UAE economy: Services sector gaining ground
Sunday, 2 December 2007
A 20-year period of fiscal deficits in the UAE's consolidated government financial accounts came to an end in 2005 when it posted a Dh38.2 billion surplus. Public revenues rose by 69.3 per cent to reach Dh 160.5 billion, while public spending increased by 27 per cent to reach Dh 122.3 billion. The resulting surplus contrasted with a deficit of Dh 1.5 billion in 2004. This surge in public finances was primarily due to the increase in oil and gas revenues, which rose by 52 per cent in 2005, reaching Dh 111.4 billion compared to Dh 73.3 billion in 2004.
The country's impressive economic performance during the year led to a GDP growth rate of 26.3 per cent at current prices, while real GDP growth is estimated at 8.2 per cent. Key factors were the strong oil market, active development of public joint stock companies, increased involvement of free zones and buoyant local stock markets, together with launches of a number of significant new projects. Astute economic policies provided solid foundations for impressive growth in all sectors with GDP at current prices reaching Dh485.5 billion in 2005 compared to Dh586.5 billion in 2004 (based on Ministry of Economy figures and Central Bank Annual Report).
According to the Ministry of Economy and the Central Bank, the non-oil sector accounted for 64 per cent of nominal GDP (73 per cent of real GDP), rising by 19 per cent to Dh312 billion, compared to Dh263 billion in 2004. Development of the relatively new private property market in the UAE supported a rise in contribution to GDP of the real estate and business services sector, which formed 11.5 per cent of the non-oil GDP. Likewise, the building and construction sector continued to boom, adding 11.2 per cent to GDP. Meanwhile government investment in education, health and social services boosted the government services sector to 11.1 per cent of non-oil GDP; and infrastructural projects involving transportation, storage and communications contributed 10.4 per cent.
The importance of the private sector in the UAE's growth can hardly be over-emphasised. Out of a total investment in projects of Dh93.7 billion in 2005, slightly over half of this investment (50.9 per cent) was by the private sector, while the public sector accounted for 34.7 per cent and government investment accounted for 14.4 per cent of the total. The largest investments were made in productive sectors (48.7 per cent of the total, or Dh45.6 billion), while the services sector, led by transport, storage and communications, accounted for Dh40.7 billion. These investments have paid dividends as far as economic growth is concerned and have placed the UAE in an advantageous position in terms of adopting advanced technologies. indeed, the World Economic Forum (WEF) ranked the UAE in first place in the Arab World and twenty-eighth position worldwide as regards preparedness for technology applications.
Balance of trade figures (FOB) achieved a surplus in 2005 of I, Dh163 billion against Dh 101 billion in 2004. Total exports were little changed from 2004 figures, at Dh334 billion in 2005, while imports rose to Dh261 billion in 2005 from Dh233 billion in 2004. As a result of the increase in oil prices and the increase in production of condensates, the value of oil exports rose by 46.8 per cent in 2005, reaching Dh159.8 billion. The weighted average of oil prices rose from US$36.9 a barrel in 2004 to US$52.9 in 2005.
Outward investment
The UAE is an important participant in global capital markets through several investment institutions, including, among others, the Abu Dhabi Investment Council, the Dubai Ports and Free Zone World, Dubai Holding, and the Abu Dhabi's International Petroleum Investment Co. (IPIC). Its current account has been in surplus since the foundation of the state.
The Abu Dhabi Investment Council was established in mid2006, to replace the Abu Dhabi Investment Authority All ADIC's investments are to be tax-exempted in the UAE. The Council will use money set aside by the Government for investment inside and outside Abu Dhabi, and will seek to maintain a balanced portfolio. ADIC will be closely involved in launching major real estate and tourism projects, both within the UAE and internationally.
Dubai Ports & Free Zone World was also established in mid-2006 as an umbrella company to manage DP World, P&O and Jafza.
The UAE's overseas investments have always formed a key strategy in its economic policy There was considerable activity in this field during the last 12 months with certain investments making world news. Some of the major UAE overseas investments completed in the last year are summarised in the accompanying panels.
Inward investment
Foreign direct investment (FDI) inflow into the UAE achieved a record US$ 10 billion in 2005, amounting to nearly 34 per cent of the total foreign capital flow of nearly US$29.6 billion channelled into the Arab world. The figure also places the UAE as the top country in the Arab World in terms of attracting inward investment.
