridity, and high summer temperatures) in the UAE, in 2004 agriculture represented a relatively small portion (an estimated 2.7 percent) of the country’s gross domestic product. Employment in the agricultural sector occupied only approximately 7 percent of the employed population in 2004, but because a relatively high proportion of UAE nationals are employed in farming, the sector receives a disproportionate share of government subsidies at both the federal and local levels. Dates remain the UAE’s major crop in terms of area cultivated, but the production of vegetables has increased dramatically, particularly in Abu Dhabi, and currently generates the most revenue. Other major products are eggs, dairy products, and poultry.
Fishing and pearl diving traditionally were an important part of the economy, but the pearl industry collapsed with the development of cultured pearls. Fishing is done almost exclusively for domestic consumption. There is no fish-processing industry in the UAE to provide a market for the 20,000 or more tons of fish caught each year that exceed local demand, and the surplus is either exported or returned to the sea.
Mining and Minerals: The UAE’s economy is dominated by the hydrocarbons sector, which accounts for more than 30 percent of total gross domestic product.TheSupreme Petroleum Council, headed by the crown prince of Abu Dhabi, has ultimate control over energy policy in the UAE. Despite the crown prince’s commitment to diversifying the economy by reducing dependency on oil, production continues to rise, with the goal of increasing capacity to 3 million barrels per day by 2007.
According to statistics published in November 2005, the UAE contains proven crude oil reserves of 98 billion barrels, or almost 10 percent of the world total. Of this amount, Abu Dhabi holds 94 percent (approximately 92.2 billion barrels). Dubai contains approximately 4.0 billion barrels. Under the UAE’s constitution, each emirate controls its own production and resource development. Abu Dhabi became a member of the Organization of the Petroleum Exporting Countries (OPEC) in 1967, but Dubai does not consider itself part of OPEC or bound by its quotas. As of late 2005, the UAE’s OPEC production quota stood at 2.5 million barrels per day, and as of third quarter 2005, its crude oil production was 2.5 million barrels per day, which is close to its sustainable capacity.
According to statistics published in January 2005, the UAE has natural gas reserves of 212 trillion cubic feet, the fifth largest supply in the world after Russia, Iran, Qatar, and Saudi Arabia. Abu Dhabi holds the largest reserves—196.1 trillion cubic feet. The emirates of Sharjah, Dubai, and Ras al Khaymah hold considerably smaller reserves. UAE natural gas production rose from 1,100 billion cubic feet in 1995 to 1,500 billion cubic feet in 2002, surpassing consumption demands.
Industry and Manufacturing: Industry (including mining, manufacturing, construction, and power) accounted for an estimated 55 percent of the gross domestic product (GDP) in 2004 and employed an estimated 35 percent of the workforce in that year. The major heavy industries in the UAE are related to hydrocarbons, and the bulk of the manufacturing industry is centered in the Jabal Ali Free Zone in Dubai and the Jabal az Zannah-Ar Ruways industrial zone in Abu Dhabi. The main products are liquefied petroleum gas, distillate fuel oils, and jet fuels. Manufacturing constituted 15.7 percent of GDP in 2003 and employed 11 percent of the workforce in 2003. Aluminum has emerged as a key manufacturing activity over the last 20 years as a result of the growth of Dubai Aluminum, owned by the Dubai government. The company’s 2004 production capacity of 600,000 tons per year placed it as one of the world’s top 10 producers. Other manufacturing sub-sectors are steel and chemicals.
In November 2004, in an effort to strengthen its industrial base, Abu Dhabi entered into a US$1.3 billion joint venture with Volkswagen of Germany to buy Leaseplan, a European car fleet firm. Volkswagen also will manufacture commercial vehicles in Abu Dhabi’s new industrial zone, which is expected to be operational by 2006.
Energy: In 1997, in response to the UAE’s rising demand for electric power, coupled with volatile swings in peak loads, the Abu Dhabi government formed the Privatization Committee for the Water and Electricity Sector to assess the emirate’s energy requirements and consider privatization as an option. This committee recommended that Abu Dhabi’s water and electricity department be changed to a semi-autonomous regulatory body, the Abu Dhabi Water and Electricity Authority (ADWEA), and that the emirate’s power stations be partially or totally privatized. The privatization of production through the creation of independent water and power projects (IWPPs) has become the cornerstone of ADWEA’s strategy to meet continuing increased demand for power and water (estimated to rise 10 to 15 percent a year). As of 2005, there were four major IWPPs in Abu Dhabi.
