United Arab Emirates
Recent Economic Developments

This paper reviews economic developments in the United Arab Emirates during 1995–98. Real GDP growth accelerated from about 5 percent in 1994 to 8.1 percent in 1995 and to 10.1 percent in 1996. However, 1997 saw a marked slowdown in real GDP growth, to an estimated 2.1 percent, reflecting mainly a decline in oil sector GDP. Over the period 1993–96, there was strong growth in non-oil GDP averaging 9½ percent per year, boosted by an exceptionally good performance in 1994 (12 percent).

Abstract

This paper reviews economic developments in the United Arab Emirates during 1995–98. Real GDP growth accelerated from about 5 percent in 1994 to 8.1 percent in 1995 and to 10.1 percent in 1996. However, 1997 saw a marked slowdown in real GDP growth, to an estimated 2.1 percent, reflecting mainly a decline in oil sector GDP. Over the period 1993–96, there was strong growth in non-oil GDP averaging 9½ percent per year, boosted by an exceptionally good performance in 1994 (12 percent).

U.A.E.: Basic Data

I. Economic Indicators, 1993–97

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Sources: U.A.E. authorities; and staff estimates and projections.

WEO June 1998 forecast.

In the U.A.E. national accounts, the volume of oil value added is adjusted for the real price of oil.

Unit labor cost in manufacturing and services.

Includes investment income and drawdown of ADIA’s foreign assets.

Imports for domestic use; excludes imports to free zones and imports of nonmonetary gold.

Gross reserves of the central bank (excluding gold).

II. Social and Demographic Indicators

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Sources: Ministry of Planning; and World Bank, Social Indicators of Development, 1997.

I. Introduction and Summary

1. The United Arab Emirates (U.A.E.) is a federation formed in 1971, which comprises seven sheikhdoms: Abu Dhabi, Ajman, Dubai, Fujairah, Ras Al-Khaimah, Sharjah and Umm Al-Qaiwan. Each of the emirates retains a considerable degree of autonomy over its economic, financial and political affairs. The oil sector continues to provide the main source of fiscal revenues and export earnings, and the U.A.E. is also a significant exporter of liquefied natural gas (LNG). Over 90 percent of the U.A.E.’s oil and gas resources are in Abu Dhabi, and the ratio of proven reserves to production is estimated to give the federation around 120 years of oil supplies. Although oil is still the mainstay of the economy, its contribution to GDP has declined steadily from about 60 percent in 1980 to around 31 percent in 1997. Efforts at further diversifying the economy are continuing, and in particular, attempts are being made to expand the tourism sector, financial services industries, and manufacturing as well as gaining market share in the entrepôt trade. Since 1992, the non-oil economy has grown strongly, and the value of non-oil exports (largely reexports) has increased substantially.

2. Attempts to develop the non-oil sector have been facilitated by the continuation of sound government economic policy, including: a free exchange rate system and a liberal trade regime; an outward-oriented strategy that stresses private sector initiative within a framework of effective regulation; extensive infrastructure investment by the government; and increasing confidence in domestic financial institutions resulting from a strengthened system of bank supervision and prudential regulation.

3. Real GDP growth accelerated from around 5 percent in 1994 to 8.1 percent in 1995 and to 10.1 percent in 1996. However, 1997 saw a marked slowdown in real GDP growth, to an estimated 2.1 percent, reflecting mainly a decline in oil sector GDP, Over the period 1993–96, there was strong growth in non-oil GDP averaging 9½ percent per year, boosted by an exceptionally good performance in 1994 (12 percent), but non-oil growth also decelerated to 5.4 percent in 1997 due to a slowing of demand in major markets and a reduced stimulus from government expenditure. Consumer price inflation decelerated from 4½–5 percent in 1993–95 to just over 3 percent in 1996–97, the slowdown reflecting mainly movements in import prices.

4. There has been a significant improvement in the public finances over the past few years, reflecting favorable oil prices for most of the period 1994–97 and the authorities’ increasing emphasis on fiscal restraint. Recognizing the need to diversify the revenue base and to address the high fiscal deficit in 1994, the federal government and the emirates introduced non-oil revenue measures and took steps to contain expenditures. Reflecting higher transfers of profits from enterprises and the central bank and the upward adjustment of customs duties from 1 percent to 4 percent, non-oil revenues rose from 6.2 percent of GDP in 1994 to 8.8 percent in 1997. At the same time total expenditures declined from 41.2 percent of GDP in 1994 to 36.7 percent in 1997 due mainly to a sharp reduction in capital expenditure. Assisted also by favorable oil prices, the overall deficit (excluding income earned on Abu Dhabi’s external reserve assets) narrowed from 14.6 percent of GDP in 1994 to 5.2 percent in 1997. If this investment income is included in the consolidated government revenues of the U.A.E. rather than as a financing item, the overall fiscal balance for 1997 would show a small surplus of 0.4 percent of GDP, the first surplus in many years. The fiscal outturn for 1998 is likely to deteriorate significantly owing to the sharp fall in oil prices to historically low levels in real terms and the weakening of demand in Asian markets for hydrocarbon-based products and in neighboring oil-producing countries for reexports.

5. The growth in broad money accelerated to over 9 percent in 1997 from 7 percent in 1996 reflecting a strong expansion of domestic credit in both years; commercial bank lending to the private sector accelerated to almost 13 percent in 1997 from 10 percent in 1996 due in part to strong demand for credit to purchase shares of newly floated companies. The net foreign assets of the banking system fell by 1.7 percent in 1997 after declining by 0.7 percent in 1996. There was continued strong growth in domestic liquidity in the first half of 1998, although the pace of lending to the private sector moderated as the authorities took steps to limit lending for share purchases toward the end of 1997. Domestic interest rates continued to trace closely movements in U.S. dollar interest rates.

6. The external current account has remained in surplus in recent years. Reflecting higher exports and investment income receipts, the surplus widened to US$6.7 billion in 1997 from US$6.6 billion in 1996, but narrowed as a percentage of GDP from 13.8 to 13.6 percent. As the capital account moved into to a deficit position in 1996 and 1997 owing mainly to net short-term capital outflows by the commercial banks, the overall balance of payments surplus narrowed to US$0.3 billion in 1997 from US$0.6 billion in 1996. At end-1997, the gross official reserves of the central bank amounted to US$8.3 billion, equivalent to 3.6 months’ merchandise imports. These reserves do not include Abu Dhabi’s very large external reserve assets.

7. The U.A.E. maintains a liberal trade system and an exchange system free from restrictions. The dirham was pegged to the U.S. dollar at Dh 3.6710=US$1 until November 1997, and at Dh 3.6725=US$1 since then. This exchange arrangement has helped to link domestic prices to those prevailing in world markets, and together with a relatively restrained domestic credit stance and strong banking supervision and prudential regulation, has kept inflation at a moderate level and helped maintain confidence in the banking system.

II. Real Sector

A. Overall Economic Activity

8. The evolution of aggregate GDP in the U.A.E. depends on the development of both oil and non-oil GDP. For the oil sector, measured growth depends not only on the volume of oil output but also on the method of calculation used by the authorities. Nominal oil sector value added—using the average annual crude oil export price—is deflated by the average annual import price index to indicate the purchasing power of oil income. Consequently, although oil production remained fairly stable in recent years under the constraint of the U.A.E.’s OPEC quota, the real value added of the oil sector fluctuated markedly, declining sharply in 1993–94, recovering again in 1995–96, and falling slightly in 1997 (Table 1 and Appendix Table 12).1 By contrast, real non-oil GDP rose each year in the 1980s and 1990s, and recorded an annual average rate of growth of over 9 percent between 1992 and 1995. Non oil growth remained robust at 7.8 percent in 1996 and 5.4 percent in 1997, suggesting that the fiscal consolidation implemented in these two years had only a modest impact on private sector activity (Chart 1). After averaging over 4 percent during 1992–95, the growth of total real GDP at factor cost increased to 10.1 percent in 1996 but slowed to an estimated 2.1 percent in 1997 due mainly to the impact of oil export price movements on measured oil sector GDP.

Table 1.

U.A.E.: Real Growth by Sector, 1993–97

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Source: Table 12.

