Sustaining Long-Run Growth and Macroeconomic Stability In UAE - Example

SUSTAINING LONG-RUN GROWTH AND MACROECONOMIC STABILITY IN UAE: THE ROLE OF STRUCTURAL TRANSFORMATION AND DIVERSIFICATION IN TIMES OF FALLING OIL PRICES NAME: UNIT: INSTRUCTOR: DATE OF SUBMISSION: WORD COUNT: 1846 Economic Background The United Arab Emirates (UAE) is situated in the Middle East and depends on oil as a primary economic driver. The country has a GDP of 3.8 at constant market prices, fiscal balance of -2.1% of the GDP percentage, the population of 9.157million and inflation rate of 1.7% in 2015. The economic environment has shown slow growth due to decreased oil prices and the mega projects that the government is undertaking. The government is trying to create non-oil investment to reduce the dependency on oil as a primary driver of economic growth for the country. The development of sports tourism, international airline hubs, retail trade service and manufacturing are part of the diversification plans of the UAE. The country experienced turbulence on its economic growth in 2014 when the oil prices fell to an average low of 5%, but since then it has taken measures and thus recovering at a slow rate (World Bank, 2016). The condition forced the government to enforce austerity measures to protect the economy from the shock. The government increased policy rate by 25basis which in turn raised the cost of lending to private investors. The increased interest rate reduced consumer confidence in the banking sector due to reduced liquidity and weaken business as a result of high cost of credit (Georgiou, n.d.). The recent survey shows that the banks have reduced their funding to private investment and narrows down to investors dealing with property investment. The residential prices fell by 10% in 2015 and 10% in the first quarter of 2016 and thus sending a warning signal on its future business sustainability and systematic risk. The resilience in real estate business is evident in non-oil investment region since they have been experiencing growth despite the fall in oil price. Therefore, lenders concentrate more on SMEs in non-oil compared to oil-related investments as to reduce exposure to oil volatility. The country experienced a sharp drop in average inflation rate (1.7%) in 2016 as compared to 2015 which they recorded 4.1%. Economic Indicators Forecast Overview The GDP is widely used indicator in determining the health of a given economy. The GDP provides the income and output in UAE within a specified period. The expenditure for all final services and goods produced within a country in a specified period equates to Country’s GDP. The lowest GDP stands at 180.617billion USD in 2005 and highest in 2014 at 401.958billion USD (tradingeconomics.com, 2017). The GDP decreased in 2015 despite the constant increase evident between 2009 and 2014. The country forecast increase in future since Q4 of 2017 will record 377billion USD, Q1 of 2018 records 390 billion USD and 2020 hits the record high at 425billion USD (World Bank, 2016). The graph below shows GDP trend 0f 2005-2015; The labour participation rate measures the proportion of individuals of age 15+years that are either employed or actively seeking employment (Unemployed) i.e. it evaluates the working population of UAE. The increase signifies an increase in the labour force and vice versa. The graph below shows labour participation of UAE; It is evident from the graph that the working population has been decreasing at a high rate from 2005 and slowed from 2010 to date. The reduction in the workforce shows that high proportion will depend on the small percentage of working population. The unemployment rate shows the percentage of the population who are actively looking for employment opportunities. The current unemployment rate is at 4.2% which ranks at a good position in Asian since Afghanistan has the highest employment rate of 40 % while the Qatar with the lowest unemployment rate has 0.2%. The unemployment is expected to rise in 2017 to 4.6%, 4.8% in 2018 and 4.9% in 2020. The 2020 rate will hit the record high since the current highest rate as per the data of 1985 to 2012 is 4.6%, and lowest rate is 1.15% (tradingeconomics.com, 2017). The consumer price index (CPI) measures the change in purchasing power of consumer for a basket of goods and services (George & Hamid, 2003). The current CPI stands at 107.41 index points which are higher compared to 2008-2012 average of 98.23 index point. The CPI is expected to increase with a forecast of 112 in Q4 of 2017, 114 in Q1 of 2018 and 130 in 2020. The lowest CPI was at 89.17 and highest at 107.41 as per the data of 2008-2017 (tradingeconomics.com, 2017). Therefore, future CPI will record the highest in history, and thus citizens are supposed to get ready to part with a considerable sum of money for the same basket of goods and services in future. The balance of trade shows the difference between exports and imports in UAE. The positive Balance of trade means that the country is exporting more than what it is importing and negative Balance of trade means the country is importing more than exports. The UAE has recorded positive Balance of trade since 2000 to date. The country is exporting an enormous amount of oil and gas. The foreign exchanged earned off the small proportion of imports made (tradingeconomics.com, 2017). The graph below shows that 2009 recorded the lowest and highest in 2011 and 2012. The amount decreased from 2013-2016 due to fall in the global oil prices. The direct foreign investment is where company or individual have a business interest in another country. The investment includes acquisition, controlling interest or establishment of a new company in the foreign country. The analysis of UAE data on direct foreign investment shows that the company received 33000million AED which was an increase from the previous period of 32000million AED. The highest record of direct investment was at 52100million AED and the lowest 14700million AED as per 2006-2016 data. The direct foreign investment plays a crucial role in shaping the health of an economy in various ways which include a favourable balance of payment, increased competition, technology and labour transfer and creation of employment. The country forecasts show an increase in direct foreign investment as follows Q4 of 2017 at 35560million AED, Q1 of 2018 at 38748million AED and 2020 at 50000 (tradingeconomics.com, 2017). Major Economic Challenges Facing the Country The slow economic growth is one of the major challenges facing UAE. The graph above shows that country’s