The UAE strongly believes that the private sector (both local and foreign) is the true engine of sustained growth. FDI is regarded as crucial in order to transfer knowledge and expertise in areas that are not yet the country's core competencies, open new market opportunities by the creation of new networks and create employment in knowledge intensive and high value-added sectors.
Building on the success of the Jebel Ali Free Trade Zone, the UAE currently has 23 free zones with more under development. Some of the zones cater to service sectors (e.g. Dubai Internet City, Dubai Media City, Dubai Healthcare City, Academic City, Dubai International Financial Centre), while others are industrial zones (e.g. Hamriyah Free Zone, Fujairah Free Zone, Ajman Free Zone and the Gold and Diamond Park). Free-zone companies may be under 100 per cent foreign ownership, enjoy corporate tax holidays, no personal taxes, freedom to repatriate capital and profits, and be free of import duties or currency restrictions.
Outside the free zones, companies may still enjoy tax holidays for most sectors, no personal taxes, freedom to repatriate capital and profits, and no currency restrictions. Foreign ownership is generally set at a ceiling of 49 per cent, though that is under review.
Foundations for growth
Successful development necessitates good planning, adequate investment and professional implementation, The UAE's success is based on all three of these cornerstones. And whilst achievements to date are highly impressive, there is much more to come. Abu Dhabi alone plans to invest over Dh555 billion (US$151.22 billion) in the coming five years. Dh520 billion (US$87.19 billion) will go to the construction sector, DhI 20 billion (US$32.69 billion) for development and expansion of the tourism sector, Dh35 billion (US$9.53 billion) for new power and water projects and Dh80 billion (US$21.79 billion) will be spent on expanding the oil and gas sector.
Ever since the foundation of the state in 1971. the UAE's economic strategy has been consistent in terms of maximising the benefits of its oil and gas resources and looking ahead to the day when these non-renewable resources will no longer be available. It has invested heavily in its hydrocarbon industries and utilised their revenues to create a socio-economic infrastructure that is less and less dependent upon oil or natural gas as its main source of income. The success of its policies are apparent wherever one looks in the UAE and indeed in many places around the world. With an average economic growth rate (at constant prices) of 6 per cent over the past ten years (over 9 per cent if you take the period 2003 to 2006) the figures speak for themselves. Diversification has reduced the dependence on petroleum and natural gas from around three-quarters of total GDP in 1980 to approximately one-third of the UAE's GDP today. Although it remains of huge importance to the UAE, the hydrocarbons sector's position as the prime economic contributor to GDP has been overtaken by the non-oil services sector, which accounts for 64 per cent of nominal GDP. On a per capita basis, the UAE's relatively small population and large resources have helped to place it close to the top rung of the world's per capita GDP ranking, with a figure of approximately US$24,000.
The UAE's fiscal surplus in 2005, combined with a decrease in external debt (which fell from over 25 per cent of GDP in 2000/01 to 12.5 per cent by the end of 2005), has boosted the country's financial position, but the Government remains vigilant on the issue of inflation which, according to the Governor of the Central Bank, grew from an annual average of 3 per cent in the period 2001/03 to between 6.5 and 7 per cent in 2005.
This economic growth has been fostered, in part at least, by the removal of barriers to trade and the creation of a relatively liberal business environment. The focus has been on how to help business develop while maintaining good standards of corporate governance. State ownership has played a key role in development of certain sectors, but in recent years there have been moves to reduce this role through a series of privatisation and partnership arrangements. In addition, introduction of free zones and other legal measures have reduced or removed some of the restrictions on foreign ownership of companies and obligations for branches of foreign companies to recruit UAE agents. The provision of jobs for UAE nationals does, however, remain a high priority for Government, which applies quotas for the percentage of Emirati staff working in banking, insurance, professional, and distribution services.
Throughout its history the people of this part of the Gulf have been active traders and so it continues today. Apart from oil and gas products (sent mainly to East Asia), the UAE exports aluminium and a range of non-oil goods to other Arab, Indian and European markets. The prime trading activity is however re-exporting, utilising the UAE as a hub for temporary storage and trans-shipment of a very wide variety of goods and materials. Iran, India, and other Gulf Cooperation Council (GCC) countries are prime participants in this re-export business.