The concept of “product value at constant prices” used for crude oil and refined petroleum products is different from that for other sectors. While for each non-oil sector the value of production at current producer prices is deflated by an index of producer prices applicable to that sector, the deflator used for the oil sector consists of the ratio of an index of oil sector producer prices to an index of prices of all imports to the U.A.E. Movements in crude oil production as reflected in this table may, therefore, differ from movements in the volume of production shown in Table 3.

Includes natural gas and petroleum processing industries.

9. GDP by expenditure categories is available only in nominal terms (Table 2 and Appendix Table 14). Domestic expenditure rose at an annual average rate of almost 10 percent during 1992–95, as a strong fiscal impulse benefitted the private sector. Public fixed investment and private consumption increased rapidly, so that their shares in total GDP increased by more than 5 and 3 percentage points, respectively, over this period. Reflecting the strong growth of domestic demand, imports increased on average by over 10 percent per year in 1992–95, albeit at a declining rate, but buoyant growth of non-oil exports was moderated by fluctuations in the oil export price so that the annual average export growth was only 5.5 percent. As a result, the external sector’s contribution to growth moderated during these years, and nominal GDP at market prices increased an average annual rate of 6.5 percent. In 1996, nominal GDP rose by 12 percent. The rate of expansion of domestic expenditure slowed only slightly to 9 percent as a deceleration in the growth of public consumption and fixed investment was largely offset by higher private expenditure on both consumption and investment, and the external current account surplus increased significantly—reflecting mainly a six-year peak in oil export prices. Preliminary estimates for 1997 suggest that nominal GDP growth slowed to 3 percent due to a deceleration in domestic expenditure. The continuing fiscal consolidation and weaker private consumption offset the impact of still buoyant private fixed investment. The external sector also contributed positively to overall growth due to higher gas and non-oil exports.

Table 2.

U.A.E.: Use of Resources at Current Prices, 1993–97

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Source: Ministry of Planning.
CHART 1
CHART 1

UNITED ARAB EMIRATES GROWTH, SAVINGS, AND INVESTMENT, 1993–97

Citation: IMF Staff Country Reports 1998, 134; 10.5089/9781451801071.002.A001

Sources: The U.A.E. Central Bank and Ministry of Planning.

B. Oil Sector Developments and Prospects

Background

10. The U.A.E.’s proven reserves of crude oil are officially estimated at 100 billion barrels, the third largest after Saudi Arabia and Iraq, and equivalent to about 10 percent of world reserves. At present levels of output, the ratio of reserves to production is over 120 years. Although the major oil reservoirs have been identified, there is an ongoing exploration and development program (see below) which could extend the longevity of reserves by over a decade. The oil reserves are located mainly in Abu Dhabi which acts as the swing producer in maintaining the U.A.E.’s total production at its OPEC quota. Abu Dhabi’s production in recent years has been 1.8–1.9 million barrels per day (mbd); output in the other oil producing emirates—Dubai, Sharjah, and Ras Al-Khaima—amounts to about 0.3 mbd and is declining due to the gradual exhaustion of Dubai’s wells (Table 3).

Table 3.

U.A.E.: Summary of Oil and Gas Production, Exports, and Prices, 1993–97

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Sources: Abu Dhabi National Oil Company; and staff estimates.

Sharjah and Ras Al-Khaimah

Includes a one time payment of US$400 million in 1997 for the retroactive adjustment of LNG Prices.

11. The U.A.E.’s policy on crude oil production is to adhere strictly to its OPEC quota which remained unchanged at 2.161 mbd between 1993 and 1997. In the light of this policy, the authorities have focused on the development of the country’s natural gas resources (see below), and the production of petroleum condensates which are recovered in association with the production of crude oil and natural gas and are not subject to the OPEC quota. Condensates consist of naphtha and other benzine-type liquid natural gas which can be exported directly, mixed with heavy crude oil to obtain a lighter weight oil which attracts a higher price, or refined into petroleum products.2

Institutional framework

12. The individual emirates retain ownership and control of the country’s oil resources. The Federal Ministry of Petroleum and Minerals has only an advisory and statistical function, however, the Minister represents the U.A.E. at OPEC meetings. In Abu Dhabi, the Supreme Petroleum Council formulates policies on the basis of advice provided by the government-owned Abu Dhabi National Oil Company (ADNOC). The three major companies involved in oil production are the Abu Dhabi Company for Onshore Oil Operations (ADCO) producing about 0.9 mbd in 1997 from the Murban and Bab fields; the Abu Dhabi Marine Areas Operating Company (ADMA-OPCO) producing about 0.4 mbd from two offshore fields Abu al Bukoosh and Umm Shaif; and the Zakum Development Company (ZADCO), producing about 0.6 mbd from two offshore fields Upper and Lower Zakum. In the former two companies and a small ZADCO field the government holds a 60 percent share managed by ADNOC,3 while for the other two ZADCO fields, the ADNOC share is 88 percent. The production sharing arrangements broadly provide for ADNOC to receive its equity share in production after the payment of royalty and cost recovery; the partners’ share is then taxed at the rate of 55 percent. In addition to the three major companies, there are three other joint venture companies which produce a total of less than 0.1 mbd from three offshore fields.

13. ADNOC is also responsible for most of the upstream and downstream activities in Abu Dhabi’s oil sector, including the refineries at Umm al-Nar and Ruwais. The marketing and distribution of petroleum products is carried out by the Abu Dhabi National Oil Company for Distribution, a wholly owned ADNOC subsidiary.4 With regard to the natural gas sector, ADNOC has 70 percent ownership of the Abu Dhabi Gas Liquefaction Company (ADGAS) and 68 percent ownership of the Abu Dhabi Gas Industries Company (GASCO).

14. In the other emirates, the Rulers’ Offices formulate policies, and operations are carried out by joint ventures with majority government ownership. The Dubai Petroleum Company operates the offshore fields at Fateh, Falah, and Rashid with foreign partners Total, Conoco, and Wintershall Crescent Oil is the operator of Sharjah’s offshore Mubarak field.

15. The five major types of crude oil produced in the U.A.E. and quoted on international oil markets are Dubai’s Fateh (31° API), and Abu Dhabi’s Murban (39°), Umm Shaif (37°), Upper Zakum (34°), and Lower Zakum (40°). The Dubai Fateh crude price is often used as a by other oil exporting countries as a benchmark in their pricing decisions.

Exploration and development

16. A major exploration program was initiated in 1996 which aimed to raise Abu Dhabi’s sustainable oil production capacity from 2.2 mbd to 3 mbd by 2000 in order to be able to take advantage of any increase in the global demand for oil. Enhanced oil recovery techniques—three dimensional seismic analysis, behavioral modeling of wells, and horizontal drilling—are being implemented. However, the pace of implementation has slowed due to the less favorable medium-term market outlook. Currently, Abu Dhabi’s focus is on the development of existing fields to maximize the production of oil over the long term and to facilitate the stripping of condensates from the top of the reservoirs. Water injection is being replaced with gas injection so that optimal pressure can be maintained in producing wells.

17. There has also been recent exploration in the Northern Emirates. In 1997 and early 1998, two additional wells were drilled in the offshore Mubarak field in Sharjah, and one exploratory well offshore in each of Ras Al-Khaimah and Fujairah; both were unsuccessful.

Production, exports, and prices

18. Under the constraint of the U.A.E.’s unchanged OPEC quota, the aggregate volume of crude oil and condensates output remained fairly stable from 1993–96 at about 2.2 mbd. However, Abu Dhabi’s share in this total increased over time to offset declining production in Dubai. In 1997, condensates output rose by an estimated 130,000 bd due to the coming on stream of a major gas development project (see below), raising aggregate output to 2.39 mbd. Export volume also remained fairly stable over 1993–95 at 2.1 mbd, but rising domestic consumption of petroleum products and the associated input of crude oil to domestic refineries lowered the volume of exports in 1996 to 2.04 mbd. The higher condensate output in 1997 enabled export volume to increase. Given the relative stability of export volume, changes in oil export revenues reflected mainly movements in prices; revenues peaked at US$14.8 billion in 1996 as export prices rose to an average of US$19.87 per barrel, the highest since the 1990–91 regional crisis, and then declined to US$14.3 billion in 1997 owing to a reduction in average prices to US$18.80 per barrel.