The first IWPP was the Taweelah A–2 project, commissioned in 2001, which added 710 megawatts of power and 50 million gallons per day of desalinated water to the UAE’s supplies. As in all IWPP joint ventures, ADWEA has a 60 percent share in the company established to build, own, and operate the plant. Taweelah A–1, a project expanding an existing facility to bring capacity to 1,350 megawatts and 84 million gallons per day, was commissioned in May 2003. The Taweelah B plant, where capacity is currently 1,000 megawatts and 90 million gallons per day, is slated for a US$3 billion expansion. An international consortium has completed an agreement with ADWEA; by 2008 power capacity will be doubled to 2,000 megawatts and water desalination capacity raised by 65 million gallons per day.
The US$3.5 billion Dolphin gas pipeline project was formulated in 1999 to bring gas from Qatar’s massive offshore North Dome Field to the UAE via a 182-kilometer export pipeline. In its initial phase, scheduled to begin in late 2006, the pipeline is expected to carry 3 billion cubic feet per day of Qatari natural gas to the UAE and Oman, almost 10 percent of total world natural gas supplies shipped by pipeline. This project is important to the UAE’s northern emirates, especially Dubai, where natural gas resources are not meeting demand. In addition, the pipeline is viewed as a long-term solution to the rising demand for power and water, because natural gas is the primary fuel for power generation and desalination plants.
The UAE is positioning itself strategically in the Gulf region by participating in a US$1 billion project to build a regional power grid throughout the Gulf Cooperation Council (GCC) countries. The first phase links Saudi Arabia, Bahrain, and Qatar. The UAE and Oman would participate in the second phase, contingent on each country’s having its own unified power grid. In 2003 the UAE awarded a contract to Electricité de France to connect all the power stations along its western coast with the central region.
Services: According to the UAE government, the services sector (including financial enterprises and government services) produced 45.2 percent of the gross domestic product (GDP) in 2003 and 42.1 percent of GDP in 2004. This sector employed more than 1.3 million persons in 2003 and more than 1.4 million in 2004, which is approximately 60 percent of the total work force.
Banking and Finance: The UAE Central Bank was established in 1980 to direct monetary, credit, and banking policy. It maintains the UAE government’s reserves of gold and foreign currencies, acts as the bank for banks operating in the UAE, and acts as the state’s financial agent at international financial institutions. In response to pressure from the World Trade Organization to open the banking sector to more foreign competition, in late 2004 the UAE Central Bank stated that it would consider allowing new foreign banks to establish themselves in the UAE for the first time in 20 years, but as of late 2005 no new licenses had been issued. Relative to its population and gross domestic product, the UAE has an unusually high number of banks—21 local, 25 foreign, 2 specialized, and approximately 50 representative offices of other foreign banks. The top five commercial banks control 65 percent of total banking assets and reported very strong profit growth from 2002 through the third quarter of 2005.
The Dubai International Financial Center (DIFC) opened officially in September 2004. The DIFC is a self-regulating financial free zone, operated independently of the UAE Central Bank and including more than a dozen international financial institutions. In September 2005, it established the Dubai International Financial Exchange, which provides markets for equities, bonds, funds, sharia-compliant products, and derivatives and is fully open to foreign investment.
The Dubai Financial Market (DFM) opened in March 2000 and by February 2004 had 14 listed companies. It reported an increase in trading volume of 49 percent between 2002 and 2003. The Abu Dhabi Securities Market, which has been linked electronically to the DFM since 2004, reported an increase in trading volume of 176 percent between 2002 and 2003. The Shuaa Capital UAE General Index has shown exceptional growth. It rose by 103 percent in 2004 and at the end of November 2005 was up 125 percent since the beginning of the year.
Terrorism is financed using the banking system in two primary ways—through money laundering and through financial transactions in the hawala system, which is a traditional alternative remittance system that operates outside the control of the conventional banking sector. After 9/11 a link was drawn between branches of Citibank in the UAE and the United States and financing of the terrorist attacks. In response, the UAE Central Bank has frozen the assets of organizations suspected of having ties to al Qaeda or to the former Taliban regime in Afghanistan. Legislation was enacted in 2002 tightening reporting requirements for financial transactions and increasing penalties for money laundering. Hawala operators, thought to be the conduit for much of the funding earmarked for terrorist activities, are now licensed in the UAE and required to report suspicious transactions to the UAE government. However, it is unclear how effective these regulations are.
Tourism: The primary source of the UAE’s rapidly growing tourism sector is the Dubai Emirate, which hosts the world’s tallest hotel. It has seen dramatic growth in hotel revenue (a 42 percent increase from 2003 to 2004) and reports hotel occupancy rates over 80 percent. The emirate hosted 5.5 million visitors from India, Pakistan, Iran, Lebanon, the Philippines, Europe, Australia, and South Africa in 2004, two-thirds of whom were traveling for business purposes. The main attractions for tourists are beaches, nightlife, shopping, and luxurious accommodations. Dubai has grandiose plans for the future—the building of four man-made island structures off the coast (valued at US$3 billion each) that will house more than 100 new hotels, as well as residential villas and apartments.
