United Arab Emirates: Selected Issues and Statistical Appendix
Author:
International Monetary Fund
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Publication Date:
12 Mar 2003
eISBN:
9781451801125
Language:
English
Keywords:
ISCR; CR; income; expenditure; investment income; cross-emirate variation; U.A.E. authorities; emirate interact; current expenditure
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This Selected Issues paper and Statistical Appendix presents five essays examining issues in the United Arab Emirates related to the financial sector, long-term fiscal trends, fiscal sustainability, the competitiveness of the non-oil economy, and the labor market, as well as estimates of the real gross domestic income. The paper presents trends of financial soundness indicators; recent developments in the nascent equity, bond, and insurance markets; as well as progress made in implementing legislation on antimoney laundering and the combating of terrorism financing. It also assesses long-term trends and cross-Emirate variation in the fiscal structure.

Abstract

This Selected Issues paper and Statistical Appendix presents five essays examining issues in the United Arab Emirates related to the financial sector, long-term fiscal trends, fiscal sustainability, the competitiveness of the non-oil economy, and the labor market, as well as estimates of the real gross domestic income. The paper presents trends of financial soundness indicators; recent developments in the nascent equity, bond, and insurance markets; as well as progress made in implementing legislation on antimoney laundering and the combating of terrorism financing. It also assesses long-term trends and cross-Emirate variation in the fiscal structure.

II. Long-Term Fiscal Developments, 1980–200114

A. Introduction

40. Fiscal policy in the United Arab Emirates—a federation of seven emirates founded in 1971—is decentralized. This reflects the complexity of the country’s political structure, with each emirate retaining considerable political, judicial, financial, and economic autonomy. In addition, sharp disparities in resource endowments among the emirates have resulted in variations in the scale, level, and composition of spending and revenue, as well as fiscal trends, with the fiscal activities of the Emirate of Abu Dhabi being by far the largest and most important in the country.15 Moreover, over time, the emirates have transferred some activities, such as defense, to the federal government. As a result, the budget of the federal government is now the second most important.16

41. U.A.E. fiscal statistics are beset with important shortcomings. Although these vary across emirates, the following ones can be highlighted: incomplete coverage of fiscal accounts such as investment income from government savings, off-budget activities (e.g., expenditures under control of the Rulers’ Offices and municipalities, and debt), no information on financing of the budget, double counting of some government activities, and lack of full adherence to international standards for classification of government expenditures and revenues.

42. This chapter compiles fiscal data over a long period (1980–2001) at various levels of aggregation. It then assesses long-term trends and cross-emirate variation in the fiscal structure, as well as the evolution of the United Arab Emirates’ overall fiscal and non-hydrocarbon balances over the period.17 Data for this chapter were in part assembled from IMF documents extending back to the 1980s, and cover accounts of the federal government and the largest four emirates (Abu Dhabi, Dubai, Sharjah, and Ras Al Khaimah). The consolidated fiscal balance represents a combination of the federal government and these four emirates, including estimated investment income on official foreign assets of Abu Dhabi.

B. Quality of Fiscal Data

43. The fiscal data used in this chapter has been compiled with the intention of addressing some of the shortcomings mentioned above.18 First, an effort was made to ensure continuity of the component fiscal series, as well as consistency in compilation, detail, and definitions. For instance, the prominence role of “Abu Dhabi federal services” has changed over time, and investment income, that is, income earned on government external assets, was missing for much of the 1980s. Second, the data on the consolidated accounts now net out intergovernmental grants. Until recently, however, the authorities’ presentation of the consolidated accounts double-counted these grants—though intergovernmental grants need to be included for each level of government.19 Third, an important issue for the United Arab Emirates is that investment income is missing from the official fiscal accounts. Excluding this income from official fiscal statistics provides a misleading picture of the fiscal stance and hampers macroeconomic assessment. In the absence of direct information on investment income, the data in this chapter therefore include Fund staff estimates. These estimates are derived in such a way that they are consistent with the level of official government external asset holdings as provided recently by the authorities to the IMF staff.20

C. Fiscal Structure

44. The differences in the revenue structure among the emirates and the federal government reflect the wide disparities in resource endowments and sources of revenue, including the ability to impose fees and charges. The federal government depends largely on grants from Abu Dhabi and Dubai for its budget, though fees and charges have increased rapidly in the past years—the federal government does not hold foreign assets and has no access to domestic or external financing. Oil revenue and investment income account for most of Abu Dhabi government receipts. Oil revenue remains the most importance source of Dubai government revenue, even though non-hydrocarbon activities account for more than 70 percent of the emirate’s GDP. Despite efforts to broaden the revenue base in the 1990s, the United Arab Emirates’ dependence on oil has increased from 54 percent of total consolidated revenues in the 1980s to 57 percent in the 1990s through 2001.