19. Oil export prices rose during the first 10 months of 1997 and then declined sharply through the first half of 1998. The price for the grade with the largest production—ADCO’s Murban—increased from US$23.75 per barrel in January 1997 to US$20.20 in October, declined to US$17.00 in December and then plummeted to US$12.35 in June 1998. The initial decline reflected the weakening of demand by Asian countries from mid-1997 onward and a warm winter in the major consuming countries. It was intensified by increased supplies coming onto the global market in the early months of 1998 in response to OPEC’s decision in December 1997 to raise quotas effective January 1998; the U.A.E.’s quota was increased by 9 percent to 2.366 mbd and Abu Dhabi quickly raised its production in January and February. In response to the price decline, OPEC and other producers agreed to cut production in subsequent months. As of July 1998, the U.A.E. agreed to reduce output by 225,000 bd leaving a targeted ceiling of 2.157 mbd.

20. The domestic prices of refined petroleum products have remained stable in recent years, with the exception of diesel fuel prices which were raised by 11.8 percent in 1996, and are well above international ex-refinery prices (Appendix Table 17). The authorities do not vary domestic prices in line with international prices as price stability is preferred by consumers.

C. Natural Gas

Background

21. The U.A.E.’s natural gas reserves are officially estimated at 6 trillion cubic meters, or about 4 percent of world natural gas reserves. As with oil, these reserves are located predominantly in Abu Dhabi. The demand for natural gas in the U.A.E. is expected to grow by 4–5 percent per year over the medium term. This includes the consumption of methane and liquid petroleum gas (LPG) by industry and households. To meet this demand and to expand its petrochemicals industry, Abu Dhabi is undertaking a large scale gas development program. This program will also involve an increase in exports of natural gas liquids (NGLs). An increase in exports of liquid natural gas (LNG) is not expected, because the market outlook had deteriorated even before the onset of the Asian crisis due to additional supplies becoming available over the medium term from Qatar’s large gas development project. Abu Dhabi’s gas development program is outlined in Box 1, and it also includes the supply of part of Dubai’s future requirements.5 Dubai currently receives its normal-load supply from Sharjah, and supplements this in peak-load periods by associated gas from its own condensate field at Margham. Sharjah has sufficient gas reserves to meet its own needs and those of the northern emirates for electricity and water production. Sharjah will also commence construction of a US$120 million gas distribution network to serve commercial, industrial, and residential users in the second half of 1998.

Recent developments

Liquid Natural Gas

22. LNG is produced by ADGAS plant at Das Island in the Persian Gulf using dry gas piped from the Khuff reservoir gas treatment plants.6 In 1990, ADGAS signed a 25-year contract with the Tokyo Electric Power Company (TEPCO) for 4.3 mt per year and 0.4 mt on a best endeavor basis. This contract underpinned an expansion of capacity culminating in the completion of a third liquefaction train in 1994 which raised production capacity of LNG and NGLs (mainly LPG and pentane) to over 8 million tons per year. All ADGAS production is exported.

23. The production and exports of LNG remained stable at 5.5 mt in 1996 and 1997. LNG exports to TEPCO amounted to 4.5 mt in 1996, and 0.7 mt were supplied to Enagas (Spain) on a one-year contract basis. The purchase of LNG carriers (see Box 1) facilitated the sale of an additional 0.3 mt on a spot basis to two French gas companies. In 1997, exports to TEPCO increased to 4.6 mt, notwithstanding a scaling back of purchases from other suppliers, and sales to Enagas rose to 0.9 mt. However, there were no spot sales and an expected contract for the sale of 250,000 tons to Korea Gas did not eventuate.

24. Under the 25-year contract with TEPCO, LNG prices are reviewed every four years. The initial price agreed between April 1994 and March 1998 was US$3.05 per million Btu, but this price was well below market prices so that a new agreement was needed. As an interim measure, a price (per million Btu) of US$3.46 was invoiced for 1995, US$3.86 for 1996, and US$4.01 for 1997. In January 1997, a new price formula was agreed which was based on the Btu equivalent of Japan’s weighted average oil import price, with a buffering mechanism that utilized upper and lower price triggers to protect both parties from extreme fluctuations in oil prices. ADGAS benefitted from the buffering mechanism until the expiration of the pricing arrangement at end-March 1998. The arrangement also required a premium to be paid retroactively on deliveries at the invoiced prices between April 1994 and November 1996, so that in March 1997 ADGAS received a retroactive payment of US$400 million. Reflecting higher prices and this payment, LNG export receipts increased from US$1.1 billion in 1996 to US$ 1.5 billion in 1997.

Methane and LPG

25. The price of methane used by industry is determined by ADNOC on the basis of the recovery of its operating and capital costs and the achievement of a hurdle rate of profit by the enterprise. The Abu Dhabi Department of Electricity and Water is charged Dh 3.95 per mBtu. The price charged by ADNOC to other enterprises (e.g., urea and ammonia plants) varies according to the extent of international competition faced by the enterprise, but are higher than the electricity price. The prices paid by industry are also higher in other emirates, for example, the Dubai Aluminum Company pays US$1.27 per mBtu for gas purchased from Sharjah. For LPG used by households, the domestic retail price throughout the U.A.E. remained unchanged during the 1990s at Dh 30 for a 56 kg cylinder (US$146 per mt) until September 1998 when the price was reduced by 10 percent to Dh 27 in view of the decline in world oil and gas prices.

D. Developments in the Non-oil Sector

Diversification of the production structure and the role of government

26. The continuing diversification of the U.A.E.’s production base is evidenced by the steadily increasing share of the non-oil sector in total GDP at constant prices in recent years—from 63.5 percent in 1993 to 69.3 percent in 1997 (Appendix Table 12). It is also reflected in the faster growth of factor inputs into the non-oil sector relative to the oil sector. Over the same period, employment in the non-oil sector grew at an annual average rate of 7.7 percent compared with 5.1 percent in the oil sector. Similarly, the gross fixed capital formation in the non-oil sector grew at an average annual rate of 11.5 percent compared with 0.9 percent in the oil sector.

Abu Dhabi’s Gas Sector and Petrochemicals Projects

The major projects completed in 1996–97 and in the pipeline are listed below. The gas development projects all involve new gathering, receiving, and separation facilities and pipelines. All projects in the pipeline will be financed by ADNOC from its own resources, unless market conditions favor bank borrowing. The polyethylene plant will also be partly financed by a joint venture partner.

• Bab Onshore Gas Development-Phase I (US$1.35 billion)

Completed in 1996, 1.5 billion cubic feet per day (cfd) of raw gas is processed to produce 130,000 b/d of condensate, 5,400 tons/day of NGLs, 1,650 tons/day of sulphur, and 1.05 billion cfd of dry gas, of which, 740 million cfd is reinjected into the Bab oil field.

• LNG Tankers (US$1.0 billion)

Two LNG tanker ships of 135,000 ton capacity were delivered in 1996 and two in 1997. The Natural Gas Shipping Company charters the tankers from ADNOC and transports LNG as required by ADGAS contracts.

• Bab Onshore Gas Development-Phase II (US$1.0 billion)

Construction commenced in late 1997 of the upstream phase of the project intended to produce 54,000 tons/day of condensate, 300 tons/day of NGLs, 2,500 tons/day of sulphur and 1.0 billion cfd of dry gas, all to be used as feedstock for power, desalination, and petrochemicals plants. Completion is expected in 2000.

• Asab Onshore Gas Development (US$700 million)

Construction commenced in the second half of 1997 of facilities to process 900 million cfd of associated gas from the reservoirs under the Asab oil field. After the recovery of condensate, NGLs, and sulphur, the dry gas will be reinjected. Completion is expected by end-1999.

• Khuff Offshore Gas Development (US$1.0 billion)

Construction will commence in the second half of 1998 of facilities to produce an additional 640 million cfd of dry gas from the Khuff reservoirs underlying the offshore oil fields Abu al Bukoosh and Umm Shaif. The pipeline to onshore processing facilities at Tahweelah will have sufficient capacity to carry 950 million cfd to allow for future expansion. The project also includes the construction of a 65 km onshore gas pipeline from Tahweelah to Jebel Ali in Dubai to deliver an initial 500 million cfd, and a 50 km pipeline liquids pipeline to the Umm al Nar refinery. Completion is expected by mid-2001.