Labor: Numerous labor issues plague the UAE, resulting directly from the disproportionate number of expatriates (80 percent of the population) living and working there. In 2004 expatriates constituted 2.5 million of the total labor force of 2.7 million, which means that nationals constituted less than 10 percent of the employed population. Nationals make up an estimated 80 percent of the federal and emirate-level civil service but hold only 2 percent of jobs in the private sector, which provides 52 percent of the jobs in the UAE. Recognizing that foreigners dominate the private sector, both as employers and employees, and that by 2006 there will be more than 100,000 secondary school and approximately 70,000 technical college/university graduates seeking employment, the concept of “emiratisation” is becoming the predominant theme in the debate over government labor policy. In addition to evaluating ways to create employment opportunities in various economic sectors (including enforcing a minimum quota of UAE nationals across the private sector, as currently exists in the banking sector), the government is developing enhanced school curricula to reflect the need for stronger math and science skills, as well as improved English language skills.
Hundreds of thousands of low skilled, poorly paid (often unpaid) South Asians work in the UAE in substandard living conditions without any rights or recourse for alleged abuses. Workers reportedly are denied health care, and there have been numerous instances of industrial accidents, particularly in the construction industry, which is the main employer of expatriate Asian labor. According to the U.S. Department of State, in 2005 there were approximately 20 widely publicized organized demonstrations of workers complaining of unpaid wages and unsuitable working conditions, and in September 2005 approximately 1,000 construction workers blocked a main thoroughfare in Dubai to protest unpaid wages. These incidents attracted widespread media coverage; in response, the UAE has begun to crack down on errant companies.
Confirming his pledge on taking office to promote the interests of UAE nationals, in early 2005 the UAE president announced a 25 percent pay increase for all citizens working in federal government institutions as well as the UAE armed forces and employees of the Abu Dhabi Emirate, effective May 1, 2005. Expatriates working in the public sector are eligible for a 15 percent raise.
Foreign Economic Relations: In 1977 the Arab Monetary Fund (AMF), based in Abu Dhabi, was established by 20 Arab states to provide loans to member states, primarily for balance-of-payments support. In 1981 the UAE joined with Saudi Arabia, Kuwait, Bahrain, Qatar, and Oman to form the Gulf Cooperation Council (GCC). Although the GCC was created primarily in response to regional stability and security concerns, it also serves to coordinate the economic and monetary policies of its members. The UAE is a member of the Organization of Arab Petroleum Exporting Countries, and Abu Dhabi joined the Organization of the Petroleum Exporting Countries in 1967. The UAE has been a member of the World Trade Organization (WTO) since 1996; WTO policies apply to each of the seven emirates.
In September 2003, the International Monetary Fund and World Bank held their joint annual meeting in Dubai, the first time the conference had been held in the Middle East and a clear reflection of the UAE’s pro-Western stance. In early 2004, the UAE and the United States signed a Trade and Investment Framework Agreement, the first step toward negotiation of a bilateral free-trade agreement (FTA). In November 2004, the United States formally announced that it would negotiate an FTA with the UAE and Oman, and negotiations began in March 2005. Saudi Arabia has opposed FTAs between GCC member countries and the United States as violations of an existing GCC external tariff agreement and has argued that the GCC should negotiate trade agreements as a bloc, as it is doing with the European Union.
In a show of regional unity, and of greater political and diplomatic than economic consequence, the UAE and Qatar have announced they will build a US$1.8 billion causeway linking the two countries. The causeway project will be part of a network that eventually will link four of the six GCC states by one road.
Imports: Imports totaled US$54.2 billion in 2004 and are projected to increase to US$60.2 billion in 2005, US$65.6 billion in 2006, and US$68.2 billion in 2007. Principal imports are machinery and transport equipment, chemicals, and food. The principal source of UAE imports in 2003 was China (10.3 percent of the total). Other major countries of origin included India, Japan, and Germany.
Exports: In 2004 UAE exports totaled US$82.7 billion; this number is projected to increase to US$103.7 billion in 2005, as a result of record oil prices, and to US$106.8 billion in 2006. According to official balance-of-payments statistics, hydrocarbon exports account for almost 60 percent of the UAE’s total export revenues (including re-exports). Non-oil sectors of the economy contribute approximately 40 percent of the country’s total exports. The primary destinations of UAE exports in 2004 were Japan (26 percent of total exports), South Korea, Thailand, and Iran.