45. Some similarities exist in the expenditure structure across emirates. Current spending currently represents more than 60 percent of the total in the emirates and close to 95 percent in the federal government. The wage bill (excluding military personnel) and goods and services account for much of this spending in Dubai and Sharjah as well as the federal government. In contrast, the wage bill only represents about 4 percent of total spending in the emirate of Abu Dhabi, and grants to the federal government, 17 percent. Expenditures on subsidies and transfers as well as defense have become the largest spending items, accounting for close to 45 percent of total spending (including grants) in Abu Dhabi. In all emirates, following the completion of important infrastructure projects, development expenditures declined significantly during the 1980s. Although, they have recovered since the early 1990s, development outlays reached about 5 percent of GDP of consolidated spending in 2001. Among other long-term characteristics of the budgets, one can note that the current fiscal balance, which provides a measure of the government’s contribution to national savings, in the federal government and emirates has always recorded a surplus over the past two decades.21

D. The Performance of the Consolidated Fiscal Accounts

46. Several broad trends are evident from 1980–2001 (Table 5). Reflecting diversification efforts, non-hydrocarbon receipts (excluding investment income) have increased over the years—albeit from a low base. Fees and charges are the main source of non-hydrocarbon revenue, followed by income taxes (on foreign banks and gas companies) and profit transfers. Customs revenue only accounts for about 10 percent of the total owing to low level of import tariffs. Although the share of non-oil revenues (excluding investment income) in the total has not changed much over the past two decades, these revenues have accompanied the rapid growth in non-oil GDP, averaging about 11 percent of non-oil GDP a year during much of the 1990s. Despite the rising importance of these revenues, total government revenue has fluctuated sharply over the years because of continued high dependence on oil. In fact, in the late 1990s, the level of total revenue was slightly higher than the level reached in the early 1980s, implying a sharp decline in real terms and in percent of GDP. Meanwhile, investment income has been a far more important source of revenue in the 1980s about 20 percent of GDP, as compared with 10 percent in the 1990s.

Table 5.

United Arab Emirates: Consolidated Fiscal Accounts, 1980–2001

(In millions of U.A.E. dirhams)

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Table 5.

United Arab Emirates: Consolidated Fiscal Accounts, 1980–2001

(In millions of U.A.E. dirhams)

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Sources: National authorities; and IMF staff estimates.

IMF staff estimates.

Mainly defense and internal security outlays.

Intergovernmental grants are excluded in the consolidated accounts.

47. Consolidated expenditures have more than doubled in nominal terms over the past two decades.22 Current expenditures have roughly tripled. The largest percent increase was Abu Dhabi “federal services,” which mostly comprise defense spending (the latter reached about 11 percent of GDP in 2001). Also, subsidies and transfers have practically doubled since 1997. In contrast, development outlays have not presented a clear trend during much of the 1990s.

48. Reflecting these changes in revenues and expenditures, the consolidated fiscal balance deteriorated in the 1990s. While recording a surplus (including investment income) from 1980–92, in the following years through 2001, the consolidated fiscal balance switched to a deficit, except in 1997 and 2000 (Table 5). Despite this deterioration, the non-hydrocarbon deficit (including investment income) shows that fiscal policy remained in line with international economic objectives through 2000.23 With average global prices of almost $26 per barrel in the 1980s, the non-hydrocarbon deficit was relatively low, averaging Dh 15.3 billion a year (about 15 percent of GDP)—that is, government consumption could have been much higher than it actually was. Thus, with an average consolidated fiscal surplus equivalent to 11 percent of GDP a year in that decade, the United Arab Emirates was clearly able to accumulate sizable government assets. In the 1990s, with oil prices declining, on average, to about $ 19 per barrel, the non-hydrocarbon deficit more than doubled in nominal terms, though this deterioration compares to a period of relatively low government consumption.24 The increase in expenditure in the 1990s was matched by rising revenue from fees and charges and rising investment income, leading, after an initial jump in 1990, to a relatively stable nominal non-hydrocarbon deficit (at about Dh 37 billion) through 2000, The consolidated fiscal deficit averaged 0.7 percent of GDP from 1990–2000. Nevertheless, in 2001, the non-hydrocarbon deficit surged to Dh 62 billion (equivalent to 24 percent of GDP), indicating that at that level, the current fiscal appears to be unsustainable, as well as out of line with international economic equity objectives (see Chapter III for further details).