• Polyethylene Plant (US$1.0 billion)

Construction will commence in the second half of 1998 of a new marine terminal, a 600,000 tons per year ethylene cracker, and two 225,000 t/y polyethylene units at Ruwais. Technology developed by Borealis—which is owned by Norway’s Statoil (50 percent), Abu Dhabi (25 percent) and Austria’s OMV (25 percent)—will be used in the polyethelene units. The project’s owner is the Abu Dhabi Polyethylene Company, a 60:40 joint venture between ADNOC and Borealis. A new marine terminal will also be built. Completion is expected by mid-2001.

• Ethylene Dichloride (EDC) Plant (US$600 million)

Construction will commence at Ruwais in the first half of 1999 of a chlor alkali facility to produce 370,000 t/y of chlorine, and a 540,000 t/y EDC plant. The plant will use the remaining 150,000 t/y ethylene feedstock from the neighboring polyethylene plant. Completion is expected in early 2002.

27. The form of diversification has varied according to the development strategies of the emirate governments which take into account the emirates’ comparative advantages and resource endowments. Abu Dhabi’s growth strategy emphasizes the development of capital-intensive energy based activities such as petrochemicals (see above) and fertilizers. Dubai is expanding its role as a commercial and financial hub, building on the entrepôt trade, and has become an attractive tourist destination for both GCC and European nationals. Sharjah has traditionally been the center of small-scale manufacturing for import replacement and textiles for export and has about 45 percent of U.A.E. manufacturing industry. However, it is now promoting large scale industry in a new free trade zone and arts-oriented tourism. The northern emirates focus on agriculture, quarrying, cement, and have some specialist manufacturing industries (pharmaceuticals) and shipping services. Fujairah is also a popular tourist destination because of its monsoonal climate.

28. A common core of these development strategies is an expanded role for private sector investment and activity. To this end, each emirate government (and the federal government in the northern emirates) has provided a modem infrastructure—roads, utilities, telecommunications, ports and airports, and hospitals and schools. The absence of income taxation on labor or capital (except for banking profits) has also attracted private investment. In addition, the emirate governments have provided direct incentives for private investment in industrial zones such as free or low cost land, prebuilt factories and warehouses, and subsidized water and electricity tariffs.

29. Private investment in the economy has been facilitated in recent years by the establishment of a number of new joint stock companies (Box 2). Under the Federal Companies Law (Law No. 8 of 1984) the founding investors of a joint stock company must provide a minimum of 35 percent of its capital and the remainder can be raised by public subscription from U.A.E. nationals in initial public offerings (IPOs).7 The founding investors must retain their shareholding for two years. The participation of emirate governments and major private sector firms as founding investors has promoted public confidence in the companies and helped ensure the success of the IPOs.

U.A.E. Joint Stock Companies

The most important new public companies established between 1995 and mid-1998 are listed below. In most cases, 45 percent of the capital was provided by founding investors and 55 percent by public subscription.

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30. Some emirate governments are also providing opportunities for private investment through the privatization of their agencies and industrial companies. The major privatization initiative in the U.A.E. is the privatization of the Abu Dhabi Department of Water and Electricity (Box 3), which, if successful, could serve as a model for the other emirates. Abu Dhabi has also transferred shares in a two companies owned by its General Industries Corporation—a food processing firm and a livestock firm—to low-income citizens as part of its policy of redistributing the oil wealth. At present, Dubai’s strategy for the electricity and water sector is to gradually increase tariffs toward full cost recovery, at which time, privatization will be considered. However, the privatization of Dubai’s largest industrial company, the Dubai Aluminum Company (DUBAL), is not being considered because it is managed on a fully commercial basis and its profits are an important source of government revenue. Privatization is not an important issue for Sharjah and the northern emirates because they have very few assets that could be privatized.

Privatization of the Abu Dhabi Water and Electricity Department (WED)

In March 1996 a committee was formed to look into the possibility of privatizing the WED in order to ensure that the supply of water and electricity matches rapidly growing demand and is produced efficiently. A feasibility study was prepared by McKinsey and Co., and decision to proceed was taken, after a relatively short period of review, in mid-1997. The strategy for urban and industrial areas is to divide the WED into three sectors: electricity generation and desalination, transmission, and distribution. A separate public company will supply outlying villages and islands. The generation and desalination, and distribution in urban and industrial areas will eventually be privatized, while transmission will remain a government monopoly. Retaining state control of the transmission sector will allow the government to more easily implement a desired level of subsidization.

All newly established generation and desalination plants will initially be “build, own, and operate” joint ventures between a new Water and Electricity Authority (holding 60 percent of capital) and foreign companies (40 percent). After about three years the government’s holding will be reduced to well below 50 percent by selling shares to U.A.E. nationals. At present, bids are being evaluated from eight foreign companies (which prequalified out of 21 proposals) for the first independent plant—Taweelah A-2 which will produce 480-580 MW and 50 million gallons per day. The bids include proposed selling prices for water and electricity, and on this basis, the authorities have indicated that the present electricity subsidy (10 fils per kwh for commercial firms) could be reduced by at least 40 percent.

An independent regulatory body will be established by the end of 1998 to oversee the new industry structure. It will set performance targets, regulate tariffs for transmission and distribution, and monitor general policy issues such as concentration of market share and ownership, and environmental standards. In setting distribution tariffs it will distinguish between nominal tariffs which fully cover costs and actual tariffs which will reflect government policy on subsidies.

31. To further promote private investment and economic diversification, the Abu Dhabi government, which is responsible for U.A.E. defense expenditure, has instituted an offset program. Administered by the U.A.E. Offset Group (UOG), the program requires international firms which receive defense contracts for more than US$10 million to invest—either through joint ventures in private companies or as founding investors in joint stock companies—in projects that generate accumulated profits over a period of seven years equivalent to 60 percent of the value of the contract. A “pre-offset agreement” also allows for an investment to be made before a contract is awarded. From its inception in 1991 to June 1998, the UOG approved 23 projects with a total paid up capital of US$500 million, including ship building, equipment leasing, biochemicals, outpatient health care, stainless steel production, tank inspection services, electric motor production, cooling equipment, and solar energy generators. All projects except the Tabreed Water Cooling Company (see Box 2) are located in Abu Dhabi.

32. Finally, emirate governments have emphasized free trade zones as an essential element of their development strategies because of their profit potential and backward linkages in providing opportunities for high-skill employment to the domestic economy.8 The prime example of a free trade zone in the region is Jebel Ali in Dubai which is now the 12th largest port in the world. Established in 1985, the number of companies in Jebel Ali increased from 298 in 1990 to 1,029 in 1996, and employment (in both high- and low-skill jobs) rose from 6,200 to 23,600 over the same period. Its activities center on warehousing and distribution, but it is also an important industrial area. Sharjah has established two free trade zones at its international airport and the Hamriya port. The former attracts industries that rely on speedy delivery or produce high value products. The latter is complementary to Jebel Ali and has attracted large scale industry including an LPG storage and export complex and a privately owned oil refinery. Abu Dhabi has announced plans to establish a US$3.3 billion free trade zone on Saadiyat Island which will include a bulk commodities exchange with facilities for storage and delivery. Ras Al-Khaima also intends to establish a 1 million square meter free trade zone near its port, and will offer ownership of land rather than long-term leases to attract investors.

Development planning

33. In 1996, the Dubai Department of Economic Development issued an indicative five-year development plan for 1996–2000 as part of a long-term vision for the emirate to achieve the status of a developed country. For the medium term, in view of the depletion of its oil reserves, it is intended that the non-oil sector will be able to generate self-sustaining growth by 2010. The plan calls for a transformation of competitive advantage based on natural resources and low cost labor to a reliance on capital formation attracted by an efficient business environment, economies of scale, and technological improvement. As a first step, a business park for information technology firms has been established. Other desirable activities are financial services, business support services and consulting, health services, education, and tourism. Abu Dhabi is presently formulating a five-year development plan within the context of a longer-term vision with technical assistance from the UNDP.