Global indices
The UAE's progress in terms of business development is regularly assessed by a number of different global studies. The country's ranking on these scoreboards provides an indication of how others view the UAE's status as a safe and attractive place to do business. Different organisations use different criteria but they usually produce similar, if not identical, results. For example, the Swiss Institute for Business Cycle Research placed the UAE first in the Arab World (twenty-first overall) in its Kof Globalization Index that covered 123 advanced and developing countries and their performance in a selected list of fields during the period from 1970 to 2003; whilst the Economic Freedom Index of the Heritage Foundation and the Wall Street journal placed the UAE second in the Arab World in its assessment of other business related criteria. Countries that were listed above the UAE in the index are all well-established economies, including in descending order the United States, Sweden, Canada, and Britain.
Structural framework
Economic policy is administered by the UAE Ministry of Economy, which oversees trade policies approved by the Federal Supreme Council (comprising the rulers of each of the seven member emirates of the UAE), Whilst the federal Ministry sets economic guidelines and provides the essential administrative framework, individual emirates exercise a high degree of direct control over their own economies, and emirati governments frequently play significant roles in local business development.
The UAE is a contracting party to GATT and one of the original members of WTO. Its Constitution, Commercial Companies Law and Trade Agencies Law form the main structure of federal legal instruments under which business and commerce operate. Within this framework, additional laws, decree-laws, ordinary decrees, and regulations are issued from time to time to deal with specific issues affecting how business is conducted in the UAE.
E-rankings
According to the Economist Intelligence Unit (EIU) working in cooperation with the IBM Institute for Business Value, the UAE's ranking in terms of 'e-readiness', within a list of 68 of the world's leading e-economies, rose from sixtieth, in 2004, to forty-second, in 2005, and thirtieth in 2006. it is in top position among Arab countries, with Saudi Arabia forty-sixth, Jordan fifty-fourth and Egypt fifty-fifth. The rankings evaluated countries based on more than 100 different criteria, organised into six categories: connectivity and technology infrastructure-, business environment; consumer and business adoption; and legal and policy. But this is only the beginning in terms of the UAE's commitment to utilise the internet as an enabling tool in both government and business. There is now a focus on developing e-government services between government agencies (intra-government, or G2G), government to business (G2B), and government to citizens (G2C).
The country's impressive economic performance during the year led to a GDP growth rate of 26.3 per cent at current prices, while real GDP growth is estimated at 8.2 per cent. Key factors were the strong oil market, active development of public joint stock companies, increased involvement of free zones and buoyant local stock markets, together with launches of a number of significant new projects. Astute economic policies provided solid foundations for impressive growth in all sectors with GDP at current prices reaching Dh485.5 billion in 2005 compared to Dh586.5 billion in 2004 (based on Ministry of Economy figures and Central Bank Annual Report).
According to the Ministry of Economy and the Central Bank, the non-oil sector accounted for 64 per cent of nominal GDP (73 per cent of real GDP), rising by 19 per cent to Dh312 billion, compared to Dh263 billion in 2004. Development of the relatively new private property market in the UAE supported a rise in contribution to GDP of the real estate and business services sector, which formed 11.5 per cent of the non-oil GDP. Likewise, the building and construction sector continued to boom, adding 11.2 per cent to GDP. Meanwhile government investment in education, health and social services boosted the government services sector to 11.1 per cent of non-oil GDP; and infrastructural projects involving transportation, storage and communications contributed 10.4 per cent.
The importance of the private sector in the UAE's growth can hardly be over-emphasised. Out of a total investment in projects of Dh93.7 billion in 2005, slightly over half of this investment (50.9 per cent) was by the private sector, while the public sector accounted for 34.7 per cent and government investment accounted for 14.4 per cent of the total. The largest investments were made in productive sectors (48.7 per cent of the total, or Dh45.6 billion), while the services sector, led by transport, storage and communications, accounted for Dh40.7 billion. These investments have paid dividends as far as economic growth is concerned and have placed the UAE in an advantageous position in terms of adopting advanced technologies. indeed, the World Economic Forum (WEF) ranked the UAE in first place in the Arab World and twenty-eighth position worldwide as regards preparedness for technology applications.