E. Fiscal Performance of the Federal Government

49. The federal budget has become more important over time with the transfer of some fiscal activities. There are currently 16 federal ministries, among them defense; agriculture and fisheries; economy and commerce; planning; health; education; labor and social affairs; and foreign affairs. Federal spending currently accounts for about 22 percent of consolidated expenditures. Grants from Abu Dhabi and Dubai represent about 65 percent of total revenue, while fees and charges (largely from expatriates) make up almost 25 percent. Federal receipts from “enterprise profits” have risen in recent years—these mainly represent profits from the central bank and the telecommunications government monopoly, Etisalat (Table 6).

Table 6.

United Arab Emirates: Federal Fiscal Accounts, 1980–2001

(In millions of U.A.E. dirhams)

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Table 6.

United Arab Emirates: Federal Fiscal Accounts, 1980–2001

(In millions of U.A.E. dirhams)

article image
Sources: National authorities; and IMF staff estimates.

Not including Abu Dhabi defense and security expenditures.

50. Over the years, the composition of spending has shifted toward wages and transfer and away from goods and services. The increase in the wage bill (which accounts for 35 percent of total spending) reflects the key role played by the federal government to provide employment to Emirati nationals, particularly from the northern poor emirates. It also reflects the hiring of teachers and health workers to keep up with the rapid increase in population. The federal authorities are currently engaged in increasing expenditure efficiency and reducing the overall wage costs. Recent steps taken include labor saving innovations such as “e-government” and “e-dirham” transactions (for fees, charges, and permits) and, beginning in 2001, the privatization of various services provided to the federal public sector. Since the federal government has no financing options, its expenditure trajectory must follow revenues rather closely. Thus, ex post, the federal fiscal balance has generally recorded a surplus or a very small deficit.

F. Fiscal Performance of Abu Dhabi

51. Endowed with most of the United Arab Emirates’ natural resources, the Emirate of Abu Dhabi is the federation’s fiscal heavyweight. Oil income dominates Abu Dhabi’s revenue structure. Indeed, in the second-half of the 1990s, this source made up about 60 percent of total revenue, even higher than the 54 percent in the first-half of the 1980s (Table 7).25 Investment income—the second most important source of revenue in the emirate—has proved to be as volatile as oil receipts, ranging, according to staff estimates, between Dh 9-25 billion over the past two decades. Non-hydrocarbon revenues (excluding investment income) has, however, increased over the years, though they continue to account for less than 10 percent of total revenue. This increase is mainly accounted for by a rise in income taxes, but it must be noted these taxes are derived exclusively from natural gas companies (e.g., ADGAS). Thus, almost all of Abu Dhabi’s budget revenue is still associated with hydrocarbon activities.

Table 7.

United Arab Emirates: Abu Dhabi Fiscal Accounts, 1980–2001

(In millions of U.A.E. dirhams)

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Table 7.

United Arab Emirates: Abu Dhabi Fiscal Accounts, 1980–2001

(In millions of U.A.E. dirhams)

article image
Sources: National authorities; and IMF staff estimates.

IMF staff estimates.

Defense and security expenditures not included in federal accounts.

Contributions and grants included in federal accounts.

52. Abu Dhabi’s total expenditures have more than doubled, and current expenditures have risen almost seven-fold since the early 1980s. Indeed, current expenditures have expanded rapidly to about 60 percent of total outlays from only about 20 percent in earlier years. This has occurred mainly at the cost of grants both to the federal government and foreign grants. In terms of their role in Abu Dhabi’s expenditures, federal grants (excluding defense services) have fallen from 50-60 percent of the emirate’s outlays, though they still account for roughly 20 percent of the total.