Manufacturing

34. The manufacturing sector is segmented between large capital-intensive establishments involved in the production of refined petroleum products, fertilizers, chemicals, petrochemicals, base metal products, and cement on the one hand, and smaller, less capital intensive companies producing food products, textiles and garments, metal products, and machinery on the other. The focus of the lower capital intensive group is primarily on the domestic market, whereas the large firms have a strong export orientation. A detailed breakdown of the development of each segment of the manufacturing sector is not available at an aggregated level.

35. The average annual rate of growth of the manufacturing sector during 1993–97 of 13 percent was well above that of the non-oil sector (8½ percent). Although the year-to-year growth rate slowed from an exceptionally high 24½ percent in 1994 to 5½ percent in 1997, the latter increase being the same as in the non-oil sector as a whole, the share of manufacturing in total non-oil GDP at constant prices rose slightly from 15 percent in 1994 to 15½ percent in 1997, indicating that manufacturing activity has maintained its importance as a contributor to growth. The manufacturing sector’s performance in 1997 reflected in part a US$470 million expansion of capacity from 240,000 tons to 375,000 tons at the Dubai Aluminum Company which came on stream in January 1997.

Construction

36. The construction sector grew at an annual average rate of 5½ percent during 1993–97 which was below the growth of real non-oil GDP. Nonetheless, the construction sector is an important contributor to GDP growth; in 1997 it accounted for 0.6 percentage points of the 3.6 percent growth in real non-oil GDP, which was the same contribution as the manufacturing and wholesale and retail trade sectors. This contribution largely reflects labor input as employment in construction averaged over 19 percent of total civilian employment over 1993–97, the highest share of any sector.

37. Developments in the construction sector are closely linked to government development expenditure (of which, the provision of infrastructure is an important component) and net lending (in large part for the construction of commercial properties and private residences).9 However, autonomous private construction activity has weakened the link to government expenditure in recent years, and this was particularly evident in 1997 when construction activity weakened in Abu Dhabi but grew strongly in Dubai and Sharjah. Moreover, the importance of additional infrastructure in total construction has declined as many large infrastructure projects, especially the road network, have been largely completed.

Services

38. The services sector as a whole was responsible for 55–65 percent of the growth of real non-oil GDP over 1993–97 (Table 1). Within the sector, the largest contributor to growth in 1993–95 was real estate, but the profitability of this sector declined in 1996–97 owing to an excess supply of low-cost residential properties after the rationalization of the expatriate labor market in 1996 (see below), and an oversupply of commercial buildings in Abu Dhabi in 1997. The finance and insurance subsector also expanded strongly in 1993–96 in response to the need for trade and business financing, construction loans, and consumer banking services. Preliminary data for 1997 indicate that the growth in profitability of the subsector slowed in 1997; however, many banks achieved record profits (see Chapter IV). The largest contribution to growth in 1996–97 came from the wholesale and retail trade sector which benefited from the expanding tourism industry and from successful trade promotions including the annual Dubai Shopping Festival. In addition, trade in Dubai and Sharjah was boosted in 1995–96 by purchases of consumer goods for personal export by residents of the former Soviet Union countries. The government subsector (excluding the armed forces) also made significant contributions to real GDP growth during 1993–97, but its share in total GDP declined from 11.7 percent to 10.6 percent reflecting the recognition by governments that they could not afford to be the employer of last resort. Consequently, employment in government services rose at an annual average rate of only 2½ percent over 1993–97.

Agriculture

39. The agriculture and fisheries sector expanded in real terms at an average annual rate of 14½ percent between 1993 and 1997, and its share in total GDP at constant prices increased from 2.4 percent to 3.2 percent over the same period. The rapid growth of the sector reflects both an increase in the labor force (which averaged almost 9 percent per year) and investments in dams and irrigation equipment to bring more land under cultivation. Land reclaimed from the desert amounts to over 250,000 acres, including agricultural land and green areas. Among the various products, the output of vegetables rose at an annual average rate of 27 percent over 1993–97, poultry at 15 percent, and meat at 6 percent (Appendix Table 18). More modest growth of 2 percent per year was recorded for dates and fish products.

40. Official support for agriculture involves agricultural extension services by the Ministry of Agriculture throughout the U.A.E. and subsidization of inputs. The subsidies are administered by the Abu Dhabi Municipality (for that emirate) and by the federal government for Dubai, Sharjah, and the northern emirates. Subsidies are provided with the objectives of creating a green belt around settlements, maintaining a viable rural population, and achieving agricultural self sufficiency in products where the U.A.E. has a comparative advantage—dates and fish. Federal subsidies include the provision of free land if it is suited to irrigation and if it will improve the economies of scale of an individual farm. Other material inputs (fertilizer, irrigation equipment and water, upgraded fishing equipment, marine engines and fuel) attract a 50 percent subsidy if they promote more efficient production techniques. Federal subsidies are also targeted by income level to assist low income farmers. In Abu Dhabi prior to 1996, all noncapital inputs including labor attracted a 100 percent subsidy and the Municipality purchased all output at a fixed market-related price. In 1996, the labor subsidy was removed and farmers were made responsible for marketing their production (except for dates which are still purchased officially); other material inputs continue to receive a 100 percent subsidy. Imports of all agricultural products are permitted without customs duty.

E. Employment, Wages and Prices

41. The population of the U.A.E. reached an estimated 2.58 million in 1997 reflecting an at an annual average rate of growth of 5 percent since 1990 (Appendix Table 23). This growth was due mainly to the inflow of foreign labor, but exact information on the share of nationals and expatriates in the population, labor force, and employment is not available because the release of the relevant data from the 1995 census has been embargoed by the authorities. Prior to the census, the International Labor Organization estimated that nationals comprised only 15–20 percent of the population and 10 percent of the labor force. It may be that the expatriate shares are higher than these estimates imply because the expansion in the non-oil economy has been mainly in labor intensive activities such as textiles, electronics, construction and the services sector. The population is concentrated in Abu Dhabi and Dubai which together account for 67 percent of the total.

Employment and wages

42. Employment in the U.A.E. expanded at an annual average rate of growth of 7.7 percent between 1993 and 1997 (Table 4). This reflected the very rapid growth of non-oil employment, particularly in trade and manufacturing (including natural gas and petroleum processing) where annual average increases of 13.7 percent and 10 percent, respectively, were recorded. Employment in agriculture also rose at an above average rate (8.7 percent) but its share in total employment was relatively small at about 7½ percent. Below average employment growth occurred in the crude oil and construction sectors, and especially in finance and insurance and government services.

Table 4.

U.A.E.: Sectoral Distribution of Civilian Employment, 1993–97 1/

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Source: Ministry of Planning.

Excludes defense personnel and visitors to the U.A.E.

Includes natural gas and petroleum processing industries.

Includes gas reticulation.

Includes repair services.

43. The 1995 census provided information on the inter-emirate structure of the labor force and employment (Appendix Table 26). In that year Dubai had the highest labor force participation rate, followed by Abu Dhabi and Sharjah, but the female participation rate in Abu Dhabi was significantly lower than in most other emirates. This reflects a more traditional attitude to female employment in Abu Dhabi, its greater ability to provide employment for nationals in its own civil service, and the location of the U.A.E. police and defense forces primarily in the emirate. Unemployment in the U.A.E. averaged 1.8 percent of the labor force in 1995, but the rate was significantly higher in Umm Al-Qaiwan and Ras Al-Khaima reflecting their relative lack of natural resource endowments. In principle, unemployment statistics refer only to U.A.E. nationals because foreign workers must be sponsored for employment by a national employer.

44. There have been no nationwide surveys of unemployment in the post-census years. However, in 1996 the Ministry of Labor established a register of U.A.E. nationals seeking jobs. It was determined at that time that about 7,300 persons were unemployed, of which, 10 had higher university degrees, 1,200 an undergraduate degree or equivalent, 5,700 a high school diploma, and about 400 were without a diploma. By 1998, voluntary withdrawal and increased employment had reduced the register to 2,500 nationals, most of whom are high school or university graduates. To some extent, this unemployment is frictional as about 65 percent of the unemployed are female, many come from the northern emirates where there are fewer job opportunities, and custom prevents unmarried women moving away from home to look for a job. However, a high proportion of university graduates have liberal arts degrees which are not in demand in the private sector.