GDP decreased as compared to other economically developed countries. The fall in global oil and gas prices had a negative impact on economic growth since UAE depends greatly on hydrocarbon exports. The oil exporters from other regions experienced growth due to the diversified economy (George & Hamid, 2003). The country is trying to solve the problem by diversifying its economy by creating sport-tourism, funding Abu Dhabi real estate centre, light manufacturing, airline business and retail transport services. The diversification creates a more resilient economy and absorbs the shocks from oil price fluctuations. Lastly, labour participation rate shows that the active population is declining as ageing population increases and thus shifts of economic attention towards carrying for the old and reduced investment on economic activities (Shayah, 2015). The unemployment on the increase due to several factors that include high population rate compared to the creation of employment opportunities. Also, the Austerity measure taken by the government discourages business since the cost of credit increased, and lenders became selective on sectors of the economy that they access the loan (Georgiou, n.d.). Consequently, it is evident from the analysis above that the direct foreign investment shrank and thus slowed down the creation of employment in the economy. Lastly, the less diversified nature of the country’s economy plays an immense role to increased unemployment. Therefore, the country should concentrate in increasing the level of output to achieve a GDP of more than 6% as a benchmark to achieve sustained employment for Middle East nations (George & Hamid, 2003). The UAE public sector infrastructure is efficient compared to other Middle East countries, but it still needs to revamp to stir economic growth and reduce government expenditure. The size of UAE public sector is relatively large and thus difficult to manage and requires an enormous funding from the national budget. The public sectors include local government, enterprises owned by the government and central government. A great proportion of public expenditure is recurrent due to a large sum of salaries paid to civil servants. Therefore, reduce the amount that would have been used to fund development project that improves the country’s GDP and promote private investment (George & Hamid, 2003). Also, the country is allocating a relatively large amount to military and thus limiting investment funding. Though, security promotes economic growth by creating an enabling environment and thus the country needs to ensure that conflict in the neighbouring countries does not interfere with country’s security. Lastly, the country has an ineffective fiscal policy and thus causing inconsistent fiscal balance and deficit budget in 2009 and 2010. The UAE tax system does not capture a wide bracket of citizens and thus low revenue collection by the government. The country is currently addressing the challenges since it seeks to introduce VAT tax at a rate of 5% in January 1st, 2018 (Price Water Coopers, 2016). The amount raised will boost the economic status of the country since it will channel the revenue in a development project that diversifies the economy i.e. Sport-tourism and manufacturing sector. Trade Volume The UAE nation is ranked 60th according to economic complexity index and among the top largest export economies. The country exported 147billion USD and imported 217billion USD, leading to a negative balance of trade. The country major exports include hydrocarbons (oil and gas), Gold and Diamonds (Atlas.media.mit.edu, 2017). The table below shows a summary of top exported and imported products in 2015; Export Amount (‘Billion’ USD) Import Amount (‘Billion’ USD) Crude oil 46.8 Transmission equipments 14.2 Diamonds 8.66 Jewelry 11.9 Refined Petroleum 18.9 Gold 12.8 Gold 13.4 Aircraft 9.2 Petroleum Gas 8.06 Cars 11.1 Total 95.82 Total 59.2 According to the data above, it can be noted that natural endowments resources account for more than 65% of the exports. Japan imports 21billion USD from UAE and ranks as its first export partner and followed by India at 19.4Billion USD (Atlas.media.mit.edu, 2017). Other trading partners include Saudi Arabia, China, Oman and Saudi Arabia. The chart below shows summary of the trading partners of UAE; The UAE import spots include Japan, India, China, United State, Germany and United Kingdom. The chart below shows the summary of imports; The chart below shows that China is the highest import trading partner for UAE. Also, the country imports from several countries since the other countries amount to 49% of the total imports. Conclusion In conclusion, it is noted that UAE economy is performing relatively well compared to other nations within the Middle East region. The lag in the economy includes increased unemployment rate, slow growth rate due to drop in hydrocarbon prices, inefficient public sector and undiversified economy. The country is addressing the above challenges by widening economic activities since non-oil related investments are recording growth. Also, the introduction of VAT tax in 2018 will improve country's revenue base. Reference: Atlas.media.mit.edu. (2017). OEC - United Arab Emirates (ARE) Exports, Imports, and Trade Partners. Atlas.media.mit.edu. Retrieved 5 May 2017, from http://atlas.media.mit.edu/en/profile/country/are/ George, A and Hamid, D. (2003). Challenges of Growth and Globalization in the Middle East and North Africa. Retrieved 5 May 2017, from https://www.imf.org/external/pubs/ft/med/2003/eng/abed.htm Georgiou, M. Austerity Measures, Banking Capital Adequacy and Income Distribution. SSRN Electronic Journal. Price Water Coopers. (2016). UAE to Impliment VAT on 1 June 2018. http://www.pwc.com. Retrieved 5 May 2017, from http://www.pwc.com/m1/en/tax/documents/2016/uae-to-implement-vat-on-1-january-2018.pdf Saadi, D. (2016). China considers UAE to be more than an end market | The National. Thenational.ae. Retrieved 5 May 2017, from http://www.thenational.ae/business/economy/china-considers-uae-to-be-more-than-an-end-market Shayah, M. (2015). Economic Diversification by Boosting Non-Oil Exports (Case of UAE). Journal Of Economics, Business And Management, 3(7), 735-738. tradingeconomics.com. (2017). United Arab Emirates. Tradingeconomics.com. Retrieved 5 May 2017, from http://www.tradingeconomics.com/united-arab-emirates World Bank. (2016). United Arab Emirates Economic Outlook- Spring 2016. (2017). Retrieved 5 May 2017, from http://pubdocs.worldbank.org/en/141211460471550773/UAE-MEM-eng.pdf Read More