53. Composition of recurrent spending has changed over the period. Apart from the grant element to the federal government for defense, discussed earlier, spending on goods and services and on wages and salaries has contracted while those on subsidies and transfers have increased sharply. The rise in Abu Dhabi’s subsidies and transfers is noteworthy.26 In recent years these outlays have been focused on power and utilities (even after creation of the Abu Dhabi Water and Electricity Authority-ADWEA). Considerable funds have also been spent in support of agriculture. Subsidies and transfers from Abu Dhabi reached almost 6 percent of GDP in 2001. The diminished shares of wages and salaries and goods and services in total current expenditures mask the fact that in nominal terms, the former doubled and the latter roughly tripled over the past two decades. Development expenditures almost doubled over these years, with both water and electricity and other infrastructure sharing in the increase. They accounted for 14 percent of total spending in 2001, significantly below the importance of subsidies and transfers. The emirate’s overall balance has switched from a surplus from 1980–90 to a deficit through 2001 (except in 1997 and 2000), ranging from 2-5.5 percent of GDP.

G. Fiscal Performance of Dubai and Sharjah

54. At the outset, two observations should be noted. First, the smaller emirates seem to face fiscal constraints similar to the federal government. Some kind of budget equilibrium is required on a high frequency basis because they do not hold external assets that could be drawn down—though at times, they have borrowed from local banks to finance fiscal deficits.27 Second, fiscal data from Dubai and Sharjah suffer from various classification problems that hinders a full assessment of their fiscal developments.28

55. More than half of Dubai’s revenues are classified as oil and gas. Another important portion is trade-related, owing to Dubai’s prominent international commercial activities, especially through its various free zones (Table 8). Similar to other levels of government, current expenditures account for about two-thirds of total outlays—having risen from less than a third in the early 1980s—and the wage bill represents approximately half of these outlays. Dubai also makes significant development expenditures, including the municipality and water and electricity sector.29 In addition, it also makes regular cash contributions to the federal government. Fiscal accounts show overall balances close to zero, or in recent years, relatively small deficits that have averaged 0.3 percent of GDP from 1995–2001.

Table 8.

United Arab Emirates: Dubai Fiscal Accounts, 1980–2001

(In millions of U.A.E. dirhams)

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Table 8.

United Arab Emirates: Dubai Fiscal Accounts, 1980–2001

(In millions of U.A.E. dirhams)

article image
Sources: National authorities; and IMF staff estimates.

Tax on profits of foreign banks.

56. Further analysis of the Dubai fiscal accounts is problematic, in part because of significant classification problems. Financial activities in the emirate interact with activities of the Ruler’s Court, and the lines defining and separating various revenues and expenditures, and operations from financing, are not very clear. As examples, “oil and gas” income booked by the Dubai Finance Department are those revenues passed along to the department by the Ruler’s Court under that rubric, and the exact connection to oil and gas operations is not specified. Customs revenue may include income received from Jebel Ali and other free zones. Various loans and amortizations with the banking system appear to be mixed in with “other revenues and expenditures.” Finally, many utilities-related transactions with the Dubai Water and Electricity Authority (DEWA) are missing, because according to officials, these are settled in an off-budget account.

57. Similar problems hamper a full analysis of the Sharjah Finance Department accounts (Table 9). Here, too, ad hoc operations with and support from the Ruler’s Court appear to be included in some line items; current and development outlays are somewhat entangled; support for water and electricity operations is not included in the statements; and Sharjah Municipality accounts are off-budget. In addition, debt service is also off-budget.30

Table 9.

United Arab Emirates: Sharjah Fiscal Accounts, 1991–2001

(In millions of U.A.E. dirhams)

article image
Sources: National authorities; and IMF staff estimates.