45. Average compensation (wages and allowances) for the economy as a whole showed a moderate fluctuation of about 4 percent between 1993 and 1997 (Appendix Table 25). The recovery in average compensation in 1996–97 was due in part to the new residency law introduced in 1996 (see below). Nevertheless, the average annual compensation of Dh 37,900 in 1997 was still slightly lower than in 1993, reflecting the competitive conditions in private sector employment where about 90 percent of employees are expatriates. There is marked segmentation in the labor market between government and private employment; average government compensation in 1997 of Dh 107,800 was almost three times higher than the national average. This reflects the high proportion of U.A.E. nationals in government employment and the government’s policy to transfer part of the oil wealth to national employees through high salaries.10 There is also a high proportion of nationals employed in the oil sector where average salaries are more than double the national average.

46. In 1996–97, the authorities introduced a number of measures to improve the operation of the expatriate labor market in which significant unemployment and underpayment of labor had developed over time.11 New penalties for violation of the residency law were introduced in July 1996, and expatriates without valid work visas—i.e., who were not working for the sponsoring employer, but who had remained when their visas expired or who had transferred to another employer when the original sponsor went out of business—were given a three-month amnesty to leave the country without penalty.12 In September 1996, the law was liberalized to permit workers to transfer their sponsorship to their current employer, and the amnesty was extended to end-year. It is officially estimated that some 150,000 workers transferred their sponsorship and about the same number left the country. However, many of the latter quickly returned with valid work permits so that the disruption to the construction industry and small business activity was only temporary. In May 1997, the flexibility of the expatriate labor market was enhanced by allowing the transfer of an employee’s sponsorship from the original employer to another after one year if all parties agree.

47. The authorities have also taken steps to increase the participation of U.A.E. nationals in private sector employment.13 For many years, the federal government has provided technical training for nationals in the Higher Institutes of Technology in the skills demanded by the private sector,14 has supported the provision of internships and vocational schools by private employers and the emirates’ Chambers of Commerce, and has made it known that the government can no longer afford to provide jobs for all nationals. New initiatives were taken in 1997–98;

(i) In order to provide additional funds for the training of nationals, the employment of expatriates was made more expensive by raising the fee for issuing a work visa and for visa renewal from Dh 80 to Dh 100, and for transfer of a visa to another employer from Dh 200 or Dh 1,000. These increases were implemented in two steps in November 1997 and March 1998.

(ii) Beginning in June 1997, private employers seeking work visas for expatriates must discuss the vacancy with the Ministry of Labor which reviews the qualifications of individuals on its register of job seekers. Interviews are arranged where possible, but there is no compulsion for nationals to take the position being discussed.

(iii) In order to narrow the gap between overall public and private sector compensation for nationals, the federal government announced in April 1998 that a defined benefit pension scheme for nationals in private sector employment will take effect at the beginning of 1999. A company with an initial capital of Dh 500 million from the federal budget will be established to administer the scheme under the guidance of the Ministry of Finance. The rate of contribution is 5 percent of current salary by the employee, 12½ percent by the employer, and 2½ percent by the federal government. Benefits are based on the employee’s salary at retirement according to length of employment.15 Those currently employed may accrue previous years’ service credits by a payment equivalent to 20 percent of the average of the last five years’ salary per year accrued; they may request employers to transfer accrued end-of-service benefits for this purpose.16

(iv) In May 1998, a compulsory quota for employment of nationals in the banking sector was announced whereby the number of nationals employed by each bank must be increased by 4 percentage points per year from 1999 onward. No distinction is made for banks which already have a high proportion of nationals. If a quota target is not reached, the bank will not be issued additional expatriate work visas.

(v) Beginning in June 1998, companies seeking work visas for female expatriate employees sponsored by their husband or father must employ a national candidate on the Ministry of Labor’s list of job seekers in addition to the expatriate employee, even if the national candidate’s qualifications do not match those of the expatriate.

Prices

48. The Ministry of Planning publishes two inflation indices: a consumer price index (CPI) and a GDP deflator. Up to 1997, the CPI (1990=100) was based on weights derived from household expenditure surveys by Abu Dhabi (1982) and Qatar (1998). The deflator of gross value added for non-oil GDP is based largely on import prices. A new household expenditure survey was conducted in Abu Dhabi in 1996 and the results were used to compile a new basket and weights for the CPI from January 1998 onward. A new household expenditure survey is planned for Dubai in 1998–99. The CPI is compiled monthly and published annually.17

49. Consumer price inflation decelerated from 4½–5 percent in 1993–95 to just over 3 percent in 1996–97 (Table 5 and Appendix Table 22). A similar slowdown was evidenced in the non-oil GDP deflator. In view of the openness of the economy, these developments largely reflected the movement of import prices. But in addition, consumer price movements are heavily influenced by the price movements of some nontraded goods, especially house rent and related housing items which has a weight of 29 percent. Up to 1996 there was an excess demand for housing due to the rapid growth of the expatriate labor force, but with the rationalization of the labor market in 1996, the demand for residential units moderated and the rent index declined by 3.7 percent in 1997.

Table 5.

U.A.E.: Price Indices and Changes in Prices, 1993–97

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Sources: Ministry of Planning; and staff estimates.

III. Government Finance

A. Institutional Background

50. The public sector in the U.A.E. comprises: the federal government ministries and departments (23), independent and autonomous federal agencies (5), federal enterprises (22), the emirate governments (7), and local authorities (8). On a gross basis, the federal budget covers the operations of all the federal ministries and departments and the federal independent and autonomous agencies. It also includes the financial flows to and from the federal public enterprises. During 1977–80, jurisdiction over functions pertaining to justice, police, health, education, and information were transferred to the federal government. Since 1981, the federal government has also been partly responsible for administering the U.A.E.’s foreign aid program; however, many of the external grants continue to be extended directly by the individual emirates.

51. The budgetary accounts of the federal and emirate governments are maintained on a cash basis. The fiscal year in the U.A.E. is the calendar year.18 The review process and discussions with departments and agencies proceed during September-October. The budget cycle usually takes about five months, but the budget may not be approved and signed until well into the fiscal year. Supplementary appropriations can be requested at any time during the fiscal year.

52. For budgetary control and accounting purposes, federal revenues are treated strictly on a cash basis—except that they are deemed to include central bank deposits of profits accruing to the government but not paid or released in cash. The federal expenditure budget is also intended to be cash-based, with a corresponding cash accounting system. However, because of the severe shortage of liquidity, the Ministry of Finance uses what is described as “an adjusted cash-based system of accounting” for virtually all payments except those for personnel. Journal vouchers are issued in lieu of cash payment for goods and services until such time as revenues become available from emirate contributions and profit transfers.

53. Oil and gas receipts are the main sources of revenue for the emirate governments of Abu Dhabi, Dubai, and Sharjah. Local authorities depend on grants from their respective emirates to finance most of their expenditures. The Dubai and Sharjah municipalities collect some revenues from municipal sources, which is directed to cover their operating expenses and municipal projects. The bulk of the federal government’s revenues consists of cash contributions by Abu Dhabi and Dubai. Sharjah supplies gas to the northern emirate power plants in lieu of its contribution to the federal budget. The federal government also receives the proceeds from certain administrative fees and charges levied at the federal level, profits from the central bank and Emirates Telecommunications, and returns on some investments.

54. The U.A.E. consolidated budget reflects only the accounts of the federal government, Abu Dhabi, Dubai (central government or the Royal Court and the Dubai Municipality), Sharjah (except for some development expenditures under the control of the Ruler’s Office), and Ras Al-Khaimah. Data on the fiscal accounts of the remaining emirates are not available; however, their inclusion in the consolidated fiscal accounts is unlikely to have a major impact. The Abu Dhabi and Dubai budgets constitute the bulk of the consolidated budget.