Balance of trade figures (FOB) achieved a surplus in 2005 of I, Dh163 billion against Dh 101 billion in 2004. Total exports were little changed from 2004 figures, at Dh334 billion in 2005, while imports rose to Dh261 billion in 2005 from Dh233 billion in 2004. As a result of the increase in oil prices and the increase in production of condensates, the value of oil exports rose by 46.8 per cent in 2005, reaching Dh159.8 billion. The weighted average of oil prices rose from US$36.9 a barrel in 2004 to US$52.9 in 2005.
Outward investment
The UAE is an important participant in global capital markets through several investment institutions, including, among others, the Abu Dhabi Investment Council, the Dubai Ports and Free Zone World, Dubai Holding, and the Abu Dhabi's International Petroleum Investment Co. (IPIC). Its current account has been in surplus since the foundation of the state.
The Abu Dhabi Investment Council was established in mid2006, to replace the Abu Dhabi Investment Authority All ADIC's investments are to be tax-exempted in the UAE. The Council will use money set aside by the Government for investment inside and outside Abu Dhabi, and will seek to maintain a balanced portfolio. ADIC will be closely involved in launching major real estate and tourism projects, both within the UAE and internationally.
Dubai Ports & Free Zone World was also established in mid-2006 as an umbrella company to manage DP World, P&O and Jafza.
The UAE's overseas investments have always formed a key strategy in its economic policy There was considerable activity in this field during the last 12 months with certain investments making world news. Some of the major UAE overseas investments completed in the last year are summarised in the accompanying panels.
Inward investment
Foreign direct investment (FDI) inflow into the UAE achieved a record US$ 10 billion in 2005, amounting to nearly 34 per cent of the total foreign capital flow of nearly US$29.6 billion channelled into the Arab world. The figure also places the UAE as the top country in the Arab World in terms of attracting inward investment.
The UAE strongly believes that the private sector (both local and foreign) is the true engine of sustained growth. FDI is regarded as crucial in order to transfer knowledge and expertise in areas that are not yet the country's core competencies, open new market opportunities by the creation of new networks and create employment in knowledge intensive and high value-added sectors.
Building on the success of the Jebel Ali Free Trade Zone, the UAE currently has 23 free zones with more under development. Some of the zones cater to service sectors (e.g. Dubai Internet City, Dubai Media City, Dubai Healthcare City, Academic City, Dubai International Financial Centre), while others are industrial zones (e.g. Hamriyah Free Zone, Fujairah Free Zone, Ajman Free Zone and the Gold and Diamond Park). Free-zone companies may be under 100 per cent foreign ownership, enjoy corporate tax holidays, no personal taxes, freedom to repatriate capital and profits, and be free of import duties or currency restrictions.
Outside the free zones, companies may still enjoy tax holidays for most sectors, no personal taxes, freedom to repatriate capital and profits, and no currency restrictions. Foreign ownership is generally set at a ceiling of 49 per cent, though that is under review.
Foundations for growth
Successful development necessitates good planning, adequate investment and professional implementation, The UAE's success is based on all three of these cornerstones. And whilst achievements to date are highly impressive, there is much more to come. Abu Dhabi alone plans to invest over Dh555 billion (US$151.22 billion) in the coming five years. Dh520 billion (US$87.19 billion) will go to the construction sector, DhI 20 billion (US$32.69 billion) for development and expansion of the tourism sector, Dh35 billion (US$9.53 billion) for new power and water projects and Dh80 billion (US$21.79 billion) will be spent on expanding the oil and gas sector.
Ever since the foundation of the state in 1971. the UAE's economic strategy has been consistent in terms of maximising the benefits of its oil and gas resources and looking ahead to the day when these non-renewable resources will no longer be available. It has invested heavily in its hydrocarbon industries and utilised their revenues to create a socio-economic infrastructure that is less and less dependent upon oil or natural gas as its main source of income. The success of its policies are apparent wherever one looks in the UAE and indeed in many places around the world. With an average economic growth rate (at constant prices) of 6 per cent over the past ten years (over 9 per cent if you take the period 2003 to 2006) the figures speak for themselves. Diversification has reduced the dependence on petroleum and natural gas from around three-quarters of total GDP in 1980 to approximately one-third of the UAE's GDP today. Although it remains of huge importance to the UAE, the hydrocarbons sector's position as the prime economic contributor to GDP has been overtaken by the non-oil services sector, which accounts for 64 per cent of nominal GDP. On a per capita basis, the UAE's relatively small population and large resources have helped to place it close to the top rung of the world's per capita GDP ranking, with a figure of approximately US$24,000.