Trade Balance: The UAE has recorded merchandise trade surpluses every year for more than 20 years. As a result of the improved outlook for international oil prices, economists expect continued significant increases in export revenues. Import spending also will continue to rise as domestic demand increases. The overall effect on the UAE’s economy is a trade surplus of US$29 billion in 2004, and a projected trade surplus of US$42 billion in 2005 and 2006.
Balance of Payments: Economists point to two primary factors contributing to the UAE’s current-account surplus: growth of services exports and greater return on the emirates’ large portfolio of foreign assets, fueled by higher interest rates. Although these inflows will be offset by higher costs associated with rising import volumes and continued reliance on foreign labor, a net current-account surplus of US$12.7 billion is calculated for 2004 (about 14 percent of gross domestic product—GDP), and a surplus of US$26.2 billion is estimated for 2005 (about 22 percent of GDP). The surplus is expected to narrow to US$23.3 billion in 2006 and to US$15.6 billion in 2007.
External Debt: The UAE does not release data on external debt, but the Organisation for Economic Co-operation and Development reported that foreign borrowing was US$18.6 billion at the end of 2000, which represented 27 percent of gross domestic product. Economists estimate that the debt stock rose to US$22.9 billion by the end of 2004. These amounts are attributed to the growing number of infrastructure projects financed through medium- and long-term foreign borrowing. According to U.S. government and International Monetary Fund estimates, UAE reserves of foreign exchange and gold in 2005 ranged from US$19.8 billion to $23.5 billion.
Foreign Investment: The UAE traditionally has resisted establishing a liberal economic environment favorable to foreign investment, and each emirate retains close controls on foreign ownership rights. In 2004 economists cited statistics from the United Nations Conference on Trade and Development setting the foreign direct investment average in the UAE at US$150 million to US$200 million per year in previous years but noted that factoring in private investment in joint ventures such as the independent water and power projects in Abu Dhabi would yield a much higher dollar amount. The Kuwait-based Inter-Arab Investment Guarantee Corporation has reported that between 1985 and 2001 the UAE received approximately US$2.1 billion in Arab capital while it in turn placed nearly US$1.3 billion into Arab markets.
The level of foreign investment in the UAE may well increase in the near future, as laws are liberalized and investment opportunities increase. At present, the UAE’s companies’ law stipulates that foreign investors may own a maximum of 49 percent of a company registered in the UAE; the controlling share of the company must remain with a UAE national. Companies located in designated “free zones” may be 100 percent foreign-owned. The UAE government views the establishment of these trade zones (most of which are in Dubai) as an effective magnet for foreign investment. Companies doing business there are eligible for corporate tax holidays, exemption from personal taxes, repatriation of capital and profits, and exemption from import duties and currency restrictions. Work is near completion on a new companies’ law that would allow foreigners to have a majority share, possibly 100 percent, of UAE-based firms. The UAE government is also expected to repeal the sole agency rule that requires firms wishing to sell goods in the UAE to operate with a single local partner.
In August 2005, the UAE president and ruler of Abu Dhabi issued a decree allowing non-Gulf Cooperation Council (GCC) foreigners to own property in that emirate through 99-year renewable leases on residential and commercial buildings; land ownership will remain restricted to UAE nationals. On March 14, 2006, the Dubai government issued Law No.7 allowing UAE and GCC citizens as well as expatriates to acquire freehold and 99-year lease property in designated areas in the emirate. In addition, World Trade Organization requirements will force the UAE government to reform, by mid-2006, a number of other business regulations that currently impede foreign firms doing business there.
The Dubai International Financial Exchange, opened at the end of September 2005, is a bond, equity, and derivatives exchange that is 100 percent open to foreign investment. The UAE wants to attract foreign issuers, particularly from the Arab world, South Africa, and India.
Foreign Aid: The Abu Dhabi Fund for Development assists developing countries in the development of their economies by extending project loans, guarantees, technical assistance grants, and equity participation. Since its founding in 1971, the fund has given approximately US$5.2 billion in aid to 56 countries; the majority of its loan commitments (80.5 percent) have gone to Arab countries. Asian countries receive 9.5 percent of the fund’s total assistance, and African countries, 7 percent.
Currency and Exchange Rate: The UAE’s currency is the dirham (Dh), which is valued at Dh 3.67 per US$1. The dirham has been pegged to the U.S. dollar at this rate since the mid-1980s. In December 2001, the Gulf Co-Operation Council agreed to establish a single currency for the region, the “dinar,” by January 2010.
Fiscal Year: The UAE’s fiscal year coincides with the calendar year.