B. Structure of Revenues and Expenditures

55. The largest contribution to government revenues comes from the hydrocarbon sector. In the 1990s, the share of hydrocarbon receipts in total revenue varied from 70 percent to 75 percent, depending in large part on the oil world prices, foreign company profits, as well as the portion of export receipts allocated to the rulers of the emirates to finance extrabudgetary expenditures and investment. Abu Dhabi’s hydrocarbon revenues, which account for about 80 percent of the total, are not necessarily related to the emirate’s oil export receipts, since ADNOC transfers its net profit to the Abu Dhabi Department of Finance, and its net profit may vary considerably from year to year depending on the amount of export revenue retained to finance ADNOC’s own investment program. Moreover, the Department of Finance allocates part of ADNOC’ profits directly to the emirate’s external reserve assets managed by the Abu Dhabi Investment Authority (ADIA) and the remainder to the budget.19 Abu Dhabi’s income tax receipts are more directly linked to total export receipts in that the shares of foreign companies involved in crude oil and gas production (after payment of royalty and cost recovery) are taxed at the rate of 55 percent. Dubai’s recorded oil revenues are not closely related to oil export proceeds because such revenues are allocated to the budget as necessitated by the difference between the consolidated expenditures of that emirate—the Government of Dubai (the Royal Court) and the Municipality of Dubai—and the consolidated nonhydrocarbon revenues.

56. Nonhydrocarbon revenues comprise mainly customs duties, enterprise profit transfers (including the profits of the U.A.E. Central Bank and the telecommunications company), income tax, water and electricity charges, and other fees and charges. Such revenues rose steadily during the past three years, increasing from 6.2 percent of GDP in 1994 to 8.8 percent in 1997, due mainly to larger transfers of the central bank’s accumulated profits and higher fees and charges. The latter have been raised on several occasions, including those related to the issuance and renewal of passports, and expatriate labor permits.

57. There are no federal or emirate personal income taxes or capital gains taxes. Profits taxes are levied at the emirate level on the petroleum and gas producing entities (Abu Dhabi) and on foreign financial institutions (Dubai). Moreover, there are no federal taxes on emirate property. The Dubai Municipality collects a property tax with a minimum rate of 10 percent on the rental value of commercial properties and 5 percent on residential properties. Other revenues include trade and vehicle license fees, building permits, passport and other documentation fees and charges, and other administrative fees and charges.

58. Overall spending has declined significantly in the past four years, from 42 percent of GDP in 1993 to about 37 percent of GDP in 1997, reflecting both the federal and emirate authorities’ emphasis on fiscal restraint as being necessary for sound macroeconomic management. The shares of both current and development expenditures in GDP have been decreasing. As a share of total spending, budgetary expenditure (both current and capital) on public order and defense has decreased over the past four years, and as a ratio to GDP declined from about 7 percent in 1993 to 5.6 percent of GDP in 1997. However, spending on education and health have increased. Outlays on subsidies and transfers have remained at about 4 percent of GDP. Nonetheless, it is difficult to draw conclusions about the factors underlying developments in subsidies and transfers owing to two offsetting factors. On the one hand, recorded outlays have risen as the authorities have gradually incorporated into the budget transfers that were previously extrabudgetary expenditures and were therefore unrecorded. One the other hand, the authorities have taken measures in recent years to reduce subsidies on electricity and water. The bulk of net lending (loans and equity) represents subsidized lending by the Abu Dhabi government for commercial and residential real estate development. The share of capital expenditure in GDP has declined significantly, from about 9 percent in 1993 to 6 percent in 1997. Cutbacks during this period primarily affected the water and electricity sectors and road construction.

C. Fiscal Developments

Consolidated fiscal accounts

59. There has been a significant improvement in the public finances since 1994 reflecting favorable oil prices and policies of fiscal restraint (Table 6). Recognizing the need to diversify the revenue base and to address the deteriorating fiscal balance, the federal government and the emirates introduced non-oil revenue measures and took steps to further contain expenditures. Aided by favorable oil and gas export prices, total revenues rose from 26.7 percent of GDP in 1994 to 31.5 percent in 1997. Total expenditures declined as a share of GDP to 36.7 percent in 1997 (compared with 41.2 percent in 1994). The bulk of the fiscal retrenchment fell on capital spending, which declined in nominal terms and was significantly lower than budgeted. These measures resulted in narrowing of the overall deficit (excluding investment income) from 14.6 percent of GDP in 1994 to 5.2 percent in 1997. If income on Abu Dhabi’s domestic and external reserve assets is included in the consolidated government revenues of the U.A.E., the overall fiscal balance for 1997 would show a small surplus of 0.4 percent of GDP, the first surplus in many years.20

Table 6.

U.A.E.: Consolidated Government Finances, 1993–97

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Sources: Federal and emirate governments.

Includes use of investment income and transfers from ADIA’s foreign assets.

60. In 1996, as a result of an average increase in oil export prices of 19 percent, total hydrocarbon revenues rose by about 16 percent to Dh 37 billion (or 21 percent of GDP). Nonhydrocarbon revenues also rose sharply by 37 percent to Dh 14.4 billion. Among these revenues, profit transfers increased by about 50 percent, while income tax receipts rose from Dh 1.9 to 3.2 billion. Fees and charges also rose due to higher water and electricity consumption. Consequently, total revenue, excluding investment income, increased by about Dh 9 billion. Total expenditure, excluding a one-time transfer of Dh 7 billion to settle government obligations arising from the liquidation of the Bank of Credit and Commerce International (BCCI), declined as a share of GDP to 39 percent (compared with 40.4 percent in 1995), reflecting the authorities’ continued efforts to restrain spending. The bulk of fiscal retrenchment fell on capital spending, which declined by 16 percent over the previous year and was substantially lower than budgeted.

61. The outcome for 1997 was significantly better than expected in the federal and emirate budgets. The consolidated government deficit narrowed to the equivalent of 5 percent of GDP, an improvement of four percentage points over the 1996 outturn. This improvement reflected a combination of factors—most importantly, the Dh 4.1 billion increase in hydrocarbon revenues arising from a sharp increase condensates exports and from a retroactive payment of US$400 million for past deliveries of LNG to Japan, which more than offset a 5½ percent decline in the average crude oil export price. Nonhydrocarbon revenues continued to rise, but at a much slower rate than in the previous year because of a Dh 0.4 billion decline in oil-related income tax receipts from foreign partners. Receipts from fees and charges continued to rise, reflecting higher fees including those related to the issuance and renewal of passports and expatriate labor permits, as well as increased consumption of water and electricity and upward adjustments to electricity and water charges in Dubai toward the end of the year.21

62. Growth in spending was constrained in most categories. The growth in wages and salaries decelerated from 8 percent in 1995 to about 4 percent in 1997 (Table 7). During the same period growth in spending on goods and services decelerated from 12 percent to less than 1 percent. However, the annual growth in subsidies and transfers remained about 16 percent because of the absence of fees and charges for public education and health services for nationals, and unchanged tariffs on the consumption of electricity and water for nationals. Foreign grants, after declining during 1994–96, were raised in 1997 to their 1993 level of Dh 1.4 billion. Development expenditure declined from 8.7 percent of GDP in 1993 to 6.0 percent in 1997 as a result of a sharp reduction in outlays on water and electricity (Table 8) Net lending (loans and equity) peaked in 1995 at 3.6 percent of GDP and then declined to 2.5 percent of GDP in 1997, reflecting the development of excess capacity in commercial construction in Abu Dhabi.

Table 7.

Consolidated Government Current Expenditures by Economic Category, 1993–97

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Sources: Federal and Emirate governments.

Excludes military wages and salaries.

Dubai Municipality and staff estimates.

Table 8.

U.A.E.: Consolidated Government Development Expenditures by Function, 1993–97

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Sources: Federal and Emirate governments.

Federal government fiscal developments

63. Federal government revenues comprise contributions by Abu Dhabi and Dubai and other receipts designated for the federal budget (Appendix Table 23). Abu Dhabi’s contribution is the largest at about Dh 12 billion, comprising cash and payments in the form of services provided on behalf of the federal government. Dubai makes a fixed contribution of Dh 1.2 billion per year. Other federal receipts comprise transfers of enterprise profits (including the profits from the central bank and the telecommunications company), fees for electricity and water supplied by the federally-owned utilities in the northern emirates, and miscellaneous fees and charges such as passport fees, visa and residency fees for foreign workers, and various charges for services (car fees, documentation charges).