The UAE's fiscal surplus in 2005, combined with a decrease in external debt (which fell from over 25 per cent of GDP in 2000/01 to 12.5 per cent by the end of 2005), has boosted the country's financial position, but the Government remains vigilant on the issue of inflation which, according to the Governor of the Central Bank, grew from an annual average of 3 per cent in the period 2001/03 to between 6.5 and 7 per cent in 2005.
This economic growth has been fostered, in part at least, by the removal of barriers to trade and the creation of a relatively liberal business environment. The focus has been on how to help business develop while maintaining good standards of corporate governance. State ownership has played a key role in development of certain sectors, but in recent years there have been moves to reduce this role through a series of privatisation and partnership arrangements. In addition, introduction of free zones and other legal measures have reduced or removed some of the restrictions on foreign ownership of companies and obligations for branches of foreign companies to recruit UAE agents. The provision of jobs for UAE nationals does, however, remain a high priority for Government, which applies quotas for the percentage of Emirati staff working in banking, insurance, professional, and distribution services.
Throughout its history the people of this part of the Gulf have been active traders and so it continues today. Apart from oil and gas products (sent mainly to East Asia), the UAE exports aluminium and a range of non-oil goods to other Arab, Indian and European markets. The prime trading activity is however re-exporting, utilising the UAE as a hub for temporary storage and trans-shipment of a very wide variety of goods and materials. Iran, India, and other Gulf Cooperation Council (GCC) countries are prime participants in this re-export business.
Global indices
The UAE's progress in terms of business development is regularly assessed by a number of different global studies. The country's ranking on these scoreboards provides an indication of how others view the UAE's status as a safe and attractive place to do business. Different organisations use different criteria but they usually produce similar, if not identical, results. For example, the Swiss Institute for Business Cycle Research placed the UAE first in the Arab World (twenty-first overall) in its Kof Globalization Index that covered 123 advanced and developing countries and their performance in a selected list of fields during the period from 1970 to 2003; whilst the Economic Freedom Index of the Heritage Foundation and the Wall Street journal placed the UAE second in the Arab World in its assessment of other business related criteria. Countries that were listed above the UAE in the index are all well-established economies, including in descending order the United States, Sweden, Canada, and Britain.
Structural framework
Economic policy is administered by the UAE Ministry of Economy, which oversees trade policies approved by the Federal Supreme Council (comprising the rulers of each of the seven member emirates of the UAE), Whilst the federal Ministry sets economic guidelines and provides the essential administrative framework, individual emirates exercise a high degree of direct control over their own economies, and emirati governments frequently play significant roles in local business development.
The UAE is a contracting party to GATT and one of the original members of WTO. Its Constitution, Commercial Companies Law and Trade Agencies Law form the main structure of federal legal instruments under which business and commerce operate. Within this framework, additional laws, decree-laws, ordinary decrees, and regulations are issued from time to time to deal with specific issues affecting how business is conducted in the UAE.
E-rankings
According to the Economist Intelligence Unit (EIU) working in cooperation with the IBM Institute for Business Value, the UAE's ranking in terms of 'e-readiness', within a list of 68 of the world's leading e-economies, rose from sixtieth, in 2004, to forty-second, in 2005, and thirtieth in 2006. it is in top position among Arab countries, with Saudi Arabia forty-sixth, Jordan fifty-fourth and Egypt fifty-fifth. The rankings evaluated countries based on more than 100 different criteria, organised into six categories: connectivity and technology infrastructure-, business environment; consumer and business adoption; and legal and policy. But this is only the beginning in terms of the UAE's commitment to utilise the internet as an enabling tool in both government and business. There is now a focus on developing e-government services between government agencies (intra-government, or G2G), government to business (G2B), and government to citizens (G2C).