H. Conclusion

58. Long-term trends appear to indicate that the U.A.E. authorities have adopted until recently a fiscal policy in line with intergenerational economic objectives. This policy has resulted in fiscal savings over the past two decades. However, the consolidated and non-hydrocarbon balances have deteriorated significantly since 2001, owing mainly to higher expenditures. The authorities cannot rely with confidence on upturns in world oil prices and on a turnaround in returns on financial assets to improve the fiscal position in the years ahead. Cuts in spending and a broadening of the revenue base—in the long run, the adoption of a federal tax system could be an important step towards broadening the revenue—are in order to restore fiscal discipline. Abu Dhabi (and to some extent the federal government because of importance of grants from Abu Dhabi in its revenue), as the largest and richest emirate, will have to bear responsibility for many of the initiatives needed to address the recent deterioration in the fiscal accounts. Without adjustment measures, in particular cuts in subsidies, the authorities might need to liquidate foreign assets and/or incur debt. Finally, the U.A.E. fiscal statistics could benefit from greater transparency, consistency, as well as adoption of internationally accepted classification of fiscal revenues and expenditures.

14

This chapter was written by John Wilson, Hamid Davoodi, and Ugo Fasano (all MED).

15

In the second-half of the 1990s, Abu Dhabi’s own spending and revenue (i.e., spending net of intergovernmental grants) accounted for about 60 and 75 percent of consolidated government spending and revenues, respectively.

16

Dubai government activities are only about one-fifth the scale of Abu Dhabi’s and one-half that of the federal government. Sharjah, in turn, is only a fraction of Dubai. Ras Al Khaimah and the other Northern Emirates rapidly diminish in fiscal scale toward de minimus levels. Fiscal statistics for the other three emirates are not available; but due to their relative small size, their exclusion does not significantly hamper the analysis.

17

See Chapter III for a framework and a detailed discussion of the relevance of non-hydrocarbon fiscal balance for the United Arab Emirates.

18

See the accompanying staff report on statistical issues regarding fiscal and other data.

19

Recorded “grants” in the U.A.E. fiscal accounts are in part cash contributions by Abu Dhabi and Dubai to the federal government. There are also some Abu Dhabi expenditures that are “attributed” to federal activities. To the extent such activities are acknowledged in the federal accounts, the income flow has been netted down in the consolidated totals. Abu Dhabi defense and internal security outlays—also regarded as “federal services” by the emirate—are not netted out, because they are not recorded in the federal accounts as “revenue.”

20

U.S. dollar short-term LIBOR rates were used from the early 1980s to approximate income flows that pertain to Abu Dhabi’s fiscal accounts. The exercise was conducted so that asset stocks near the end of the period converged with the information provided by the authorities. However, the implicit path of assets derived for the 1980s and most of the 1990s may diverge from actual market values in each year.

21

The current fiscal balance represents the difference between total revenue and current expenditures.

22

After peaking at almost 48 percent of GDP in 1991, total spending averaged 39 percent of GDP in the 1990s.

23

The non-oil fiscal balance is a better indicator of underlying fiscal trends in oil-dependent economies than the traditional overall fiscal balance because it abstracts from the volatility in oil prices and revenue.

24

In percent of GDP, the non-hydrocarbon deficit (excluding investment income) remained relatively stable in the 1980s and 1990s (at about 34 percent).

25

This income is a mixture arising from royalties, taxes (on ADNOC, as well as on foreign companies), and many individual concession agreements, so that responsiveness to spot hydrocarbon prices is somewhat complicated.

26

These were, especially in the 1980s, termed “compensation and transfers,” reflecting payments for land appropriated by the government for public projects. The surge of subsidies and transfers in 1996 was in connection with obligations arising from the liquidation of a bank (BCCI).

27

Government debt to the local banking system remains small, at less than 5 percent of GDP by end of 2001.

28

However, the assessment of consolidated fiscal developments is not much affected because of these data issues in the smaller emirates.

29

Unlike Abu Dhabi, Dubai has not moved to privatize its Electricity and Water Authority (DEWA). Development expenditures have fluctuated close to Dh 2 billion for many years.

30

Dubai Municipality is included in the emirate’s fiscal accounts.

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Cover IMF Staff Country Reports
United Arab Emirates: Selected Issues and Statistical Appendix
Author:
International Monetary Fund
Volume/Issue:
Volume 2003: Issue 067
Publisher:
International Monetary Fund
ISBN:
9781451801125
ISSN:
1934-7685
Pages:
108
DOI:
https://doi.org/10.5089/9781451801125.002