64. Federal expenditures currently make up approximately 27 percent of total consolidated (federal plus emirates’) expenditures. Defense expenditures are the major single item, constituting about 48 percent of all current expenditures in 1997.22 Other current expenditures comprise education and health (25 percent), subsidies and transfers (12 percent), expenditure on public administration (12 percent) and foreign grants (1 percent). The main pressures on current expenditures over the past four years have been experienced in the health and education sectors. Virtually the entire increase in current spending over this period has occurred in salaries and allowances, as expenditures on materials and services have remained close to their 1994 nominal levels. Actual development expenditures have stabilized at around Dh 500 million per year since 1995 and have been significantly lower than the budgeted development expenditures. Constraints on federal expenditures have been applied through firm limits on civil service establishment levels (excluding health and education) and through effective caps on materials and services expenditures.

65. Both revenues and expenditures in terms of GDP remained steady during the past three years. Federal revenues amounted to about 11 percent of GDP, while expenditures represented 10 percent of GDP. Thus, the federal budget was in a small surplus during the past few years. The emirate contributions remained in the Dh 12–13 billion range, while other receipts doubled between 1993 and 1997, to an estimated Dh 6.1 billion. This is explained by a 95 percent increase in enterprise profit transfers during the same period, due mainly to the transfer of accumulated central bank profits. Receipts from fees and charges (largely from the issuance and renewal of passports, and work permits to expatriates) more than doubled. On the expenditure side, the federal wage bill increased by an average of 5 percent annually during 1995–97, reflecting mainly increases in the number of federal employees (mostly U.A.E. nationals) and a 25 percent increase in base salaries for nationals in December 1996.23 Federal interior and defense expenditure, which represents the majority of total defense expenditure for the U.A.E., amounted to about 5 percent of GDP. Subsidies and transfers increased sharply in 1996 to about 1.2 percent of GDP and remained at this level in 1997.

66. The federal budget for 1998 projects a deficit of slightly less than 1 percent of GDP. Revenues are expected to increase by 1.4 percent over the outcome of the previous year, while total expenditures are projected to rise by about 17 percent. However, actual expenditures in the past have always been much lower than budgeted.

Fiscal developments in Abu Dhabi

67. Abu Dhabi’s budget represents almost 75 percent of the consolidated government budget (Appendix Table 26). Hydrocarbon income is the major revenue item, which averaged about 86 percent of total revenue during 1995–97. Nonhydrocarbon revenues include receipts from the use of water and electricity (Dh 1.2 billion in 1997), income tax (Dh 2.8 billion) and other revenues comprising various fees and charges. In addition to current and development expenditure, Abu Dhabi’s budgetary expenditures include domestic loans and equity directed to real estate development,24 and foreign loans and equity. The largest expenditure item is contributions to the federal budget, of which, about 45 percent consists of current transfers and about 55 percent are “payments services” made on behalf of the federal government toward defense and security (including major defense hardware purchases), health, and education.

68. The favorable oil prices during 1995–97, combined with the increase in exports of condensates in volume terms and the retroactive LNG payment in 1997, resulted in a steady increase in hydrocarbon revenues, from Dh 25.5 billion in 1995 to over 34 billion in 1997. The sharp rise in oil revenue was also accompanied by a significant increase in nonhydrocarbon revenues through 1996, but lower income taxes on foreign oil companies reduced these revenues in 1997. Higher current expenditures offset the improvement in nonhydrocarbon revenues in 1995, but in 1996 the one-time transfer of Dh 7 billion to settle government obligations arising from the liquidation of the BCCI together with higher transfers for agricultural production and for the expropriation of private properties doubled current expenditures and boosted the overall deficit to Dh 26 billion, or 15 percent of the U.A.E.’s GDP. The deficit was financed by drawing down domestic bank deposits, by investment income on Abu Dhabi’s domestic and external financial assets, and by transfers from ADIA.

69. After increasing by 13 percent in 1996, the wage and salary bill rose by only 7 percent in 1997, notwithstanding the application of the 25 percent federal base salary increase to Abu Dhabi national civil servants in December 1996.25 Compensations and transfers returned to about their pre-1996 level in 1997. Although loans and equity payments rose by Dh 0.4 billion in 1997 (because of the increase in committed projects in that year) and development expenditure increased by only Dh 0.2 billion (largely reflecting lower cash flow requirements of ongoing electricity, water, and road construction projects), these increases were offset by lower contributions to the federal budget in the form of payments for services. Consequently, the 1997 fiscal deficit narrowed to Dh 10.2 billion (6 percent of GDP). The deficit, which nearly corresponds to the U.A.E.’s consolidated budget deficit due to Abu Dhabi’s large share in the consolidated fiscal operations, was mostly financed by investment income earned on Abu Dhabi’s domestic and external financial assets, together with a small drawdown of domestic bank deposits.

Fiscal developments in Dubai

70. Dubai’s budget comprises the consolidated budgets of the central government (Royal Court) and the Dubai Municipality.26 While remaining at about Dh 5.5 billion in recent years, the share of hydrocarbon income in total revenue declined from about 90 percent in the early 1990s to 61 percent in 1997 as nonhydrocarbon revenues, particularly receipts from customs, increased sharply. Receipts from the Dubai Municipality have also increased substantially in recent years.27

71. Dubai’s consolidated budget has remained in deficit since the early 1990s (Appendix Table 28). However, the deficit narrowed significantly in 1996 and 1997 due, on the revenue side, to the full application of the increase in the U.A.E.’s customs tariff from 1 percent to 4 percent, and increased water and electricity consumption and improved collection of electricity tariffs. On the expenditure side, development expenditures were reduced sharply in 1996 (reflecting the completion of a new power plant in 1995) and rose modestly in 1997. The 1998 budget indicates that the deficit would continue to narrow despite a sharp fall hydrocarbon revenues and a return of development spending to the level of 1995. Effective in 1998, Dubai’s defense forces will be fully integrated into the U.A.E. national forces, and its defense expenditure will be taken over by Abu Dhabi, thus reducing current expenditures by about Dh 3 billion.

Fiscal developments in Sharjah

72. Sharjah’s fiscal balance has always been in surplus in the 1990s. However, the surplus narrowed significantly in 1995–96 due to substantial increases in development expenditures, particularly outlays on large development projects such as roads, subsidized housing, and urban beautification.28 In addition, nonhydrocarbon revenues declined owing to a reduction in land sales. In 1997, the surplus doubled to Dh 0.3 billion on account of higher hydrocarbon (gas) revenues and increase in profit transfers to the budget by state-owned companies (including some banks and a cement company) (Appendix Table 29). The 1998 budget envisages a surplus of Dh 0.3 billion; this, however, is unlikely to be achieved as the budget was drawn up before the extent of the decline in international oil and gas prices was known.

IV. Money and Banking

A. Structure of the Banking System

73. The U.A.E. banking system comprises the central bank, 19 locally incorporated commercial banks (with 262 branches and cash offices), 27 foreign banks (with 110 branches and cash offices), 1 restricted license commercial bank, 30 representative offices (which are not allowed to engage in deposit-taking or lending activities), a specialized bank, 2 investment banks, 2 development institutions, and 2 investment institutions. Foreign and domestic commercial banks are allowed to offer identical services. Since 1983 the central bank has imposed a moratorium on the opening of new banks.

B. Overall Monetary, Credit and Interest Rate Developments

74. The growth in broad money accelerated from 7 percent in 1996 to over 9 percent in 1997; this, however, was below the increase recorded in 1995 of more than 10 percent (Table 9 and Appendix Table 31). The net foreign assets of the banking system fell by 1.7 percent during 1997 (compared with a decline of 0.7 percent in 1996) as the net foreign asset position of the commercial banks deteriorated by Dh 2.4 billion (7 percent), mainly reflecting a sharp increase in their foreign liabilities (23 percent). This was in part offset by an accumulation of net foreign assets by the central bank, which increased by 4 percent (Dh 1.2 billion) over 1996. Other items (net) also made a negative contribution to liquidity growth in 1997, as in previous years.

Table 9.

U.A.E.: Factors Affecting Changes in Domestic Liquidity, 1993–98 1/

(In percent of beginning period stock of domestic liquidity)

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Source: Central Bank of the United Arab Emirates.

As of January 1996, data exclude assets and liabilities of U.A.E. branches of BCCI (S.A.) Luxembourg.